What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2020-12-29 compared with 2019-12-23 · 379 added, 306 removed, 434 unchanged (61% of the section changed)

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September 30,

CURRENT ASSETS:

4 unchanged sentences

Intangible assets, net

Right-of-use assets

Other long-term assets

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Subordinated debt

Current Paycheck Protection Program Loans and accrued interest

Current operating lease liabilities

Other current liabilities

1 unchanged sentence

Deferred taxes

Paycheck Protection Program loans and accrued interest

Revolving credit facility

Term loan, net of discount

Subordinated convertible debt

(includes $1,269 and $0, net of discount, respectively, due to related parties)

Subordinated convertible debt (includes $0 and $1,269, net of discount, respectively, due to related parties)

Noncurrent operating lease liabilities

Other long-term liabilities

14 unchanged sentences

authorized - 3,000 shares;

issued and outstanding - 60 and 0 shares at September 30, 2019 and September 30, 2018, respectively;

issued and outstanding - 0 and 60 shaes at September 30, 2020 and September 30, 2019, respectively;

liquidation value of the preferred series C stock is approximately $0 and $60 at September 30, 2020 and September 30, 2019, respectively

3 unchanged sentences

authorized - 200,000 shares;

issued and outstanding - 12,538 shares at September 30, 2019 and 10,783 shares at September 30, 2018

issued and outstanding - 17,667 shares at September 30, 2020 and 12,538 shares at September 30, 2019, respectively

Additional paid in capital

6 unchanged sentences

Year Ended September 30,

(in thousands)

(in thousands except per share data)

NET REVENUES:

2 unchanged sentences

Cost of contract services

Selling, general and administrative expenses (including noncash stock-based compensation expense of $2,186 and $1,660 respectively)

Acquisition, integration and restructuring expenses

Selling, general and administrative expenses (including noncash

stock-based compensation expense of $1,559 and $2,186 respectively)

Depreciation expense

1 unchanged sentence

Goodwill impairment charge

INCOME (LOSS) FROM OPERATIONS

Change in acquisition deposit for working capital guarantee

LOSS FROM OPERATIONS

Gain on extinguishment of debt

Interest expense

1 unchanged sentence

Provision for income tax

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

BASIC AND DILUTED LOSS PER SHARE

WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED

Gain on redeemed preferred stock

NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS

BASIC EARNINGS (LOSS) PER SHARE

DILUTED EARNINGS (LOSS) PER SHARE

WEIGHTED AVERAGE SHARES OUTSTANDING:

The accompanying notes are an integral part of these consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

Shareholders'

(in thousands)

Balance, September 30, 2018

2 unchanged sentences

Conversion of preferred Series B to common stock

Beneficial conversion features on subordinated debt

Balance, September 30, 2019

Share-based compensation

Issuance of stock for restricted stock

Issuance of stock for interest

Conversion of preferred Series B to common stock

Beneficial conversion features on subordinated debt

Issuance of stock for debt conversion

Issuance of stock for preferred stock conversion

Gain on redemption of preferred stock

Balance, September 30, 2020

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CASH FLOWS FROM OPERATING ACTIVITIES:

Adjustments to reconcile net loss to cash (used in) provided by operating activities:

Adjustments to reconcile net loss to cash used in operating activities:

Gain on extingishment of debt

Depreciation and amortization

Goodwill impairment charge

Loss on disposal of assets

Non-cash lease expense

Stock compensation expense

3 unchanged sentences

Interest expense paid with common and preferred stock

Paid in kind interest on term loan

Change in acquisition deposit for working capital guarantee

1 unchanged sentence

Accounts receivable

Accrued interest

Accounts payable

Accrued compensation

Other current items, net

Long-term liabilities, net

Net cash (used in) provided by operating activities

Change in other assets, net of change in other liabilities

Net cash used in operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

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Payment on term loan

Net proceeds from subordinated debt

Net proceeds from (payments on) subordinated debt

Payment on preferred stock redemption

Net proceeds from CARES Act Paycheck Protection Program Loans

Payments on capital lease

Net proceeds from revolving credit

Net cash provided by (used in) financing activities

Net (payments on) proceeds from revolving credit

Net cash provided by financing activities

Net change in cash

Cash at beginning of period

Cash at end of period

Cash at beginning of year

Cash at end of year

SUPPLEMENTAL CASH FLOW INFORMATION:

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Cash paid for taxes

Non-cash financing activities

Non-cash investing and financing activities

Conversion of series B convertible preferred stock to common stock

Beneficial conversion features on subordinated debt

Acquisition of equipment with capital leases

Acquisition of equipment with finance lease

Conversion of 8% subordinated notes to common stock by related parties

Conversion of 10% subordinated notes to common stock

Conversion of series C preferred stock to common by related parties

Redemption of series B preferred stock

Redemption of series C preferred stock

Accrued fees on term loan

Right-of-use assets, net of deferred rent

Operating lease liability

The accompanying notes are an integral part of these consolidated financial statements.

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The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.

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, 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.

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 management works 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.

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

Net working capital at September 30, 2019 was approximately $8.7 million, as compared to net working capital of approximately $13.1 million for September 30, 2018.

The Company experienced net losses in fiscal 2020 and 2019, which also negatively impacted the Company’s ability to generate liquidity.

During much of this period, the Company significantly restructured its operations, made significant cost reductions, including closing and consolidating unprofitable locations and eliminating underperforming personnel, implemented strategic management changes, and intensified focus on stabilizing the business and restoring profitable growth.

As a result, management believes the Company had begun to see its operations and business stabilize.

In approximately mid-March 2020, the Company began to experience the severe negative effects of the economic disruptions resulting from the Coronavirus Pandemic (“COVID-19”).

These have included abrupt reductions in demand for the Company’s primary sources of revenue, its temporary and direct hire placements, lost productivity due to business closings both by clients and at the Company’s own operating locations, and the significant disruptive impacts to many other aspects of normal operations.

These effects have continued to be felt across all businesses, with the most severe impacts being felt in the commercial (light industrial) and finance, accounting and office clerical (FAO) end markets within the professional segment.

On June 30, 2020, the Company completed a financial restructuring and eliminated approximately $19,685 of its subordinated indebtedness and approximately $27,695 of its convertible preferred stock as required pursuant to the terms of Seventh Amendment, dated as of April 28, 2020, to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017.

The Company entered into a Repurchase Agreement for Preferred Stock and Subordinated Notes (the “Repurchase Agreement”), dated as of June 30, 2020 with Ronald R.

Smith”), Thrivent Financial for Lutherans (“Thrivent”), Madison Capital Funding LLC (“Madison”), Maurice R.

Harrison IV (“Mr.

Harrison”), Peter Langlois (“Mr.

Langlois”), Vincent Lombardo (“Mr.

Lombardo”) and Shane Parr (Mr.

Parr, and collectively with Mr.

Smith, Thrivent, Madison, Mr.

Harrison, Mr.

Langlois, and Mr.

Lombardo), the “SNI Group Members” pursuant to which the SNI Group Members agreed to allow the Company to repurchase and settle all of the 9.5% Convertible Subordinated Notes (the “9.5% Notes”), Series B Convertible Preferred Stock, no par value (“Series B Preferred Stock”), 8% Convertible Subordinated Notes (“8% Notes”) and Series C 8% Cumulative Convertible Preferred Stock, no par value (“Series C Preferred Stock”) held by each of them as set forth below.

All of the outstanding 9.5% Notes and all of the outstanding Series B Preferred Stock were held by SNI Group Members.

Management believes that the Company can generate adequate liquidity to meet its obligations for the foreseeable future assuming the negative economic effects of COVID-19 do not worsen, and that economic recovery continues.

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

Net working capital as of September 30, 2020 was $13,351, as compared to net working capital of $8,534 for September 30, 2019.

Paycheck Protection Program Loan

Between April 29 and May 7, 2020, the Company obtained loans in the aggregate amount of $19,927 for its operating subsidiaries from BBVA USA (“BBVA”), as lender, pursuant to the Payroll Protection Plan (the “PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and administered by the U.S.

Small Business Administration (“SBA”).

These funds were the only source of financing available to our companies and businesses and have been and continue to be critical to our ability to maintain operations, including the employment of our temporary and full-time employees, in order to produce and meet our foreseeable liquidity requirements in the midst of this continuing worldwide Coronavirus Pandemic.

The Company accounted for the PPP loans as a debt (See Note 9) in accordance with Accounting Standards Codification (“ASC”) Topic 470 Debt.

Accordingly, the PPP loans were recognized as current and noncurrent debt in the Company’s consolidated financial statements.

The Company, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, deferred paying $2,435 of applicable payroll taxes as of September 30, 2020, which is included in long-term liability in the consolidated financial statements.

The deferred deposits of the employer’s share of Social Security tax must be paid to be considered timely (and avoid a failure to deposit penalty) by December 31, 2021, 50 percent of the eligible deferred amount, and the remaining amount by December 31, 2022.

Principles of Consolidation

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All significant inter-company accounts and transactions are eliminated in consolidation.

Estimates and Assumptions

Use of Estimates

Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented.

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Revenue Recognition

Revenues from contracts with clients are generated through the following services:

direct hire placement services, temporary professional services staffing, and temporary light industrial staffing.

Revenues from contracts with customers are generated from direct hire placement services, temporary professional services staffing, and temporary light industrial staffing.

Revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

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No fees for permanent placement services are charged to employment candidates.

Temporary staffing service revenues from contracts with customers are recognized in amounts for which the Company has a right to invoice, as the services are rendered by the Company’s temporary employees.

Temporary staffing service revenues from contracts with customers are recognized in amounts the Company has the right to invoice as the services are rendered by the Company’s temporary employees.

The Company records temporary staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses.

The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a client.

The Company has the risk of identifying and hiring qualified employees, has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by client.

Falloffs and refunds during the period are reflected in the statements of operations as a reduction of placement service revenues and were approximately $2.2 million in fiscal 2019 and $2.1 million in fiscal 2018.

Expected future falloffs and refunds are reflected in the consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below.

The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a customer.

The Company has the risk of identifying and hiring qualified employees as Company employees (as opposed to client employees), has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by customers.

Falloffs and refunds during the period are reflected in the statements of operations as a reduction of placement service revenues and were approximately $1,375 in fiscal 2020 and $2,243 in fiscal 2019.

Expected future falloffs and refunds are estimated and reflected in the consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below.

See Note 15 for disaggregated revenues by segment.

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As of September 30, 2020, and September 30, 2019, there were no cash equivalents.

The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation.

Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits.

Cash deposit accounts are maintained at financial institutions and, at times, balances may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation.

We have never experienced any losses related to these balances.

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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 client companies are generally dependent on their contract employees in the same manner as permanent employees for the production cycle and the conduct of their respective businesses allows for a relatively small accounts receivable allowance.

As of September 30, 2019, and September 30, 2018 allowance for doubtful accounts was $0.5 million and $0.3 million, respectively.

The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible.

The allowance also includes permanent placement falloff reserves of $0.2 million as of September 30, 2019 and September 30, 2018, respectively.

Management believes that the nature of the contract service business, wherein client companies are generally dependent on our contract employees in the same manner as permanent employees for their production cycles and the conduct of their respective businesses contributes to a relatively small accounts receivable allowance.

As of September 30, 2020, and September 30, 2019 allowance for doubtful accounts was $2,072 and $515, respectively.

The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible.

The allowance also includes permanent placement falloff reserves of $287 and $197 as of September 30, 2020 and September 30, 2019, respectively.

Property and Equipment

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There was no impairment of property and equipment for fiscal 2020 and fiscal 2019.

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

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

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

Due to a sustained decline in the market capitalization of our common stock during the third quarter of 2019, we performed an interim goodwill impairment test in the 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.

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.

The Company determines if a contractual arrangement is a lease at inception.

Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheet.

The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes.

The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty.

All the Company’s real estate leases are classified as operating leases.

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease.

Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term.

The lease payments included in the present value are fixed lease payments.

As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments.

The Company applies the portfolio approach in applying discount rates to its classes of leases.

The operating lease ROU assets include any payments made before the commencement date.

Lease expense for lease payments is recognized on a straight-line basis over the lease term.

The Company does not currently have subleases.

The Company does not currently have residual value guarantees or restrictive covenants in its leases.

Fair Value Measurement

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Earnings and Loss per Share

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period.

Diluted loss per share is computed giving effect to all potentially dilutive common shares.

Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable and preferred stock to common stock.

In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation.

Common stock equivalents, which are excluded because their effect is anti-dilutive, were 12.8 million and 11.0 million for fiscal 2019 and fiscal 2018, respectively.

Basic earnings and loss per share are computed by dividing net income or loss attributable to common stockholders by the weighted average common shares outstanding for the period.

Diluted earnings per share is computed giving effect to all potentially dilutive common shares.

Potentially dilutive common shares may consist of incremental shares issuable upon the vesting of restricted shares granted but unissued, exercise of stock options and warrants and the conversion of notes payable and preferred stock to common stock.

The dilutive effect of outstanding warrants and options is reflected in earnings per share by use of the treasury stock method.

The dilutive effect of preferred stock is reflected in earnings per share by use of the if-converted method.

The weighted average dilutive incremental shares, or common stock equivalents, included in the calculations of dilutive shares were 6,356 for fiscal 2020.

Common stock equivalents, which are excluded because their effect is anti-dilutive, were approximately 1,689 and 12,832 for the fiscal 2020 and 2019, respectively.

September 30,

Basic net income (loss) per share computation:

gain on redeemed preferred stock

Net income (loss) attributable to common stockholders

Weighted-average common shares outstanding

Basic net income (loss) per share

Diluted net income per share computation:

Net income (loss) attributable to common stockholders

gain on redeemed preferred stock

gain on extinguishment of convertible debt

interest expense on convertible note

Diluted loss attributable to common stockholders

Weighted average common shares outstanding

Incremental shares attributable to the assumed conversion of preferred stock, convertible debt and exercise of outstanding stock options and warrants

Total adjusted weighted-average shares

Diluted net loss per share

For the fiscal 2019, in which net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation.

Advertising Expenses

The Company expenses the costs of print and internet media advertising and promotions as incurred and reports these costs in selling, general and administrative expenses.

Advertising expense totaled $2.3 million for fiscal 2019 and fiscal 2018, respectively.

Advertising expense totaled $1,913 and $2,322 for fiscal 2020 and fiscal 2019, respectively.

The Company evaluates its goodwill for possible impairment as prescribed by ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment at least annually and when one or more triggering events or circumstances indicate that the goodwill might be impaired.

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

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

The Company performed annual goodwill impairment testing effective as of September 30, 2020, and allocates its goodwill among two reporting units, its Professional segment and its Commercial segment for purposes of evaluation for impairments.

In determining the fair value of our two reporting units, we use one or a combination of commonly accepted valuation methodologies:

1) the income approach, which is based on the present value of discounted cash flows projected for the reporting unit or, in certain instances, capitalization of earnings, and 2) the market approach, which estimates a fair value based on an appropriate revenue and/or earnings multiple(s) derived from comparable companies.

These valuation techniques on assumptions and other factors, such as the estimated future cash flows of our reporting units, the discount rate used to determine the present value of our cash flows and the market multiples of comparable companies utilized.

In applying our methods, we also use averages or medians to select assumptions derived from comparable companies or market data, and in the application of the income and/or market approaches if we determine that this will provide a more appropriate estimated fair value or range of fair value estimates of the reporting units.

Changes to input assumptions and other factors used or considered in the analysis could result in materially different evaluations of goodwill impairment.

As a result of the evaluation performed, the carrying value of its net assets exceeded the estimated fair value of the Company’s Professional segment as of September 30, 2020, while the estimated fair value of the Commercial segment exceeded its net carrying value.

The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $8,850, which was recorded in the consolidated financial statements for fiscal 2020.

For purposes of performing this goodwill impairment assessment, management applied the valuation techniques and assumptions to its Professional and Commercial segments as reporting units discussed above and also considered recent trends in the Company’s stock price, implied control or acquisition premiums, and other possible factors and their effects on estimated fair value of the Company’s reporting units.

Management also considered the Company’s market capitalization, as recently reported on the NYSE American exchange, in conducting its assessment, which has been lower than its consolidated net book value (consolidated stockholders’ equity).

Management believes that the continuing declines in global economic and labor market conditions and other disruptions caused by the COVID-19 pandemic that have negatively impacted the Company’s business and operating results also are a contributing factor to the Company’s recent stock prices, market capitalization, and potentially, the value of its goodwill resulting, in part, in the non-cash impairment charge recognized during fiscal 2020.

Management believes and expects that these conditions, including those impacting the Company, are improving and will continue to improve.

However, there can be no assurance that the Company’s goodwill or other long-lived assets will not become impaired in the future.

The Company adopted ASU 2017-04 in 2019.

Due to a previous sustained decline in the market capitalization of our common stock during the third quarter of 2019, we also performed a goodwill impairment test in accordance with the provisions of ASU 2017-04, and recognized a non-cash charge for the impairment of goodwill of $4,300 in fiscal 2019.

Intangible Assets

Separately identifiable intangible assets held in the form of customer lists, non-compete agreements, customer relationships, management agreements and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using 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 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 record any impairment during fiscal 2019 and fiscal 2018.

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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The discount is then amortized as interest or deemed dividends over the period from the date of the convertible instrument’s issuance to the earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future.

As a result of the settlement and conversion of the Company’s subordinated debt and preferred stock as of June 30, 2020, the Company charged off the remaining unamortized BCF associated with these instruments to interest expense and a gain was recognized from extinguishment of its convertible subordinated debt.

Stock-Based Compensation

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Reclassification

Certain reclassifications have been made to the financial statements as of and for the years ended September 30, 2019 to conform to the current year presentation.

Certain reclassifications have been made to the financial statements as of and for the years ended September 30, 2020 to conform to the current year presentation with no effect on total expenses or net loss.

The Company provides the following distinctive services:

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The Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services.

Selling, general and administrative expenses are not entirely allocated among Industrial and Professional Staffing Services.

Selling, general and administrative expenses are not entirely allocated among the Industrial and Professional Staffing Services segments.

Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance.

Other factors, including type of business, type of employee, length of employment and revenue recognition are considered in determining the Company’s operating segments.

Other factors, including type of business, type of employees, length of employment and revenue recognition are considered in determining the Company’s operating segments.

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue from Contracts with Customers.

On May 28, 2014, the FASB issued Accounting Standards Update ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.

The ASU superseded the existing revenue recognition guidance under U.S.

In August 2015, the FASB issued ASU No.

2015-14, Revenue from Contracts with Customers (Topic 606):

Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018.

The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date.

This ASC 606 permits the use of either the retrospective or cumulative effect transition method.

The new standard was adopted by the Company under the modified retrospective approach effective October 1, 2018.

The adoption of this standard did not have a material impact on the Company’s financial statements.

Simplifying the Test for Goodwill Impairment .

In January 2017, the FASB issued authoritative guidance to simplify the goodwill impairment testing process.

The new standard eliminates Step 2 of the goodwill impairment test.

If a company determines in Step 1 of the goodwill impairment test that the carrying value of goodwill is greater than the fair value, an impairment in that amount should be recorded to the income statement, rather than proceeding to Step 2.

The new guidance is effective for the Company for fiscal years beginning after December 15, 2019, although early adoption is permitted.

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

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

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

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

Recently Issued Accounting Pronouncements Not Yet Adopted

Lease Accounting.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous ASC 840 guidance.

The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted.

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 ASU beginning on October 1, 2019 and elected the transition option provided under ASU 2018-11.

We adopted this guidance as of October 1, 2019 and elected the transition method provided under ASU 2018-11.

This standard has a material effect on our consolidated balance sheets with the recognition of new right of use assets and lease liabilities for all operating leases, except for those leases where we elected the short-term lease recognition exemption, as these leases have a non-cancelable lease term of approximately one year or less.

Adoption of the new standard did not have a material effect on the Company’s results of operations.

As of the transition date, the ROU asset and total lease liability (current and long-term) were $5,900 and $6,341, respectively.

The Company elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) lease classification, and (iii) not revaluing initial direct costs for existing leases.

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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.

We estimate that approximately $6.3 million will be recognized as total lease liabilities and right-of-use assets on our consolidated balance sheet, offset by approximately $0.4 million of accrued rent, which will reduce the right-of-use assets.

Other than the recognition of right of use assets and related lease liabilities and related newly required disclosures, we do not expect the new standard to have a material impact on our remaining consolidated financial statements.

See Note 5 for further discussion of leases.

Stock Compensation.

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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 financial statements.

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.

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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, 2019, with early adoption permitted for annual reporting periods beginning after December 15, 2022.

The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

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.

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September 30,

(In thousands)

Computer software

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Property and equipment, net

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

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

The Company leases space for all its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters.

Branch offices are generally leased over periods ranging from three to five years.

The corporate office lease expires in 2021.

The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.

Operating lease expenses were $2,433 and $2,872 for fiscal 2020 and 2019, respectively.

Supplemental cash flow information related to leases consisted of the following:

Cash paid for operating lease liabilities

Right-of-use assets obtained in exchange for new operating lease liabilities

Supplemental balance sheet information related to leases consisted of the following:

Weighted average remaining lease term for operating leases

Weighted average discount rate for operating leases

The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the consolidated balance sheet as of September 30, 2020, including certain closed offices are as follows:

Imputed interest

Present value of operating lease liabilities (a)

(a) Includes current portion of $1,615 for operating leases.

Disclosures related to periods prior to adoption of ASU 2016-02

The Company adopted ASU 2016-02 using a modified retrospective adoption method at October 1, 2019 as noted in Note 3.

As of September 30, 2019, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices are as follows:

Goodwill and Intangible Assets

Goodwill asset for fiscal 2019 and fiscal 2018 was $72.3 million and $76.6 million, respectively.

Goodwill asset for fiscal 2020 and fiscal 2019 was $63,443 and $72,293, respectively.

The outcome of this goodwill impairment test resulted in a non-cash charge for the impairment of goodwill of $8,850, which was recorded in the consolidated financial statements for fiscal 2020.

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

Intangible Assets

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September 30, 2019

(in thousands)

Accumulated Amortization

Net Book Value

Accumulated Amortization

Net Book Value

Customer relationships

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Intangible assets that represent customer relationships are amortized on the basis of estimated future undiscounted cash flows or using the straight – line basis over estimated remaining useful lives of five to ten years.

Non-compete agreements are amortized based on a straight-line basis over the term of the respective noncompete agreements, which are typically five years in duration.

The intangible assets amortization expense was approximately $5.6 million and $5.5 million for fiscal 2019 and 2018, respectively.

Non-compete agreements are amortized based on a straight-line basis over the term of the respective non-compete agreements, which are typically five years in duration.

The amortization expense for intangible assets was $5,038 and $5,586 for fiscal 2020 and 2019, respectively.

Accrued Compensation

Accrued Compensation is comprised of accrued wages, the related payroll taxes, employee benefits of the Company’s employees, including those working on contract assignments, commissions earned and not yet paid and estimated commissions and bonuses payable.

Revolving Credit Facility and Term Loan

Revolving Credit, Term Loan and Security Agreement

After the close of business on March 31, 2017, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank National Association (“PNC”), and certain investment funds managed by MGG 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 approximately $73.8 million consisting of a four-year term loan in the principal amount of approximately $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.

Loan Covenants

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 approximately $0.07 million as a 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 certain 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.

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

The Company and its subsidiaries, as borrowers, are parties to a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with certain investment funds managed by MGG Investment Group LP (“MGG”).

The Revolving Credit Facility and Term Loan under the Credit Agreement, as amended, mature on June 30, 2023.

Revolving Credit Facility

As of September 30, 2019, the Company had $14.2 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $13.4 million was at an interest rate of approximately 17.06%, and the remainder was at an interest rate of approximately 19.00%.

As of September 30, 2019, the Company had $0.5 million available on the Revolving Credit facility.

The Revolving Credit Facility is secured by all the Company’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests.

As of September 30, 2020, the Company had $11,828 in outstanding borrowings under the Revolving Credit Facility, which accrued interest at an annual effective rate of approximately 11%.

Outstanding balances and corresponding amounts available to be borrowed or required to be repaid under the Revolving Credit Facility are determined using an agreed upon borrowing base calculation, which allows the Company to borrow amounts of up to 85% of its eligible outstanding accounts receivable, excluding specified past due balances and which amounts are further reduced for certain reserves and set asides under the Credit Agreement.

As of September 30, 2020, the Company had $1,592 then currently available for borrowing under the terms of the Revolving Credit Facility.

In addition to the Company’s accounts receivable, the Revolving Credit Facility is secured by all the Company’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests.

The Company had outstanding balances under its Term Loan, as follows:

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September 30,

(In thousands)

Unamortized debt discount

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Long term portion of term loan, net of discounts

The Term Loan is payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on March 31, 2021.

Further principal payments are required as follows:

fiscal 2020 – $5.5 million and fiscal 2021 - $36.4 million.

The Company also is required to prepay the outstanding amount of the Term Loan in an amount equal to the Specified Excess Cash Flow Amount (as defined in the agreement) for the immediately preceding fiscal year, commencing with the fiscal year ending September 30, 2018.

The Company did not owe any amounts designated as Specified Excess Cash Flow under Credit Agreement as of September 30, 2019 or 2018.

The loans under the Credit Agreement for the period commencing on the Second Amendment Effective Date up to and including May 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.75 to 1.00, an amount equal to the bank prime rate plus 9.75% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount equal to the bank prime rate plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.

Commencing on June 1, 2018 up to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, interest on the loans is payable in an amount equal to the bank prime rate plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, interest is payable in an amount equal to the prime rate plus 9.75% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans.

Commencing on September 1, 2018 through the remainder of the Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, interest on the loans is payable in an amount equal to the bank prime rate plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, interest is payable in an amount equal to bank prime rate plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.

As of September 30, 2019, the Company had $41.9 million in outstanding borrowings under the Term Loan Facility, of which approximately $35.7 million was at an interest of approximately 17.05%, and approximately $6.2 million was at an interest of approximately 17.06%.

Loan Fees and Amortization

In connection with the Credit Agreement, the Company agreed to pay an original discount fee of approximately $0.9 million, a closing fee for the term loan of approximately $0.1 million, a finder’s fee of approximately $1.6 million and a closing fee for the revolving credit facility of approximately $0.5 million.

The total of the loan fees paid at closing was approximately $3.1 million.

The Company has reported these direct loan-related costs in the form of a discount and reduction of the term loan in the accompanying consolidated balance sheets and is amortizing them as interest expense over the term of the loans.

During fiscal 2019 and fiscal 2018, the Company amortized approximately $0.8 million, respectively, of debt discount.

Accrued Compensation

Accrued compensation includes accrued wages and commissions, the related payroll taxes, and employee benefits earned by the Company’s employees, including the Company’s contract employees while they work on contract assignments, and including commissions earned and not yet paid and estimated commissions payable and related payroll-related items.

The Term Loan is payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that any and all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on maturity as of June 30, 2023.

Principal and accrued interest payments are required as follows:

fiscal 2021- $889, fiscal 2022 – $1,778, and fiscal 2023 - $39,979.

The Company also has been required to make prepayments on the Term Loan in amounts equal to the Specified Excess Cash Flow Amount (as defined in the agreement) for the immediately preceding fiscal year, commencing with the fiscal year ending September 30, 2019 (refer to Seventh Amendment to Credit Agreement , below, which includes certain modifications to this prepayment requirement).

To date, the Company has not been required to make any prepayments on the Term Loan.

As of September 30, 2020, the Company had $42,646 in outstanding borrowings under the Term Loan Facility that was at an interest of approximately 11%, plus additional interest at an annual rate 5% in the form of PIK (noncash, paid-in-kind), which accrues and is added to the balance of the Term Loan on a monthly basis.

The Credit Agreement includes financial and other restrictive covenants.

Financial covenants include minimum fixed charge coverage ratios, minimum EBITDA, as defined under the Credit Agreement to include certain adjustments, and maximum senior leverage ratios.

The Company measures and certifies these covenants quarterly.

The financial covenants are measured on a trailing four quarter basis as of the end of each quarter.

The Company met its financial covenants for the trailing four quarters ended September 30, 2020.

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

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

Seventh Amendment to Credit Agreement

On April 28, 2020, the Company and its subsidiaries entered into Seventh Amendment, dated as of April 28, 2020 (the “Seventh Amendment”), to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

The Seventh Amendment represents the most significant loan modification of the Company’s Credit Agreement since inception.

The Company and its senior lenders previously entered into the Sixth Amendment on February 12, 2020, while negotiating and in contemplation of the larger loan modification contained in Seventh Amendment.

The Seventh Amendment extends the maturity of the Credit Agreement from June 30, 2021 to June 30, 2023, lowered cash interest approximately 500 basis points (5%) per annum, postponed quarterly principal payments to recommence beginning June 30, 2021, and reduced the amounts of quarterly principal payments from the current $500 per quarter to $446.

The Company has agreed to pay 5% PIK (non-cash, paid-in-kind) interest on the Term Loan only, which is accrued and added to the balance of the Term Loan, and to pay a restructuring fee of $3,478 and an exit fee of $1,500, which became fully earned upon the effective date, but are payable upon the occurrence of a triggering event.

The triggering events include a change in control, refinancing, maturity, or other termination of the senior loans, and in the case of the restructuring fee, an acquisition by the Company also is considered a triggering event.

In addition, the Company has agreed that for each six-month period commencing with the period ending on March 31, 2021 and for each fiscal year commencing with the fiscal year ending on September 30, 2021, it shall utilize its “Specified Excess Cash Flow Amount” (as defined in the Credit Agreement) to repay amounts outstanding under the Credit Agreement.

Under the Seventh Amendment, the Company also agreed to the condition that it will pursue, negotiate, and execute conversions of all of the Company’s outstanding subordinated debt and preferred stock into shares of the Company’s common stock.

In the event the Company was able to meet the conversion conditions of the agreement, it would have then had the option to settle the restructuring fee, exit fee, and accumulated PIK balance, each when due, in cash or in shares of the Company’s common stock.

In the case of the latter, the amount or number of shares distributable to the Senior Lenders would be determined using the most favorable conversion rate at which the holders of the Company’s subordinated indebtedness or preferred stock converted their securities to shares of common stock of the Company in their conversion transactions.

On June 30, 2020, the Company completed the transactions contemplated above, as planned, except that the Company was able to settle a significant portion of outstanding subordinated debt and preferred stock for cash and at very attractive terms, thereby eliminating the need to issue substantially more of its common stock and avoiding significant dilution to existing shareholders.

(Refer to Ninth Amendment to Credit Agreement, below.)

Eighth Amendment to Credit Agreement and CARES Act Payroll Protection Program Loans

On May 5, 2020, the Company and its subsidiaries entered into nine (9) unsecured promissory notes payable under CARES Act Payroll Protection Program (“PPP”) and received net funds totaling $19,927 in order to obtain needed relief funds for allowable expenses under the CARES Act PPP.

On May 5, 2020, the Company also entered into Eighth Amendment, dated as of May 5, 2020 (the “Eighth Amendment”) to the Credit Agreement.

The Eighth Amendment to the Credit Agreement serves as the conforming amendment under the Credit Agreement to enable the Company and its subsidiaries to enter into the PPP loans and additional permitted indebtedness in compliance with the Credit Agreement.

Ninth Amendment to Credit Agreement

On June 30, 2020, the Company and its subsidiaries entered into Ninth Amendment, dated as of June 30, 2020 (the “Ninth Amendment”), to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

Under the Ninth Amendment, the Company’s senior lender agreed to modify the earlier conversion condition of the Seventh Amendment and allow the Company to settle a significant portion of the subordinated debt and preferred stock with up to $5,100 in cash, instead of by converting all of it into the Company’s common stock.

In exchange, the Company agreed to settle the exit and restructuring fees agreed to in the Seventh Amendment totaling $4,978, which were accrued as of September 30, 2020, in cash or in shares of the Company’s common stock, except under the Ninth Amendment, the determination of cash or stock would be at the Senior Lender’s discretion and no longer at the Company’s discretion as provided in the earlier Seventh Amendment.

On December 22, 2020, the Company and its subsidiaries entered into a letter amendment, dated as of December 22, 2020, to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (as amended, amended and restated, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”).

Under the letter amendment, the Company’s senior lender agreed to modify settlement date for the exit and restructuring fees, which are now due to be settled on or before June 30, 2021.

CARES Act Payroll Protection Program Loans

Between April 29 and May 7, 2020, the Company obtained for each of its operating subsidiaries a loan from BBVA USA (“BBVA”) pursuant to the Payroll Protection Plan (the “PPP”) which was established under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and administered by the U.S.

Small Business Administration (“SBA”).

The PPP loans were necessary to support ongoing operations due to current economic hardship, uncertainty, and the significant negative effects on the business operations and activity levels of the applicants attributable to COVID-19 including the impact of “lock-downs”, “quarantines” and “shut-downs”.

The PPP loans were used primarily to restore employee pay-cuts, recall furloughed or laid-off employees, support the payroll costs for existing employees, hire new employees, and for other allowable purposes including interest costs on certain mortgage and other obligations, rent and utilities.

Each of the Company’s subsidiary executed a separate promissory note evidencing unsecured loans under the PPP.

The following promissory notes were executed by the Company and its subsidiaries:

GEE Group, Inc., for $1,992 (the “GEE Group Note”), Scribe Solutions, Inc.

for $277 (the “Scribe Note”), Agile Resources, Inc.

is for $1,206 (the “Agile Note”), Access Data Consulting Corporation for $1,456 (the “Access Note”), Paladin Consulting, Inc.

for $1,925 (the “Paladin Note”), SNI Companies, Inc.

for $10,000 (the “SNI Note”), Triad Personnel Services, Inc.

for $404 (the “Triad Personnel Note”), Triad Logistics, Inc.

for $78 (the “Triad Logistics Note”), and BMCH, Inc.

for $2,589 (the “BMCH Note”).

The GEE Group Note, the Scribe Note, the Agile Note, the Access Note, the Paladin Note, the SNI Note, the Triad Personnel Note, the Triad Logistics Note, and the BMCH Note are referred to together as the “PPP Notes” and each individually as a “PPP Note”.

The loans evidenced by the PPP Notes (the “PPP Loans”) are being made through BBVA as the lender.

Principal and accrued interest payments are due and payable as follows:

fiscal 2021- $2,243, and fiscal 2022 – $17,779.

The PPP Loans have two-year terms and bear interest at a rate of 1.00% per annum.

Monthly principal and interest payments under the PPP Loans are deferred to either (1) the date that SBA remits the borrower’s loan forgiveness amount to the lender or (2) if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.

The PPP Loans may be prepaid at any time prior to maturity with no prepayment penalties.

Subordinated Debt – Convertible and Non - Convertible

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September 30,

(In thousands)

10% Convertible Subordinated Note

Amended and Restated Non-negotiable promissory note

Subordinated Promissary Note

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10% Convertible Subordinated Note

The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4.2 million, and which was scheduled to become due on October 2, 2018.

On April 3, 2017, the Company and JAX Legacy amended and restated the 10% Subordinated Note in its entirety in the form of a 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4.2 million.

The replacement 10% Note matures on October 3, 2021 (the “Maturity Date”).

The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share.

All or any portion of the 10% Note may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days.

The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon.

The Company agreed to issue to the investors in JAX Legacy approximately 77,775 shares of common stock, at a value of approximately $0.4 million which was expensed as loss on the extinguishment of debt during the year ended September 30, 2017.

Total discount recorded at issuance of the original JAX Legacy subordinated note payable was approximately $0.6 million.

Total amortization of debt discount for the year ended September 30, 2017 was approximately $0.1 million, and the remaining $0.3 million was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.

During fiscal 2019 and 2018, the Company issued approximately 408,891 and 264,280 shares of common stock to Jax Legacy as payment-in-kind interest of approximately $0.4 million and $0.9 million, respectively, on the 10% Note.

On October 3, 2019 the Company issued 148,783 shares of common stock to Jax Legacy related to interest of $0.1 million on the 10% Note.

Amended and Restated Non-Negotiable Promissory Note

On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier (sellers of Access Data Consulting Corporation) in the amount of approximately $1.2 million (the “Note”).

This Note restates in its entirety and replaces the earlier 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 $3.0 million.

The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of approximately $107,675, commencing on November 4, 2017 and ending on October 4, 2018.

The note was paid off during the three months ended December 31, 2018.

The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,185.

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

The maturity date was on October 3, 2021 (the “Maturity Date”).

The 10% Note was convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share.

All or any portion of the 10% Note was redeemable by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeded the then applicable Conversion Price for a period of 20 trading days.

The redemption price was an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon.

During fiscal 2020 and 2019, the Company issued approximately 756 and 408 shares of common stock to Jax Legacy as payment-in-kind interest of approximately $314 and $419, respectively, on the 10% Note.

On June 30, 2020, the Company and Jax Legacy, the sole holder of the Company’s 10% Note entered into a Note Conversion Agreement (the “Note Conversion Agreement”) whereby Jax Legacy agreed to immediately convert the $4,185 aggregate principal amount of the 10% Note to 718 shares of Common Stock at the $5.83 per share conversion rate stated in the 10% Notes.

The conversion of the 10% Note was executed on June 30, 2020 and the Company issued 718 shares of Common Stock to Jax Legacy on that date.

Subordinated Promissory Note

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

(i) the Company paid $250,000 in cash to the Sellers prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company issued to the Sellers a subordinated promissory note in the principal amount of $1.0 million (the “Subordinated Note”), The Subordinated Note bears interest at the rate of 5.5% per annum.

Interest on the Subordinated Note is payable monthly and principal can only be paid in stock until the term loan and Revolving Credit Facility are repaid.

The Subordinated Note is due January 20, 2020 and may be prepaid without penalty.

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

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

(i) the Company paid $250 in cash to the Sellers prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company issued to the Sellers a subordinated promissory note in the principal amount of $1,000 (the “Subordinated Note”).

The Subordinated Note originally bore interest at the rate of 5.5% per annum.

Interest on the Subordinated Note was payable monthly and principal could only be paid in stock until the term loan and Revolving Credit Facility was repaid.

On February 8, 2020, the Company and its subsidiaries, as Borrowers, entered into a first amendment (the “First Amendment”) to the Subordinated Note, dated as of January 20, 2017 (the “Subordinated Note”).

Under the First Amendment, the Company and its lender agreed to amend Subordinated Note to change maturity date to January 20, 2022.

On June 30, 2020, the Company and Enoch S.

Timothy and Dorothy Timothy entered into a Note Settlement Agreement (the “Note Settlement Agreement”).

Timothy agreed to accept an aggregate amount of $89 in cash consideration for the purchase by the Company of the $1,000 aggregate principal amount of the Subordinated Note dated January 20, 2017.

The Subordinated Note was settled at a conversion rate of $5.83 per share (the agreed conversion price at which the Subordinated Note would be convertible to Common Stock) and purchased at $0.52 per share (the closing price on the NYSE American for the Common Stock on June 16, 2020).

The Timothy note settlement amount was paid to Timothy on June 30, 2020.

9.5% Convertible Subordinated Notes

On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the acquisition of SNIH an aggregate of $12.5 million in the form of 9.5% Convertible Subordinated Notes (the “9.5% Notes”).

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

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

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

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

Each of the 9.5% Notes is subordinated in payment to the obligations of the Company under its Credit Agreement (see Note 6) pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.

During the fiscal 2019 and 2018 the Company issued approximately 1,095,787 shares and 530,071 shares of common stock to the SNI Sellers as payment-in-kind interest of approximately $1.2 million and $1.5 million, respectively, on the 9.5% Notes.

On October 3, 2019 the Company issued approximately 402,509 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.

On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the acquisition of SNIH an aggregate of $12,500 in the form of 9.5% Convertible Subordinated Notes (the “9.5% Notes”).

The maturity date was October 3, 2021 (the “Maturity Date”).

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

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

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

Each of the 9.5% Notes was subordinated in payment to the obligations of the Company under its Credit Agreement pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.

During the fiscal 2020 and 2019 the Company issued approximately 2,039 shares and 1,096 shares of common stock to the SNI Sellers as payment-in-kind interest of approximately $890 and $1,188, respectively, on the 9.5% Notes.

On June 30, 2020, the holders of the 9.5% Notes agreed to accept an aggregate amount of $1,115 in cash in consideration for the purchase by the Company of the entire $12,500 aggregate principal amount of the 9.5% Notes.

The 9.5% Notes were settled at a conversion rate of $5.83 (the price at which the 9.5% Notes were converted into shares of the Company’s common stock and purchased by the Company at $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020).

The payment was made to the note holders on June 30, 2020.

Registration Rights Agreement

On June 30, 2020, the Company and the SNI Group Members entered into a Registration Rights Agreement dated as of June 30, 2020 (the “Registration Rights Agreement”).

Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to file on or prior to July 31, 2020, an initial registration statement with respect to the resale of shares of Common Stock currently owned by the SNI Group members that are “Registrable Securities” (as defined in the Registration Rights Agreement) on or prior to July 31, 2020.

In addition, the Company has agreed that it shall, on one occasion, on or after September 30, 2020 and upon the written request of the holders of 51% or more of the Registrable Securities, file a registration statement with respect to the Registrable Securities held by such holders.

The demanding holders may require, in connection with the registration, that such demand registration take the form of an underwritten public offering of such Registrable Securities.

The Registration Rights Agreement also provides that for a period of three years after the closing date of the Restructuring, the holders of Registrable Securities shall have piggyback registration rights with respect to all registration statements filed by the Company (other than those on Form S-4 or Form S-8).

8% Convertible Subordinated Notes to Related Parties

On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2.0 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;

On May 15, 2019, the Company issued and sold to members of its executive management and Board of Directors (the “Investors”) $2,000 in aggregate principal amount of its 8% Notes.

The maturity date of the 8% Notes was on October 3, 2021 (the “Maturity Date”).

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

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

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

All or any portion of the 8% Notes was redeemable by the Company for cash at any time.

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

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

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

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

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

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

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

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.

The BCF for the 8% Notes is recorded as a discount to their carrying value and is equal to the fair value of the conversion feature.

The discount will be amortized as interest over the period from the date of issuance to maturity.

The total BCF recorded was approximately $0.8 million.

During fiscal 2019 and 2018, the Company amortized approximately $0.1 million and $0 of debt discount, respectively.

Future minimum payments of all subordinated debt will total approximately as follows:

fiscal 2020 - $1.0 million, fiscal 2021- $0.0 and fiscal 2022 - $18.7 million.

During fiscal 2019 and 2018, the Company issued 250,000 and 110,083 shares of common stock for the conversion of approximately 250,000 and 110,083 shares of Series B Convertible Preferred Stock, respectively (See Note 10).

Restricted Common Stock

The Company granted 400,000 and 1,100,000 restricted shares of common stock in fiscal 2019 and 2018, respectively.

In fiscal 2018, the Company granted 600,000 and 500,000 restricted shares of common stock to its Chairman and Chief Executive Officer and President, respectively.

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

The Company issued 104 and 60 shares of Series C Preferred Stock to Investors related to interest of $104 and $60 on the 8% Notes for fiscal 2020 and fiscal 2019, respectively.

The BCF for the 8% Notes was recorded as a discount to their carrying value and was equal to the fair value of the conversion feature upon the date of issuance.

The discount was being amortized as interest over the period from the date of issuance to maturity.

The total BCF recorded was $841.

During fiscal 2020 and 2019, the Company amortized approximately $731 and $110 of debt discount, respectively.

Pursuant to the Repurchase Agreement, Mr.

Smith (a former member of the Company’s board of directors) agreed to accept an aggregate amount of $520 in cash (the “Smith Note Payment Amount”) in consideration for the purchase by the Company of the $1,000 aggregate principal amount of 8% Notes (the “Smith Note Amount”) held by him.

The Smith Note Payment Amount was calculated based on the following formula:

the Smith Note Amount, divided by $1.00 (the price at which the Smith Notes are convertible to Common Stock), times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020).

The Smith Note Payment Amount was paid to Mr.

Smith on June 30, 2020.

On June 30, 2020, the holders of the remaining $1,000 aggregate principal amount of the 8% Notes converted such 8% Notes to an aggregate of 1,000 shares of Series C Preferred Stock which were immediately and simultaneously converted into 1,000 shares of Common Stock at the $1.00 per share conversion price stated in the 8% Notes and in the Series C Preferred Stock.

These holders also converted an aggregate of 93 additional shares of Series C Preferred Stock issued or issuable to them into a total of 93 shares of Common Stock at the $1.00 per share conversion price stated in the Series C Preferred Stock.

The issuance of the 1,093 shares of Common Stock to these former holders of 8% Notes and Series C Preferred Stock was completed on June 30, 2020.

These shares, along with those of the SNI Sellers that previously held the 9.5% Notes, also were included in the registration statement on SEC Form S-3 filed by the Company on July 31, 2020.

On June 30, 2020, the Company issued 1,718 shares of common stock for debt conversion of $1,000 aggregate principal amount of the 8% Notes, related shares of Series C Preferred Stock and 10% Note.

The Company also issued 93 shares of common stock for Series C Preferred Stock discussed above (Note 10).

During fiscal 2019 the Company issued 250 shares of common stock for the conversion of approximately 250 shares of Series B Convertible Preferred Stock (See Note 12).

Restricted Stock

The Company granted 450 and 400 shares of restricted common stock in fiscal 2020 and 2019, respectively.

The restricted shares are to be earned over a three-year period and cliff vest at the end of the third year from the date of grant.

Stock-based compensation expense attributable to restricted stock was $0.8 million and $0.3 million in fiscal 2019 and fiscal 2018, respectively.

As of September 30, 2019, there was approximately $1.6 million of unrecognized compensation expense related to restricted stock outstanding.

Bajalia’s 500,000 shares of restricted common stock were fully vested on November 23, 2019 upon his passing.

Stock-based compensation expense attributable to restricted stock was $1,150 and $819 in fiscal 2020 and fiscal 2019, respectively.

As of September 30, 2020, there was $818 of unrecognized compensation expense related to restricted stock outstanding.

On November 23, 2019, 500 shares of restricted common stock held by the Company’s former president became fully vested upon his passing.

These shares were issued during fiscal 2020.

A summary of restricted stock activity is presented as follows:

(In thousands)

Restricted stock outstanding as of September 30, 2017

Restricted stock outstanding as of September 30, 2018

Restricted stock outstanding as of September 30, 2019

Restricted stock vested as of September 30, 2019

No warrants were granted or exercised during fiscal 2019.

Non-vested restricted stock outstanding as of September 30, 2018

Non-vested restricted stock outstanding as of September 30, 2019

Non-vested restricted stock outstanding as of September 30, 2020

No warrants were granted or exercised during fiscal 2020 or fiscal 2019.

A summary of warrant activity is presented as follows:

(In thousands)

Weighted Average Exercise Price Per Share

Remaining Contractual Life

Total Intrinsic Value of

Warrants outstanding as of September 30, 2018

Warrants outstanding as of September 30, 2019

Forfeited/Expired

Warrants outstanding as of September 30, 2020

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Stock Options

As of September 30, 2019, there were stock options outstanding under the Company’s, Second Amended and Restated 1997 Stock Option Plan and the Company’s Amended and Restated 2013 Incentive Stock Plan.

Both plans were approved by the shareholders.

The plans granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees.

As of September 30, 2020, there were stock options outstanding under the Company’s Amended and Restated 2013 Incentive Stock Plan.

During fiscal 2020, 2013 Incentive Stock Plan was amended to increase available balance by 1,000.

The plan granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees.

Vesting periods are established by the Compensation Committee at the time of grant.

All stock options outstanding as of September 30, 2020 and September 30, 2019 were non-statutory stock options, had exercise prices equal to the market price on the date of grant, and had expiration dates ten years from the date of grant.

Stock-based compensation expense attributable to stock options and warrants was $1.4 million in fiscal 2019 and fiscal 2018, respectively.

As of September 30, 2019, there was approximately $1.5 million of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.97 years.

Stock-based compensation expense attributable to stock options and warrants was $409 and $1,367 in fiscal 2020 and fiscal 2019, respectively.

As of September 30, 2020, there was approximately $652 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.95 years.

A summary of stock option activity is as follows:

(In thousands)

Exercise Price

per share ($)

Remaining Contractual

Options outstanding as of September 30, 2018

Forfeited/Expired

Options outstanding as of September 30, 2019

Forfeited/Expired

Options outstanding as of September 30, 2020

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Weighted average risk-free interest rate

Weighted average dividend yield

Weighted average volatility factor

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Series B Convertible Preferred Stock

On April 3, 2017, the Company issued an aggregate of approximately 5.9 million shares of no par value, Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the Merger Consideration.

On April 3, 2017, the Company issued an aggregate of approximately 5,900 shares of no-par value, Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the SNIH acquisition.

The no par value, Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

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Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of no par value, Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the no par value, Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting).

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

None of the shares of no par value, Series B Convertible 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 no par value, Series B Convertible 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.

Based on the terms of the Series B Convertible Preferred Stock, if certain fundamental transactions were to occur, the Series B Convertible Preferred Stock would require redemption, which precludes permanent equity classification on the accompanying consolidated Balance Sheet.

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.

During fiscal 2018 the Company issued 110,083 shares of common stock for the conversion of approximately 110,083 shares of Series B Convertible Preferred Stock.

Pursuant to a Repurchase Agreement dated June 30, 2020, the holders of the Series B Preferred Stock agreed to accept an aggregate amount of $2,894 in cash (the “Series B Preferred Stock Purchase Price”) in consideration for the purchase by the Company of all 5,566 currently outstanding shares of Series B Preferred Stock (the “Series B Preferred Stock Amount”) held by them.

The Series B Preferred Stock Purchase Price was calculated based on the following formula:

Series B Preferred Stock Amount, divided by $4.86 (the price at which the Series B Preferred Stock is convertible to Common Stock in the Statement of Resolution Establishing Series of the Series B Preferred Stock), times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020).

The Series B Preferred Stock Purchase Price was paid to the SNI Group Members on June 30, 2020.

A net gain attributable to common stockholders of $24,475 was recognized on the redemption of Series B Preferred Stock and Smith Series C Preferred Stock during fiscal 2020.

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

Series C Convertible Preferred Stock

On May 17, 2019, the Company filed a Statement of Resolution Establishing Series C 8% Cumulative Convertible Preferred Stock (“Series C Convertible 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 its Series C Convertible Preferred Stock, without par value.

The Series C Convertible 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 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 Convertible Preferred Stock are entitled to receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share.

Such dividend shall be payable quarterly on June 30, September 30, December 31 and March 31 of each year commencing on June 30, 2019, in preference to any dividend paid on or declared and set aside for the Series B Convertible Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Convertible 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 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 C 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 superior to the Series C Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting).

Each share of Series C Convertible 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 Convertible Preferred Stock to Investors related to interest of $60,400 on the 8% Notes.

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

(the Resolution Establishing Series”).

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

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

Holders of shares of Series C Preferred Stock are entitled to receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share.

Such dividend shall be payable quarterly on June 30, September 30, December 31 and March 31 of each year commencing on June 30, 2019, in preference to any dividend paid on or declared and set aside for the Series B Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Preferred Stock.

Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the Series C Preferred Stock have no voting rights.

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

Each share of Series C Preferred Stock shall be convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $1.00 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.

The Company issued 104 and 60 shares of Series C Preferred Stock to Investors related to interest of $104 and $60 on the 8% Notes during fiscal 2020 and fiscal 2019, respectively.

Pursuant to a Repurchase Agreement dated June 30, 2020, Mr.

Smith also agreed to accept an aggregate amount equal to $37 in cash (the “Smith Series C Preferred Stock Purchase Price”) in consideration for the purchase by the Company of the 72 shares of Series C Preferred Stock (the “Series C Preferred Stock Amount”) held by him.

The Smith Preferred Stock Purchase Price was calculated based on the following formula:

the Smith Series C Preferred Stock Amount, divided by $1.00, times $0.52 (the closing price on the NYSE American for the Common Stock on June 16, 2020).

The Smith Series C Preferred Stock Purchase Price was paid to Mr.

Smith on June 30, 2020.

The remaining holders of Series C Preferred Stock converted an aggregate of 93 shares of Series C Preferred Stock into a total of 93 shares of Common Stock at the $1.00 per share conversion price stated in the Series C Preferred Stock.

The conversion was completed on June 30, 2020.

The components of the provision for income taxes is as follows:

Year Ended September 30,

(in thousands)

Current expense (benefit):

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Year Ended September 30,

(in thousands)

Income at US statutory rate

State taxes, net of federal benefit

Acquisition related costs

Statutory rate changes

Nondeductible Expenses

Stock compensation

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Year Ended September 30,

(in thousands)

Net operating losses carryforwards

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Tax credit carryforwards

ROU liability

Total deferred tax assets

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Net deferred tax liability

As of September 30, 2019, the Company had federal and state net operating loss carryforwards of approximately $25.1 million and $22.8 million, respectively, which begin to expire in 2029 for federal and 2020 for state purposes.

Of the $25.1 million of federal net operating losses, $5.9 million can be carried indefinitely.

As of September 30, 2018, the Company had federal and state net operating loss carryforwards of approximately $27.3 million and $23.7 million, respectively.

As of September 30, 2020, the Company had federal and state net operating loss carryforwards of approximately $11,500 and $13,300, respectively, which begin to expire in 2029 for federal and 2021 for state purposes.

Of the $11,500 of federal net operating losses, $6,200 can be carried indefinitely.

As of September 30, 2019, the Company had federal and state net operating loss carryforwards of approximately $25,100 and $22,800, respectively.

Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period.

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Commitment and Contingencies

The Company leases space for all its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters.

Branch offices are generally leased over periods ranging from three to seven years.

The corporate office lease expires in 2020.

The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.

Rent expense was approximately $2.9 million and $3.1 million for fiscal 2019 and fiscal 2018, respectively.

As of September 30, 2019, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices are as follows:

(In thousands)

Litigation and Claims

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The Company provides the following distinctive services:

(a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, accounting, finance, office, engineering, and medical, and (c) temporary light industrial staffing.

These Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services.

(a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, accounting, finance and office, engineering, and medical, and (c) temporary light industrial staffing.

These services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services.

Some selling, general and administrative expenses are not fully allocated among light industrial services and professional staffing services.

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Year Ended September 30,

(In thousands)

Industrial Staffing Services

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Industrial services gross margin 1

Operating income

Depreciation & amortization

Operating (loss) income

Depreciation and amortization

Accounts receivable – net

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Corporate facility expenses

Stock option amortization expense

Stock compensation expense

Board related expenses

Acquisition, integration and restructuring expenses

Total unallocated expenses

Total revenue

Operating (loss) income

Operating loss

Depreciation and amortization

1 unchanged sentence

Intangible assets

1 Professional Staffing Services operating income for the year ended September 30, 2019 includes the effect of a goodwill impairment charge of $4.3 million.

2 Certain administrative expenses previously allocated to the Professional Staffing Services segment for the year ended September 30, 2018, in the amount of approximately $0.9 million, have been reclassified to corporate administrative expenses presented above, in order to conform with the current classification of these expenses for the year ended September 30, 2019.

Subsequent Events

Table of Contentes

1 Includes $1,284 and $1,432 of annual premium refunds from the Ohio Bureau of Workers Compensation for the fiscal 2020 and 2019, respectively.

The Industrial Services gross margins normalized for the effects of these items were approximately 14% for the fiscal 2020 and 2019, respectively.

2 Includes certain costs and expenses incurred related to restructuring activities, including corporate legal and general expenses associated with capital markets activities and not directly associated with core business operations.

These costs were $4,277 and $4,281 for fiscal 2020 and 2019, respectively, and include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 8. Financial Statements and Supplementary Data