GEE Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview We specialize in the placement of information technology, accounting, finance, office, and engineering professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics and provide temporary staffing services for our light industrial clients. The acquisitions of Agile Resources, Inc., a Georgia corporation (“Agile”), Access Data Consulting Corporation, a Colorado corporation (“Access”), Paladin Consulting Inc. (“Paladin”) and SNI Companies, a Delaware corporation (“SNI”) expanded our geographical footprint within the placement and contract staffing of information technology, accounting, finance, office and engineering professionals. The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing. As of June 30, 2020, we operated thirty-two branch offices in downtown or suburban areas of major U.S. cities in fourteen states. We have one office located in each of Arizona, Washington D.C., Iowa, Connecticut, Georgia, Minnesota, New Jersey, and Virginia, three offices in Colorado, two offices in Illinois and Massachusetts, four offices in Texas, seven offices in Ohio and six offices in Florida. Management has implemented a strategy which includes cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of equity and debt to improve the overall profitability and cash flows of the Company. The Company’s contract and placement services are principally provided under two operating divisions or segments: Professional Staffing Services and Industrial Staffing Services. We believe our current segments complement one another and position us for future growth. Results of Operations Three Months Ended June 30, 2020 Compared to the Three Months Ended June 30, 2019 Net Revenues Consolidated net revenues are comprised of the following: Three Months Ended June 30, (in thousands) 2020 2019 Change Change Professional contract services $ 20,595 $ 27,775 $ (7,180 ) -26 % Industrial contract services 2,898 5,442 (2,544 ) -47 % Total professional and industrial contract services 23,493 33,217 (9,724 ) -29 % Direct hire placement services 3,101 4,884 (1,783 ) -37 % Consolidated net revenues $ 26,594 $ 38,101 $ (11,507 ) -30 % Contract staffing services contributed $23,493 or approximately 88% of consolidated revenue and direct hire placement services contributed $3,101, or approximately 12%, of consolidated revenue for the three-month period ended June 30, 2020. This compares to contract staffing services revenue of $33,217, or approximately 87%, of consolidated revenue and direct hire placement revenue of $4,884, or approximately 13%, of consolidated revenue for the three-month period ended June 30, 2019. 28 Table of Contents The overall decrease in contract staffing services revenues of $9,724, or 29%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to the Coronavirus Pandemic outbreak that resulted in client closures, postponements in recruiting activities at some clients, and layoffs. The Company experienced the majority, but not all, of these contract staffing services reductions in its finance, accounting and office professional end markets and in its light industrial segment. In addition to reductions in temporary workforce requirements brought about as a result of the coronavirus, reorganization of a few key customers in the three-month period ended June 30, 2020 contributed to the net reduction in revenues. Direct hire placement revenue for the three months ended June 30, 2020 decreased by $1,783, or approximately 37%, over the three months ended June 30, 2019. The demand for direct hire services also declined significantly due to adverse impact of the Coronavirus Pandemic outbreak. The Company continues to observe, analyze and make modifications and changes to its core business operating model and practices on a daily basis in response to the on-going Coronavirus Pandemic and related health and safety concerns. These include, but are not limited to, implementation of policies and procedures in observance of Federal, state and/or local guidelines regarding the coronavirus, including matters ranging working from home, use of personal protective equipment (principally, protective masks), social distancing, personal hygiene and sanitary practices, and other preventative and responsive measures, impacting both our core human resources, as well as our contract laborers serving clients. Cost of Contract Services Cost of contract services includes wages and related payroll taxes and employee benefits of the Company’s contract services employees, and certain other contract employee-related costs, while working on contract assignments. Cost of contract services for the three months ended June 30, 2020 decreased by approximately 31% to $16,925 compared to $24,521 for the three months ended June 30, 2019. The $7,596 overall decrease in cost of contract services for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily attributable to and consistent with the corresponding decline in revenues. Gross Profit percentage by service: Three Months Ended June 30, 2020 2019 Professional contract services 26.6 % 26.1 % Industrial contract services 37.1 % 26.8 % Professional and industrial services combined 28.0 % 26.2 % Direct hire placement services 100.0 % 100.0 % Combined gross profit margin % (1) 36.4 % 35.6 % (1) Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the three-month period ended June 30, 2020 was approximately 36.4% as compared with approximately 35.6% for the three-month period ended June 30, 2019. In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26.6% for three-month period ended June 30, 2020 compared to approximately 26.1% for the three-month period ended June 30, 2019. This increase is primarily the result of increases in the amounts and mix of higher margin contract services business in IT end markets, including growth in several of the Company’s higher end IT brands during the fiscal quarter ended June 30, 2020, as compared with the same quarter of the prior fiscal year. 29 Table of Contents The Company’s industrial staffing services gross margin for the three-month period ended June 30, 2020 was approximately 37.1% versus approximately 26.8% for the three-month period ended June 30, 2019. The increase in industrial staffing services gross margin is due to a significant decrease in cost of services ratio to an amount of return premiums the Company’s light industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program. It includes $697 and $658 of annual premium refunds from the Ohio Bureau of Workers Compensation for the three months ended June 30, 2020 and 2019, respectively; and $747 and $1,357 for the nine months ended June 30, 2020 and 2019, respectively. The Industrial Services gross margins normalized for the effects of these items were approximately 13% and 15% for the three months ended June 30, 2020 and 2019, respectively; and approximately 14% and 14% for the nine months ended June 30, 2020 and 2019, respectively. Selling, General and Administrative Expenses Selling, general and administrative expenses include the following categories: • Compensation and benefits in the operating divisions, which includes salaries, wages and commissions earned by the Company’s employment consultants and branch managers on permanent and temporary placements. • Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. • Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. • Recruitment advertising, which includes the cost of identifying job applicants. • Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. The Company’s SG&A for the three-month period ended June 30, 2020 decreased by $1,351 as compared to the three-month period ended June 30, 2019. SG&A for the three-month period ended June 30, 2020, as a percentage of revenues, was approximately 38% compared to approximately 30% for the three-month period ended June 30, 2019. The decrease in SG&A expenses is primarily attributable to a decrease in employee related expenses associated with eliminated positions in response to the downturn associated with the coronavirus outbreak. The increase in the SG&A percentage for the three-month period ended June 30, 2020 over the three-month period ended June 30, 2019, is primarily due to the corresponding significant reduction in revenues, which results in less coverage of our SG&A fixed or semi-variable expenses. SG&A also includes certain non-cash costs and expenses incurred related to acquisition, integration and restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis. These costs were estimated to be $1,557 and $564 for the three-month periods ended June 30, 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. The net increase in these costs for the three-month period ended June 30, 2020 compared to the three-month period ended June 30, 2019 is primarily attributable to personnel costs eliminated to align operational needs related to coronavirus outbreak. 30 Table of Contents Depreciation Expense Depreciation expense was $33 and $89 for the three-month period ended June 30, 2020, and 2019, respectively. The decrease is due to closed locations resulted from coronavirus outbreak. Amortization Expense Amortization expense was $1,125 and $1,396 for the three-month period ended June 30, 2020 and 2019, respectively. The decrease is due to amortization completion of SNI intangible assets related to non-compete agreements. Loss from Operations The loss from operations decreased by $2,067 for the three-month period ended June 30, 2020 compared to the three-month period ended June 30, 2019. The decrease is entirely attributable to the goodwill impairment charge recognized for the three-month period ended June 30, 2019. Excluding the impact of the goodwill impairment charge, the loss from operations increased by $(2,233). This net increase in our loss from operations is directly attributable to the matters discussed regarding revenues and operating expenses above; including most notably, the negative effects of the Coronavirus Pandemic. Interest Expense Interest expense was $3,334 for the three-month period ended June 30, 2020, which remained approximately level compared to the three-month period ended June 30, 2019. Interest expense for the three-month period ended June 30, 2020 includes an increase in amortization of the debt issue costs related to exit and restructuring fees originated under Seventh Amendment to the Company’s Senior Credit Agreement. Also, included in the interest expense was the charge-off of the remaining unamortized beneficial conversion feature associated with the former 8% Notes in the amount of $243 for the three-month period ended June 30, 2020. Provision for Income Taxes The Company recognized a tax expense of $90 for the three-month period ended June 30, 2020. Our effective tax rate for the three-month periods ended June 30, 2020 and 2019, is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived assets, the Company is maintaining a valuation allowance against the remaining net DTA position. Net Income (Loss) The Company’s net income (loss) was $7,195 and $(6,834) for the three-month periods ended June 30, 2020 and 2019, respectively. The increase in net income for the three-month periods ended June 30, 2020 resulted from the gain recognized of $12,316 on extinguishment of subordinated debt. The significant sources or drivers of the Company’s net loss during the three-month period ended June 30, 2019 have been the interest costs associated with debt, the amortization expenses associated with the Company identifiable intangible assets, and a goodwill impairment charge. The Company continues to closely manage costs and to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue and direct hire placement revenue, including business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. The Company’s strategic plans to achieve this goal involve setting aggressive new business growth targets, including initiatives to increase services to existing customers, increasing its numbers of revenue producing core professionals, including primarily, business development managers and recruiters, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategy entails both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing. 31 Table of Contents 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 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 and continue 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 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. 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 served 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. The CARES Act PPP relief funds are the only source of financing available to our companies and businesses to help withstand the significant downturn and disruptions we are now undergoing and are absolutely 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 pandemic. Management believes that the execution of the amendments to the Company’s senior Credit Agreement and the CARES Act PPP loans and related funding are providing significant relief to the otherwise negative effects of the present Coronavirus Pandemic. 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 $5,083 million in cash, instead of by converting all of it into the Company’s common stock. As a result, the Company was able to negotiate and settle $46,900 in subordinated debt and preferred stock for $5,083 in cash and 1,811 shares of the Company’s common stock. These transactions resulted in recognition of a net gain on the extinguishment of debt of $12,316, and a net gain on redemption of preferred stock of $24,475 and positive net income and net income attributable to common shareholders of $7,195 and $31,670, respectively, for the three-month period ended June 30, 2020. Nine Months Ended June 30, 2020 Compared to the Nine Months Ended June 30, 2019 Net Revenues Consolidated net revenues are comprised of the following: Nine Months Ended June 30, (in thousands) 2020 2019 $ Change Change Professional contract services $ 73,810 $ 82,900 (9,090 ) -11 % Industrial contract services 13,025 16,157 (3,132 ) -19 % Total professional and industrial contract services 86,835 99,057 (12,222 ) -12 % Direct hire placement services 11,996 13,764 (1,768 ) -13 % Consolidated net revenues $ 98,831 $ 112,821 (13,990 ) -12 % Contract staffing services contributed $86,835 or approximately 88% of consolidated revenue and direct hire placement services contributed $11,996, or approximately 12%, of consolidated revenue for the nine-month period ended June 30, 2020. This compares to contract staffing services revenue of $99,057, or approximately 88%, of consolidated revenue and direct hire placement revenue of $13,764, or approximately 12%, of consolidated revenue for the nine-month period ended June 30, 2019. 32 Table of Contents The overall decrease in contract staffing services revenues of $12,222, or 12%, for the nine-month period ended June 30, 2020 compared to the nine-month period ended June 30, 2019 was primarily attributable to the Coronavirus Pandemic that resulted in client closures, postponements in recruiting activities at some clients, and layoffs. The Company experienced the majority, but not all, of these contract staffing services reductions its finance, accounting and office professional end markets and in its light industrial segment. In addition to reductions in temporary workforce requirements brought about as a result of the coronavirus, reorganization of a few key customers in the nine-month period ended June 30, 2020 contributed to the net reduction in revenues. Direct hire placement revenue for the nine-month period ended June 30, 2020 also declined by $1,768 to $11,996 compared to the nine-month period ended June 30, 2019. The Company has seen demand for its direct hire services drop significantly due to negative impacts related to the Coronavirus Pandemic outbreak. The Company continues to observe, analyze and make modifications and changes to its core business operating model and practices on a daily basis in response to the on-going Coronavirus Pandemic and related health and safety concerns. These include, but are not limited to, implementation of policies and procedures in observance of Federal, state and/or local guidelines regarding the coronavirus, including matters ranging working from home, use of personal protective equipment (principally, protective masks), social distancing, personal hygiene and sanitary practices, and other preventative and responsive measures, impacting both our core human resources, as well as our contract laborers serving clients. Cost of Contract Services Cost of contract services includes wages and related payroll taxes and employee benefits of the Company’s contract services employees, and certain other contract employee-related costs, while working on contract assignments. Cost of contract services for the nine-month period ended June 30, 2020 decreased by approximately 13% to $64,654 compared to $74,093 for the nine-month period ended June 30, 2019. The $9,439 overall decrease in cost of contract services for the nine-month period ended June 30, 2020 compared to the nine-month period ended June 30, 2019 was primarily attributable to and consistent with the corresponding decline in revenues, which is discussed further below. Gross Profit percentage by service: Nine Months Ended June 30, 2020 2019 Professional contract services 26.5 % 25.7 % Industrial contract services 19.9 % 22.5 % Professional and industrial services combined 25.5 % 25.2 % Direct hire placement services 100.0 % 100.0 % Combined gross profit margin % (1) 34.6 % 34.3 % (1) Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. 33 Table of Contents The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the nine-month period ended June 30, 2020 was approximately 34.6% as compared with approximately 34.3% for the nine-month period ended June 30, 2019. In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26.5% for nine-month period ended June 30, 2020. The increase is primarily the result of increases in the amounts and mix of higher margin contract services business in IT end markets, including growth in several of the Company’s higher end IT brands during nine-month period ended June 30, 2020, as compared with the same period of the prior fiscal year. The Company’s industrial staffing services gross margin for the nine-month period ended June 30, 2020 was approximately 19.9% versus approximately 22.5% for the nine-month period ended June 30, 2019. The decrease in industrial staffing services gross margin is due to a decrease in the estimated amounts of return premiums the Company’s light industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program. Selling, General and Administrative Expenses Selling, general and administrative expenses include the following categories: • Compensation and benefits in the operating divisions, which includes salaries, wages and commissions earned by the Company’s employment consultants and branch managers on permanent and temporary placements. • Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. • Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. • Recruitment advertising, which includes the cost of identifying job applicants. • Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. The Company’s SG&A for the nine-month period ended June 30, 2020 decreased by $237 as compared to the nine-month period ended June 30, 2019. SG&A for the nine-month period ended June 30, 2020, as a percentage of revenues was approximately 35% compared to approximately 31% for the nine-month period ended June 30, 2019. The increase in the SG&A percentage for the nine-month period ended June 30, 2020 over the nine-month period ended June 30, 2019, is primarily due to the corresponding significant reduction in revenues, which results in less coverage of our SG&A fixed or semi-variable expenses. SG&A expenses for the nine-month period ended June 30 2020, also included increases in our allowance for doubtful accounts of approximately $1,887 during the nine-month period ended June 30, 2020, including $1,653 associated with a single large customer of our light industrial segment that has declared bankruptcy. SG&A also includes certain costs and expenses incurred related to acquisition, integration and restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis. These costs were $3,247 and $2,990 for the nine-month periods ended June 30, 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. Such costs for the nine-month period ended June 30, 2020, included approximately $1,496 attributable to personnel costs eliminated to align operational needs related to coronavirus outbreak. 34 Table of Contents Depreciation Expense Depreciation expense was $181 for the nine-month period ended June 30, 2020, which decreased by $88 compared to the nine-month period ended June 30, 2019. Amortization Expense Amortization expense was $3,921 and $4,189 for the nine-month period ended June 30, 2020 and 2019, respectively. The decrease is due to amortization completion of SNI intangible asset related to non-compete agreements. In addition to amortization expense, the Company recognized an impairment charge related to its goodwill of $4,300 for the nine-month period ended June 30, 2019. Loss from Operations The loss from operations decreased by $343 for the nine-month period ended June 30, 2020 compared to the nine-month period ended June 30, 2019. The decrease is entirely attributable to the goodwill impairment charge recognized for the three-month period ended June 30, 2019. Excluding the impact of the goodwill impairment charge, the loss from operations increased by $(3,956). This remaining net increase in our loss from operations is directly attributable to the matters discussed regarding revenues and operating expenses above; including most notably, the negative effects of the Coronavirus Pandemic and increases in our allowance for doubtful accounts of approximately $1,887, including $1,653 associated with a single large customer of our light industrial segment that has declared bankruptcy. Interest Expense Interest expense for the nine-month period ended June 30, 2020, increased by $409 compared to the nine-month period ended June 30, 2019. The increase in interest expense is attributable to an increase in an amortization of the debt issue costs related to exit and restructuring fees originated under Seventh Amendment during nine-month period ended June 30, 2020. Also, included in the interest expense was the charge-off of the remaining unamortized beneficial conversion feature associated with the former 8% Notes in the amount of $243 for the three-month period ended June 30, 2020. Provision for Income Taxes The Company recognized a tax expense of $271 for the nine-month period ended June 30, 2020. Our effective tax rate for the nine-month periods ended June 30, 2020 and 2019, is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a valuation allowance against the remaining net DTA position. Net Loss The Company’s net loss was $1,797 and $14,176 for the nine-month periods ended June 30, 2020 and 2019, respectively. The significant decrease in the net loss for the nine-month period ended June 30, 2020, principally the result of the gain recognized of $12,316 on an extinguishment of subordinated debt. In addition to the items discussed above, other significant drivers of the Company’s net loss have been the interest costs associated with debt and the amortization expenses associated with the Company identifiable intangible assets. The Company also incurred a goodwill impairment charge of $4,300 for the nine-month period ended June 30, 2019. The Company continues to closely manage costs and to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue and direct hire placement revenue, including business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. The Company’s strategic plans to achieve this goal involve setting aggressive new business growth targets, including initiatives to increase services to existing customers, increasing its numbers of revenue producing core professionals, including primarily, business development managers and recruiters, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing. 35 Table of Contents 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 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 and continue to be felt across all businesses, with the most severe impacts being felt in the commercial (light industrial) and finance, accounting and office clerical (“FA&O) end markets within the professional segment. 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. 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 served 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. The CARES Act PPP relief funds are the only source of financing available to our companies and businesses to help withstand the significant downturn and disruptions we are now undergoing and are absolutely 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 pandemic. Management believes that the execution of the amendments to the Company’s senior Credit Agreement and the CARES Act PPP loans and related funding are providing significant needed relief to the otherwise negative effects of the present Coronavirus Pandemic. 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 $5,083 million in cash, instead of by converting all of it into the Company’s common stock. As a result, the Company was able to negotiate and settle $46,900 in subordinated debt and preferred stock for $5,083 in cash and 1,811 shares of the Company’s common stock. These transactions resulted in recognition of a net gain on the extinguishment of debt of $12,316, and a net gain on redemption of preferred stock of $24,475 and smaller net income (loss) and net income attributable to common shareholders of $(1,767) and $22,678, respectively, for the nine-month period ended June 30, 2020. Liquidity and Capital Resources 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 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, operating costs and expenses, payment of taxes, payment of interest and principal under its debit agreements, and capital expenditures. 36 Table of Contents The following table sets forth certain consolidated statements of cash flows data: Nine Months Ended June 30, (in thousands) 2020 2019 Cash flows used in operating activities $ 245 $ (551 ) Cash flows used in investing activities $ (105 ) $ (108 ) Cash flows provided by financing activities $ 12,382 $ 1,609 As of June 30, 2020, the Company had $16,577 of cash, which was an increase of $12,522 from $4,055 as of September 30, 2019. As of June 30, 2020, the Company had working capital of $6,880 compared to $8,534 of working capital as of September 30, 2019. Net cash used in operating activities for the nine-month periods ended June 30, 2020 and 2019 was $245 and $(551), respectively. The positive operating cash flow in the nine-month period ended June 30, 2020 is attributable to lowered cash interest payments per Seventh Amendment. The negative operating cash flow in the fiscal nine months period ended June 30, 2019 corresponds with negative income from operations and other net changes in working capital. The primary uses of cash for investing activities were for the acquisition of property and equipment in the nine-month periods ended June 30, 2020 and 2019. Cash flow provided by financing activities for the nine-month periods ended June 30, 2020 and 2019 was primarily attributed to the net funds received from nine (9) unsecured promissory notes payable under CARES Act Payroll Protection Program (“PPP”) totaling $19,927 in order to provide needed relief for allowable expenses under the CARES Act PPP. Offsetting the effect of the new PPP funds received were payments required to pay down the Company’s Revolving Credit Facility resulting from the decline in the Company’s business and accounts receivable that serve as borrowing base collateral as a direct result of the Coronavirus Pandemic and settlement payments on the extinguishment of subordinated notes and preferred stock. Minimum debt service payments (principal) for the twelve-month period commencing after the close of business on June 30, 2020, are approximately $445. All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on June 30, 2020, are approximately $1,840. The Company experienced significant net losses for the first nine months of its current fiscal year, and for its most recent fiscal years ended September 30, 2019 and 2018, 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 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. Following months of extensive negotiations, effective April 28, 2020, the Company entered into the Seventh Amendment to the Credit Agreement with its senior lenders. The Seventh Amendment (as defined below) is the most significant modification of the Company’s senior credit facilities since inception and provides several important concessions and features, including extending the maturity by two years to June 30, 2023, and adjusting (reducing) cash debt service and thereby improving the Company’s ability to generate liquidity. Effective May 5, 2020 the Company entered into the Eighth Amendment to the Credit Agreement with its senior lenders (the “Eighth Amendment”) which allowed the Company and its subsidiaries to obtain loans 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”). 37 Table of Contents Between April 29 and May 4, 2020, the Company was able to obtain CARES Act relief financing under the Paycheck Protection Program (“PPP Loans”) for each of its operating subsidiaries, in the aggregate amount of $19,927. These funds are the only source of financing available to our companies and businesses and are absolutely 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 pandemic. On June 30, 2020, the Company completed a financial restructuring and eliminated $19,685 of its subordinated indebtedness and $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, Peter Langlois, Vincent Lombardo and Shane Parr (collectively with Smith, Thrivent and Madison, 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. 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 occurs. Off-Balance Sheet Arrangements As of June 30, 2020, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable.