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 December 31, 2018 |
OR
| ¨ 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) |
7751 Belfort Parkway, Suite 150, Jacksonville, FL 32256
(Address of principal executive offices)
(630) 954-0400
(Registrant’s telephone number, including area code)
184 Shuman Blvd., Suite 420, Naperville, IL 60563________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
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 August 9, 2018February 8, 2019 was 10,783,457.11,720,967.
GEE GROUP INC.
Form 10-Q
For the Quarter Ended June 30,December 31, 2018
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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 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.
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Table of Contents |
Item 1. Financial Statements.PART I -FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (In Thousands) June 30, September 30, 2018 2017 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances (June - $897 and September - $1,712) Other current assets Total current assets Property and equipment, net Other long-term assets Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Revolving credit facility Acquisition deposit for working capital guarantee Accrued interest Accounts payable Accrued compensation Other current liabilities Short-term portion of subordinated debt Short-term portion of term-note, net of discount Total current liabilities Deferred rent Deferred taxes Term-loan, net of debt discounts Subordinated debt Subordinated convertible debt Other long-term liabilities Total long-term liabilities Commitments and contingencies MEZZANINE EQUITY Preferred stock; no par value Preferred series A stock - 160 authorized; issued and outstanding - none Preferred series B stock - 5,950 authorized; issued and outstanding - 5,816 and 5,926 at June 30, 2018 and September 30, 2017, respectively Liquidation value of the preferred series B stock is approximately $28,265 and $28,800 at June 30, 2018 and September 30, 2017, respectively SHAREHOLDERS' EQUITY Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 10,609 and 9,879 at June 30, 2018 and September 30, 2017, respectively Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ITEM 1. FINANCIAL STATEMENTS (unaudited)$ 2,637 $ 2,785 21,166 23,178 1,853 3,014 25,656 28,977 850 914 400 282 76,593 76,593 30,862 35,049 $ 134,361 $ 141,815 $ 10,200 $ 7,904 1,500 1,500 1,510 2,175 2,030 3,243 5,188 7,394 385 515 419 1,225 6,551 3,433 27,783 27,389 400 334 1,248 958 37,364 42,018 1,000 1,000 16,685 16,685 18 35 56,715 61,030 - - 28,788 29,333 - - 43,085 39,517 (22,010 ) (15,454 ) 21,075 24,063 $ 134,361 $ 141,815
GEE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands)
ASSETS |
| December 31, 2018 |
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| September 30, 2018 |
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CURRENT ASSETS: |
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Cash |
| $ | 3,500 |
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| $ | 3,213 |
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Accounts receivable, less allowances ($302 and $302, respectively) |
|
| 19,047 |
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|
| 20,755 |
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Prepaid expenses and other current assets |
|
| 2,452 |
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|
| 2,266 |
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Total current assets |
|
| 24,999 |
|
|
| 26,234 |
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Property and equipment, net |
|
| 849 |
|
|
| 891 |
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Goodwill |
|
| 76,593 |
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|
| 76,593 |
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Intangible assets, net |
|
| 28,070 |
|
|
| 29,467 |
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Other long-term assets |
|
| 394 |
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|
| 416 |
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TOTAL ASSETS |
| $ | 130,905 |
|
| $ | 133,601 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
| $ | 2,856 |
|
| $ | 2,523 |
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Acquisition deposit for working capital guarantee |
|
| 883 |
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|
| 883 |
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Accrued compensation |
|
| 4,215 |
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|
| 5,212 |
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Short-term portion of subordinated debt |
|
| - |
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|
| 106 |
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Short-term portion of term loan, net of discount |
|
| 3,226 |
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| 2,331 |
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Other current liabilities |
|
| 2,274 |
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|
| 2,064 |
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Total current liabilities |
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| 13,454 |
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| 13,119 |
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Deferred taxes |
|
| 668 |
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| 146 |
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Revolving credit facility |
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| 12,676 |
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| 11,925 |
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Term loan, net of discounts |
|
| 38,466 |
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| 40,253 |
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Subordinated debt |
|
| 1,000 |
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|
| 1,000 |
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Subordinated convertible debt |
|
| 16,685 |
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| 16,685 |
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Other long-term liabilities |
|
| 535 |
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| 583 |
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Total long-term liabilities |
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| 70,030 |
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| 70,592 |
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Commitments and contingencies |
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MEZZANINE EQUITY |
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Preferred stock; no par value; authorized - 20,000 shares - |
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Preferred series A stock; authorized - 160 shares; issued and outstanding - none |
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| - |
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| - |
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Preferred series B stock; authorized - 5,950 shares; issued and outstanding - 5,566 and 5,816 at December 31, 2018 and September 30, 2018, respectively; liquidation value of the preferred series B stock is approximately $27,050 and $28,255 at December 31, 2018 and September 30, 2018, respectively |
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| 27,551 |
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| 28,788 |
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SHAREHOLDERS' EQUITY |
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Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 11,204 shares at December 31, 2018 and 10,783 shares at September 30, 2018, respectively |
|
| - |
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| - |
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Additional paid in capital |
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| 46,340 |
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| 44,120 |
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Accumulated deficit |
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| (26,470 | ) |
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| (23,018 | ) |
Total shareholders' equity |
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| 19,870 |
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| 21,102 |
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
| $ | 130,905 |
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| $ | 133,601 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In Thousands, Except Per Share Data) Three Months Ended Nine Months Ended June 30, June 30, 2018 2017 2018 2017 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services GROSS PROFIT Selling, general and administrative expenses Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets INCOME (LOSS) FROM OPERATIONS Loss on extinguishment of debt Interest expense LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE Income tax benefit (expense) NET LOSS NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS NET LOSS PER SHARE - BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED GEE GROUP INC.$ 33,879 $ 40,100 $ 107,860 $ 80,046 6,388 5,969 17,496 8,578 40,267 46,069 125,356 88,624 25,546 29,015 81,235 60,472 14,721 17,054 44,121 28,152 12,111 15,546 35,839 24,852 514 2,206 1,712 2,306 92 178 287 328 1,409 1,570 4,199 2,308 595 (2,446 ) 2,084 (1,642 ) - 994 - 994 2,889 2,378 8,381 3,130 (2,294 ) (5,818 ) (6,297 ) (5,766 ) 407 (202 ) (259 ) (332 ) $ (1,887 ) $ (6,020 ) $ (6,556 ) $ (6,098 ) $ (1,887 ) $ (6,020 ) $ (6,556 ) $ (6,098 ) $ (0.18 ) $ (0.61 ) $ (0.64 ) $ (0.64 ) 10,526 9,879 10,177 9,546
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended December 31, 2018 2017 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 $581 and $293, respectively) Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets INCOME 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 $ 34,014 $ 39,461 4,529 5,771 38,543 45,232 25,812 29,458 12,731 15,774 10,078 12,766 1,159 40 79 97 1,396 1,396 19 1,475 (2,948 ) (3,294 ) (2,929 ) (1,819 ) (523 ) 28 $ (3,452 ) $ (1,791 ) $ (3,452 ) $ (1,791 ) $ (0.32 ) $ (0.18 ) 10,946 9,905
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) (In Thousands) Total Common Stock Additional Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2016 Amortization of stock option expense Exercise of stock warrants Net loss �� Balance, September 30, 2017 Amortization of stock option expense Issuance of stock for interest Conversion of preferred B stock to common stock Net loss Balance, June 30, 2018 GEE GROUP INC.9,379 $ 37,615 $ (13,082 ) $ 24,533 - 902 - 902 500 1,000 - 1,000 - - (2,372 ) (2,372 ) 9,879 39,517 (15,454 ) 24,063 - 1,028 - 1,028 620 1,995 - 1,995 110 545 - 545 - - (6,556 ) (6,556 ) 10,609 $ 43,085 $ (22,010 ) $ 21,075
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In Thousands)
Common Additional Total Stock Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2017 Share-based compensation Issuance of stock for interest Conversion of preferred Series B to common stock Net loss 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 9,879 $ 39,517 $ (15,454 ) $ 24,063 - 1,660 - 1,660 794 2,400 - 2,400 110 543 - 543 - - (7,564 ) (7,564 ) 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
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In Thousands) Nine Months Ended June 30, 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization Stock option expense Provision for doubtful accounts Deferred income taxes Amortization of debt discount and non cash extinguishment of debt Changes in operating assets and liabilities: Accounts receivable Acquisition deposit for working capital guarantee Accrued interest Accounts payable Accrued compensation Other current items, net Long-term liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Acquisition payments, net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Payments on the debt related to acquisitions Payments on term loan Proceeds from exercise of stock warrants Payments on capital lease Net proceeds from short-term debt Net proceeds from revolving credit 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 Non-cash financing activities Stock paid for interest on subordinated note Stock paid for fees in connection with subordinated note Conversion of preferred to common Issuance of preferred stock for acquisition Issuance of note payable for acquisition Issuance of stock for extinguishment of debt GEE GROUP INC.$ (6,556 ) $ (6,098 ) 4,486 2,636 1,028 640 (815 ) 1,724 290 - 576 1,006 2,827 (3,458 ) - 1,500 1,332 1,700 (1,213 ) (1,006 ) (2,206 ) 251 1,016 278 (67 ) (16 ) 698 (843 ) (224 ) (79 ) - (25,256 ) (224 ) (25,335 ) (806 ) (1,219 ) (2,112 ) (19,951 ) - 1,000 - (17 ) - 45,676 2,296 1,015 (622 ) 26,504 (148 ) 326 2,785 2,528 $ 2,637 $ 2,854 $ 6,435 $ 1,122 $ 1,610 $ - $ 385 $ - $ 545 $ - $ - $ 29,333 $ - $ 12,500 $ - $ 385
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
|
| Three Months Ended |
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| December 31, |
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| 2018 |
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| 2017 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
| $ | (3,452 | ) |
| $ | (1,791 | ) |
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
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Depreciation and amortization |
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| 1,475 |
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| 1,493 |
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Stock Compensation expense |
|
| 581 |
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| 293 |
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Provision for doubtful accounts |
|
| - |
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| (53 | ) |
Deferred income taxes |
|
| 523 |
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|
| - |
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Amortization of debt discount |
|
| 195 |
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| 192 |
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Interest expense paid with common stock |
|
| 401 |
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|
| 210 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
|
| 1,710 |
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|
| 562 |
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Accrued interest |
|
| - |
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|
| (388 | ) |
Accounts payable |
|
| 333 |
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|
| (577 | ) |
Accrued compensation |
|
| (997 | ) |
|
| (1,267 | ) |
Other current items, net |
|
| 21 |
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| 1,295 |
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Long-term items, net |
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| (11 | ) |
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| (218 | ) |
Net cash provided by (used in) operating activities |
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| 779 |
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| (249 | ) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
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| (36 | ) |
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| (128 | ) |
Net cash used in investing activities |
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| (36 | ) |
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| (128 | ) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Payment on term loan |
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| (1,087 | ) |
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| (812 | ) |
Payments on subordinated debt |
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| (107 | ) |
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| (212 | ) |
Payments on capital lease |
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| (13 | ) |
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| - |
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Net proceeds from revolving credit |
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| 751 |
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| 2,096 |
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Net cash provided by (used in) financing activities |
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| (456 | ) |
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| 1,072 |
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Net change in cash |
|
| 287 |
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| 695 |
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Cash at beginning of period |
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| 3,213 |
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| 2,785 |
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Cash at end of period |
| $ | 3,500 |
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| $ | 3,480 |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash paid for interest |
| $ | 2,615 |
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| $ | 2,699 |
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Cash paid for taxes |
| $ | 12 |
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| $ | - |
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Non-cash financing activities |
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Conversion of Series B Convertible Preferred Stock to common stock |
| $ | 1,238 |
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| $ | - |
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Issuance of stock for extinguishment of debt |
| $ | - |
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| $ | 385 |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents |
GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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 and industrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, engineering, medical and accounting professionals for direct hire and contract staffing for our clients and provide temporary staffing services for our commercial clients.
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 notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-monththree-month period ended June 30,December 31, 2018 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 notes 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 experienced significant net losses for its most recent fiscal year ended September 30, 2017,2018, and for the first nine-months ofthree months ended December 31, 2018. Management has implemented a strategy which includes cost reductions and consolidation of certain back officeoperating activities to continue gain efficiencies as well as identifying strategic acquisitions, financed primarily through a combination of the issuance of preferredequity and common stock and convertible debt, to improve the overall profitability and cash flows of the Company.
As explained more fully in Note 6, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) after the close of business on MarchDecember 31, 2017. Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000 consisting of a four-year term loan in the principal amount of $48,750,000 and revolving loans in a maximum amount up to the lesser of (i) $25,000,000 or (ii) an amount determined pursuant to a borrowing base that is calculated based on the outstanding amount of the Company’s eligible accounts receivable, as described in the Credit Agreement. The loans under the Credit Agreement mature on March 31, 2021.
On April 3, 2017, 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, as more fully disclosed in Note 11. Amounts borrowed under the Credit Agreement also may be used by the Company 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 the lenders.
As of June 30, 2018, the Company had cash of approximately $2,637,000,$3.5 million, which was a decreasean increase of approximately $148,000$0.3 million from approximately $2,785,000$3.2 million at September 30, 2017. Negative working2018. Working capital at June 30,December 31, 2018 was approximately $2,127,000,$11.5 million, as compared to working capital of approximately $1,588,000$13.1 million for September 30, 2017. The net loss for the nine months ended June 30, 2018, was approximately $6,556,000.2018.
Management believescurrently expects that the combination of future cash flow from operations and the availability under the Revolving Credit Facility will provide sufficient liquidity for the next 12 months.
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 occur
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Table of Contents |
GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in a subsequent period, the Company will recognize those differences when they become 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.thousands except per share data, unless otherwise stated)
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 performed to customers, 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 ranges 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 $ 1,562,000$0.7 million and $1,515,000$0.6 million for the nine-month periodsthree months ended June 30,December 31, 2018 and 2017, 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 $342,000 aslocation of June 30, 2018our 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 June 30,As of December 31, 2018 and September 30, 2017,2018, there were no cash equivalents. In some cases, theThe Company maintains cash on depositdeposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company maintains its deposit accounts in a large, national, financial institution and, hasat 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 theirthe customer’s financial condition and ability to pay the Company in accordance with establishedthe 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 servicesservice 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 December 31, 2018, and September 30, 2018 allowance for doubtful accounts of approximately $897,000 is considered necessary as of June 30, 2018 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 $342,000 reserve for permanent placement falloffs considered necessaryof $0.2 million as of June 30,December 31, 2018 and $997,000 as of September 30, 2017, respectively.2018.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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. Leasehold improvements are amortized over the shorter of the lease or useful life. 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 nine-monthsthree-months period ended June 30,December 31, 2018 and 2017.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions. The Company assessesevaluates goodwill for impairment at least annually. Testing goodwill for impairment allows the Company to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value.
Fair Value Measurement
The Company follows the provisions of the accounting 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.
The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carrying valuesfair value disclosures of the Company’s long-term liabilities included herein are believed to approximate their fair value based on levelestimated using Level 3 inputs. The fair value of the Company’s long-lived assets, including goodwill and other intangible assets are subject to measurementmeasured at fair value on a non-recurring basis using levelLevel 3 inputs.inputs, as discussed in Note 5.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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 orand 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. There were approximately 10,513,000 and 10,902,000 of common
Common stock equivalents, which are excluded for the three and nine months ended June 30, 2018, respectively, (which include common share equivalents of preferred stock, convertible debt, warrants and options) because their effect is anti-dilutive. Thereanti-dilutive were approximately 10,111,00011.8 million and 3,743,000 of common stock equivalents excluded10.3 million for the three and nine months ended June 30,December 31, 2018 and 2017, respectively, (which include common share equivalents of preferred stock, convertible debt, warrants and options) because their effect is anti-dilutive.respectively.
Advertising Expenses
Most ofThe Company expenses the Company's advertising expense budget is used to support the Company's business consistingcosts of print and internet media with expenses recordedadvertising and promotions as they are incurred and are includedreports these costs in selling, general and administrative expenses in the unaudited condensed consolidated financial statements.expenses. Advertising expense was approximately $572,000 and $588,000,totaled $0.6 million for each of the three months ended June 30,December 31, 2018 and 2017, respectively, and approximately $1,737,000 and $1,092,000, for the nine months ended June 30, 2018 and 2017, respectively.2017.
Intangible Assets
IntangibleSeparately identifiable intangible assets includeheld in the form of customer lists, non-compete agreements, customer relationships, non-competemanagement agreements and trade names and were recorded at their estimated fair value at the date of acquisition. The trade namesacquisition and are amortized on a straight-line basis over thetheir estimated useful life of five and ten years. Customer relationships are amortized based on the future undiscounted cash flows or straight-line basis over estimated remaining useful lives of fiveranging from two to ten years. Non-compete agreements are amortized based on ayears using both accelerated and straight-line basis of three and five years, which is the term of the non-compete agreement.methods.
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not recordrecognize any impairmentimpairments during the nine monthsthree-month periods ended June 30,December 31, 2018 and 2017.
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, and restricted stock, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options or restricted 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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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.
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 June 30,December 31, 2018 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 and nine months ended June 30, 2017 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 entirely 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 guidancestandard did not have a material impact on its 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 itsCompany’s financial statements.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
In February 2016 FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendment in the ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all eases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. In July 2018, the FASB issued ASU No. 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 842): Targeted Improvement” which now allows entities the option 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 lease liabilities on the consolidated balance sheets.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting (Topic 718)” that expands the scope to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2018-07 will have a material impact on the Company's financial condition or results of operations.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements.
4. Property and Equipment
Property and equipment, net consisted of the following:
(in thousands) |
| June 30, 2018 |
|
| September 30, 2017 |
| ||||||||||
|
| December 31, 2018 |
|
| September 30, 2018 |
| ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Computer software |
| $ | 1,447 |
| $ | 1,447 |
|
| $ | 1,447 |
| $ | 1,447 |
| ||
Office equipment, furniture and fixtures and leasehold improvements |
|
| 3,241 |
|
|
| 3,243 |
|
|
| 3,374 |
|
|
| 3,356 |
|
Total property and equipment, at cost |
| 4,688 |
| 4,690 |
|
| 4,821 |
| 4,803 |
| ||||||
Accumulated depreciation and amortization |
|
| (3,838 | ) |
|
| (3,776 | ) |
|
| (3,972 | ) |
|
| (3,912 | ) |
Property and equipment, net |
| $ | 850 |
|
| $ | 914 |
|
| $ | 849 |
|
| $ | 891 |
|
Depreciation expense for three monthsthree-month periods ended June 30,December 31, 2018 and 2017, was approximately $92,000 and $178,000, respectively, and for the nine months ended June 30, 2018 and 2017 was approximately $287,000 and $328,000, respectively.
5. Goodwill and Intangible Assets
Goodwill
The following table sets forth activity in goodwill from September 2016 through June 30, 2018. See Note 11 for details of acquisitions that occurred during the year ended September 30, 2017.
(in thousands) Goodwill as of September 30, 2016 Acquisition of SNI Companies Goodwill as of September 30, 2017 Goodwill as of June 30, 2018 $0.1 million.$ 18,590 58,003 $ 76,593 $ 76,593
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DuringGEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
5. Intangible Assets
The following tables set forth the nine months ended Junecosts, accumulated amortization and net book value of the Company’s separately identifiable intangible assets as of December 31, 2018 and September 30, 2018, and the year ended September 30, 2017 the Company did not record any impairment of goodwill.estimated future amortization expense.
December 31, 2018 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 $ Estimated Amortization Expense Remainder of Fiscal 2019 $ Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter $ Intangible Assets29,070 $ 8,175 $ 20,895 $ 29,070 $ 7,459 $ 21,611 8,329 2,892 5,437 8,329 2,537 5,792 4,331 2,593 1,738 4,331 2,267 2,064 41,730 $ 13,660 $ 28,070 $ 41,730 $ 12,263 $ 29,467 4,190 5,038 4,088 3,469 2,879 8,406 28,070
June 30,2018 September 30,2017 (in thousands) Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships Trade name Non-Compete agreements Total The trade names are amortized on a straight – line basis over the estimated useful life of between five and ten years. Intangible assets that represent customer relationships are amortized 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 respective noncompete agreements, which are typically five years in duration.$ 29,070 $ 6,744 $ 22,326 $ 29,070 $ 4,601 $ 24,469 8,329 2,182 6,147 8,329 1,115 7,214 4,331 1,942 2,389 4,331 965 3,366 $ 41,730 $ 10,868 $ 30,862 $ 41,730 $ 6,681 $ 35,049
Estimated Amortization Expense |
| |||
Fiscal 2018 |
| $ | 1,396 |
|
Fiscal 2019 |
|
| 5,586 |
|
Fiscal 2020 |
|
| 5,038 |
|
Fiscal 2021 |
|
| 4,088 |
|
Fiscal 2022 |
|
| 3,469 |
|
Thereafter |
|
| 11,285 |
|
|
| $ | 30,862 |
|
The intangible assets amortization expense attributable to the amortization of identifiable intangible assets was approximately $1,409,000 and $1,570,000$1.4 million for the three monthsthree-month periods ended June 30,December 31, 2018 and 2017, respectively, and was approximately $4,199,000 and $2,308,000 for the nine months ended June 30, 2018 and 2017, respectively2017.
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.MGG 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: 1.25 to 1.00 for the trailing four quarters ended September 30, 2018; 0.80 to 1.00 for the quarter ending December 31, 2018; 1.00 to 1.00 for the two fiscal quarters ending March 31, 2019; 1.05 to 1.00 for the three fiscal quarters ending June 30, 2019; 1.05 to 1.00 for the four fiscal quarters ending September 30, 2019; and 1.25 to 1.00 for each fiscal quarter thereafter.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Minimum EBITDA. Minimum EBITDA, which is determined on a consolidated basis, as defined in the Credit Agreement, as amended, are: $13.3 million for the quarter ended September 30, 2018; $12.7 million for the fiscal quarter ended December 31, 2018; $13.0 million for the fiscal quarter ended March 31, 2019; $13.3 million for the fiscal quarter ended June 30, 2019; and $14.0 million for the fiscal quarter ending September 30, 2019 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: 4.00 to 1.00 for the fiscal quarter ended September 30, 2018; 4.40 to 1.00 for the fiscal quarter ended December 31, 2018; 4.25 to 1.00 for the fiscal quarter ended March 31, 2019; 4.10 to 1.00 for the fiscal quarter ended June 30, 2019; and 4.00 to 1.00 for the fiscal quarter ending September 30, 2019 and 2.50 to 1.00 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 $73,500 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 also obtained.
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 “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 Company also agreed to certain amendments to the loan covenants required to be maintained.
The Credit Agreement contains certain financial covenants applicable to both the Revolving Credit Facility and Term Loan. 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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or at 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 its subsidiaries, as Borrowers, entered into a third amendment and third waiver (the “Third Amendment and Waiver”) to the Credit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders have agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition 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 reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.
AlthoughOn December 27, 2018, the Company and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to the Revolving Credit, Term 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. The Company met its financial loan covenants for the three-month period ended December 31, 2018.
Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. The Company also is seeking replacement financing with a view towards lowering its borrowing costs. 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 in the Fourth Amendment. 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 absolute assurance management believes that the conditions that led to the inability to achieve compliance with the financial covenants of the Credit Agreement at June 30, 2018 and March 31, 2018 are improving and continues to forecast results that indicate that the Company will returnnot fall into non-compliance with its loan covenants or that its Lenders will continue to complianceprovide waivers or amendments to the Company in the event of future non-compliance with applicable future financial covenants.debt covenants or other possible events of default that could happen in the future.
Revolving Credit Facility
At June 30,As of December 31, 2018, the Company had $10,200,000$12.7 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $8,000,000$1.0 million was at an interest rate of approximately LIBOR plus 15%17.31%, approximately $8.0 million was at an interest rate of approximately 17.46%, and the remainder was at an interest rate of approximately prime plus 14%19.50%.
As of June 30,December 31, 2018, the Company had approximately $2,900,000$0.6 million available on the Revolving Credit facility.
The Revolving Credit Facility is secured by all 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.
Term Loan
The Company had outstanding balances under its Term Loan, as follows:
December 31, 2018 September 30, 2018 Term loan Unamortized debt discount Term loan, net of discount Short term portion of term loan, net of discount Long term portion of term loan, net of discount $ 43,505 $ 44,505 (1,813 ) (1,921 ) 41,692 42,584 3,226 2,331 $ 38,466 $ 40,253
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Term LoanGEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
At June 30, 2018 and September 30, 2017, the Company had outstanding balances under its Term Loan, as follows:
June 30, 2018 September 30, 2017 (in thousands) Term loan Unamortized debt discount Short term portion of term loan Long term portion of term loan (Dollar amounts in thousands except per share data, unless otherwise stated)$ 46,029 $ 48,141 (2,114 ) (2,690 ) 43,915 45,451 (6,551 ) (3,433 ) $ 37,364 $ 42,018
The Term 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 – $1,523,438, Fiscal year 2019 – $7,727,776,$2.1 million, Fiscal year 2020 – $8,337,152$8.3 million and Fiscal year 2021 - $28,439,759.$33.1 million.
The Company also is required to prepay the outstanding amount of the Term 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. The Company does not owe any amount as of December 31, 2018.
Interest
The loans under the Credit Agreement for the period commencing on the Second Amendment 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 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 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.
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 Senior Leverage Ratio is less than 4.00 to 1.00, interest is payable in 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.
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, 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.
As of December 31, 2018, the Company had $43.5 million in outstanding borrowings under the Term Loan Facility, of which approximately $37.0 million was at an interest of approximately 17.53%, and approximately $6.4 million was at an interest of approximately 17.45%.
Loan Fees and Amortization
In connection with the Credit Agreement, 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 loan in the accompanying consolidated balance sheets and amortizedis amortizing them as interest expense over the term of the loans. DuringFor the periodthree months ended June 30,December 31, 2018 and 2017, the Company amortized approximately $576,000$0.2 million of the debt discount.
7. Accrued Compensation
Accrued Compensation includes 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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
8. Subordinated Debt – Convertible and Non-Convertible
At June 30, 2018 and September 30, 2017, theThe Company had outstanding balances under its Convertible and Non-Convertible Subordinated Debt agreements, as follows:
|
| June 30, 2018 |
|
| September 30, 2017 |
|
| December 31, |
| September 30, |
| |||||
(in thousands) |
|
|
|
|
| |||||||||||
|
| 2018 |
|
| 2018 |
| ||||||||||
|
|
|
|
|
| |||||||||||
10% Convertible Subordinated Note |
| $ | 4,185 |
| $ | 4,185 |
|
| $ | 4,185 |
| $ | 4,185 |
| ||
Amended and Restaetd Non-negotiable promissory note |
| 419 |
| 1,225 |
| |||||||||||
Subordinated Promissary Note |
| 1,000 |
| 1,000 |
| |||||||||||
Amended and Restated Non-negotiable promissory note |
| - |
| 106 |
| |||||||||||
Subordinated Promissory Note |
| 1,000 |
| 1,000 |
| |||||||||||
9.5% Convertible Subordinated Note |
|
| 12,500 |
|
|
| 12,500 |
|
|
| 12,500 |
|
|
| 12,500 |
|
Total subordinated debt, convertible and non-convertible |
| 18,104 |
| 18,910 |
|
| 17,685 |
| 17,791 |
| ||||||
Short term portion of subordinated debt, convertible and non-convertible |
|
| (419 | ) |
|
| (1,225 | ) |
|
| - |
|
|
| (106 | ) |
Long term portion of subordinated debt, convertible and non-convertible |
| $ | 17,685 |
|
| $ | 17,685 |
|
| $ | 17,685 |
|
| $ | 17,685 |
|
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to JaxJAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,185,000,$4.2 million, and which was scheduled to become due on October 2, 2018.
On April 3, 2017, the Company and JAX 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 JAX 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, 2017, the Company issued 135,655 shares of common stock for both the conversion and paid in kind interest through September 30, 2017.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.
On April 4, 2018, the Company issued approximately 42,500 shares of common stock to JAX Legacy related to the interest on the subordinated note through April 4, 2018. The stock was valued at approximately $105,000.
On July 25, 2018, the Company issued 46,061 shares of common stock to JAX Legacy related to the interest on the subordinated note through July 4, 2018. The stock was valued at approximately $105,000.
Total discount recorded at issuance of the original JaxJAX Legacy subordinated note payable was approximately $647,000.$0.6 million. Total amortization of debt discount for the year ended September 30, 2017 was approximately $107,000,$0.1 million, and the remaining $322,000$0.3 million was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.
On January 4, 2019 the Company issued approximately 148,834 shares of common stock to Jax Legacy related to interest of $0.1 million on the 10% Note.
Amended and Restated Non-Negotiable Promissory Note
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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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 loan and Revolving Credit Facility are repaid. 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).
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 11)acquisition of SNIH an aggregate of $12.5 million in aggregate principal amountthe form of its 9.5% 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 the lenders parties to that certain Revolving Credit, Term LoanSubordination and Security Agreement,Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Company’s subsidiaries named as borrowers therein (collectively with the Company, the “Borrowers”), the seniorCredit Agreement lenders, named therein and PNC Bank, National Association, as administrative agent and collateral agent (the “Agent”) for the senior lenders (the “Senior Credit Agreement”), pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and each of the holders of the 9.5% Notes.
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 - $16.7 million.
During the three months ended December 31, 2018 the Company issued approximately 130,952 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
On January 4, 2019 the Company issued approximately 367,498 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
9. Equity
During the three months ended December 31, 2018 the Company issued 250,000 shares of common stock for the conversion of approximately 250,000 shares of Series B Convertible Preferred Stock, see Note 10.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Restricted Stock
During the three months ended December 31, 2018 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 million and $0.0 million for the three months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there was approximately $1.9 million of unrecognized compensation expense related to restricted stock outstanding.
A summary of restricted stock activity is presented as follows: | ||||
Number of Shares | ||||
Restricted stock outstanding as of September 30, 2018 | 1,100 | |||
Granted | - | |||
Exercised | - | |||
Restricted stock outstanding as of December 31, 2018 | 1,100 |
Warrants
No warrants were granted or exercised during the three months ended December 31, 2018.
Number of Shares Weighted Average Exercise Price Per Share ($) 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 Warrants exercisable as of September 30, 2018 Warrants exercisable as of December 31, 2018 497 3.84 2.87 67 - - - - (58 ) 2.00 439 4.09 2.48 - 497 3.84 2.87 67 439 4.09 2.48 -
Stock Options
As of December 31, 2018, 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 plans 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 December 31, 2018 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 attributable to stock options and warrants was $0.4 million and $0.3 million for the three months ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there was approximately $2.7 million of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.5 years.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
A summary of stock option activity is as follows: Number of Shares Weighted Average Exercise Price per share ($) Weighted Average Remaining Contractual Life (Years) Total Intrinsic Value of Options ($) Options outstanding as of September 30, 2018 Granted Exercised Forfeited/Expired Options outstanding as of December 31, 2018 Exercisable as of September 30, 2018 Exercisable as of December 31, 2018 1,578 3.76 7.53 142 394 1.91 - - (178 ) 3.89 1,794 3.34 8.58 - 512 5.08 7.30 1 385 5.92 7.19 -
The fair value of stock options granted was made using the Black-Scholes option pricing model and the following assumptions:
Three Months Ended December 31, 2018 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
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.
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 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 (as defined below) 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).
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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 9.5% Notesshares of no par value, Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act of 1933, as amended (the “Securities Act”).Act. Each of the SNIH Stockholders who received 9.5% Notesshares of Series B Preferred Stock is an accredited investor. The issuance of the 9.5% Notesshares of no 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 Act.
Future minimum paymentsBased on the terms of subordinated debt will total approximately as follows: fiscal 2018 - $313,000, fiscal 2019 - $106,000, fiscal 2020 - $1,000,000, fiscal 2021- $0 and fiscal 2022 - $16,685,000.the Series B Convertible Preferred Stock, if certain fundamental transactions were to occur, the Series B Convertible Preferred Stock would require redemption, which precludes permanent equity classification on the accompanying consolidated Balance Sheet.
On January 4,During the three months ended December 31, 2018 the Company issued approximately 280,602250,000 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.
On January 25, 2018, the Company issued approximately 110,083 shares of common stock to a SNI Sellers for the conversion of approximately 110,083250,000 shares of seriesSeries B preferred shares.Convertible Preferred Stock.
On April 4, 2018, the Company issued approximately 120,654 shares of common stock to the SNI Sellers related to the accrued interest of approximately $298,000 on the subordinated note through April 4, 2018.
On July 25, 2018, the Company issued approximately 128,815 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through July 4, 2018.
9. Equity
On March 31, 2017, the Company issued approximately 500,000 shares of common stock upon exercise of warrants by two officers and received cash of $1,000,000.
On November 27, 2017, the Company issued approximately 135,655 shares of common stock to JAX Legacy related to the conversion of the subordinated note and the interest through October 4, 2017. The stock was valued at approximately $595,000.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.
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.
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.
On April 4, 2018, the Company issued approximately 120,654 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through April 4, 2018.
On April 4, 2018, the Company issued approximately 42,529 shares of common stock to JAX Legacy related to the interest on the subordinated note through April 4, 2018. The stock was valued at approximately $105,000.
On July 25, 2018, the Company issued approximately 128,815 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through July 4, 2018.
On July 25, 2018, the Company issued approximately 46,061 shares of common stock to JAX Legacy related to the interest on the subordinated note through July 4, 2018. The stock was valued at approximately $105,000.
Restricted Stock, Stock Options and Warrants
The Company has recognized compensation expense in the amount of approximately $400,000 and $255,000 during the three months ended June 30, 2018 and 2017, respectively, related to the issuance of stock options. The Company has recognized compensation expense in the amount of approximately $1,028,000 and $641,000 during the nine months ended June 30, 2018 and 2017, respectively, related to the issuance of stock options.
During the nine-month period ended June 30, 2018, there were options granted to purchase 780,000 shares of common stock with a weighted average price of approximately $2.45 per common share. This estimated value was made using the Black-Scholes Merton option pricing model and approximated $1,747,000. 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 105% and the risk-free interest rate was between 2.2% and 2.9%. At June 30, 2018, there was approximately $2,802,000 of unamortized compensation.
At June 30, 2018, there were exercisable options to purchase approximately 590,000 shares of common stock and exercisable warrants to purchase approximately 497,000 shares of common stock.
Effective June 15, 2018, the Company granted 600,000 restricted shares of common stock to its Chairman and Chief Executive Officer. 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. The total fair value was approximately $1,326,000.
10.11. Income Tax
The following table presents the provision for income taxes and our effective tax rate for the three and nine months ended June 30,December 31, 2018 and 2017:
Three Months Ended Nine Months Ended (in thousands) June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Income tax benefit (expense) Effective tax rate % Three Months Ended, % $ 407 $ (202 ) $ (259 ) $ (332 ) 18 % 3 % -4 6 %
December 31,2018 2017 Provision for Income Taxes 523 (28 ) Effective Tax Rate -17 2 %
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.
TheOur effective tax rate for the three months ended June 30,December 31, 2018 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. TheOther than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
Our effective tax rate for the ninethree months ended June 30, 2018December 31, 2017 is lower than the statutory tax rate primarily due to a tax provision for state income taxes and 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 ninethree months ended June 30, 2018December 31, 2017 includes discrete tax benefit totaling $0.4 million relating to the US Tax Reform that was recorded in the period ending December 31, 2017.
The effective tax rate for the three and nine months ended June 30, 2017 was higher than the statutory rate primarily due to a change in the valuation allowance.Reform.
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 changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the US Tax Reform will becomebecame 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.
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Beginning on January 1, 2018,GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
During 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.
Although2017, we believe we have accountedrecorded tax charges for the partsimpact of the Tax Act effects using the current available information and technical guidance on the interpretations of the US Tax Reform that will have the most significant impact on our financials, the ultimate impactReform. As permitted by SEC Staff Accounting Bulletin 118, Income Tax Accounting Implications of the US Tax Reform onCuts and Jobs Act, we recorded provisional estimates and have subsequently finalized 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.
11. Acquisitions
SNI
The Company entered into an Agreement and Plan of Merger dated as of March 31, 2017 (the “Merger Agreement”) whereby it has acquired 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 isaccounting analysis based on the historical financial statementsguidance, interpretations, and data available as of the Company and SNI Companies, Inc., after giving effectDecember 31, 2018 with no material adjustments to the Company’s acquisition as if the acquisition occurred on October 1, 2016.
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 nine months ended June 30, 2017, as if the acquisition occurred on October 1, 2016. The pro forma results of operations for the nine months ended June 30, 2017 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 fair value adjustment of definite lived intangible assets of approximately $2,009,000 for the nine months ended June 30, 2017 for the SNI acquisition.
Nine Months Ended (in thousands, except per share data) June 30, 2017 Net sales Cost of sales Operating expenses Net loss Basic and dilutive income per common share $ 142,795 $ 90,286 $ 50,203 $ (4,387 ) (0.47 )
The Company'sour consolidated financial statements for the three and nine months ended June 30, 2018 include the actual results of all acquisitions.
12. Commitments and Contingencies
Leases
The Company leases space for all 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 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 $892,000$0.8 million and $345,000$0.9 million for the three month period ended June 30, 2018 and 2017, respectively, and approximately $2,447,000 and $1,029,000 nine monththree-month periods ended June 30,December 31, 2018 and 2017, respectively.
As of June 30,December 31, 2018 future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices are as follows:
(in thousands) Fiscal 2018 Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Thereafter Total $ 605 2,283 1,294 668 622 988 $ 6,460
Working Capital Deposit
Remainder of Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter Total The Company retained approximately $1,500,000 of the purchase price, in cash, as a guarantee from the sellers of the SNI Companies that SNI would provide a minimum of $9,200,000 of working capital, as defined in the purchase agreement. As of June 30, 2018, the Company and the sellers of the SNI Companies have not agreed to the provided working capital and the cash continues to be retained by the Company with a corresponding liability reported in its consolidated balance sheet, pending final determination and resolution among the parties.$ 1,506 1,289 742 699 505 648 $ 5,389
13. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary light industrial staffing. These distinctCompany’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Some selling, general and administrative expenses are not fully allocated among light industrial services and professional staffing services.
Unallocated Corporate expenses primarily include, certain executive compensation expenses and salaries, certain administrative salaries, corporate legal expenses, stock amortization expenses, consulting expenses, audit fees, corporate rent and facility costs, board fees, acquisition, integration and restructuring expenses and interest expense.
Three Months Ended Nine Months Ended (in thousands) June 30 June 30 2018 2017 2018 2017 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 option amortization expense Board related expenses Acquisition, integration and restructuring expenses Total unallocated expenses Consolidated Total revenue Operating income Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 5,166 $ 6,718 $ 16,165 $ 18,824 13.06 % 14.08 14.15 % 14.69 % $ 31 $ 365 $ 315 $ 954 65 43 197 184 3,386 3,967 3,386 3,967 526 745 526 745 1,084 1,084 1,084 1,084 $ 5,555 $ 8,484 $ 5,555 $ 8,484 $ 6,388 $ 5,969 $ 17,496 $ 8,578 100 % 100 % 100 % 100 % $ 28,713 $ 33,382 $ 91,695 $ 61,222 26.67 % 29.29 % 26.54 % 26.87 % $ 2,301 $ 535 $ 5,861 $ 2,659 1,436 1,705 4,289 2,452 17,780 20,073 17,780 20,073 30,336 36,541 30,336 36,541 75,509 71,967 75,509 71,967 $ 128,806 $ 132,478 $ 128,806 $ 132,478 $ 686 $ 900 $ 1,065 $ 2,135 139 80 287 223 399 255 1,028 640 - - - 38 514 2,206 1,712 2,306 $ 1,738 $ 3,441 $ 4,092 $ 5,342 $ 40,267 $ 46,069 $ 125,356 $ 88,624 595 (2,446 ) 2,084 (1,642 ) 1,501 1,748 4,486 2,636 21,166 24,040 21,166 24,040 30,862 37,286 30,862 37,286 76,593 73,051 76,593 73,051 $ 134,361 $ 140,962 $ 134,361 $ 140,962
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Three Months Ended (in thousands) December 31, 2018 2017 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 Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 5,620 $ 5,872 13.9 % 15.6 % $ 255 $ 253 64 66 3,136 3,521 415 637 1,084 519 $ 4,635 $ 4,177 $ 4,529 $ 5,771 100 % 100 % $ 28,394 $ 33,589 26.14 % 27.0 % $ 2,219 $ 2,477 1,411 1,427 15,911 19,148 27,655 33,016 75,509 76,074 $ 126,270 $ 134,844 $ 609 $ 817 106 105 581 293 1,159 40 $ 2,455 $ 1,255 $ 38,543 $ 45,232 19 1,475 1,475 1,493 19,047 22,669 28,070 33,653 76,593 76,593 $ 130,905 $ 139,021
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
14. Subsequent Events
On February 13, 2019, the Company entered into an employment agreement with Kim Thorpe (the “Thorpe Employment Agreement”), for an initial term of four years ending on February 13, 2023, which shall be extended automatically for one year on February 13, 2023 and each annual anniversary thereof. Mr. Thorpe will receive an annual base salary of $200,000 which will be subject to annual review by the Company’s Chief Executive Officer for discretionary periodic increases in accordance with the Company’s compensation policies. Mr. Thorpe is also entitled to receive stock option, and other forms of equity compensation such as restricted stock, stock appreciation rights or phantom stock which may be granted to him from time to time at the discretion of the Compensation Committee of the Board of Directors. The Thorpe Employment Agreement contains standard termination, change in control, severance, non-competition and non-disclosure, in addition to others customarily included in executive employment agreements.
Mr. Thorpe shall also receive up to three grants of 50,000 options each (150,000 options, in aggregate) under the Company’s 2013 Stock Incentive Plan based upon certain performance and other criteria. The first such grant of 50,000 options was made upon the effective date of the appointment of Mr. Thorpe as Chief Financial Officer, has an exercise price of $2.21 per share and shall vest over five (5) years.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
We specialize in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing for our clients, 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. (“Paladin”) and SNI Companies, Inc.a Delaware corporation (“SNI”) expanded our geographical footprint within the placement and contract staffing of information technology.
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., Triad Personnel Services and Triad Staffing. As of June 30,December 31, 2018, we operated thirty-fivethirty-four branch offices in downtown or suburban areas of major U.S. cities in sixteenthirteen states. We have one office located in each of Arizona, Connecticut, Georgia, Minnesota, New Jersey, Virginia and Washington DC, and Virginia, three offices in Illinois and Massachusetts, four offices in Colorado and Illinois, four offices in Massachusetts and Texas, six offices in Ohio and seven offices in Ohio and 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 June 30,December 31, 2018 Compared to the Three Months Ended June 30,December 31, 2017
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months Ended (in thousands) June 30, 2018 June 30, 2017 $ Change % Change Direct hire placement services Professional contract services % Industrial contract services % Consolidated net revenues % $ 6,388 $ 5,969 $ 419 7.02 % 28,713 33,382 (4,669 ) -13.99 5,166 6,718 (1,552 ) -23.10 $ 40,267 $ 46,069 $ (5,802 ) -12.59
Three Months Ended December 31, December 31, (in thousands) 2018 2017 $ Change % Change Professional contract services Industrial contract services Total professional and industrial contract services Direct hire placement services Consolidated net revenues The Company reported consolidated revenue of approximately $40.3 million for the fiscal third quarter ended June 30, 2018 compared to revenue of approximately $46.1 million for the fiscal third quarter ended June 30, 2017.$ 28,394 $ 33,589 (5,195 ) (15 ) 5,620 5,872 (252 ) (4 ) 34,014 39,461 (5,447 ) (14 ) 4,529 5,771 (1,242 ) (22 ) $ 38,543 $ 45,232 (6,689 ) (15 )
Contract staffing services contributed approximately $33.9$34 million or approximately 84%88% of consolidated revenue and direct hire placement services contributed approximately $6.4$4.5 million, or approximately16%approximately 12%, of consolidated revenue for the fiscal quarterthree months ended June 30,December 31, 2018. This compares to contract staffing services revenue of approximately $40.1$39.5 million, or approximately 87%, of consolidated revenue and direct hire placement revenue of approximately $6$5.8 million, or approximately 13%, of consolidated revenue respectively, for the fiscal third quarterthree months ended June 30,December 31, 2017.
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The overall decrease in contract staffing services revenue of approximately $6.2$5.4 million, or 14%, for the three months ended December 31, 2018 fiscal third quarter compared to the comparable prior year fiscal third quarterthree months ended December 31, 2017 was primarily dueattributable to a reduction in the temporary workforce requirements of a few key customers in the industrial services division and the strategic actions instituted by management primarily in the professional services division to reduce the number of unproductive or underperforming full time personnel including recruiters, account representatives, sales professionals and related administrative support staff.staff and to a lesser extent, reductions in the temporary workforce requirements of a few key customers in the industrial services division. In addition, some of the decline in revenue was a natural result of certain office consolidations and office closures that were undertaken by the Company as a by-product of its definitive actions to maximize productivity, reduce overall field costs and improve profitability.
Direct hire placement revenue for the fiscal third quarterthree months ended June 30,December 31, 2018 increaseddecreased by approximately $419,000$1.2 million over the comparable prior yearthree months ended December 31, 2017.The decrease is attributable to market speculation of an impending recession in the U.S economy during the first fiscal third quarter of 2019, which had a cooling effect on hiring, especially around the holiday season. An additional nuance of this trend were higher falloffs, in part, due to increased productivityinstances where placements initially accepted offers from a smaller numberthe Company’s customers, but immediately thereafter decided not to change employers, again due to economic concerns of dedicated direct hire placement personnel. GEE Group expectsthe candidates.
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 together with theand direct hire placement revenue, for the quarter includesincluding 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. GEE Group’sThe Company’s strategic plans to achieve this goal involve, setting aggressive new business growth targets, initiatives to increase services to existing customers, 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, which represents approximately 87%85% of total revenue for the 2018 fiscal third quarter.
Industrial contract services revenue decreased by approximately $1.5 million for the fiscal third quarterthree months ended June 30, 2018 to approximately $5.2 million from $6.7 million reported for the 2017 fiscal third quarter. To improve overall performance in the industrial services division, the Company has implemented an aggressive sales incentive program, streamlined branch operations and increased its focus on obtaining better pricing from new and existing accounts. GEE Group expects that the aforementioned actions coupled with new and expanded services offered to customers will contribute to enhanced financial performance from that segment.December 31, 2018.
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 employee-related costs, while they workworking on contract assignments. Cost of contract services for the three-month periodthree months ended June 30,December 31, 2018 decreased by approximately 12%13% to approximately $25.5$25.8 million compared to the three months ended December 31, 2017 of $29.5 million. The $3.7 million overall decrease in cost of contract services for the three months ended December 31, 2018 compared to the three months ended December 31, 2017 was primarily attributable to and consistent with the three-month period ended June 30, 2017 of approximately $29.0 million.corresponding declines in revenues, which is discussed further below.
Three Months Ended December 31, 2018 December 31, 2017 Gross Profit percentage by segment:Professional contract services 26.1 % 27.0 % Industrial contract services 13.9 % 15.6 % Consolidated professional and industrial services 24.1 % 25.4 % Direct hire placement services 100.0 % 100.0 % Combined gross profit margin %(1) 33.0 % 34.9 %
Three Months Ended June 30, 2018 June 30, 2017 Direct hire placement services % Industrial contract services Professional contact services Combined Gross Profit Margin % (1) 100 100 % 13.06 % 14.08 % 26.26 % 29.29 % 36.56 % 37.02 %
_________
(1) Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses.
In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately
The Company’s industrial staffing services gross margin for the
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
The Company’s SG&A for the Acquisition, Integration and
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 increased to $1.2 million for the three months ended December 31, 2018 from $0.04 million for the three months ended December 31, 2017 and include
Depreciation expense for the
Amortization Expense
Amortization expense for the three months ended Income from Operations As a result of
Interest Expense
Interest expense for the three months ended Provision for Income Taxes The Company recognized a tax expense
Net
Nine Months Ended (in thousands) June 30, 2018 June 30, 2017 $ Change % Change Direct hire placement services Professional contract services Industrial contract services % Consolidated net revenues
Nine months ended June 30, 2018 June 30, 2017 Direct hire placement services Professional contract services Industrial contract services Comined Gross Profit Margin %(1)
Liquidity and Capital Resources
The
As of December 31, 2018, the Company had $3.5 million of cash which was an increase of approximately $0.3 million from approximately $3.2 million as of September 30, 2018. As of December 31, 2018, the Company had working capital of $11.5 million compared to $13.1 million of working capital as of September 30, 2018.
The increase in net cash provided by (used in) operating activities for the three months ended December 31, 2018 as compared to the three months ended December 31, 2017, is consistent with reductions in accounts receivable and changes in other accruals as the result of corresponding reductions in revenue during the three months ended December 31, 2018 in comparison with the three months ended December 31, 2017. The primary uses of cash for investing activities were for the acquisition of property and equipment in the three months ended December 31, 2018 and 2017. Cash flow used in financing activities for the three months ended December 31, 2018 was primarily for payments on our term loan offset by proceeds from advances taken on the revolving credit facility. Cash flow provided by financing activities for the three months ended December 31, 2017 was primarily from net borrowings of the Revolving Credit Facility. Minimum debt service payments (principal) for the twelve-month period commencing after the close of business on December 31, 2018, are approximately $4 million. All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on December 31, 2018, are approximately $1.9 million. In recent years, the Company
Under the terms of the Credit Agreement, the Company may borrow up to
On the
The Credit Agreement contains certain
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or On August 10, 2018, the Company and its subsidiaries, as Borrowers, entered into a third amendment and
Management has taken definitive actions and expect to improve operations, reduce costs and improve profitability, and position the Company for future growth. The Company also is seeking replacement financing with a view towards lowering its borrowing costs. Based on its current projections, management expects that the Company can meet its future debt service requirement and comply with its financial covenants and other commitments, as amended in the Fourth Amendment and Waiver. 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
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”) pursuant to a Subscription Agreement dated October 2, 2015 between the Company and Jax. On April 3, 2017, the Company and JAX amended and restated the Subordinated Note in its entirety in the form of the 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021. The 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 lenders parties to the Credit Agreement, pursuant to a Subordination and Inter-creditor Agreements, dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and JAX. The 10% Note issued to JAX is not registered under the Securities Act of 1933, as amended (the “Securities Act”). JAX is an accredited investor. The issuance of the 10% Note to JAX 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, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier 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 On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of
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 SNIH acquisition, an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred 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
None of the shares of Series B Preferred Stock issued to the SNIH Stockholders are registered under the During the three months ended December 31, 2018, the Company issued 250,000 shares of common stock for the
Off-Balance Sheet Arrangements
As of
Not applicable.
Disclosure Controls and Procedures
As of
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
None.
Not required.
Not required.
None.
Not Applicable
On Mr. Thorpe shall also receive up to
The following exhibits are filed as a part of Part I of this report:
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.
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