What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-17 · 109 added, 116 removed, 138 unchanged (62% of the section changed)

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

The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies, Inc., (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing.

As of March 31, 2021, we operated thirty-one branch offices in downtown or suburban areas of major U.S.

cities in eleven states.

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

The Company markets its services using the trade names General Employment, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies, Inc., (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing.

As of June 30, 2021, we operated twenty-seven branch offices in downtown or suburban areas of major U.S cities in eleven states and additional local staff members working remotely serving four additional U.S.

We have offices or serve markets remotely in each of Connecticut, Georgia, Minnesota, New Jersey, and Virginia, two offices each in Illinois and Massachusetts, three offices in Colorado, three offices and two additional local market presences in Texas, five offices and two additional local market presences in Florida, and seven offices in Ohio.

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

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

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

In approximately mid-March 2020, the Company began to experience the severe negative effects of the economic disruptions resulting from the COVID-19 pandemic.

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

These effects have been and continue to be felt across all businesses, with the most severe impacts being felt in the commercial (industrial) and finance, accounting, and office clerical (“FA&O) end markets within the professional segment.

These effects have been and continue to be felt across all businesses, with the most severe impacts being felt in the industrial and finance, accounting, and office clerical (“FA&O) end markets within the professional segment.

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

These actions allowed us to generate cost savings and time with which to mitigate the impacts of the COVID-19 pandemic on our businesses and brands.

Our businesses have continued recover to a significant extent during six-month period ended March 31, 2021, as compared with prior sequential quarters since the quarter ended June 30, 2020.

While we remain optimistic about our prospects for continuing recovery to pre-COVID-19 levels of results and performance, the rate of such recovery is still somewhat uncertain and could be delayed, for example, by potential resurgences and negative impacts of COVID-19 on the U.S.

Our businesses have continued recover to a significant extent during nine-month period ended June 30, 2021, as compared with prior sequential quarters since the quarter ended June 30, 2020.

economy and the specific markets and clients we serve in the future.

Results of Operations

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020

Consolidated net revenues are comprised of the following:

Ended March 31,

Ended June 30,

(in thousands)

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Consolidated net revenues

Contract staffing services contributed $31,063, or approximately 89%, of consolidated revenue and were up by $798, or approximately 3%, for the three-month period ended March 31, 2021, as compared with the comparable period ended March 31, 2020.

Direct hire placement services contributed $3,655, or approximately 11%, of consolidated revenue for the three-month period ended March 31, 2021, and were down $761, or approximately 17%, as compared with the comparable three-month period ended March 31, 2020.

Contract staffing services revenue was $30,265, or approximately 87%, of consolidated revenue and direct hire placement revenue was $4,416, or approximately 13%, of consolidated revenue for the three-month period ended March 31, 2020.

The overall increase in contract staffing services revenues of $798, or 3%, for the three-month period ended March 31, 2021 compared to the three-month period ended March 31, 2020 was primarily attributable to recovery and improvement in professional contract services markets from the negative effects of the COVID-19 pandemic beginning in approximately June 2020.

Contract staffing services contributed $32,539, or approximately 85%, of consolidated revenue and increased by $9,046, or approximately 39%, for the three-month period ended June 30, 2021, as compared with the comparable period ended June 30, 2020.

Direct hire placement services contributed $5,529, or approximately 15%, of consolidated revenue for the three-month period ended June 30, 2021 and were up $2,428, or approximately 78%, as compared with the comparable three-month period ended June 30, 2020.

Contract staffing services revenue was $23,493, or approximately 88%, of consolidated revenue and direct hire placement revenue was $3,101, or approximately 12%, of consolidated revenue for the three-month period ended June 30, 2020.

The overall increase in contract staffing services revenues of $9,046, or 39%, for the three-month period ended June 30, 2021 compared to the three-month period ended June 30, 2020 was primarily attributable to recovery and improvement in professional contract services markets from the negative effects of the COVID-19 pandemic beginning approximately in the month of June 2020.

The onset of COVID-19 resulted in a near immediate decline in demand for our staffing services due to client closures, postponements in projects and related needs for our services at some clients, significant travel restrictions, and corresponding decreases in the volume of contract services billable hours.

The Company experienced the majority, but not all, of these contract staffing services reductions in its finance, accounting, and office professional end markets and in its industrial contract services.

Professional contract services has experienced consistent recovery since May 2020 through this quarter resulting in the revenue increase of $1,246 for the three-month period ended March 31, 2021, as compared with the three-month period ended March 31, 2020.

Professional contract services have experienced consistent recovery through this quarter resulting in the revenue increase of $8,152 for the three-month period ended June 30, 2021, as compared with the three-month period ended June 30, 2020.

Management believes this trend is the result of U.S.

economic recovery, as well as actions taken by the Company to adapt to COVID-19 and position the Company for recovery.

The decline in industrial contract services is driven by a continuation of negative impacts related to COVID-19, including most recently, a workforce shortage being felt across the U.S.

economic recovery, as well as actions taken by the Company to adapt to COVID-19, hire top talent, and position the Company for recovery and growth.

Industrial contract services revenue experienced improvement this quarter due to continuing recovery and improvement from negative impacts related to COVID-19, including most recently, a workforce shortage being felt across the U.S.

and widely believed to be attributable to recent and plentiful economic stimulus and unemployment benefits, as well as school and other shutdowns.

Direct hire placement revenue for the three-month period ended March 31, 2021 decreased by $761, or approximately 17%, over the three-month period ended March 31, 2020, driven primarily by a decrease in number of placements.

Demand for the Company’s direct hire services also have declined due to the continuing presence and negative impacts related to the COVID-19 pandemic.

Direct hire services demand has historically been observed to be more sensitive to economic and labor market conditions than demand for contract staffing, which means it may be expected to recover more slowly than contract staffing services in the aftermath of the COVID-19 pandemic, as well.

Management believes that the underlying trends toward recovery since May 2020 are generally consistent with the recovery experienced in the overall U.S.

Direct hire placement revenue for the three-month period ended June 30, 2021 increased by $2,428, or approximately 78%, over the three-month period ended June 30, 2020, driven by an increase in number of placements.

Demand for the Company’s direct hire services increased due to the continuing recovery and significant improvement from the negative effects of the COVID-19 pandemic beginning in approximately June 2020.

Management believes that the underlying trends toward significant recovery since May 2020 are generally consistent with the recovery experienced in the overall U.S.

economy so far and, therefore, may be expected to continue, accordingly.

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Cost of contract services includes wages and related payroll taxes and employee benefits of the Company's contract services employees, and certain other contract employee-related costs, while working on contract assignments.

Cost of contract services for the three-month period ended March 31, 2021 increased by approximately 5% to $23,810 compared to $22,767 for the three-month period ended March 31, 2020.

The $1,043 overall increase in cost of contract services for the three-month period ended March 31, 2021 compared to the three-month period ended March 31, 2020 was primarily attributable to the corresponding increase in professional contract service revenues.

Cost of contract services for the three-month period ended June 30, 2021 increased by approximately 43% to $24,242 compared to $16,925 for the three-month period ended June 30, 2020.

The $7,317 overall increase in cost of contract services for the three-month period ended June 30, 2021 compared to the three-month period ended June 30, 2020 was attributable to the corresponding increase in contract service revenues.

Gross Profit percentage by service:

Ended March 31,

Ended June 30,

Professional contract services

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Combined gross profit margin % (1)

________________

Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses.

The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the three-month period ended March 31, 2021 was approximately 31.4% as compared with approximately 34.4% for the three-month period ended March 31, 2020.

In the professional contract services, the gross margin (excluding direct hire placement services) was approximately 25.5% for three-month period ended March 31, 2021 compared to approximately 26.6% for the three-month period ended March 31, 2020.

This decrease is generally due to shifts in the amounts and mix of business between end markets and higher and lower billing rates and margins.

Contributing to this 1.1% (1,100 basis points) decrease is a disproportionate increase in the mix of lower margin office and clerical temporary staffing services within the overall COVID-19 pandemic business recovery taking place.

The Company’s industrial contract services gross margin for the three-month period ended March 31, 2021 was approximately 8.8% versus approximately 14.1% for the three-month period ended March 31, 2020.

The decrease in industrial contract services gross margin is due to a charge taken in the three-month period ended March 31, 2021, for a decrease in the amount of premium refunds the Company’s industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program.

The industrial contract services gross margins normalized for the effects of these items were approximately 14.2% and 14.1% for the three months ended March 31, 2021 and 2020, respectively.

The increase after adjustment to remove the effect of the workers compensation premium refunds is generally within a reasonable performance range for our industrial business.

The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the three-month period ended June 30, 2021 and 2020, was approximately 36% each.

In the professional contract services, the gross margin (excluding direct hire placement services) was approximately 27% for three-month period ended June 30, 2021 and 2020 each.

The Company’s industrial contract services gross margin for the three-month period ended June 30, 2021 was approximately 15% versus approximately 37% for the three-month period ended June 30, 2020.

The decrease in industrial contract services gross margin is due to a decrease in the amount of premium refunds the Company’s industrial business is eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program.

The industrial contract services gross margins normalized for the effects of these items were approximately 15% and 13% for the three months ended June 30, 2021 and 2020, respectively.

The increase after adjustment to remove the effect of the workers compensation premium refunds is primarily attributable to increased bill rates and a decrease in premium charges related to workers compensation for the three-month period ended June 30, 2021.

Selling, General and Administrative Expenses

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

The Company’s SG&A for the three-month period ended March 31, 2021, decreased by $3,621 as compared to the three-month period ended March 31, 2020.

SG&A for the three-month period ended March 31, 2021, as a percentage of revenues, was approximately 26% compared to approximately 37% for the three-month period ended March 31, 2020.

The decrease in SG&A expenses is primarily attributable to the Company’s mitigating efforts to reduce and manage costs to adopt to COVID-19 and position the Company for recovery.

In addition, a provision for doubtful accounts related to a key customer who filed for a bankruptcy protection of approximately $1.7 million, was taken in the form of a charge to income during March 2020.

SG&A also includes certain non-cash costs and expenses incurred related to acquisition, integration and restructuring, and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis.

These costs were estimated to be $39 and $776 for the three-month periods ended March 31, 2021 and 2020, respectively, and include mainly expenses associated with former closed and consolidated locations, and personnel costs associated with eliminated positions.

The Company’s SG&A for the three-month period ended June 30, 2021, increased by $905 as compared to the three-month period ended June 30, 2020.

SG&A for the three-month period ended June 30, 2021, as a percentage of revenues, was approximately 29% compared to approximately 38% for the three-month period ended June 30, 2020.

The decrease in SG&A expenses as a percentage of revenue is primarily attributable to the significant recovery and improvement in revenues discussed earlier and Company’s efforts to manage costs effectively.

SG&A also includes certain non-cash costs, expenses incurred related to acquisition, integration and restructuring, non-recurring items, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations, and/or other items that have been eliminated on a going forward basis and/or are of an isolated, non-recurring nature.

These costs were estimated to be $159 and $1,557 for the three-month periods ended June 30, 2021 and 2020, respectively, and include mainly expenses associated with former closed and consolidated locations, and former personnel costs associated with eliminated positions.

Depreciation Expense

Depreciation expense was $77 and $69 for the three-month period ended March 31, 2021, and 2020, respectively.

Depreciation expense was $78 and $33 for the three-month period ended June 30, 2021, and 2020, respectively.

The increase is due to the fixed assets additions.

Amortization Expense

Amortization expense was $1,015 and $1,398 for the three-month period ended March 31, 2021 and 2020, respectively.

The decrease is due to certain SNI intangible assets related to non-compete agreements that have become fully amortized since the three-month period ended March 31, 2020.

Amortization expense was $1,015 and $1,125 for the three-month period ended June 30, 2021 and 2020, respectively.

The decrease is due to certain SNI intangible assets related to non-compete agreements that have become fully amortized as of March 31, 2020.

Income from Operations

The income from operations increased by $2,990 for the three-month period ended March 31, 2021 compared to the three-month period ended March 31, 2020.

The increase is due to the factors described above including a decrease in amortization and interest expense, recognition of provision for doubtful accounts related to a key customer who filed for a bankruptcy protection during March 2020, and the Company’s mitigating efforts beginning in approximately mid-March 2020 to restore revenues and to reduce and manage costs to adapt to the COVID-19 pandemic and position the Company for recovery.

The income from operations increased by $3,317 for the three-month period ended June 30, 2021 compared to the three-month period ended June 30, 2020.

The increase is due to the factors described above including a significant improvement and recovery in revenues and the Company’s mitigating efforts beginning in approximately mid-March 2020 to restore and grow revenues, and to manage costs effectively to adapt to the COVID-19 pandemic and position the Company for recovery.

Interest Expense

Interest expense was $2,534 for the three-month period ended March 31, 2021, which decreased by $531 compared to the three-month period ended March 31, 2020.

The decrease in interest expense for the three-month period ended March 31, 2021 is mainly attributable to the interest expense related to the former 9.5% Notes and 10% Notes that was included in the three-month period ended March 31, 2020.

In addition, of the $2,534 of net interest expense, $2,040 represents interest on the Company’s Senior Credit Agreement, and $445 represents amortization of capitalized and other debt related costs.

On April 20, 2021, the Company repaid its remaining principal and accrued interest balances under its former Senior Credit Agreement, after which time interest expense ceased to accrue.

Interest expense was $539 for the three-month period ended June 30, 2021, which decreased by $2,795 compared to the three-month period ended June 30, 2020.

The decrease in interest expense for the three-month period ended June 30, 2021 is mainly attributable to the interest expense related to the former Senior Credit Agreement, 9.5% Notes, and 10% Notes that were included in the three-month period ended June 30, 2020.

The Company’s former Senior Credit Agreement contributed $459 and $2,093 the three-month period ended June 30, 2021 and June 30, 2020, respectively.

On April 20, 2021, the Company retired and fully repaid its remaining principal and accrued interest balances under its former Senior Credit Agreement.

Provision for Income Taxes

The Company recognized a tax expense of $117 for the three-month period ended March 31, 2021.

Our effective tax rate for the three-month period ended March 31, 2021 and 2020, is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.

The Company recognized a tax benefit of $29 for the three-month period ended June 30, 2021.

Our effective tax rate for the three-month periods ended June 30, 2021 and 2020, were lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.

Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a valuation allowance against the remaining net DTA position.

The Company’s net loss was $1,735 and $5,428 for the three-month periods ended March 31, 2021 and 2020, respectively.

The increase is due to the factors described above including decrease in amortization and interest expense, a recognition of provision for doubtful accounts related to a key customer who filed for a bankruptcy protection during March 2020, and the Company’s mitigating efforts beginning in approximately mid-March 2020 to restore revenues and to reduce and manage costs to adapt to the COVID-19 pandemic and position the Company for recovery.

On April 19, 2021, the Company was able to raise common equity capital and on April 20, 2021, repaid all its remaining outstanding principal and accrued interest balances under its former Senior Credit Agreement.

The Company incurred $2,485 in interest expense in the accompanying consolidated statement of operations for the three-month period ended March 31, 2021, which obligations have now ceased effective April 21, 2021.

Net (Loss) Income

The Company’s net (loss) income was $(937) and $7,195 for the three-month periods ended June 30, 2021 and 2020, respectively.

The decrease in net income is primarily attributable to gains recognized of $12,316 on extinguishment of subordinated debt during the three-month period ended June 30, 2020.

In addition to the changes discussed above gains of $1,957 on the extinguishment of PPP loans were offset by a loss in the form of a charge off of unamortized debt costs on a debt extinguishment related to the term loan pay-off in amount of $4,004 during the three-month period ended June 30, 2021.

On April 19, 2021, the Company raised net proceeds of $45,487 of common equity capital and on April 20, 2021, repaid all its remaining outstanding principal and accrued interest balances of $56,022 under its former Senior Credit Agreement.

The Company incurred $459 in interest expense in the accompanying unaudited condensed consolidated statement of operations for the three-month period ended June 30, 2021, which obligations have now ceased effective April 21, 2021..

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

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The Company’s strategy entails both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing.

Six Months Ended March 31, 2021 Compared to the Six Months Ended March 31, 2020

Nine Months Ended June 30, 2021 Compared to the Nine Months Ended June 30, 2020

Consolidated net revenues are comprised of the following:

Ended March 31,

Ended June 30,

(in thousands)

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Consolidated net revenues

Contract staffing services contributed $62,311 or approximately 90% of consolidated revenue and were lower by ($1,031) for the six-month period ended March 31, 2021, as compared with the comparable period ended March 31, 2020.

Direct hire placement services contributed $7,050, or approximately 10%, of consolidated revenue for the six-month period ended March 31, 2021, and were down ($1,845), or approximately 21%, as compared with the comparable period ended March 31, 2020.

Contract staffing services revenue was $63,342, or approximately 88%, of consolidated revenue and direct hire placement revenue was $8,895, or approximately 12%, of consolidated revenue for the six-month period ended March 31, 2020.

The overall decrease in contract staffing services revenues of $1,031, or 2%, for the six-month period ended March 31, 2021 compared to the six-month period ended March 31, 2020 was primarily attributable to negative effects of the COVID-19 pandemic primarily for our industrial services.

The onset of COVID-19 resulted in a near immediate decline in demand for our staffing services due to client closures, postponements in projects and related needs for our services at some clients, and corresponding decreases in the volume of contract services billable hours.

The Company experienced the majority, but not all, of these contract staffing services reductions in its finance, accounting, and office professional end markets and in its industrial business.

Professional contract services have experienced consistent recovery since May 2020 through the first six months ended March 31, 2021, resulting in the near full return of professional contract services revenue (to within $39) with revenue reported for the comparable first six months ended March 31, 2020.

Contract staffing services contributed $94,850 or approximately 88% of consolidated revenue and were higher by $8,015 for the nine-month period ended June 30, 2021, as compared with the comparable period ended June 30, 2020.

Direct hire placement services contributed $12,579, or approximately 12%, of consolidated revenue for the nine-month period ended June 30, 2021 and were up $583, or approximately 5%, as compared with the comparable period ended June 30, 2020.

Contract staffing services revenue was $86,835, or approximately 88%, of consolidated revenue and direct hire placement revenue was $11,996, or approximately 12%, of consolidated revenue for the nine-month period ended June 30, 2020.

The overall increase in contract staffing services revenues of $8,015, or 9%, for the nine-month period ended June 30, 2021 compared to the nine-month period ended June 30, 2020 was primarily attributable to significant recovery and improvement in professional contract services markets from the negative effects of the COVID-19 pandemic beginning in approximately June 2020.

Professional contract services significantly outperformed their historical trends and experienced consistent recovery since May 2020 through this quarter resulting in the revenue increase of $8,113 for the nine-month period ended June 30, 2021, as compared with the nine-month period ended June 30, 2020.

Management believes this trend is the result of U.S.

economic recovery, as well as actions taken by the Company to adapt to COVID-19 and position the Company for recovery.

The decline in industrial contract services is driven by a continuation of negative impacts related to the COVID-19 pandemic, including most recently, a workforce shortage being felt across the U.S.

and widely believed to be attributable to recent and plentiful economic stimulus and unemployment benefits, as well as school closings and other shutdowns.

Direct hire placement revenue for the six-month period ended March 31, 2021 decreased by $1,845, or approximately 21%, over the six-month period ended March 31, 2020.

Demand for the Company’s direct hire services also have sharply dropped due to the continuing presence and negative impacts related to the COVID-19 pandemic.

economic recovery, as well as actions taken by the Company to adapt to COVID-19, hire top talent, and position the Company for recovery and growth.

Industrial contract services revenue experienced improvement due to continuing recovery and improvement from negative impacts related to COVID-19, including most recently, a workforce shortage being felt across the U.S.

and widely believed to be attributable to recent and plentiful economic stimulus and unemployment benefits, as well as school and other shutdowns.

Direct hire placement revenue for the nine-month period ended June 30, 2021 increased by $583, or approximately 5%, over the nine-month period ended June 30, 2020.

Management believes that the underlying trends toward recovery since May 2020 are generally consistent with the recovery experienced in the overall U.S.

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Cost of contract services for the six-month period ended March 31, 2021 decreased by approximately 4% to $45,873 compared to $47,729 for the six-month period ended March 31, 2020.

The $1,856 overall decrease in cost of contract services for the six-month period ended March 31, 2021 compared to the six-month period ended March 31, 2020 was primarily attributable to the corresponding decline in revenues, and an increase in additional premium refunds in the form of policyholder dividends from the Ohio Bureau of Workers’ Compensation related to the Company’s industrial business.

Cost of contract services for the nine-month period ended June 30, 2021 increased by approximately 8% to $70,115 compared to $64,654 for the nine-month period ended June 30, 2020.

The $5,461 overall increase in cost of contract services for the nine-month period ended June 30, 2021 compared to the nine-month period ended June 30, 2020 was primarily attributable to the corresponding increase in revenues, and an increase in additional premium refunds in the form of policyholder dividends from the Ohio Bureau of Workers’ Compensation related to the Company’s industrial business.

Gross Profit percentage by service:

Ended March 31,

Ended June 30,

Professional contract services

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Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses.

The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the six-month period ended March 31, 2021 and 2020 was approximately 33.9% each.

In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 25.9% for six-month period ended March 31, 2021 compared to approximately 26.5% for the six-month period ended March 31, 2020.

The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the nine-month period ended June 30, 2021 and 2020 was approximately 35% each.

In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26% for nine-month period ended June 30, 2021 compared to approximately 27% for the nine-month period ended June 30, 2020.

This decrease is generally due to shifts in the amounts and mix of business between end markets and higher and lower billing rates and margins.

Contributing to this 0.3% (300 basis points) decrease is a disproportionate increase in the mix of lower margin office and clerical temporary staffing services within the overall COVID-19 business recovery taking place.

The Company’s industrial contract services gross margin for the six-month period ended March 31, 2021 was approximately 29.3% versus approximately 15.0% for the six-month period ended March 31, 2020.

The Company’s industrial contract services gross margin for the nine-month period ended June 30, 2021 was approximately 25% versus approximately 20% for the nine-month period ended June 30, 2020.

The increase in industrial contract services gross margin is due to the amount of additional premium refunds in the form of policyholder dividends the Company’s industrial business was eligible to receive under the Ohio Bureau of Workers’ Compensation retrospectively-rated insurance program.

Results for the six months ended March 31, 2021 includes $1,318 of such premium refunds.

The industrial contract services gross margins excluding the effects of these items were approximately 14.9% and 14.5% for the six months ended March 31, 2021 and 2020, respectively.

Results for the nine months ended June 30, 2021 includes $1,337 of such premium refunds.

The industrial contract services gross margins excluding the effects of these items were approximately 15% and 14% for the nine months ended June 30, 2021 and 2020, respectively.

The increase, adjusted to remove the effects of workers compensation premium refunds, is generally within a reasonable performance range for our Light Industrial segment.

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The Company’s SG&A for the six-month period ended March 31, 2021 decreased by $5,426 as compared to the six-month period ended March 31, 2020.

SG&A for the six-month period ended March 31, 2021, as a percentage of revenues, was approximately 27% compared to approximately 33% for the six-month period ended March 31, 2020.

The decrease in SG&A expenses is primarily attributable to the Company’s mitigating efforts to reduce and manage costs to adopt to COVID-19 and position the Company for recovery.

The Company’s SG&A for the nine-month period ended June 30, 2021 decreased by $4,520 as compared to the nine-month period ended June 30, 2020.

SG&A for the nine-month period ended June 30, 2021, as a percentage of revenues, was approximately 28% compared to approximately 35% for the nine-month period ended June 30, 2020.

The decrease in SG&A expenses is primarily attributable to the Company’s mitigating efforts to reduce and manage costs to adopt to COVID-19 and position the Company for recovery and growth.

In addition, a provision for doubtful accounts related to a key customer who filed for a bankruptcy protection of approximately $1,700, was taken in the form of a charge to income during March 2020.

SG&A also includes certain non-cash costs and expenses incurred related to acquisition, integration and restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis.

These costs were estimated to be $181 and $633 for the six-month periods ended March 31, 2021 and 2020, respectively, and include mainly expenses associated with former closed and consolidated locations, and personnel costs associated with eliminated positions.

These costs were estimated to be $340 and $3,247 for the nine-month periods ended June 30, 2021 and 2020, respectively, and include mainly expenses associated with former closed and consolidated locations, and personnel costs associated with eliminated positions.

Depreciation Expense

Depreciation expense was $150 and $148 for the six-month period ended March 31, 2021, and 2020, respectively.

Depreciation expense was $228 and $181 for the nine-month period ended June 30, 2021, and 2020, respectively.

The increase is attributable to net fixed assets additions.

Amortization Expense

Amortization expense was $2,059 and $2,795 for the six-month period ended March 31, 2021 and 2020, respectively.

The decrease is due to certain SNI intangible assets related to non-compete agreements that have become fully amortized since the six-month period ended March 31, 2020.

Amortization expense was $3,074 and $3,921 for the nine-month period ended June 30, 2021 and 2020, respectively.

The decrease is due to certain SNI intangible assets related to non-compete agreements that have become fully amortized during March 31, 2020.

Income from Operations

The income from operations increased by $5,141 for the six-month period ended March 31, 2021 compared to the six-month period ended March 31, 2020.

The income from operations increased by $8,457 for the nine-month period ended June 30, 2021 compared to the nine-month period ended June 30, 2020.

The increase is due to the factors described above including an increase in revenues, a decrease in amortization, recognition of provision for doubtful accounts related to a key customer who filed for a bankruptcy protection during March 2020, and the Company’s mitigating efforts beginning in approximately mid-March 2020 to restore and grow revenues, and to manage costs to adapt to the COVID-19 pandemic and position the Company for recovery and growth.

Interest Expense

Interest expense was $5,220 for the six-month period ended March 31, 2021, which decreased by $1,064 compared to the six-month period ended March 31, 2020.

The decrease in interest expense for the six-month period ended March 31, 2021 is mainly attributable to the interest expense related to the former 9.5% Notes and 10% Notes that was included in the six-month period ended March 31, 2020.

In addition, of the $5,220 of net interest expense, $4,225 represents interest on the Company’s Senior Credit Agreement, and $890 represents amortization of capitalized and other debt related costs.

Interest expense was $5,759 for the nine-month period ended June 30, 2021, which decreased by $3,859 compared to the nine-month period ended June 30, 2020.

The decrease in interest expense for the nine-month period ended June 30, 2021 is mainly attributable to the interest expense related to the former Senior Credit Agreement, 9.5% Notes, and 10% Notes that were included in the nine-month period ended March 31, 2020.

The Company’s former Senior Credit Agreement contributed $3,595 and $6,888 the nine-month period ended June 30, 2021 and June 30, 2020, respectively.

On April 20, 2021, the Company repaid its remaining principal and accrued interest balances under its former Senior Credit Agreement, after which time interest expense ceased to accrue.

Provision for Income Taxes

The Company recognized a tax benefit of $277 for the six-month period ended March 31, 2021.

Our effective tax rate for the six-month period ended March 31, 2021 and 2020, is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.

In six-month period ended March 31, 2021, the statutory changes regarding the deductibility of PPP loan expenses resulted in the recognition of a $352 discrete item.

The Company recognized a tax benefit of $307 for the nine-month period ended June 30, 2021.

Our effective tax rate for the nine-month periods ended June 30, 2021 and 2020, is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets.

In nine-month period ended June 30, 2021, the statutory changes regarding the deductibility of PPP loan expenses resulted in the recognition of a $352 discrete item.

Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a valuation allowance against the remaining net DTA position.

The Company’s net loss was $2,050 and $8,992 for the six-month periods ended March 31, 2021 and 2020, respectively.

The increase in net income for the six-month periods ended March 31, 2021 is mainly attributable to the factors described above including $1,318 of annual premium refunds from the Ohio Bureau of Workers Compensation during the six months ended March 31, 2021, a decrease in interest expense and amortization expense.

Also, the Company’s mitigating efforts beginning in approximately mid-March 2020 to restore revenues, to reduce and manage costs to adapt to the COVID-19 pandemic contributed to the Company’s recovery.

On April 19, 2021, the Company was able to raise common equity capital and on April 20, 2021, repaid all of its remaining outstanding principal and accrued interest balances under its former Senior Credit Agreement.

The Company incurred $5,115 in interest expense in the accompanying unaudited condensed consolidated statement of operations for the six-month period ended March 31, 2021, which obligations have now ceased effective April 21, 2021.

The Company’s net loss was $(2,987) and $(1,797) for the nine-month periods ended June 30, 2021 and 2020, respectively.

The increase in net loss for the nine-month periods ended June 30, 2021 is attributable to the factors described above including recognized gains of $12,316 on extinguishment of subordinated debt during the nine-month period ended June 30, 2020.

In addition to the changes discussed above, gain of $2,236 on the extinguishment of PPP loans were offset by a loss in the form of a charge off of unamortized debt costs on a debt extinguishment related to the term loan pay-off in amount of $4,004 during the nine-month period ended June 30, 2021.

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

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Liquidity and Capital Resources

The primary sources of liquidity for the Company are revenues earned and collected from its clients for the placement of contractors and permanent employment candidates and borrowings available under the Credit Agreement.

Uses of liquidity include primarily the costs and expenses necessary to fund operations, including payment of compensation to the Company’s contract and permanent employees, operating costs and expenses, payment of taxes, payment of interest and principal under its debit agreements, and capital expenditures.

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

Ended March 31,

Ended June 30,

(in thousands)

Cash flows provided by (used in) operating activities

Cash flows (used in) provided by operating activities

Cash flows used in investing activities

Cash flows provided by financing activities

As of March 31, 2021, the Company had $14,258 of cash, which was an increase of $184 from $14,074 as of September 30, 2020.

As of March 31, 2021, the Company had working capital of $8,685 compared to $13,351 of working capital as of September 30, 2020.

Net cash provided by (used in) operating activities for the six-month periods ended March 31, 2021 and 2020 was $196 and ($2,067), respectively.

The positive operating cash flow in the six-month period ended March 31, 2021 corresponds with positive income from operations and other net changes in working capital.

The primary uses of cash for investing activities were for the acquisition of property and equipment in the six-month periods ended March 31, 2021 and 2020.

Cash flow provided by financing activities for the six-month period ended March 31, 2020 was primarily attributable to proceeds from advances taken on the revolving credit facility.

Minimum debt service payments (principal) for the twelve-month period commencing after the close of business on March 31, 2021, are approximately $15,604.

Cash flows (used in) provided by financing activities

As of June 30, 2021, the Company had $7,359 of cash, which was a decrease of $6,715 from $14,074 as of September 30, 2020.

As of June 30, 2021, the Company had working capital of $5,110 compared to $13,351 of working capital as of September 30, 2020.

Net cash (used in) provided by operating activities for the nine-month periods ended June 30, 2021 and 2020 was $(2,276) and $245, respectively.

The negative operating cash flow in the nine-month period ended June 30, 2021 corresponds with net changes in working capital.

The primary uses of cash for investing activities were for the acquisition of property and equipment in the nine-month periods ended June 30, 2021 and 2020.

Cash flow (used in) provided by financing activities for the nine-month period ended June 30, 2021 and 2020 was $(4,371) and $12,382, respectively.

The decrease during nine-month period ended June 30, 2021 was primarily attributable to the payment on former Senior Credit Agreement that was offset by the proceeds received from the public offering.

The increase during nine-month period ended June 30, 2020 was primarily attributable to the net proceeds received from PPP Loans.

Minimum debt service payments (principal) for the twelve-month period commencing after the close of business on June 30, 2021, are approximately $10,966.

All the Company’s office facilities are leased.

Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on March 31, 2021, are approximately $1,822.

The Company experienced net losses for the first six months of its current fiscal year, and for its most recent fiscal years ended September 30, 2020 and 2019, which also negatively impacted the Company’s ability to generate liquidity.

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

Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on June 30, 2021, are approximately $1,777.

The Company experienced net losses for the first nine months of its current fiscal year, and for its most recent fiscal years ended September 30, 2020 and 2019, which also negatively impacted the Company’s ability to generate liquidity.

During much of this period, the Company significantly restructured its operations, made significant cost reductions, including closing and consolidating unprofitable locations, eliminating underperforming personnel and pursuing top talent, 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.

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

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

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

Between April 29 and May 7, 2020, the Company was able to obtain CARES Act relief financing under the Paycheck Protection Program (“PPP Loans”) for each of its operating subsidiaries, in the aggregate amount of $19,927.

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Accrued interest of approximately $459 was paid in connection with the principal repayments.

The Company took one time charge of $4,004 which represents unamortized debt issue costs associated with its former senior debt.

On May 14, 2021, GEE Group, Inc.

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Concurrent with the May 14, 2021 closing of the CIT Facility, the Company borrowed $5,326 and utilized these funds to pay all remaining unpaid Exit and Restructuring Fees due to its former senior lenders in the amount of $4,978, with the remainder going to direct fees and costs associated with the CIT Facility.

The Company will take one time charge of $4,004 which represents unamortized debt issue costs associated with its former senior debt.

Under the CIT Facility, advances will be subject to a borrowing base formula that will be computed based on 85% of eligible accounts receivable of the Company and subsidiaries as defined in the CIT Facility, and subject to certain other criteria, conditions, and applicable reserves, including any additional eligibility requirements as determined by the administrative agent.

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Off-Balance Sheet Arrangements

As of March 31, 2021, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.

As of June 30, 2021, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.

Quantitative and Qualitative Disclosures About Market Risk .

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis