(in thousands)
|
|
|
|
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
14,074
|
|
|
$
|
4,055
|
|
Accounts receivable, less allowances ($2,072 and $515, respectively)
|
|
|
16,047
|
|
|
|
20,826
|
|
Prepaid expenses and other current assets
|
|
|
1,393
|
|
|
|
2,221
|
|
Total current assets
|
|
|
31,514
|
|
|
|
27,102
|
|
Property and equipment, net
|
|
|
906
|
|
|
|
852
|
|
Goodwill
|
|
|
63,443
|
|
|
|
72,293
|
|
Intangible assets, net
|
|
|
18,843
|
|
|
|
23,881
|
|
Right-of-use assets
|
|
|
4,623
|
|
|
|
-
|
|
Other long-term assets
|
|
|
684
|
|
|
|
353
|
|
TOTAL ASSETS
|
|
$
|
120,013
|
|
|
$
|
124,481
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,051
|
|
|
$
|
3,733
|
|
Acquisition deposit for working capital guarantee
|
|
|
-
|
|
|
|
783
|
|
Accrued compensation
|
|
|
5,506
|
|
|
|
5,212
|
|
Short-term portion of term loan, net of discount
|
|
|
-
|
|
|
|
4,668
|
|
Subordinated debt
|
|
|
-
|
|
|
|
1,000
|
|
Current Paycheck Protection Program Loans and accrued interest
|
|
|
2,243
|
|
|
|
-
|
|
Current operating lease liabilities
|
|
|
1,615
|
|
|
|
-
|
|
Other current liabilities
|
|
|
6,748
|
|
|
|
3,172
|
|
Total current liabilities
|
|
|
18,163
|
|
|
|
18,568
|
|
Deferred taxes
|
|
|
430
|
|
|
|
300
|
|
Paycheck Protection Program loans and accrued interest
|
|
|
17,779
|
|
|
|
-
|
|
Revolving credit facility
|
|
|
11,828
|
|
|
|
14,215
|
|
Term loan, net of discount
|
|
|
37,752
|
|
|
|
36,029
|
|
Subordinated convertible debt (includes $0 and $1,269, net of discount, respectively, due to related parties)
|
|
|
-
|
|
|
|
17,954
|
|
Noncurrent operating lease liabilities
|
|
|
3,927
|
|
|
|
-
|
|
Other long-term liabilities
|
|
|
2,756
|
|
|
|
595
|
|
Total long-term liabilities
|
|
|
74,472
|
|
|
|
69,093
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MEZZANINE EQUITY
|
|
|
|
|
|
|
|
|
Preferred stock; no par value; authorized - 20,000 shares -
|
|
|
|
|
|
|
|
|
Preferred series A stock; authorized -160 shares; issued and outstanding - none
|
|
|
-
|
|
|
|
-
|
|
Preferred series B stock; authorized - 5,950 shares; issued and outstanding - 0 and 5,566 shares at September 30, 2020 and September 30, 2019, respectively; liquidation value of the preferred series B stock is approximately $0 and $27,050 at September 30, 2020 and September 30, 2019, respectively
|
|
|
-
|
|
|
|
27,551
|
|
Preferred series C stock; authorized - 3,000 shares; issued and outstanding - 0 and 60 shaes at September 30, 2020 and September 30, 2019, respectively; liquidation value of the preferred series C stock is approximately $0 and $60 at September 30, 2020 and September 30, 2019, respectively
|
|
|
-
|
|
|
|
60
|
|
Total mezzanine equity
|
|
|
-
|
|
|
|
27,611
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 17,667 shares at September 30, 2020 and 12,538 shares at September 30, 2019, respectively
|
|
|
-
|
|
|
|
-
|
|
Additional paid in capital
|
|
|
58,031
|
|
|
|
49,990
|
|
Accumulated deficit
|
|
|
(30,653
|
)
|
|
|
(40,781
|
)
|
Total shareholders' equity
|
|
|
27,378
|
|
|
|
9,209
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
120,013
|
|
|
$
|
124,481
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Year Ended September 30,
|
|
(in thousands except per share data)
|
|
2020
|
|
|
2019
|
|
NET REVENUES:
|
|
|
|
|
|
|
Contract staffing services
|
|
$
|
114,526
|
|
|
$
|
133,143
|
|
Direct hire placement services
|
|
|
15,309
|
|
|
|
18,531
|
|
NET REVENUES
|
|
|
129,835
|
|
|
|
151,674
|
|
|
|
|
|
|
|
|
|
|
Cost of contract services
|
|
|
85,131
|
|
|
|
99,653
|
|
GROSS PROFIT
|
|
|
44,704
|
|
|
|
52,021
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses (including noncash
|
|
|
|
|
|
|
|
|
stock-based compensation expense of $1,559 and $2,186 respectively)
|
|
|
44,401
|
|
|
|
46,739
|
|
Depreciation expense
|
|
|
248
|
|
|
|
349
|
|
Amortization of intangible assets
|
|
|
5,038
|
|
|
|
5,586
|
|
Goodwill impairment charge
|
|
|
8,850
|
|
|
|
4,300
|
|
LOSS FROM OPERATIONS
|
|
|
(13,833
|
)
|
|
|
(4,953
|
)
|
Gain on extinguishment of debt
|
|
|
12,316
|
|
|
|
-
|
|
Interest expense
|
|
|
(12,233
|
)
|
|
|
(12,440
|
)
|
LOSS BEFORE INCOME TAX PROVISION
|
|
|
(13,750
|
)
|
|
|
(17,393
|
)
|
Provision for income tax
|
|
|
(597
|
)
|
|
|
(370
|
)
|
NET LOSS
|
|
|
(14,347
|
)
|
|
|
(17,763
|
)
|
Gain on redeemed preferred stock
|
|
|
24,475
|
|
|
|
-
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
10,128
|
|
|
$
|
(17,763
|
)
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS (LOSS) PER SHARE
|
|
$
|
0.67
|
|
|
$
|
(1.50
|
)
|
DILUTED EARNINGS (LOSS) PER SHARE
|
|
$
|
(1.14
|
)
|
|
$
|
(1.50
|
)
|
WEIGHTED AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
BASIC
|
|
|
15,214
|
|
|
|
11,840
|
|
DILUTED
|
|
|
21,570
|
|
|
|
11,840
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Common
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Paid
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
(in thousands)
|
|
Shares
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
|
10,783
|
|
|
$
|
44,120
|
|
|
$
|
(23,018
|
)
|
|
$
|
21,102
|
|
Share-based compensation
|
|
|
-
|
|
|
|
2,186
|
|
|
|
-
|
|
|
|
2,186
|
|
Issuance of stock for interest
|
|
|
1,505
|
|
|
|
1,605
|
|
|
|
-
|
|
|
|
1,605
|
|
Conversion of preferred Series B to common stock
|
|
|
250
|
|
|
|
1,238
|
|
|
|
-
|
|
|
|
1,238
|
|
Beneficial conversion features on subordinated debt
|
|
|
-
|
|
|
|
841
|
|
|
|
-
|
|
|
|
841
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(17,763
|
)
|
|
|
(17,763
|
)
|
Balance, September 30, 2019
|
|
|
12,538
|
|
|
$
|
49,990
|
|
|
$
|
(40,781
|
)
|
|
$
|
9,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
23
|
|
|
|
1,559
|
|
|
|
-
|
|
|
|
1,559
|
|
Issuance of stock for restricted stock
|
|
|
500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of stock for interest
|
|
|
2,795
|
|
|
|
1,204
|
|
|
|
-
|
|
|
|
1,204
|
|
Issuance of stock for debt conversion
|
|
|
1,718
|
|
|
|
5,185
|
|
|
|
-
|
|
|
|
5,185
|
|
Issuance of stock for preferred stock conversion
|
|
|
93
|
|
|
|
93
|
|
|
|
-
|
|
|
|
93
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(14,347
|
)
|
|
|
(14,347
|
)
|
Gain on redemption of preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
24,475
|
|
|
|
24,475
|
|
Balance, September 30, 2020
|
|
|
17,667
|
|
|
$
|
58,031
|
|
|
$
|
(30,653
|
)
|
|
$
|
27,378
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Year Ended September 30,
|
|
(in thousands)
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,347
|
)
|
|
$
|
(17,763
|
)
|
Adjustments to reconcile net loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Gain on extingishment of debt
|
|
|
(12,316
|
)
|
|
|
-
|
|
Depreciation and amortization
|
|
|
5,286
|
|
|
|
5,935
|
|
Goodwill impairment charge
|
|
|
8,850
|
|
|
|
4,300
|
|
Non-cash lease expense
|
|
|
1,623
|
|
|
|
-
|
|
Stock compensation expense
|
|
|
1,559
|
|
|
|
2,186
|
|
Provision for doubtful accounts
|
|
|
1,557
|
|
|
|
213
|
|
Deferred income taxes
|
|
|
130
|
|
|
|
154
|
|
Amortization of debt discount
|
|
|
1,779
|
|
|
|
909
|
|
Interest expense paid with common and preferred stock
|
|
|
1,288
|
|
|
|
1,666
|
|
Paid in kind interest on term loan
|
|
|
1,242
|
|
|
|
-
|
|
Change in acquisition deposit for working capital guarantee
|
|
|
(783
|
)
|
|
|
(100
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
3,222
|
|
|
|
(284
|
)
|
Accrued interest
|
|
|
95
|
|
|
|
-
|
|
Accounts payable
|
|
|
(2,156
|
)
|
|
|
1,210
|
|
Accrued compensation
|
|
|
2,729
|
|
|
|
-
|
|
Change in other assets, net of change in other liabilities
|
|
|
(2,005
|
)
|
|
|
1,180
|
|
Net cash used in operating activities
|
|
|
(2,247
|
)
|
|
|
(394
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(119
|
)
|
|
|
(209
|
)
|
Net cash used in investing activities
|
|
|
(119
|
)
|
|
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment on term loan
|
|
|
(500
|
)
|
|
|
(2,687
|
)
|
Net proceeds from (payments on) subordinated debt
|
|
|
(1,724
|
)
|
|
|
1,893
|
|
Payment on preferred stock redemption
|
|
|
(2,931
|
)
|
|
|
-
|
|
Net proceeds from CARES Act Paycheck Protection Program Loans
|
|
|
19,927
|
|
|
|
-
|
|
Payments on capital lease
|
|
|
-
|
|
|
|
(51
|
)
|
Net (payments on) proceeds from revolving credit
|
|
|
(2,387
|
)
|
|
|
2,290
|
|
Net cash provided by financing activities
|
|
|
12,385
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
10,019
|
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
4,055
|
|
|
|
3,213
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
14,074
|
|
|
$
|
4,055
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
7,785
|
|
|
$
|
10,137
|
|
Cash paid for taxes
|
|
|
80
|
|
|
|
92
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Conversion of series B convertible preferred stock to common stock
|
|
|
-
|
|
|
|
1,238
|
|
Beneficial conversion features on subordinated debt
|
|
|
-
|
|
|
|
841
|
|
Acquisition of equipment with finance lease
|
|
|
184
|
|
|
|
102
|
|
Conversion of 8% subordinated notes to common stock by related parties
|
|
|
1,000
|
|
|
|
-
|
|
Conversion of 10% subordinated notes to common stock
|
|
|
4,185
|
|
|
|
-
|
|
Conversion of series C preferred stock to common by related parties
|
|
|
93
|
|
|
|
-
|
|
Redemption of series B preferred stock
|
|
|
24,441
|
|
|
|
-
|
|
Redemption of series C preferred stock
|
|
|
34
|
|
|
|
-
|
|
Accrued fees on term loan
|
|
|
4,978
|
|
|
|
-
|
|
Right-of-use assets, net of deferred rent
|
|
|
6,246
|
|
|
|
-
|
|
Operating lease liability
|
|
|
6,687
|
|
|
|
-
|
|
The accompanying notes are an integral part of these consolidated financial statements.
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.
The Company’s fiscal year begins on October 1 and ends on September 30 of each year. Fiscal 2020 and fiscal 2019 refer to the fiscal years ended September 30, 2020 and 2019, respectively.
2. Significant Accounting Policies and Estimates
Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.
Liquidity
The primary sources of liquidity for the Company are revenues earned and collected from its clients for the placement of contractors and permanent employment candidates and borrowings available under the Senior Credit Agreement. Uses of liquidity include primarily the costs and expenses necessary to fund operations, including payment of compensation to the Company’s contract and permanent employees, payment of operating costs and expenses, payment of taxes, payment of interest and principal under its debt agreements, and capital expenditures.
The Company experienced net losses in fiscal 2020 and 2019, which also negatively impacted the Company’s ability to generate liquidity. During much of this period, the Company significantly restructured its operations, made significant cost reductions, including closing and consolidating unprofitable locations and eliminating underperforming personnel, implemented strategic management changes, and intensified focus on stabilizing the business and restoring profitable growth. As a result, management believes the Company had begun to see its operations and business stabilize.
In approximately mid-March 2020, the Company began to experience the severe negative effects of the economic disruptions resulting from the Coronavirus Pandemic (“COVID-19”). These have included abrupt reductions in demand for the Company’s primary sources of revenue, its temporary and direct hire placements, lost productivity due to business closings both by clients and at the Company’s own operating locations, and the significant disruptive impacts to many other aspects of normal operations. These effects have continued to be felt across all businesses, with the most severe impacts being felt in the commercial (light industrial) and finance, accounting and office clerical (FAO) end markets within the professional segment.
On June 30, 2020, the Company completed a financial restructuring and eliminated approximately $19,685 of its subordinated indebtedness and approximately $27,695 of its convertible preferred stock as required pursuant to the terms of Seventh Amendment, dated as of April 28, 2020, to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017. The Company entered into a Repurchase Agreement for Preferred Stock and Subordinated Notes (the “Repurchase Agreement”), dated as of June 30, 2020 with Ronald R. Smith (“Mr. Smith”), Thrivent Financial for Lutherans (“Thrivent”), Madison Capital Funding LLC (“Madison”), Maurice R. Harrison IV (“Mr. Harrison”), Peter Langlois (“Mr. Langlois”), Vincent Lombardo (“Mr. Lombardo”) and Shane Parr (Mr. Parr, and collectively with Mr. Smith, Thrivent, Madison, Mr. Harrison, Mr. Langlois, and Mr. Lombardo), the “SNI Group Members” pursuant to which the SNI Group Members agreed to allow the Company to repurchase and settle all of the 9.5% Convertible Subordinated Notes (the “9.5% Notes”), Series B Convertible Preferred Stock, no par value (“Series B Preferred Stock”), 8% Convertible Subordinated Notes (“8% Notes”) and Series C 8% Cumulative Convertible Preferred Stock, no par value (“Series C Preferred Stock”) held by each of them as set forth below. All of the outstanding 9.5% Notes and all of the outstanding Series B Preferred Stock were held by SNI Group Members.
Management believes that the Company can generate adequate liquidity to meet its obligations for the foreseeable future assuming the negative economic effects of COVID-19 do not worsen, and that economic recovery continues.
As of September 30, 2020, the Company had cash of $14,074, which was an increase of $10,019 from $4,055 as of September 30, 2019. Net working capital as of September 30, 2020 was $13,351, as compared to net working capital of $8,534 for September 30, 2019.
Paycheck Protection Program Loan
Between April 29 and May 7, 2020, the Company obtained loans in the aggregate amount of $19,927 for its operating subsidiaries from BBVA USA (“BBVA”), as lender, pursuant to the Payroll Protection Plan (the “PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). These funds were the only source of financing available to our companies and businesses and have been and continue to be critical to our ability to maintain operations, including the employment of our temporary and full-time employees, in order to produce and meet our foreseeable liquidity requirements in the midst of this continuing worldwide Coronavirus Pandemic. The Company accounted for the PPP loans as a debt (See Note 9) in accordance with Accounting Standards Codification (“ASC”) Topic 470 Debt. Accordingly, the PPP loans were recognized as current and noncurrent debt in the Company’s consolidated financial statements.
The Company, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, deferred paying $2,435 of applicable payroll taxes as of September 30, 2020, which is included in long-term liability in the consolidated financial statements. The deferred deposits of the employer’s share of Social Security tax must be paid to be considered timely (and avoid a failure to deposit penalty) by December 31, 2021, 50 percent of the eligible deferred amount, and the remaining amount by December 31, 2022.
Principles of Consolidation
The 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.
Use of Estimates
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates.
Revenue Recognition
Revenues from contracts with customers are generated from direct hire placement services, temporary professional services staffing, and temporary light industrial staffing. Revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances.
Direct hire placement service revenues from contracts with customers are recognized when employment candidates accept offers of employment, less a provision for estimated credits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company’s guarantee period (referred to as “falloffs”). The Company’s guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire. Fees associated with candidate placement are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates.
Temporary staffing service revenues from contracts with customers are recognized in amounts the Company has the right to invoice as the services are 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 as Company employees (as opposed to client 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 statements of operations as a reduction of placement service revenues and were approximately $1,375 in fiscal 2020 and $2,243 in fiscal 2019. Expected future falloffs and refunds are estimated and reflected in the consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below.
See Note 15 for disaggregated revenues by segment.
Payment terms in our contracts vary by the type and location of our customer and 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, employee benefits and certain other employee-related costs of the Company’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. As of September 30, 2020, and September 30, 2019, there were no cash equivalents. Cash deposit accounts are maintained at financial institutions and, at times, balances may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation. We have never experienced any losses related to these balances.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. 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. An allowance for placement fall-offs also is recorded as a reduction of revenues for estimated losses due to applicants not remaining employed for the Company’s guarantee period. These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. Management believes that the nature of the contract service business, wherein client companies are generally dependent on our contract employees in the same manner as permanent employees for their production cycles and the conduct of their respective businesses contributes to a relatively small accounts receivable allowance.
As of September 30, 2020, and September 30, 2019 allowance for doubtful accounts was $2,072 and $515, respectively. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The allowance also includes permanent placement falloff reserves of $287 and $197 as of September 30, 2020 and September 30, 2019, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation expense is calculated on a straight-line basis over estimated useful lives of five years for computer equipment and two to ten years for office equipment, furniture and fixtures. The Company capitalizes computer software purchased or developed for internal use and amortizes it over an estimated useful life of five years. The carrying value of property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that it may not be recoverable. If the carrying amount of an asset group is greater than its estimated future undiscounted cash flows, the carrying value is written down to the estimated fair value. There was no impairment of property and equipment for fiscal 2020 and fiscal 2019.
Leases
The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheet. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All the Company’s real estate leases are classified as operating leases.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have subleases. The Company does not currently have residual value guarantees or restrictive covenants in its leases.
Fair Value Measurement
The Company follows the provisions of Financial 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”) 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 of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carrying value of the Company’s long-term liabilities represents their fair value based on level 3 inputs. The Company’s goodwill and other intangible assets are measured at fair value on a non-recurring basis using level 3 inputs, as discussed in Note 6.
Earnings and Loss per Share
Basic earnings and loss per share are computed by dividing net income or loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the vesting of restricted shares granted but unissued, exercise of stock options and warrants and the conversion of notes payable and preferred stock to common stock. The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method. The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method.
The weighted average dilutive incremental shares, or common stock equivalents, included in the calculations of dilutive shares were 6,356 for fiscal 2020. Common stock equivalents, which are excluded because their effect is anti-dilutive, were approximately 1,689 and 12,832 for the fiscal 2020 and 2019, respectively.
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Basic net income (loss) per share computation:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,347
|
)
|
|
$
|
(17,763
|
)
|
Add: gain on redeemed preferred stock
|
|
|
24,475
|
|
|
|
-
|
|
Net income (loss) attributable to common stockholders
|
|
|
10,128
|
|
|
|
(17,763
|
)
|
Weighted-average common shares outstanding
|
|
|
15,214
|
|
|
|
11,840
|
|
Basic net income (loss) per share
|
|
$
|
0.67
|
|
|
$
|
(1.50
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net income per share computation:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
|
10,128
|
|
|
|
(17,763
|
)
|
Less: gain on redeemed preferred stock
|
|
|
(24,475
|
)
|
|
|
-
|
|
Less: gain on extinguishment of convertible debt
|
|
|
(11,405
|
)
|
|
|
-
|
|
Add: interest expense on convertible note
|
|
|
1,204
|
|
|
|
-
|
|
Diluted loss attributable to common stockholders
|
|
$
|
(24,548
|
)
|
|
$
|
(17,763
|
)
|
Weighted average common shares outstanding
|
|
|
15,214
|
|
|
|
11,840
|
|
Incremental shares attributable to the assumed conversion of preferred stock, convertible debt and exercise of outstanding stock options and warrants
|
|
|
6,356
|
|
|
|
-
|
|
Total adjusted weighted-average shares
|
|
|
21,570
|
|
|
|
11,840
|
|
Diluted net loss per share
|
|
$
|
(1.14
|
)
|
|
$
|
(1.50
|
)
|
For the fiscal 2019, in which net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation.
Advertising Expenses
The Company expenses the costs of print and internet media advertising and promotions as incurred and reports these costs in selling, general and administrative expenses. Advertising expense totaled $1,913 and $2,322 for fiscal 2020 and fiscal 2019, respectively.
Goodwill
The Company evaluates its goodwill for possible impairment as prescribed by ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment at least annually and when one or more triggering events or circumstances indicate that the goodwill might be impaired. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the estimated fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.
The Company performed annual goodwill impairment testing effective as of September 30, 2020, and allocates its goodwill among two reporting units, its Professional segment and its Commercial segment for purposes of evaluation for impairments. In determining the fair value of our two reporting units, we use one or a combination of commonly accepted valuation methodologies: 1) the income approach, which is based on the present value of discounted cash flows projected for the reporting unit or, in certain instances, capitalization of earnings, and 2) the market approach, which estimates a fair value based on an appropriate revenue and/or earnings multiple(s) derived from comparable companies. These valuation techniques on assumptions and other factors, such as the estimated future cash flows of our reporting units, the discount rate used to determine the present value of our cash flows and the market multiples of comparable companies utilized. In applying our methods, we also use averages or medians to select assumptions derived from comparable companies or market data, and in the application of the income and/or market approaches if we determine that this will provide a more appropriate estimated fair value or range of fair value estimates of the reporting units. Changes to input assumptions and other factors used or considered in the analysis could result in materially different evaluations of goodwill impairment.
As a result of the evaluation performed, the carrying value of its net assets exceeded the estimated fair value of the Company’s Professional segment as of September 30, 2020, while the estimated fair value of the Commercial segment exceeded its net carrying value. The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $8,850, which was recorded in the consolidated financial statements for fiscal 2020. For purposes of performing this goodwill impairment assessment, management applied the valuation techniques and assumptions to its Professional and Commercial segments as reporting units discussed above and also considered recent trends in the Company’s stock price, implied control or acquisition premiums, and other possible factors and their effects on estimated fair value of the Company’s reporting units.
Management also considered the Company’s market capitalization, as recently reported on the NYSE American exchange, in conducting its assessment, which has been lower than its consolidated net book value (consolidated stockholders’ equity). Management believes that the continuing declines in global economic and labor market conditions and other disruptions caused by the COVID-19 pandemic that have negatively impacted the Company’s business and operating results also are a contributing factor to the Company’s recent stock prices, market capitalization, and potentially, the value of its goodwill resulting, in part, in the non-cash impairment charge recognized during fiscal 2020. Management believes and expects that these conditions, including those impacting the Company, are improving and will continue to improve. However, there can be no assurance that the Company’s goodwill or other long-lived assets will not become impaired in the future.
The Company adopted ASU 2017-04 in 2019. Due to a previous sustained decline in the market capitalization of our common stock during the third quarter of 2019, we also performed a goodwill impairment test in accordance with the provisions of ASU 2017-04, and recognized a non-cash charge for the impairment of goodwill of $4,300 in fiscal 2019.
Intangible Assets
Separately identifiable intangible assets held in the form of customer lists, non-compete agreements, customer relationships, management agreements and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.
Impairment of Long-lived Assets (other than Goodwill)
The Company recognizes an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that these assets 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. In the event the net carrying value of the Company’s long-lived assets are determined not to be recoverable, they are reduced to fair value, which is typically calculated using one or a combination of the relief from royalty method, the multiple of excess cash flow method, and/or other applicable adaptations of the discounted cash flow method. For purposes of testing the long-lived assets other than goodwill, long-lived assets are grouped and considered with other assets and liabilities within the Professional and Commercial segments. The Company did not record any impairments to its long-lived assets during fiscal 2020 and 2019.
Beneficial Conversion Feature
The Company evaluates embedded conversion features within a convertible instrument under ASC 815 Derivatives and Hedging to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require treatment under ASC 815, the instrument is evaluated under ASC 470-20 Debt with Conversion and Other Options for consideration of any beneficial feature.
The Company records a beneficial conversion feature (“BCF”) when the convertible instrument is issued with conversion features at fixed or adjustable rates that are below market value when issued. The BCF for convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.
The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized as interest or deemed dividends over the period from the date of the convertible instrument’s issuance to the earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future. As a result of the settlement and conversion of the Company’s subordinated debt and preferred stock as of June 30, 2020, the Company charged off the remaining unamortized BCF associated with these instruments to interest expense and a gain was recognized from extinguishment of its convertible subordinated debt.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with FASB ASC 718, “Compensation-Stock Compensation”, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, we recognize expense on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Such options are valued using the Black-Scholes option pricing model.
See Note 11 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation. Upon the exercise of options, it is the Company’s policy to issue new shares rather than utilizing treasury shares.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
We recognize and group interest and penalties, if any, with income tax expense in the accompanying consolidated statement of operations. As of September 30, 2020, and September 30, 2019, 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 years ended September 30, 2020 to conform to the current year presentation with no effect on total expenses or net loss.
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. The 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 the Industrial and Professional Staffing Services segments. 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 employees, length of employment and revenue recognition are considered in determining the Company’s operating segments.
3. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Lease Accounting. In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous ASC 840 guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. We adopted this guidance as of October 1, 2019 and elected the transition method provided under ASU 2018-11. This standard has a material effect on our consolidated balance sheets with the recognition of new right of use assets and lease liabilities for all operating leases, except for those leases where we elected the short-term lease recognition exemption, as these leases have a non-cancelable lease term of approximately one year or less. Adoption of the new standard did not have a material effect on the Company’s results of operations. As of the transition date, the ROU asset and total lease liability (current and long-term) were $5,900 and $6,341, respectively.
The Company elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) lease classification, and (iii) not revaluing initial direct costs for existing leases. Also, the Company elected the practical expedient which allows aggregation of non-lease components with the related lease components when evaluating accounting treatment. Lastly, the Company applied the modified retrospective adoption method, utilizing the simplified transition option available in the ASC 842, which allows entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption. See Note 5 for further discussion of leases.
Stock Compensation. In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (“ASC 718”), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted (but no sooner than the adoption of Topic 606). The Company adopted the new guidance as of October 1, 2019. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
Current Expected Credit Losses Model. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company has not yet determined the impact of the new guidance on its consolidated financial statements and related disclosures.
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:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
|
|
|
|
|
|
Computer software
|
|
$
|
1,535
|
|
|
$
|
1,497
|
|
Office equipment, furniture, fixtures and leasehold improvements
|
|
|
3,595
|
|
|
|
3,599
|
|
Total property and equipment, at cost
|
|
|
5,130
|
|
|
|
5,096
|
|
Accumulated depreciation and amortization
|
|
|
(4,224
|
)
|
|
|
(4,244
|
)
|
Property and equipment, net
|
|
$
|
906
|
|
|
$
|
852
|
|
Depreciation expense for fiscal 2020 and 2019 was $248 and $349, respectively.
5. 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 2021. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.
Operating lease expenses were $2,433 and $2,872 for fiscal 2020 and 2019, respectively.
Supplemental cash flow information related to leases consisted of the following:
|
|
Fiscal 2020
|
|
Cash paid for operating lease liabilities
|
|
$
|
1,946
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
733
|
|
Supplemental balance sheet information related to leases consisted of the following:
|
|
Fiscal 2020
|
|
Weighted average remaining lease term for operating leases
|
|
2.4 years
|
|
Weighted average discount rate for operating leases
|
|
|
6.0
|
%
|
The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the consolidated balance sheet as of September 30, 2020, including certain closed offices are as follows:
Fiscal 2021
|
|
$
|
1,848
|
|
Fiscal 2022
|
|
|
1,686
|
|
Fiscal 2023
|
|
|
1,159
|
|
Fiscal 2024
|
|
|
898
|
|
Fiscal 2025
|
|
|
434
|
|
Thereafter
|
|
|
108
|
|
Less: Imputed interest
|
|
|
(591
|
)
|
Present value of operating lease liabilities (a)
|
|
$
|
5,542
|
|
(a) Includes current portion of $1,615 for operating leases.
Disclosures related to periods prior to adoption of ASU 2016-02
The Company adopted ASU 2016-02 using a modified retrospective adoption method at October 1, 2019 as noted in Note 3. As of September 30, 2019, 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:
Fiscal 2020
|
|
$
|
1,990
|
|
Fiscal 2021
|
|
|
1,597
|
|
Fiscal 2022
|
|
|
1,485
|
|
Fiscal 2023
|
|
|
1,007
|
|
Fiscal 2024
|
|
|
779
|
|
Thereafter
|
|
|
427
|
|
Total
|
|
$
|
7,285
|
|
6. Goodwill and Intangible Assets
Goodwill
Goodwill asset for fiscal 2020 and fiscal 2019 was $63,443 and $72,293, respectively. As a result of the evaluation performed, the carrying value of its net assets exceeded the estimated fair value of the Company’s Professional segment as of September 30, 2020, while the estimated fair value of the Commercial segment exceeded its net carrying value. The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $8,850, which was recorded in the consolidated financial statements for fiscal 2020. For purposes of performing this goodwill impairment assessment, management mainly considered recent trends in the Company’s stock price, estimated control or acquisition premium, earnings and other possible factors and their effects on estimated fair value of the Company’s reporting units.
Due to a previous sustained decline in the market capitalization of our common stock during the third quarter of 2019, we also performed a goodwill impairment test in accordance with the provisions of ASU 2017-04, and recognized a non-cash charge for the impairment of goodwill of $4,300 in fiscal 2019.
Intangible Assets
The following tables set forth the costs, accumulated amortization and net book value of the Company’s separately identifiable intangible assets as of September 30, 2020 and September 30, 2019 and estimated future amortization expense.
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
Customer relationships
|
|
$
|
29,070
|
|
|
$
|
13,188
|
|
|
$
|
15,882
|
|
|
$
|
29,070
|
|
|
$
|
10,321
|
|
|
$
|
18,749
|
|
Trade names
|
|
|
8,329
|
|
|
|
5,379
|
|
|
|
2,950
|
|
|
|
8,329
|
|
|
|
3,958
|
|
|
|
4,371
|
|
Non-Compete agreements
|
|
|
4,331
|
|
|
|
4,320
|
|
|
|
11
|
|
|
|
4,331
|
|
|
|
3,570
|
|
|
|
761
|
|
Total
|
|
$
|
41,730
|
|
|
$
|
22,887
|
|
|
$
|
18,843
|
|
|
$
|
41,730
|
|
|
$
|
17,849
|
|
|
$
|
23,881
|
|
Estimated Amortization Expense
Fiscal 2021
|
|
$
|
4,088
|
|
Fiscal 2022
|
|
|
3,469
|
|
Fiscal 2023
|
|
|
2,879
|
|
Fiscal 2024
|
|
|
2,879
|
|
Fiscal 2025
|
|
|
2,741
|
|
Thereafter
|
|
|
2,787
|
|
|
|
$
|
18,843
|
|
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 non-compete agreements, which are typically five years in duration.
The amortization expense for intangible assets was $5,038 and $5,586 for fiscal 2020 and 2019, respectively.
7. Accrued Compensation
Accrued Compensation is comprised of accrued wages, the related payroll taxes, employee benefits of the Company’s employees, including those working on contract assignments, commissions earned and not yet paid and estimated commissions and bonuses payable.
8. Revolving Credit Facility and Term Loan
Revolving Credit, Term Loan and Security Agreement
The Company and its subsidiaries, as borrowers, are parties to a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with certain investment funds managed by MGG Investment Group LP (“MGG”). The Revolving Credit Facility and Term Loan under the Credit Agreement, as amended, mature on June 30, 2023.
Revolving Credit Facility
As of September 30, 2020, the Company had $11,828 in outstanding borrowings under the Revolving Credit Facility, which accrued interest at an annual effective rate of approximately 11%.
Outstanding balances and corresponding amounts available to be borrowed or required to be repaid under the Revolving Credit Facility are determined using an agreed upon borrowing base calculation, which allows the Company to borrow amounts of up to 85% of its eligible outstanding accounts receivable, excluding specified past due balances and which amounts are further reduced for certain reserves and set asides under the Credit Agreement. As of September 30, 2020, the Company had $1,592 then currently available for borrowing under the terms of the Revolving Credit Facility.
In addition to the Company’s accounts receivable, 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:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
42,646
|
|
|
$
|
41,905
|
|
Unamortized debt discount
|
|
|
(4,894
|
)
|
|
|
(1,208
|
)
|
Term loan, net of discount
|
|
|
37,752
|
|
|
|
40,697
|
|
Short term portion of term loan, net of discounts
|
|
|
-
|
|
|
|
4,668
|
|
Long term portion of term loan, net of discounts
|
|
$
|
37,752
|
|
|
$
|
36,029
|
|
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 any and all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on maturity as of June 30, 2023. Principal and accrued interest payments are required as follows: fiscal 2021- $889, fiscal 2022 – $1,778, and fiscal 2023 - $39,979.
The Company also has been required to make prepayments on the Term Loan in amounts 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, 2019 (refer to Seventh Amendment to Credit Agreement, below, which includes certain modifications to this prepayment requirement). To date, the Company has not been required to make any prepayments on the Term Loan.
As of September 30, 2020, the Company had $42,646 in outstanding borrowings under the Term Loan Facility that was at an interest of approximately 11%, plus additional interest at an annual rate 5% in the form of PIK (noncash, paid-in-kind), which accrues and is added to the balance of the Term Loan on a monthly basis.
The Credit Agreement includes financial and other restrictive covenants. Financial covenants include minimum fixed charge coverage ratios, minimum EBITDA, as defined under the Credit Agreement to include certain adjustments, and maximum senior leverage ratios. The Company measures and certifies these covenants quarterly. The financial covenants are measured on a trailing four quarter basis as of the end of each quarter. The Company met its financial covenants for the trailing four quarters ended September 30, 2020.
The Credit Agreement also 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.
Seventh Amendment to Credit Agreement
On April 28, 2020, the Company and its subsidiaries entered into Seventh Amendment, dated as of April 28, 2020 (the “Seventh Amendment”), to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). The Seventh Amendment represents the most significant loan modification of the Company’s Credit Agreement since inception. The Company and its senior lenders previously entered into the Sixth Amendment on February 12, 2020, while negotiating and in contemplation of the larger loan modification contained in Seventh Amendment.
The Seventh Amendment extends the maturity of the Credit Agreement from June 30, 2021 to June 30, 2023, lowered cash interest approximately 500 basis points (5%) per annum, postponed quarterly principal payments to recommence beginning June 30, 2021, and reduced the amounts of quarterly principal payments from the current $500 per quarter to $446. The Company has agreed to pay 5% PIK (non-cash, paid-in-kind) interest on the Term Loan only, which is accrued and added to the balance of the Term Loan, and to pay a restructuring fee of $3,478 and an exit fee of $1,500, which became fully earned upon the effective date, but are payable upon the occurrence of a triggering event. The triggering events include a change in control, refinancing, maturity, or other termination of the senior loans, and in the case of the restructuring fee, an acquisition by the Company also is considered a triggering event. In addition, the Company has agreed that for each six-month period commencing with the period ending on March 31, 2021 and for each fiscal year commencing with the fiscal year ending on September 30, 2021, it shall utilize its “Specified Excess Cash Flow Amount” (as defined in the Credit Agreement) to repay amounts outstanding under the Credit Agreement.
Under the Seventh Amendment, the Company also agreed to the condition that it will pursue, negotiate, and execute conversions of all of the Company’s outstanding subordinated debt and preferred stock into shares of the Company’s common stock. In the event the Company was able to meet the conversion conditions of the agreement, it would have then had the option to settle the restructuring fee, exit fee, and accumulated PIK balance, each when due, in cash or in shares of the Company’s common stock. In the case of the latter, the amount or number of shares distributable to the Senior Lenders would be determined using the most favorable conversion rate at which the holders of the Company’s subordinated indebtedness or preferred stock converted their securities to shares of common stock of the Company in their conversion transactions.
On June 30, 2020, the Company completed the transactions contemplated above, as planned, except that the Company was able to settle a significant portion of outstanding subordinated debt and preferred stock for cash and at very attractive terms, thereby eliminating the need to issue substantially more of its common stock and avoiding significant dilution to existing shareholders. (Refer to Ninth Amendment to Credit Agreement, below.)
Eighth Amendment to Credit Agreement and CARES Act Payroll Protection Program Loans
On May 5, 2020, the Company and its subsidiaries entered into nine (9) unsecured promissory notes payable under CARES Act Payroll Protection Program (“PPP”) and received net funds totaling $19,927 in order to obtain needed relief funds for allowable expenses under the CARES Act PPP. On May 5, 2020, the Company also entered into Eighth Amendment, dated as of May 5, 2020 (the “Eighth Amendment”) to the Credit Agreement. The Eighth Amendment to the Credit Agreement serves as the conforming amendment under the Credit Agreement to enable the Company and its subsidiaries to enter into the PPP loans and additional permitted indebtedness in compliance with the Credit Agreement.
Ninth Amendment to Credit Agreement
On June 30, 2020, the Company and its subsidiaries entered into Ninth Amendment, dated as of June 30, 2020 (the “Ninth Amendment”), to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Under the Ninth Amendment, the Company’s senior lender agreed to modify the earlier conversion condition of the Seventh Amendment and allow the Company to settle a significant portion of the subordinated debt and preferred stock with up to $5,100 in cash, instead of by converting all of it into the Company’s common stock. In exchange, the Company agreed to settle the exit and restructuring fees agreed to in the Seventh Amendment totaling $4,978, which were accrued as of September 30, 2020, in cash or in shares of the Company’s common stock, except under the Ninth Amendment, the determination of cash or stock would be at the Senior Lender’s discretion and no longer at the Company’s discretion as provided in the earlier Seventh Amendment.
On December 22, 2020, the Company and its subsidiaries entered into a letter amendment, dated as of December 22, 2020, to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”). Under the letter amendment, the Company’s senior lender agreed to modify settlement date for the exit and restructuring fees, which are now due to be settled on or before June 30, 2021.
9. CARES Act Payroll Protection Program Loans
Between April 29 and May 7, 2020, the Company obtained for each of its operating subsidiaries a loan from BBVA USA (“BBVA”) pursuant to the Payroll Protection Plan (the “PPP”) which was established under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The PPP loans were necessary to support ongoing operations due to current economic hardship, uncertainty, and the significant negative effects on the business operations and activity levels of the applicants attributable to COVID-19 including the impact of “lock-downs”, “quarantines” and “shut-downs”. The PPP loans were used primarily to restore employee pay-cuts, recall furloughed or laid-off employees, support the payroll costs for existing employees, hire new employees, and for other allowable purposes including interest costs on certain mortgage and other obligations, rent and utilities. Each of the Company’s subsidiary executed a separate promissory note evidencing unsecured loans under the PPP. The following promissory notes were executed by the Company and its subsidiaries: GEE Group, Inc., for $1,992 (the “GEE Group Note”), Scribe Solutions, Inc. for $277 (the “Scribe Note”), Agile Resources, Inc. is for $1,206 (the “Agile Note”), Access Data Consulting Corporation for $1,456 (the “Access Note”), Paladin Consulting, Inc. for $1,925 (the “Paladin Note”), SNI Companies, Inc. for $10,000 (the “SNI Note”), Triad Personnel Services, Inc. for $404 (the “Triad Personnel Note”), Triad Logistics, Inc. for $78 (the “Triad Logistics Note”), and BMCH, Inc. for $2,589 (the “BMCH Note”). The GEE Group Note, the Scribe Note, the Agile Note, the Access Note, the Paladin Note, the SNI Note, the Triad Personnel Note, the Triad Logistics Note, and the BMCH Note are referred to together as the “PPP Notes” and each individually as a “PPP Note”. The loans evidenced by the PPP Notes (the “PPP Loans”) are being made through BBVA as the lender. Principal and accrued interest payments are due and payable as follows: fiscal 2021- $2,243, and fiscal 2022 – $17,779.
The PPP Loans have two-year terms and bear interest at a rate of 1.00% per annum. Monthly principal and interest payments under the PPP Loans are deferred to either (1) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. The PPP Loans may be prepaid at any time prior to maturity with no prepayment penalties.
10. Subordinated Debt – Convertible and Non - Convertible
The Company had outstanding balances under its Convertible and Non-Convertible Subordinated Debt agreements, as follows:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
|
|
|
|
|
|
10% Convertible Subordinated Note
|
|
$
|
-
|
|
|
$
|
4,185
|
|
Subordinated Promissary Note
|
|
|
-
|
|
|
|
1,000
|
|
9.5% Convertible Subordinated Note
|
|
|
-
|
|
|
|
12,500
|
|
8% Convertible Subordinated Notes, net of discount, due to related parties
|
|
|
-
|
|
|
|
1,269
|
|
Total subordinated debt, convertible and non-convertible
|
|
|
-
|
|
|
|
18,954
|
|
Short term portion of subordinated debt, convertible and non-convertible
|
|
|
-
|
|
|
|
(1,000
|
)
|
Long term portion of subordinated debt, convertible and non-convertible
|
|
$
|
-
|
|
|
$
|
17,954
|
|
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,185.
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. The maturity date was on October 3, 2021 (the “Maturity Date”). The 10% Note was 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 was redeemable 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 exceeded the then applicable Conversion Price for a period of 20 trading days. The redemption price was an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon.
During fiscal 2020 and 2019, the Company issued approximately 756 and 408 shares of common stock to Jax Legacy as payment-in-kind interest of approximately $314 and $419, respectively, on the 10% Note.
On June 30, 2020, the Company and Jax Legacy, the sole holder of the Company’s 10% Note entered into a Note Conversion Agreement (the “Note Conversion Agreement”) whereby Jax Legacy agreed to immediately convert the $4,185 aggregate principal amount of the 10% Note to 718 shares of Common Stock at the $5.83 per share conversion rate stated in the 10% Notes. The conversion of the 10% Note was executed on June 30, 2020 and the Company issued 718 shares of Common Stock to Jax Legacy on that date.
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 in cash to the Sellers prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company issued to the Sellers a subordinated promissory note in the principal amount of $1,000 (the “Subordinated Note”). The Subordinated Note originally bore interest at the rate of 5.5% per annum. Interest on the Subordinated Note was payable monthly and principal could only be paid in stock until the term loan and Revolving Credit Facility was repaid.
On February 8, 2020, the Company and its subsidiaries, as Borrowers, entered into a first amendment (the “First Amendment”) to the Subordinated Note, dated as of January 20, 2017 (the “Subordinated Note”). Under the First Amendment, the Company and its lender agreed to amend Subordinated Note to change maturity date to January 20, 2022.
On June 30, 2020, the Company and Enoch S. Timothy and Dorothy Timothy entered into a Note Settlement Agreement (the “Note Settlement Agreement”). Timothy agreed to accept an aggregate amount of $89 in cash consideration for the purchase by the Company of the $1,000 aggregate principal amount of the Subordinated Note dated January 20, 2017. The Subordinated Note was settled at a conversion rate of $5.83 per share (the agreed conversion price at which the Subordinated Note would be convertible to Common Stock) and purchased at $0.52 per share (the closing price on the NYSE American for the Common Stock on June 16, 2020). The Timothy note settlement amount was paid to Timothy on June 30, 2020.
9.5% Convertible Subordinated Notes
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the acquisition of SNIH an aggregate of $12,500 in the form of 9.5% Convertible Subordinated Notes (the “9.5% Notes”). The maturity date was October 3, 2021 (the “Maturity Date”). The 9.5% Notes were 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 accrued at the rate of 9.5% per annum and was 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 was payable on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock was valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes was subordinated in payment to the obligations of the Company under its Credit Agreement pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.
During the fiscal 2020 and 2019 the Company issued approximately 2,039 shares and 1,096 shares of common stock to the SNI Sellers as payment-in-kind interest of approximately $890 and $1,188, respectively, on the 9.5% Notes.
On June 30, 2020, the holders of the 9.5% Notes agreed to accept an aggregate amount of $1,115 in cash in consideration for the purchase by the Company of the entire $12,500 aggregate principal amount of the 9.5% Notes. The 9.5% Notes were settled at a conversion rate of $5.83 (the price at which the 9.5% Notes were converted into shares of the Company’s common stock and purchased by the Company at $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020). The payment was made to the note holders on June 30, 2020.
Registration Rights Agreement
On June 30, 2020, the Company and the SNI Group Members entered into a Registration Rights Agreement dated as of June 30, 2020 (the “Registration Rights Agreement”). Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to file on or prior to July 31, 2020, an initial registration statement with respect to the resale of shares of Common Stock currently owned by the SNI Group members that are “Registrable Securities” (as defined in the Registration Rights Agreement) on or prior to July 31, 2020. In addition, the Company has agreed that it shall, on one occasion, on or after September 30, 2020 and upon the written request of the holders of 51% or more of the Registrable Securities, file a registration statement with respect to the Registrable Securities held by such holders. The demanding holders may require, in connection with the registration, that such demand registration take the form of an underwritten public offering of such Registrable Securities. The Registration Rights Agreement also provides that for a period of three years after the closing date of the Restructuring, the holders of Registrable Securities shall have piggyback registration rights with respect to all registration statements filed by the Company (other than those on Form S-4 or Form S-8).
8% Convertible Subordinated Notes to Related Parties
On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2,000 in aggregate principal amount of its 8% Notes. The maturity date of the 8% Notes was on October 3, 2021 (the “Maturity Date”). The 8% Notes were converted into shares of the Company’s Series C 8% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price equal to $1.00 per share (subject to adjustment as provided in the 8% Notes upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). Interest on the 8% Notes accrued at the rate of 8% per annum and was payable quarterly in non-cash payments-in-kind (“PIK”) in arrears on June 30, September 30, December 31, and March 31, beginning on June 30, 2019, on each conversion date with respect to the 8% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). Interest was payable on an Interest Payment Date in shares of Series C Preferred Stock of the Company, which Series C Preferred Stock was valued at its liquidation value. All or any portion of the 8% Notes was redeemable by the Company for cash at any time. The redemption price was an amount equal to 100% of the then outstanding principal amount of the 8% Notes being redeemed, plus accrued and unpaid PIK interest thereon. The Company could, at its option, prepay any portion of the principal amount of the 8% Notes without the prior consent of the holders thereof; provided, however, that any prepayments of the 8% Notes shall be made on a pro rata basis to all holders of 8% Notes based on the aggregate principal amount of 8% Notes held by such holders. The Company was required to prepay the 8% Notes together with accrued and unpaid PIK interest thereon upon the consummation by the Company of any “Change of Control”.
The Company issued 104 and 60 shares of Series C Preferred Stock to Investors related to interest of $104 and $60 on the 8% Notes for fiscal 2020 and fiscal 2019, respectively.
The BCF for the 8% Notes was recorded as a discount to their carrying value and was equal to the fair value of the conversion feature upon the date of issuance. The discount was being amortized as interest over the period from the date of issuance to maturity. The total BCF recorded was $841. During fiscal 2020 and 2019, the Company amortized approximately $731 and $110 of debt discount, respectively.
Pursuant to the Repurchase Agreement, Mr. Smith (a former member of the Company’s board of directors) agreed to accept an aggregate amount of $520 in cash (the “Smith Note Payment Amount”) in consideration for the purchase by the Company of the $1,000 aggregate principal amount of 8% Notes (the “Smith Note Amount”) held by him. The Smith Note Payment Amount was calculated based on the following formula: the Smith Note Amount, divided by $1.00 (the price at which the Smith Notes are convertible to Common Stock), times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020). The Smith Note Payment Amount was paid to Mr. Smith on June 30, 2020.
On June 30, 2020, the holders of the remaining $1,000 aggregate principal amount of the 8% Notes converted such 8% Notes to an aggregate of 1,000 shares of Series C Preferred Stock which were immediately and simultaneously converted into 1,000 shares of Common Stock at the $1.00 per share conversion price stated in the 8% Notes and in the Series C Preferred Stock. These holders also converted an aggregate of 93 additional shares of Series C Preferred Stock issued or issuable to them into a total of 93 shares of Common Stock at the $1.00 per share conversion price stated in the Series C Preferred Stock. The issuance of the 1,093 shares of Common Stock to these former holders of 8% Notes and Series C Preferred Stock was completed on June 30, 2020. These shares, along with those of the SNI Sellers that previously held the 9.5% Notes, also were included in the registration statement on SEC Form S-3 filed by the Company on July 31, 2020.
11. Equity
On June 30, 2020, the Company issued 1,718 shares of common stock for debt conversion of $1,000 aggregate principal amount of the 8% Notes, related shares of Series C Preferred Stock and 10% Note. The Company also issued 93 shares of common stock for Series C Preferred Stock discussed above (Note 10).
During fiscal 2019 the Company issued 250 shares of common stock for the conversion of approximately 250 shares of Series B Convertible Preferred Stock (See Note 12).
Restricted Stock
The Company granted 450 and 400 shares of restricted common stock in fiscal 2020 and 2019, respectively. 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 $1,150 and $819 in fiscal 2020 and fiscal 2019, respectively. As of September 30, 2020, there was $818 of unrecognized compensation expense related to restricted stock outstanding. On November 23, 2019, 500 shares of restricted common stock held by the Company’s former president became fully vested upon his passing. These shares were issued during fiscal 2020.
A summary of restricted stock activity is presented as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Fair Value
($)
|
|
Non-vested restricted stock outstanding as of September 30, 2018
|
|
|
1,100
|
|
|
|
2.21
|
|
Granted
|
|
|
400
|
|
|
|
0.52
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Non-vested restricted stock outstanding as of September 30, 2019
|
|
|
1,500
|
|
|
|
1.76
|
|
Granted
|
|
|
450
|
|
|
|
0.85
|
|
Issued
|
|
|
(500
|
)
|
|
|
2.21
|
|
Non-vested restricted stock outstanding as of September 30, 2020
|
|
|
1,450
|
|
|
|
1.32
|
|
Warrants
No warrants were granted or exercised during fiscal 2020 or fiscal 2019.
A summary of warrant activity is presented as follows:
|
|
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
|
|
|
497
|
|
|
|
3.84
|
|
|
|
2.87
|
|
|
|
67
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(58
|
)
|
|
|
2.00
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding as of September 30, 2019
|
|
|
439
|
|
|
|
4.09
|
|
|
|
1.39
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(362
|
)
|
|
|
4.53
|
|
|
|
-
|
|
|
|
-
|
|
Warrants outstanding as of September 30, 2020
|
|
|
77
|
|
|
|
2.00
|
|
|
|
4.50
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable as of September 30, 2019
|
|
|
439
|
|
|
|
4.09
|
|
|
|
1.39
|
|
|
|
-
|
|
Warrants exercisable as of September 30, 2020
|
|
|
77
|
|
|
|
2.00
|
|
|
|
4.50
|
|
|
|
-
|
|
Stock Options
As of September 30, 2020, there were stock options outstanding under the Company’s Amended and Restated 2013 Incentive Stock Plan. During fiscal 2020, 2013 Incentive Stock Plan was amended to increase available balance by 1,000. The plan 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 September 30, 2020 and September 30, 2019 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 $409 and $1,367 in fiscal 2020 and fiscal 2019, respectively. As of September 30, 2020, there was approximately $652 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.95 years.
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
per share
($)
|
|
|
Weighted
Average
Remaining Contractual
Life (Years)
|
|
|
Total
Intrinsic
Value of
Options
($)
|
|
Options outstanding as of September 30, 2018
|
|
|
1,578
|
|
|
|
3.76
|
|
|
|
7.53
|
|
|
|
142
|
|
Granted
|
|
|
437
|
|
|
|
1.81
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(281
|
)
|
|
|
4.05
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding as of September 30, 2019
|
|
|
1,734
|
|
|
|
3.22
|
|
|
|
7.84
|
|
|
|
-
|
|
Granted
|
|
|
75
|
|
|
|
0.54
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(555
|
)
|
|
|
3.68
|
|
|
|
-
|
|
|
|
-
|
|
Options outstanding as of September 30, 2020
|
|
|
1,254
|
|
|
|
2.85
|
|
|
|
7.34
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2019
|
|
|
720
|
|
|
|
4.24
|
|
|
|
6.50
|
|
|
|
-
|
|
Exercisable as of September 30, 2020
|
|
|
749
|
|
|
|
3.43
|
|
|
|
6.78
|
|
|
|
-
|
|
The fair value of stock options granted was made using the Black-Scholes option pricing model and the following assumptions:
|
|
2020
|
|
|
2019
|
|
Weighted average fair value of options
|
|
$
|
0.49
|
|
|
$
|
1.65
|
|
Weighted average risk-free interest rate
|
|
|
0.71
|
%
|
|
|
2.94
|
%
|
Weighted average volatility factor
|
|
|
108
|
%
|
|
|
104
|
%
|
Weighted average expected life (years)
|
|
|
10
|
|
|
|
10
|
|
12. Mezzanine Equity
Series A Convertible Preferred Stock
On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series A Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 160 shares of its authorized preferred stock as Series A Preferred Stock. There are no shares issued and outstanding under this designation.
Series B Convertible Preferred Stock
On April 3, 2017, the Company issued an aggregate of approximately 5,900 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 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).
Pursuant to a Repurchase Agreement dated June 30, 2020, the holders of the Series B Preferred Stock agreed to accept an aggregate amount of $2,894 in cash (the “Series B Preferred Stock Purchase Price”) in consideration for the purchase by the Company of all 5,566 currently outstanding shares of Series B Preferred Stock (the “Series B Preferred Stock Amount”) held by them. The Series B Preferred Stock Purchase Price was calculated based on the following formula: Series B Preferred Stock Amount, divided by $4.86 (the price at which the Series B Preferred Stock is convertible to Common Stock in the Statement of Resolution Establishing Series of the Series B Preferred Stock), times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020). The Series B Preferred Stock Purchase Price was paid to the SNI Group Members on June 30, 2020. A net gain attributable to common stockholders of $24,475 was recognized on the redemption of Series B Preferred Stock and Smith Series C Preferred Stock during fiscal 2020.
During fiscal 2019 the Company issued 250 shares of common stock for the conversion of 250 shares of Series B Convertible Preferred Stock.
Series C Convertible Preferred Stock
On May 17, 2019, the Company filed a Statement of Resolution Establishing its Series C Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 3,000 shares of its authorized preferred stock as “Series C 8% Cumulative Convertible Preferred Stock”, without par value. The Series C Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) and senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. Holders of shares of Series C Preferred Stock are entitled to receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share. Such dividend shall be payable quarterly on June 30, September 30, December 31 and March 31 of each year commencing on June 30, 2019, in preference to any dividend paid on or declared and set aside for the Series B Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Preferred Stock. Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the Series C Preferred Stock have no voting rights.
Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of Series C Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks superior to the Series C Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting). Each share of Series C Preferred Stock shall be convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $1.00 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.
The Company issued 104 and 60 shares of Series C Preferred Stock to Investors related to interest of $104 and $60 on the 8% Notes during fiscal 2020 and fiscal 2019, respectively.
Pursuant to a Repurchase Agreement dated June 30, 2020, Mr. Smith also agreed to accept an aggregate amount equal to $37 in cash (the “Smith Series C Preferred Stock Purchase Price”) in consideration for the purchase by the Company of the 72 shares of Series C Preferred Stock (the “Series C Preferred Stock Amount”) held by him. The Smith Preferred Stock Purchase Price was calculated based on the following formula: the Smith Series C Preferred Stock Amount, divided by $1.00, times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020). The Smith Series C Preferred Stock Purchase Price was paid to Mr. Smith on June 30, 2020.
The remaining holders of Series C Preferred Stock converted an aggregate of 93 shares of Series C Preferred Stock into a total of 93 shares of Common Stock at the $1.00 per share conversion price stated in the Series C Preferred Stock. The conversion was completed on June 30, 2020.
13. Income Taxes
The components of the provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Current expense (benefit):
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
93
|
|
State
|
|
|
467
|
|
|
|
123
|
|
Total current expense (benefit):
|
|
$
|
467
|
|
|
$
|
216
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
68
|
|
|
$
|
172
|
|
State
|
|
|
62
|
|
|
|
(18
|
)
|
Total deferred expense (benefit):
|
|
$
|
130
|
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit):
|
|
$
|
597
|
|
|
$
|
370
|
|
A reconciliation of the Company s statutory income tax rate to the Company s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Income at US statutory rate
|
|
$
|
(2,888
|
)
|
|
$
|
(3,653
|
)
|
State taxes, net of federal benefit
|
|
|
930
|
|
|
|
(469
|
)
|
Tax credits
|
|
|
(88
|
)
|
|
|
(149
|
)
|
Nondeductible Expenses
|
|
|
4,182
|
|
|
|
-
|
|
Stock compensation
|
|
|
186
|
|
|
|
132
|
|
Goodwill impairment
|
|
|
1,560
|
|
|
|
637
|
|
Valuation allowance
|
|
|
(3,466
|
)
|
|
|
3,743
|
|
Other
|
|
|
181
|
|
|
|
129
|
|
|
|
$
|
597
|
|
|
$
|
370
|
|
The net deferred income tax asset balance related to the following:
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Net operating losses carryforwards
|
|
$
|
2,856
|
|
|
$
|
6,352
|
|
Stock options
|
|
|
1,564
|
|
|
|
1,333
|
|
Allowance for doubtful accounts
|
|
|
515
|
|
|
|
124
|
|
Accrued & prepaid expenses
|
|
|
339
|
|
|
|
582
|
|
Tax credit carryforwards
|
|
|
681
|
|
|
|
593
|
|
ROU liability
|
|
|
1,371
|
|
|
|
-
|
|
Interest
|
|
|
1,065
|
|
|
|
2,454
|
|
Other
|
|
|
7
|
|
|
|
5
|
|
Total deferred tax assets
|
|
$
|
8,398
|
|
|
$
|
11,443
|
|
Intangibles
|
|
$
|
(4,479
|
)
|
|
$
|
(5,149
|
)
|
ROU asset
|
|
|
(1,145
|
)
|
|
|
-
|
|
Depreciation
|
|
|
(122
|
)
|
|
|
(46
|
)
|
Total deferred tax liability
|
|
$
|
(5,746
|
)
|
|
$
|
(5,195
|
)
|
Deferred tax asset
|
|
$
|
2,652
|
|
|
$
|
6,248
|
|
Valuation allowance
|
|
|
(3,082
|
)
|
|
|
(6,548
|
)
|
Net deferred tax liability
|
|
$
|
(430
|
)
|
|
$
|
(300
|
)
|
As of September 30, 2020, the Company had federal and state net operating loss carryforwards of approximately $11,500 and $13,300, respectively, which begin to expire in 2029 for federal and 2021 for state purposes. Of the $11,500 of federal net operating losses, $6,200 can be carried indefinitely. As of September 30, 2019, the Company had federal and state net operating loss carryforwards of approximately $25,100 and $22,800, respectively.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of September 30, 2020, and 2019, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the net deferred tax assets (deferred tax assets in excess of corresponding deferred tax liabilities) will not be realized. Accordingly, the Company maintained a valuation allowance as of September 30, 2020 and 2019.
With the passage of time, the Company will continue to generate additional deferred tax assets and liabilities related to amortization of acquired intangible assets for tax purposes. As goodwill, an indefinite-lived intangible asset, will not be amortized for financial reporting purposes under current accounting standards, any tax amortization related goodwill claimed by the Company in future years will give rise to an increasing deferred tax liability, which will only reverse at the time of a future impairment under current accounting rules or ultimate sale of the underlying intangible assets. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income, but for the amount of indefinite federal NOL carryforwards available due to the U.S. Tax Reform Act as noted above, for purposes of determining a valuation allowance against the Company’s other net deferred tax assets. As a result, the Company’s net deferred tax position at September 30, 2020 and 2019, represents the tax impact of the cumulative tax amortization of goodwill, which is primarily attributable to historical tax deductible goodwill from SNI.
Under Internal Revenue Code 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change”. In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of September 30, 2020, and 2019 we have not recorded any uncertain tax positions in our financial statements.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2020, and 2019, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from September 30, 2017, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards form those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
14. Commitment and Contingencies
Litigation and Claims
The Company and its subsidiaries are involved in various litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position.
15. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, accounting, finance and office, engineering, and medical, and (c) temporary light industrial staffing. These 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 compensation expenses, consulting expenses, audit fees, corporate rent and facility costs, board fees, acquisition, integration and restructuring expenses, and interest expense.
|
|
Year Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Industrial Staffing Services
|
|
|
|
|
|
|
Industrial services revenue
|
|
$
|
17,560
|
|
|
$
|
21,710
|
|
Industrial services gross margin1
|
|
|
21.7
|
%
|
|
|
20.8
|
|
Operating (loss) income
|
|
$
|
(70
|
)
|
|
$
|
2,193
|
|
Depreciation and amortization
|
|
|
274
|
|
|
|
263
|
|
Accounts receivable – net
|
|
|
2,470
|
|
|
|
3,660
|
|
Intangible assets
|
|
|
17
|
|
|
|
246
|
|
Goodwill
|
|
|
1,084
|
|
|
|
1,084
|
|
Total assets
|
|
$
|
5,060
|
|
|
$
|
4,990
|
|
|
|
|
|
|
|
|
|
|
Professional Staffing Services
|
|
|
|
|
|
|
|
|
Permanent placement revenue
|
|
$
|
15,309
|
|
|
$
|
18,531
|
|
Placement services gross margin
|
|
|
100
|
%
|
|
|
100
|
|
Professional services revenue
|
|
$
|
96,966
|
|
|
$
|
111,433
|
|
Professional services gross margin
|
|
|
26.4
|
%
|
|
|
26.0
|
|
Operating income
|
|
$
|
(3,480
|
)
|
|
$
|
3,338
|
|
Depreciation and amortization
|
|
|
5,012
|
|
|
|
5,672
|
|
Accounts receivable – net
|
|
|
13,577
|
|
|
|
17,166
|
|
Intangible assets
|
|
|
18,826
|
|
|
|
23,635
|
|
Goodwill
|
|
|
62,359
|
|
|
|
71,209
|
|
Total assets
|
|
$
|
114,953
|
|
|
$
|
119,491
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses
|
|
|
|
|
|
|
|
|
Corporate administrative expenses2
|
|
$
|
8,312
|
|
|
$
|
7,964
|
|
Corporate facility expenses
|
|
|
377
|
|
|
|
332
|
|
Stock compensation expense
|
|
|
1,559
|
|
|
|
2,186
|
|
Board related expenses
|
|
|
35
|
|
|
|
2
|
|
Total unallocated expenses
|
|
$
|
10,283
|
|
|
$
|
10,484
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
129,835
|
|
|
$
|
151,674
|
|
Operating loss
|
|
|
(13,833
|
)
|
|
|
(4,953
|
)
|
Depreciation and amortization
|
|
|
5,286
|
|
|
|
5,935
|
|
Total accounts receivables – net
|
|
|
16,047
|
|
|
|
20,826
|
|
Intangible assets
|
|
|
18,843
|
|
|
|
23,881
|
|
Goodwill
|
|
|
63,443
|
|
|
|
72,293
|
|
Total assets
|
|
$
|
120,013
|
|
|
$
|
124,481
|
|
1 Includes $1,284 and $1,432 of annual premium refunds from the Ohio Bureau of Workers Compensation for the fiscal 2020 and 2019, respectively. The Industrial Services gross margins normalized for the effects of these items were approximately 14% for the fiscal 2020 and 2019, respectively.
2 Includes certain costs and expenses incurred related to restructuring activities, including corporate legal and general expenses associated with capital markets activities and not directly associated with core business operations. These costs were $4,277 and $4,281 for fiscal 2020 and 2019, respectively, and include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs.