What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-12-29 compared with 2019-12-23 · 168 added, 208 removed, 136 unchanged (73% of the section changed)

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and its consolidated subsidiaries.

We specialize in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics and provide temporary staffing services for our light industrial clients.

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 the array and numbers of end markets and clients we serve, as well as our geographical footprint within the placement and contract staffing end markets we serve, including information technology, in particular.

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, Triad Personnel Services and Triad Staffing.

As of September 30, 2019, we operated thirty-three 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 and Massachusetts, two offices in Illinois, four offices in Texas, seven offices in Ohio and six offices in Florida.

(“Paladin”) and SNI Companies, Inc., a Delaware corporation (“SNI”) expanded our geographical footprint within the placement and contract staffing verticals or end markets of information technology, accounting, finance, office and engineering professionals.

As of September 30, 2020, we operated thirty branch offices in downtown or suburban areas of major U.S.

cities in eleven states.

We have one office located in each of Connecticut, Georgia, Minnesota, New Jersey, and Virginia, three offices in Colorado, two offices each in Illinois and Massachusetts, four offices each in Texas, seven offices each in Ohio and Florida.

Management has implemented a strategy which includes organic and acquisition growth components.

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Professional Staffing Services and Industrial Staffing Services.

We believe our current segments complement one another and position us for future growth.

We believe our current segments and array of businesses and brands within our segments complement one another and position us for future growth.

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.

These effects have been 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.

In response to the crisis, in April 2020 we took a series of proactive actions including a 10% pay cut for full-time salaried employees, temporary furloughing and redeployment of some employees, reduction of discretionary expenses and projects, and obtaining funds under CARES Act Payroll Protection Program (“PPP”).

These actions allowed us to generate cost savings and time to assess the impacts of the COVID-19.

As explained above, our businesses have recovered to a significant extent in our final fiscal quarter ended September 30, 2020 as compared with the sequential prior quarter ended June 30, 2020.

We expect a continuing, but perhaps, more gradual return to pre-COVID-19 levels for our business operations and customer demand for our services, however, the rate of such recovery may be delayed by continuing negative impacts of COVID-19 on the U.S.

economy and the markets and clients we serve.

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.

As of 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.

The Company also entered the 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 enabling 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 were the only source of financing available for our companies and businesses to help withstand the significant downturn and disruptions we have experienced and continue to experience 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 have been and continue to be essential in providing significant needed relief to the otherwise negative effects of the continuing 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 loss and net income attributable to common shareholders of $(14,347) and $10,128, respectively, in fiscal 2020.

Results of Operations

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Consolidated net revenues are comprised of the following:

(in thousands)

Professional contract services

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Consolidated net revenues

Contract staffing services contributed $133.1 million or approximately 88% of consolidated revenue and direct hire placement services contributed $18.5 million or approximately 12% of consolidated revenue for fiscal 2019.

This compares to contract staffing services revenue of $142.2 million, or approximately 86% of consolidated revenue and direct hire placement revenue of $23.1 million or approximately 14% of consolidated revenue, respectively, for fiscal 2018.

The overall decrease in contract staffing services revenue of $9.1 million, or 6.4% for fiscal 2019 compared to fiscal 2018 was primarily attributable to the continuing effects of office consolidations and office closures and other reductions in core workforce that have been undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability following SNI acquisition.

Reductions in the temporary workforce requirements of a few key customers in the professional and industrial services divisions, and to a lesser extent, higher incidences of bad weather in Midwest and northeastern markets in fiscal 2019, as compared to fiscal 2018, also contributed.

Direct hire placement revenue for fiscal 2019 decreased by $4.5 million or 19.6% over fiscal 2018.

The decrease in direct hire placement revenues also is attributable to the continuing effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.

Management also believes market speculation of an impending recession in the U.S economy during the first fiscal quarter of 2019 had a cooling effect on hiring, especially around the holiday season and into the beginning of the 2019 calendar year.

Contract staffing services contributed $114,526 or approximately 88% of consolidated revenue and direct hire placement services contributed $15,309 or approximately 12% of consolidated revenue for fiscal 2020.

This compares to contract staffing services revenue of $133,143, or approximately 88% of consolidated revenue and direct hire placement revenue of $18,531 or approximately 12% of consolidated revenue, respectively, for fiscal 2019.

The overall decrease in contract staffing services revenue of $18,617, or 14% for fiscal 2020 compared to fiscal 2019 was primarily attributable to the continuous impact of the COVID-19 pandemic and resulting mitigation efforts beginning in approximately mid-March 2020.

This resulted in a decline in demand for our staffing services due to client closures, postponements in projects and related needs for our services at some clients, and corresponding decreases in the volume of contract services billable hours.

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.

Direct hire placement revenue for fiscal 2020 decreased by $3,222 or 17% over fiscal 2019.

The Company also has seen demand for its direct hire services drop significantly due to the continuous negative impacts related to the COVID-19 Pandemic.

With the onset of COVID-19, the Company’s business and revenues began to decrease significantly in approximately mid-March 2020.

Consolidated net revenues for the fiscal quarter ended March 31, 2020 of $34,681 decreased by approximately $1,496, or 4%, as compared with consolidated net revenues for the fiscal quarter ended March 31, 2019 of $36,177, and decreased by approximately $2,876, or 8%, as compared with consolidated net revenues for the sequential fiscal quarter ended December 31, 2019 of $37,557.

Consolidated net revenues decreased further by approximately $8,087, or 23%, to $26,594 during the fiscal quarter ended June 30, 2020;

however, have rebounded since resulting in an increase of approximately $4,410, or 17%, to $31,004 during this year’s final fiscal quarter ended September 30, 2020.

Consolidated revenues on monthly basis bottomed during the month of May 2020 to a low of approximately $8,248 and steadily rose each month to a high of $12,216 during the month of October 2020.

November 2020’s revenues were lower at $10,560 largely due to significant lower billing days than October, including the Thanksgiving holidays.

Management believes that the trend towards recovery since May 2020 is the result of actions taken to adapt to COVID-19 and position the Company for recovery and, otherwise, is generally consistent with the recovery experienced in the overall U.S.

economy so far.

The Company continues to observe, analyze, and make modifications and changes to its business operating model and practices on a daily basis in response to the on-going Coronavirus Pandemic and related health and safety concerns.

With regard to revenue generation, the Company has expanded focus and priority towards sales and marketing of our placement and staffing services to clients that provide products or services considered essential during COVID-19, including principally, IT, financial services, and healthcare staffing in the professional segment, and in our light industrial segment, staffing for clients that manufacture and distribute PPE.

In addition, we have implemented policies and procedures in observance of Federal, state and/or local guidelines regarding the coronavirus, including but not limited to, 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, employee benefits of the Company’s contract services employees, and certain other employee-related costs, while they work on contract assignments.

Cost of contract services for fiscal 2019 decreased by approximately 6.3% to $99.7 million compared to fiscal 2018 of $106.4 million.

The $6.7 million decrease in cost of contract services for fiscal 2019 compared to fiscal 2018 is consistent with the decline in revenues and also was primarily attributable to the continuing effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.

Cost of contract services for fiscal 2020 decreased by approximately 15% to $85,131 compared to fiscal 2019 of $99,653.

The $14,522 decrease in cost of contract services for fiscal 2020 compared to fiscal 2019 is consistent with the decline in revenues, which is discussed further below.

Gross Profit percentage by service:

(in thousands)

Professional contract services

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The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for fiscal 2020 was approximately 34.4% versus approximately 34.3% for the fiscal 2019.

The change in the overall gross margin from the comparable prior fiscal year was primarily due to a decrease in amount and mix of direct hire placement services revenue.

In the professional contract staffing services segment, the gross margin excluding direct placement services was approximately 26.4% for fiscal 2020 compared to approximately 26.0% for fiscal 2019.

The change in professional contract staffing services gross margin was primarily due to proportionally higher revenue from Vendor Management Systems (“VMS”), Managed Service Providers (“MSP”), Master Service Agreements (“MSA”) and other volume corporate accounts that occurred in fiscal 2019, all of which typically have lower gross margins.

Other differences in the composition of revenues among the specialties served by the Company (information technology, engineering, healthcare, finance and accounting and others) also contributed to the change in the professional contract services gross profit and margin.

The Company’s industrial staffing services gross margin for fiscal 2019 was approximately 20.8% versus approximately 17.9% for fiscal 2018.

The increase in gross margin for fiscal 2019 was principally due to increases in the estimated amounts of return premiums and experience refunds the Company’s light industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program, which accounted for approximately $0.7 million of the increase in gross profits and 2.9 percentage points (288 basis points) of the increase in gross margin for fiscal 2019, as compared with the gross margin for 2018.

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 fiscal 2020, as compared with the prior fiscal year.

This trend also is consistent with COVID-19 related declines in business, which weighed more heavily on the Company’s lower margin finance, accounting, and office (primarily, office) and light industrial end markets, resulting in a higher mix of higher margin business.

The Company’s industrial staffing services gross margin for fiscal 2020 was approximately 21.7% as compared with approximately 20.8% for fiscal 2019.

The increase in industrial staffing services gross margin is due to a higher proportion of 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

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Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.

In addition to depreciation and amortization, which are broken out and reported separately in the consolidated statement of operations from other selling, general and administrative expenses (SG&A), the Company separately reports expenses incurred that are related to acquisition, integration and restructuring activities.

These include expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and other costs incurred related to acquisitions, including associated legal and professional costs.

Management believes reporting these expenses separately from other SG&A provides useful information considering the Company’s dual track growth strategy of internal (organic) growth and growth by acquisitions and when comparing and considering the Company’s operating results and activities with other entities.

The Company’s SG&A for fiscal 2019, decreased by approximately $4.9 million as compared to fiscal 2018.

The Company’s SG&A for fiscal 2020, decreased by $2,338 as compared to fiscal 2019.

SG&A for fiscal 2020, as a percentage of revenue was approximately 34.2% versus 30.8% for fiscal 2019.

The decline in SG&A expenses is primarily attributable to the continuing effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.

Acquisition, Integration and Restructuring Expenses

The Company classifies and reports costs incurred related to acquisition, integration and restructuring activities separately from other SG&A within its operating expenses.

These costs were $4.3 million in fiscal 2019 and $3.1 million in fiscal 2018.

These costs include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs.

The increase in acquisition, integration and restructuring expenses in fiscal 2019 were related to potential acquisitions and restructuring costs of prior acquisitions.

The increase in SG&A expenses as a percentage of revenue is primarily attributable to the corresponding significant reduction in revenues, which resulted in less coverage of our SG&A fixed or semi-variable expenses.

SG&A expenses for fiscal 2020 decreased as the result of a decrease in employee related costs of $2,984 and a decrease in a stock compensation expense of $627.

SG&A in fiscal 2020 also included increases in bad debt expense of $1,765 compared to fiscal 2019, 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 may be expected not to recur in whole or in part on a going forward basis.

These costs were $4,277 and $4,281 for fiscal 2020 and fiscal 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.

Depreciation Expense

Depreciation expense was $0.3 million for fiscal 2019 and $0.4 million for fiscal 2018.

Depreciation expense was $248 for fiscal 2020 and $349 for fiscal 2019.

The net decrease in depreciation expense is primarily the result of Company fixed assets becoming fully depreciated exceeding new capital expenditures.

Amortization Expense

Amortization expense was $5.6 million for fiscal 2019, and remained approximately level compared with 2018.

Goodwill Impairment Charge

In 2019, the Company early adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test.

Under this guidance, annual or interim goodwill impairment testing is performed by comparing the fair value of a reporting unit with its carrying amount.

An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.

Due to a sustained decline in the market capitalization of our common stock during fiscal 2019, we performed an interim goodwill impairment test during our third quarter in accordance with the provisions of ASU 2017-04.

The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $4.3 million, which was recorded in the consolidated financial statements for fiscal 2019.

For purposes of performing this interim goodwill impairment assessment, management mainly considered recent trends in the Company’s stock price, estimated control or acquisition premium, and related matters, including other possible factors affecting the recent declines in the Company’s stock price and their effects on estimated fair value of the Company’s reporting units.

Amortization expense was $5,038, and 5,586 for fiscal 2020 and 2019.

The decrease is due to amortization completion of SNI intangible asset related to non-compete agreements.

Goodwill Impairment

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.

As a result of the evaluation performed, the carrying value of the 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 applicable to the Professional segment of $8,850, which was recorded in the consolidated financial statements for fiscal 2020.

For purposes of performing this goodwill impairment assessment, management applied valuation techniques and assumptions to its Professional and Commercial segments as reporting units and also considered recent trends in the Company’s stock price, implied control or acquisition premiums, earnings 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.

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.

Loss from Operations

As the net result of the matters discussed regarding revenues and operating expenses above, income from operations decreased $7.4 million, to a loss of approximately $(5.0) million for fiscal 2019 from income of approximately $2.5 million for fiscal 2018.

Change in Acquisition Deposit for Working Capital Guarantee

As of September 30, 2018, the SNI Merger Consideration held in the Working Capital Reserve Fund of $1.5 million was reduced by $0.6 million (“NWC Adjustment Amount”), following completion of the process provided for in the Merger Agreement, in which an independent accounting firm (the “firm”) was engaged to review related working capital-related claims made by the Company against such funds.

As a result of the firm’s findings, the Company has recognized and reported a corresponding gain in its consolidated statement of operations for the fiscal year ended September 30, 2018.

As of September 30, 2019, the SNI Merger Consideration held in the Working Capital Reserve Fund is $0.8 million.

As the net result of the matters discussed regarding revenues and operating expenses above, loss from operations increased by $8,880, to a loss of $13,833 for fiscal 2020 from a loss of $4,953 for fiscal 2019.

The increase in our loss from operations is directly attributable to the matters discussed regarding revenues and operating expenses above;

including, notably, the negative impacts of the COVID-19 pandemic, increases in our bad debt expense of approximately $1,765, and an increase of approximately $4,550 in the amount of a non-cash goodwill impairment charge recognized in fiscal 2020, as compared with a similar non-cash goodwill impairment charge recognized during fiscal 2019.

Interest Expense

Interest expense for fiscal 2019, increased by approximately $0.9 million or 8% compared to fiscal 2018.

The increase in interest expense is attributable to a scheduled increase in the required interest margin under the Company’s senior credit facilities of approximately 500 basis points (5%) annually, that began as of June 1, 2018.

Interest expense for fiscal 2020, decreased by $207 compared to fiscal 2019.

The decrease in interest expense is mostly attributable to a decrease in interest on Revolving Credit Facility and Term Loan of $1,107 during fiscal 2020 compared to fiscal 2019.

This was mainly offset by increases in an amortization of the debt issue costs related to exit and restructuring fees originated under Seventh Amendment of $422 and interest expense for beneficial conversion feature associated with the former 8% Notes of $487 in fiscal 2020 compared to fiscal 2019.

Provision for Income Taxes

The Company recognized a tax expense of approximately $0.4 million in fiscal 2019.

The Company recognized a tax benefit of approximately $0.8 million primarily associated with recognition of the newly adopted Tax Cuts and Jobs Act enacted in fiscal 2018.

As a result of the matters discussed regarding revenues and expenses above, the Company incurred net losses for 2019 and 2018 of $17.8 million and $7.6 million, respectively.

The Company continues to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals.

The Company recognized provisions for income tax expense of $597 and $370 in fiscal 2020 and 2019, respectively.

The composition of the Company’s income tax provisions is relatively complex;

however, the net increase in the provision for fiscal 2020 as compared with fiscal 2019 can be attributed to higher state and local taxes in certain jurisdictions.

The Company’s net loss was $14,347 and $17,763 for fiscal 2020 and 2019, respectively.

The decrease in the net loss was principally the result of the gain recognized of $12,316 on an extinguishment of subordinated debt in fiscal 2020 that was offset by goodwill impairment of $8,850.

As explained under the Overview section and Results of Operations sections above, the negative effects of the coronavirus pandemic during the later portion of fiscal 2020 also significantly impacted our business and contributed to our fiscal 2020 net loss.

Net Income (Loss) Attributable to Common Stockholders

Net Income (Loss) Attributable to Common Stockholders for fiscal 2020 increased by $27,891.

The significant items contributing to this improvement were the gains resulting from extinguishments of the Company’s subordinated debt and outstanding preferred stock of $12,316 and $24,475, respectfully.

These were offset, in part, by a non-cash goodwill impairment charge during fiscal 2020, which exceeded a similar non-cash charge in fiscal 2019 by approximately $4,550, increases in our bad debt expense of approximately $1,765, including $1,653 associated with a single large customer of our light industrial segment that has declared bankruptcy, and the negative effects of the COVID-19 pandemic and other matters discussed above.

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.

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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, operating costs and expenses, payment of taxes, payment of interest and principal under its debit agreements, and capital expenditures.

The Company experienced significant net losses in fiscal 2019 and fiscal 2018, which also have negatively impacted the Company’s ability to generate liquidity.

Management believes the Company can generate adequate liquidity to meet its obligations for the foreseeable future and has taken definitive actions to improve operations, reduce costs and improve profitability and liquidity, and position the Company for future growth.

In addition, management has successfully negotiated amendments and waivers to the Credit Agreement with the Company’s current senior lenders on six occasions to date as we work to improve the Company’s operations and to refinance and restructure its current debt and equity capitalization.

However, there can be no assurance that the Company will not fall into non-compliance with its loan covenants in the future or that its Lenders will continue to provide waivers or amendments to the Company in the event of future non-compliance with debt covenants or other possible events of default that could happen.

There also can be no assurance that the Company will be successful in its efforts to refinance and restructure the Company’s debt and equity capitalization under reasonable terms or at all, or that it will generate adequate liquidity to fund operations and meet its debt service obligations in the future.

The following table sets forth certain consolidated statements of cash flows data:

(in thousands)

Cash flows (used in) provided by operating activities

Cash flows used in operating activities

Cash flows used in investing activities

Cash flows provided by (used in) financing activities

At September 30, 2019, the Company had approximately $4.1 million of cash which was an increase of approximately $0.9 million from approximately $3.2 million at September 30, 2018.

At September 30, 2019, the Company had working capital of approximately $8.5 million compared to $13.1 million of working capital at September 30, 2018.

Net cash (used in) provided by operating activities for fiscal 2019 and fiscal 2018 was approximately $(0.4) million and $1.5 million, respectively.

The negative operating cash flow in the fiscal 2019 corresponds with negative income from operations and other net changes in working capital.

Cash flows provided by financing activities

At September 30, 2020, the Company had $14,074 of cash which was an increase of $10,019 from $4,055 at September 30, 2019.

At September 30, 2020, the Company had working capital of $13,351 compared to $8,534 of working capital at September 30, 2019.

Net cash used in operating activities for fiscal 2020 and fiscal 2019 was $2,247 and $394, respectively.

The negative operating cash flow in the fiscal 2020 and 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 fiscal 2020 and fiscal 2019.

Cash flow provided by financing activities for fiscal 2019 was primarily from the proceeds of the 8% Convertible Subordinated Notes issued to related parties in May 2019 and borrowings under the Company’s Revolving Credit Facility, offset by payments on the Company’s debt, principally its Term Loan.

Cash flow used in financing activities for fiscal 2018 was primarily from net borrowings on the Revolving Credit Facility offset by payments on the Company’s debt, principally its term loan and subordinated debt.

Minimum debt service payments (principal) for the twelve-month period commencing after the close of business on September 30, 2019, are approximately $6.5 million.

Cash flow provided by financing activities for fiscal 2020 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 September 30, 2020, are approximately $3,132.

Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on September 30, 2020, are approximately $1,848.

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 September 30, 2019, are approximately $2.0 million.

Revolving Credit Facility and Term Loan

After the close of business on March 31, 2017, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank National Association (“PNC”), and certain investment funds managed by MGG Investment Group LP (“MGG”).

Initial funds were distributed on April 3, 2017 (the “Closing Date”) to repay existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.

Under the terms of the Credit Agreement, the Company may borrow up to $73.8 million consisting of a four-year term loan in the principal amount of $48.8 million and revolving loans in a maximum amount up to the lesser of (i) $25.0 million or (ii) an amount determined pursuant to a borrowing base that is calculated based on the outstanding amount of the Company’s eligible accounts receivable, as described in the Credit Agreement.

The loans under the Credit Agreement mature on March 31, 2021.

The Credit Agreement, as amended, contains certain financial covenants, which are required to be maintained as of the last day of each fiscal quarter, including the following:

Fixed Charge Coverage Ratio (“FCCR”).

This is the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Fixed Charges, each of which is as defined in the Credit Agreement, as amended.

The minimum FCCR requirements are:

1.00 to 1.00 for the trailing two fiscal quarters ending March 31, 2019;

0.60 to 1.00 for the trailing three fiscal quarters ending June 30, 2019;

0.70 to 1.00 for the trailing four fiscal quarters ending September 30, 2019;

0.75 to 1.00 for the trailing four fiscal quarters ending December 31, 2019;

0.85 to 1.00 for the trailing four fiscal quarters ending March 31, 2020;

and 1.00 to 1.00 for each of the trailing four fiscal quarterly periods ending thereafter.

Minimum EBITDA .

Minimum EBITDA, which is determined on a consolidated basis and measured on a trailing four (4) quarter basis, as defined in the Credit Agreement, as amended, are:

$13 million for the fiscal quarter ending March 31, 2019;

$10 million for the fiscal quarter ending June 30, 2019;

$10.0 million for the fiscal quarter ending September 30, 2019;

$10.0 million for the fiscal quarter ending December 31, 2019;

and $11.0 million for the fiscal quarter ending March 31, 2020, and each fiscal quarter thereafter.

Senior Leverage Ratio .

This is the ratio of maximum Indebtedness, which is substantially comprised of consolidated senior indebtedness, to consolidated EBITDA, each of which is as defined under the Credit Agreement, as amended.

The Senior Leverage Ratios are:

4.25 to 1.00 for the fiscal quarter ending March 31, 2019;

5.50 to 1.00 for the fiscal quarter ending June 30, 2019;

5.50 to 1.00 for the fiscal quarter ending September 30, 2019;

5.60 to 1.00 for the fiscal quarter ending December 31, 2019;

and 5.00 to 1.00 for the fiscal quarter ended March 31, 2020, and for each fiscal quarter thereafter.

In addition to these financial covenants, the Credit Agreement includes other restrictive covenants.

The Credit Agreement permits capital expenditures up to a certain level and contains customary default and acceleration provisions.

The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.

On August 31, 2017, the Company entered into a Consent to Extension of Waiver to the Credit Agreement (the “Waiver”).

Under the terms of the Waiver, the Lenders and the Agents agreed to extend to October 3, 2017 the deadline by which the Company must deliver updated financial information satisfactory to the lenders in order to amend the financial covenant levels, execute a fully executed amendment to the Credit Agreement, and any other terms and conditions required by the lenders in their sole discretion.

Additionally, the Company paid a $0.07 million consent fee to the Agents for the pro rata benefit of the lenders, in connection with the Waiver.

On August 31, 2017, an additional waiver to the Credit Agreement (“Additional Waiver”), pursuant to which the due date for the Company to deliver the subordination agreement and an amended subordinated note, executed by one of the Company’s subordinated lenders was extended from August 31, 2017 to October 3, 2017, also was obtained.

On October 2, 2017, the Company, the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC, and certain investment funds managed by MGG (collectively the (“Lenders”) entered into a First Amendment and Waiver (the “First Amendment”) to the Revolving Credit, Term Loan and Security Agreement dated as of March 31, 2017 (the “Credit Agreement”) by and among the Loan Parties, and the Lenders.

The First Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans.

The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtedness under the Credit Agreement.

Pursuant to the First Amendment the Lenders also waived any Event of Default arising out of the Loan Parties’ failure to deliver, on or before October 3, 2017, the materials satisfying the requirements of clauses (i) and (ii) of Section 5 of the Waiver to Revolving Credit, Term Loan and Security Agreement, dated as of August 14, 2017, as amended.

On November 14, 2017, the Company and its subsidiaries, as Borrowers, entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).

Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10.0 million in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement.

Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement.

The Company also agreed to certain amendments to the loan covenants required to be maintained.

The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or March 31, 2018, previously.

On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018.

On August 10, 2018, the Company and its subsidiaries, as Borrowers, entered into a third amendment and waiver (the “Third Amendment and Waiver”) to the Credit Agreement.

Pursuant to the Third Amendment and Waiver, the Lenders agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.

On December 27, 2018, the Company and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).

Under the Fourth Amendment and Waiver, the Company and its Lenders have negotiated and agreed to a waiver for noncompliance with the financial covenants under the Credit Agreement as of September 30, 2018, and amendments to the financial covenants and to the remaining scheduled principal payments.

On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).

Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments.

Following the Fifth Amendment, the Company has met its financial covenants, as amended, for the quarters ended June 30, 2019 and September 30, 2019.

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 significant net losses in fiscal 2019 and fiscal 2018, which also have negatively impacted the Company’s ability to generate liquidity.

In addition, management has successfully negotiated amendments and waivers to the Senior Credit Agreement with the Company’s current senior lenders on six occasions to date as management works to improve the Company’s operations and refinancing and restructuring its current debt and equity capitalization.

Subordinated Debt – Convertible and Non-Convertible

On October 2, 2015, the Company issued and sold a Subordinated Note in the aggregate principal amount of $4,185,000 to JAX Legacy – Investment 1, LLC (“JAX”) pursuant to a Subscription Agreement dated October 2, 2015 between the Company and Jax.

On April 3, 2017, the Company and JAX amended and restated the Subordinated Note in its entirety in the form of the 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000.

The 10% Note matures on October 3, 2021.

The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 10% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”).

The 10% Note is subordinated in payment to the obligations of the Company to the lending parties to the Credit Agreement, pursuant to a Subordination and Inter-creditor Agreements, dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and JAX.

The 10% Note issued to JAX is not registered under the Securities Act of 1933, as amended (the “Securities Act”).

JAX is an accredited investor.

The issuance of the 10% Note to JAX is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.

On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier in the amount of $1,202,405 (the “Note”).

This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000.

The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of $107,675, commencing on November 4, 2017 and ending on October 4, 2018, and is fully paid off as of September 30, 2019.

On January 20, 2017, the Company entered into Addendum No.

1 (the “Addendum”) to the Paladin Agreement Pursuant to the terms of the Addendum, the Company and the Sellers agreed (a) that the conditions to the “Earnouts” (as defined in the Paladin Agreement) had been satisfied or waived and (b) that the amounts payable to the Sellers in connection with the Earnouts shall be amended and restructured as follows:

(i) the Company shall pay $250,000 in cash to the Sellers on or prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company shall issue to the Sellers a subordinated promissory note in the principal amount of $1,000,000 (the “Subordinated Note”), The Subordinated Note shall bear interest at the rate of 5.5% per annum.

Interest on the Subordinated Note shall be payable monthly.

The Subordinated Note shall have a term of three years and may be prepaid without penalty.

The principal of and interest on the Subordinated Note may be paid, at the option of the Company, either in cash or in shares of common stock of the Company or in any combination of cash and common stock.

The Sellers have agreed that all payments and obligations under the Subordinated Note shall be subordinate and junior in right of payment to any “Senior Indebtedness” (as defined in the Paladin Agreement) now or hereafter existing to “Senior Lenders” (current or future) (as defined in the Paladin Agreement).

The Company has paid the $250,000 cash payment to the Sellers.

On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the SNIH acquisition an aggregate of $12.5 million in aggregate principal amount of its 9.5% Notes.

The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”).

The 9.5% Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share.

Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paid quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”).

At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement.

Each of the 9.5% Notes is subordinated in payment to the obligations of the Company to the lending parties to the Credit Agreement, pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the other borrowers under the Credit Agreement, the Agent under the Credit Agreement and each of the holders of the 9.5% Notes.

On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2.0 million in aggregate principal amount of its 8% Notes.

The 8% Notes mature on October 3, 2021 (the “Maturity Date”).

The 8% Notes are convertible into shares of the Company’s Series C 8% Cumulative Convertible Preferred Stock (“Series C Preferred Stock”) at a conversion price equal to $1.00 per share (subject to adjustment as provided in the 8% Notes upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”).

Interest on the 8% Notes accrues at the rate of 8% per annum and shall be paid quarterly in non-cash payments-in-kind (“PIK”) in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2019, on each conversion date with respect to the 8% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”).

Interest shall be paid on an Interest Payment Date in shares of Series C Preferred Stock of the Company, which Series C Preferred Stock shall be valued at its liquidation value.

All or any portion of the 8% Notes may be redeemed by the Company for cash at any time.

The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 8% Notes being redeemed, plus accrued and unpaid PIK interest thereon.

The Company may, at its option, prepay any portion of the principal amount of the 8% Notes without the prior consent of the holders thereof;

provided, however, that any prepayments of the 8% Notes shall be made on a pro rata basis to all holders of 8% Notes based on the aggregate principal amount of 8% Notes held by such holders.

The Company shall be required to prepay the 8% Notes together with accrued and unpaid PIK interest thereon upon the consummation by the Company of any Change of Control.

For purposes of the 8% Notes, a Change of Control of the Company shall mean any of the following:

(A) the Company effects any sale of all or substantially all of its assets in one transaction or a series of related transactions or (B) the consummation of any transaction (including, without limitation, any merger or consolidation), the result of which is that any person or entity together with their affiliates, becomes the beneficial owner, directly or indirectly, of more than 50% of the Common Stock of the Company.

Each of the 8% Notes is subordinated in payment to the obligations of the Company to the lenders parties to that certain Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017, as amended, by and among the Company, the Company’s subsidiaries named as borrowers therein (collectively with the Company, the “Borrowers”), the senior lenders named therein and MGG Investment Group LP, as administrative agent and collateral agent (the “Agent”) for the senior lenders (the “Credit Agreement”), pursuant to those certain Subordination and Intercreditor Agreements, each dated as of May 15, 2019 by and among the Company, the Borrowers, the Agent and each of the holders of the 8% Notes.

Series B Convertible Preferred Stock

On April 3, 2017, the Company agreed to issue to certain SNIH Stockholders upon receipt of duly executed letters of transmittal as part of the SNIH acquisition, an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock.

The Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

In the event that the Company declares or pays a dividend or distribution on its Common Stock, whether such dividend or distribution is payable in cash, securities or other property, including the purchase or redemption by the Company or any of its subsidiaries of shares of Common Stock for cash, securities or property, the Company is required to simultaneously declare and pay a dividend on the Series B Convertible Preferred Stock on a pro rata basis with the Common Stock determined on an as-converted basis assuming all Shares had been converted as of immediately prior to the record date of the applicable dividend or distribution.

On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series B Convertible Preferred Stock with the State of Illinois.

(the “Resolution Establishing Series”).

Except as set forth in the Resolution Establishing Series, the holders of the Series B Convertible Preferred Stock have no voting rights.

Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting).

Each share of Series B Convertible Preferred Stock is convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $4.86 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.

None of the shares of Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act.

Each of the SNIH Stockholders who received shares of Series B Preferred Stock is an accredited investor.

The issuance of the shares of Series B Preferred Stock to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.

During fiscal 2019, the Company issued 250,000 shares of common stock for the conversion of approximately 250,000 shares of Series B Convertible Preferred Stock.

Series C Convertible Preferred Stock

On May 17, 2019, the Company filed a Statement of Resolution Establishing its Series C Preferred Stock with the State of Illinois (the Resolution Establishing Series”).

Pursuant to the Resolution Establishing Series, the Company designated 3,000,000 of its authorized preferred stock as “Series C 8% Cumulative Convertible Preferred Stock”, without par value.

The Series C Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) and senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

Holders of shares of Series C Preferred Stock shall be 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.

During fiscal 2019, the Company issued approximately 60,400 shares of Series C Preferred Stock to Investors related to interest of $60,400 on the 8% Notes and PIK dividend on the Series C Preferred Stock.

The Company experienced significant net losses for the fiscal years ended September 30, 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 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”).

Between April 29 and May 7, 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 were the only source of financing available to our companies and businesses and have been and continue to be 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 Coronavirus 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”), 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 continues.

Off-Balance Sheet Arrangements

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If differences were to occur in a subsequent period, the Company would recognize those differences when they became known.

Significant accounting and disclosure matters requiring the use of estimates and assumptions include, but may not be limited to, accounting for acquisitions, determining fair values of financial assets and liabilities, accounting for asset impairments, revenue recognition, accounts receivable allowances, deferred income tax valuation allowances, and accounting for derivative liabilities and beneficial conversion features.

Significant accounting and disclosure matters requiring the use of estimates and assumptions include, but may not be limited to, revenue recognition, accounts receivable allowances, determining fair values of financial assets and liabilities, deferred income tax valuation allowances, accounting for asset impairments, and accounting for derivative liabilities and beneficial conversion features.

Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.

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The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms.

An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period.

An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues.

An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period.

These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers.

The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a small accounts receivable allowance.

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.

Fair Value Measurement

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As of September 30, 2020, no material accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.

Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions.

Under this guidance, annual or interim goodwill impairment testing is performed by comparing the fair value of a reporting unit with its carrying amount.

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.

Due to a sustained decline in the market capitalization of our common stock during the third quarter of 2019, we performed an interim goodwill impairment test in accordance with the provisions of ASU 2017-04.

The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $4.3 million, which was recorded in the consolidated financial statements for the fiscal 2019.

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, earnings and other possible factors and their effects on estimated fair value of the Company’s reporting units.

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.

Intangible Assets

Customer lists, non-compete agreements, customer relationships, management agreements and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.

Impairment of Long-lived Assets

The Company recognizes an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items.

The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method.

The Company did not recognize and record any impairments of long-lived assets used in operations in fiscal 2019 and 2018, other than goodwill in fiscal 2019.

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

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Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 3 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.

Recently Adopted Accounting Pronouncements

Lease Accounting.

In February 2016, the FASB issued Accounting Standard Update (“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 consolidated 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.

Quantitative and Qualitative Disclosures About Market Risk.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis