Overview
We specialize in the placement of information technology, accounting, finance,
office, and engineering professionals for direct hire and contract staffing for
our clients, data entry assistants (medical scribes) who specialize in
electronic medical records (EMR) services for emergency departments, specialty
physician practices and clinics and provide temporary staffing services for our
light industrial clients. The acquisitions of Agile Resources, Inc., a Georgia
corporation ("Agile"), Access Data Consulting Corporation, a Colorado
corporation ("Access"), Paladin Consulting Inc. ("Paladin") and SNI Companies, a
Delaware corporation ("SNI") expanded our geographical footprint within the
placement and contract staffing of information technology, accounting, finance,
office and engineering professionals.
The Company markets its services using the trade names General Employment
Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc.,
Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies
(including Staffing Now, Accounting Now, and Certes), Triad Personnel Services
and Triad Staffing. As of December 31, 2019, we operated thirty-three branch
offices in downtown or suburban areas of major U.S. cities in fourteen states.
We have one office located in each of Arizona, Washington D.C., Iowa,
Connecticut, Georgia, Minnesota, New Jersey, and Virginia, three offices in
Colorado and Massachusetts, two offices in Illinois, four offices in Texas,
seven offices in Ohio and six offices in Florida.
Management has implemented a strategy which includes cost reduction efforts as
well as identifying strategic acquisitions, financed primarily through the
issuance of equity and debt to improve the overall profitability and cash flows
of the Company. The Company's contract and placement services are principally
provided under two operating divisions or segments: Professional Staffing
Services and Industrial Staffing Services. We believe our current segments
complement one another and position us for future growth.
Results of Operations
Three Months Ended December 31, 2019 Compared to the Three Months Ended December
31, 2018
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months
Ended December 31,
(in thousands) 2019 2018 $ Change % Change
Professional contract services $ 27,423 $ 28,394 (971 ) (3 )
Industrial contract services 5,655 5,620 35 1
Total professional and industrial
contract services 33,078 34,014 (936 ) (3 )
Direct hire placement services 4,479 4,529 (50 ) (1 )
Consolidated net revenues $ 37,557 $ 38,543 (986 ) (3 )
Contract staffing services contributed $33,078 or approximately 88% of
consolidated revenue and direct hire placement services contributed $4,479, or
approximately 12%, of consolidated revenue for the three-month period ended
December 31, 2019. This compares to contract staffing services revenue of
$34,014, or approximately 88%, of consolidated revenue and direct hire placement
revenue of $4,529, or approximately 12%, of consolidated revenue for the
three-month period ended December 31, 2018.
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The overall decrease in contract staffing services revenues of $936, or 3%, for
the three months ended December 31, 2019 compared to the three months ended
December 31, 2018 was primarily attributable to a lower number of work days
during the fiscal quarter ended December 31, 2019 as compared with the fiscal
quarter ended December 31, 2018. The lower number of net work days in the fiscal
quarter ended December 31, 2019 was due to the Christmas and New Year's holidays
falling mid-week and inclement weather in some portions of the country resulting
in higher incidences of client closures, holidays taken and other ancillary time
off taken. In addition, lower temporary workforce requirements and
reorganization of a few key customers in the quarter ended December 31, 2019
contributed to the net reduction in revenues. Industrial contract services
revenue grew by 1% on higher demand, despite experiencing these same conditions
in addition to the negative effects of an auto industry strike on some of its
clients.
Direct hire placement revenue for the three months ended December 31, 2019
decreased by $50, or approximately 1%, over the three months ended December 31,
2018. The Company believes demand for its direct hire services remains stable
and strong and that the decrease in direct hire placement revenue can also be
attributed to the holidays and weather conditions and related postponements in
recruiting activities at some of its clients.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes and employee
benefits of the Company's contract services employees, and certain other
contract employee-related costs, while working on contract assignments. Cost of
contract services for the three-month period ended December 31, 2019 decreased
by approximately 3% to $24,962 compared to $25,812 for the three-month period
ended December 31, 2018. The $850 overall decrease in cost of contract services
for the three-month period ended December 31, 2019 compared to the three-month
period ended December 31, 2018 was primarily attributable to and consistent with
the corresponding decline in revenues, which is discussed further below.
Gross Profit percentage by service:
Three Months Ended
December 31, December 31,
2019 2018
Professional contract services 26.4 % 26.1 %
Industrial contract services 15.6 % 13.9 %
Professional and industrial services combined 24.5 % 24.1 %
Direct hire placement services 100.0 % 100.0 %
Combined gross profit margin %(1) 33.5 % 33.0 %
____________
(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
December 31, 2019 was approximately 33.5% as compared with approximately 33.0%
for the three-month period ended December 31, 2018.
In the professional contract staffing services segment, the gross margin
(excluding direct placement services) was approximately 26.4% for three months
ended December 31, 2019, which is 0.3% (30 basis points) higher than the gross
margin for the three months ended December 31, 2018. This increase is primarily
the result of increases in the amounts and mix of higher margin contract
services business in IT end markets, including growth in several of the
Company's higher end IT brands during the fiscal quarter ended December 31,
2019, as compared with the same quarter of the prior fiscal year.
The Company's industrial staffing services gross margin for the three-month
period ended December 31, 2019 was approximately 15.6% versus approximately
13.9% for the three-month period ended December 31, 2018. The increase in
industrial staffing services gross margin is due to an increase in the estimated
amounts of return premiums the Company's light industrial business is eligible
to receive under the Ohio Bureau of Workers' Compensation retrospectively-rated
insurance program.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
· Compensation and benefits in the operating divisions, which includes
salaries, wages and commissions earned by the Company's employment
consultants and branch managers on permanent and temporary placements.
· Administrative compensation, which includes salaries, wages, payroll taxes
and employee benefits associated with general management and the operation
of the finance, legal, human resources and information technology
functions.
· Occupancy costs, which includes office rent, depreciation and
amortization, and other office operating expenses.
· Recruitment advertising, which includes the cost of identifying job
applicants.
· Other selling, general and administrative expenses, which includes travel,
bad debt expense, fees for outside professional services and other
corporate-level expenses such as business insurance and taxes.
In addition to depreciation and amortization, which are broken out and reported
separately in the consolidated statement of operations from other selling,
general and administrative expenses (SG&A), the Company separately reports
expenses incurred that are related to acquisition, integration and restructuring
activities. These include expenses associated with former closed and
consolidated locations, personnel costs associated with eliminated positions,
and other costs incurred related to acquisitions, including associated legal and
professional costs. Management believes reporting these expenses separately from
other SG&A provides useful information considering the Company's dual track
growth strategy of internal (organic) growth and growth by acquisitions and when
comparing and considering the Company's operating results and activities with
other entities.
The Company's SG&A for the three-month period ended December 31, 2019 increased
by approximately $1,128 as compared to the three-month period ended December 31,
2018. SG&A for the three-month period ended December 31, 2019, as a percentage
of revenues was approximately 29% compared to approximately 25% for the
three-month period ended December 31, 2018. The increase in SG&A expenses is
primarily attributable to the benefit recognized for return premiums the Company
was eligible to receive from Ohio Bureau of Workers' Compensation
retrospectively-rated insurance program three-month period ended December 31,
2018; an increase in sales-related compensation, including increased incentive
compensation intended to accelerate the Company's return to sustainable growth;
and an increase in professional services fees incurred in connection with the
Company's fiscal 2019 year end audit, tax compliance and SEC reporting.
Acquisition, Integration and Restructuring Expenses
The Company classifies and reports costs incurred related to acquisition,
integration and restructuring activities separately from other SG&A within its
operating expenses. These costs were $377 and $1,451 for the three-month periods
ended December 31, 2019 and 2018, respectively. These costs include mainly
expenses associated with former closed and consolidated locations, personnel
costs associated with eliminated positions, costs incurred related to
acquisitions and associated legal and professional costs. The significant
decline in these costs is the direct result of lessening activities in these
areas.
Depreciation Expense
Depreciation expense was $79 for the three-month period ended December 31, 2019,
which remained approximately level compared to the three-month period ended
December 31, 2018.
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Amortization Expense
Amortization expense was $1,398 for the three-month period ended December 31,
2019, which remained approximately level compared to the three-month period
ended December 31, 2018.
Loss from Operations
As the net result of the matters discussed regarding revenues and operating
expenses above, income from operations decreased by approximately $192 for the
three-month period ended December 31, 2019 compared to the three-month period
ended December 31, 2018. The decrease is a function of a combination of factors
discussed above, including the accelerated vesting of restricted stock to a
former president, higher sales-related compensation, including increased
incentive compensation intended to accelerate the Company's return to
sustainable growth, and professional services fees incurred in connection with
the Company's fiscal 2019 year end audit, tax compliance and SEC reporting.
Interest Expense
Interest expense for the three-month period ended December 31, 2019, increased
by approximately $271 compared to the three-month period ended December 31,
2018. The increase in interest expense is attributable to an increase in the
loan balances under the Credit Agreement for the three-month period ended
December 31, 2019.
Provision for Income Taxes
The Company recognized a tax expense of approximately $171 for the three-month
period ended December 31, 2019. Our effective tax rate for the three-month
periods ended December 31, 2019 and 2018, is lower than the statutory tax rate
primarily due to an increase in the deferred tax liability related to indefinite
lived assets. Other than the deferred tax liability relating to indefinite lived
asset, the Company is maintaining a valuation allowance against the remaining
net DTA position.
Net Loss
As the net result of the matters discussed regarding revenues and expenses
above, the Company incurred net losses for the three-month periods ended
December 31, 2019 and 2018 of $3,563 and $3,452, respectively. The most
significant drivers of the Company's net loss continue to be the interest costs
associated with debt and the amortization expenses associated with the Company
identifiable intangible assets.
The Company continues to pursue opportunities to selectively increase revenue
producing headcount in key markets and industry verticals. The Company also
seeks to organically grow its professional contract services revenue and direct
hire placement revenue, including business from staff augmentation, permanent
placement, statement of work (SOW) and other human resource solutions in the
information technology, engineering, healthcare and finance and accounting
higher margin staffing specialties. The Company's strategic plans to achieve
this goal involve setting aggressive new business growth targets, including
initiatives to increase services to existing customers, increasing its numbers
of revenue producing core professionals, including primarily, business
development managers and recruiters, changes to compensation, commission and
bonus plans to better incentivize producers, and frequent interaction with the
field to monitor and motivate growth. The Company's strategic plan contains both
internal and acquisition growth objectives to increase revenue in the
aforementioned higher margin and more profitable professional services sectors
of staffing.
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.
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The Company experienced significant net losses for its most recent fiscal years
ended September 30, 2019 and 2018, and for the three-month periods ended
December 31, 2019 and 2018, and 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 waivers to the Credit Agreement
with the Company's current senior lenders, when needed, and six amendments 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.
The following table sets forth certain consolidated statements of cash flows
data:
Three Months Ended
December 31, December 31,
(in thousands) 2019 2018
Cash flows (used in) provided by operating
activities $ (1,450 ) $ 766
Cash flows used in investing activities $ (58 ) $ (36 )
Cash flows used in financing activities $ (408 ) $ (443 )
As of December 31, 2019, the Company had $2,139 of cash, which was a decrease of
approximately $1,916 from approximately $4,055 as of September 30, 2019. As of
December 31, 2019, the Company had working capital of approximately $10,252
compared to approximately $8,534 of working capital as of September 30, 2019.
Net cash (used in) provided by operating activities for the three-month periods
ended December 31, 2019 and 2018 was approximately $(1,450) and $766,
respectively. The negative operating cash flow in the three-month period ended
December 31, 2019 is attributable to negative income (lower operating income
excluding depreciation and amortization) 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 three-month periods ended December 31, 2019 and
2018.
Cash flow used in financing activities for the three-month periods ended
December 31, 2019 and 2018 was primarily for payments on our term loan offset by
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 December 31, 2019, are approximately $2,000. 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 December 31, 2019, are approximately $1,891.
Revolving Credit Facility and Term Loan
After the close of business On March 31, 2017, the Company and its subsidiaries,
as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement
(the "Credit Agreement") with PNC Bank National Association ("PNC"), and certain
investment funds managed by MGG Investment Group LP ("MGG"). Initial funds were
distributed on April 3, 2017, the closing date to repay the existing
indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay
a portion of the purchase price for the acquisition of the SNI Companies.
Under the terms of the Credit Agreement, the Company may borrow up to $73,800
consisting of a four-year term loan in the principal amount of $48,800 and
revolving loans in a maximum amount up to the lesser of (i) $25,000 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, as amended,
mature on June 30, 2021.
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On the closing date of the Credit Agreement, the Company borrowed $48,800 from
term loans and borrowed approximately $7,500 from the Revolving Credit Facility
for a total of $56,200, which was used by the Company to repay existing
indebtedness, to pay fees and expenses relating to the Credit Agreement, and to
pay a portion of the purchase price for the acquisition of all of the
outstanding stock of SNI Holdco Inc. pursuant to the Merger Agreement. Amounts
borrowed under the Credit Agreement also may be used by the Company to partially
fund capital expenditures, provide for on-going working capital needs and
general corporate needs, and to fund future acquisitions subject to certain
customary conditions of the lenders.
The Credit Agreement contains certain covenants applicable to both the Revolving
Credit Facility and Term Loan. In addition to the 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 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 negotiated and agreed to a temporary waiver for non-compliance 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, September 30, 2019 and December
31, 2019.
On February 12, 2020, the Company and its subsidiaries, as Borrowers, entered
into a sixth amendment (the "Sixth Amendment") to the Revolving Credit, Term
Loan and Security Agreement, dated as of March 31, 2017 (the "Credit
Agreement"). Under the Sixth Amendment, the Company and its Lenders have
negotiated and agreed to amendments to the remaining scheduled principal
payments and to the maturity date of the Credit Agreement. The maturity date was
extended to June 30, 2021.
Subordinated Debt - Convertible and Non-Convertible
10% Convertible Subordinated Note
On October 2, 2015, the Company issued and sold a Subordinated Note in the
aggregate principal amount of $4,185 to JAX Legacy - Investment 1, LLC ("JAX")
pursuant to a Subscription Agreement dated October 2, 2015 between the Company
and Jax. On April 3, 2017, the Company and JAX amended and restated the
Subordinated Note in its entirety in the form of the 10% Convertible
Subordinated Note (the "10% Note") in the aggregate principal amount of $4,185.
The 10% Note matures on October 3, 2021. The 10% Note is convertible into shares
of the Company's Common Stock at a conversion price equal to $5.83 per share
(subject to adjustment as provided in the 10% Note upon any stock dividend,
stock combination or stock split or upon the consummation of certain fundamental
transactions) (the "Conversion Price"). The 10% Note is subordinated in payment
to the obligations of the Company to the lending parties to the Credit
Agreement, pursuant to a Subordination and Inter-creditor Agreements, dated as
of March 31, 2017 by and among the Company, the Borrowers, the Agent and JAX.
The 10% Note issued to JAX is not registered under the Securities Act of 1933,
as amended (the "Securities Act"). JAX is an accredited investor. The issuance
of the 10% Note to JAX is exempt from the registration requirements of the Act
in reliance on an exemption from registration provided by Section 4(2) of the
Act.
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Subordinated Promissory Note
On January 20, 2017, the Company entered into Addendum No. 1 (the "Addendum") to
the Stock Purchase Agreement dated as of January 1, 2016 (the "Paladin
Agreement") by and among the Company and Enoch S. Timothy and Dorothy Timothy
(collectively, the "Sellers"). Pursuant to the terms of the Addendum, the
Company and the Sellers agreed (a) that the conditions to the "Earnouts" (as
defined in the Paladin Agreement) had been satisfied or waived and (b) that the
amounts payable to the Sellers in connection with the Earnouts shall be amended
and restructured as follows: (i) the Company paid $250 in cash to the Sellers
prior to January 31, 2017 (the "Earnout Cash Payment") and (ii) the Company
issued to the Sellers a subordinated promissory note in the principal amount of
$1,000 (the "Subordinated Note"). The Subordinated Note originally bore interest
at the rate of 5.5% per annum. Interest on the Subordinated Note is payable
monthly and principal can only be paid in stock until the term loan and
Revolving Credit Facility are repaid. The Subordinated Note 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).
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 have negotiated and agreed to amend the Subordinated Note
to change the maturity date to January 20, 2022.
9.5% Convertible Subordinated Notes
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as
part of the SNIH acquisition an aggregate of $12,500 in aggregate principal
amount of its 9.5% Notes. The 9.5% Notes mature on October 3, 2021 (the
"Maturity Date"). The 9.5% Notes are convertible into shares of the Company's
Common Stock at a conversion price equal to $5.83 per share. Interest on the
9.5% Notes accrues at the rate of 9.5% per annum and shall be paid quarterly in
arrears on June 30, September 30, December 31 and March 31, beginning on June
30, 2017, on each conversion date with respect to the 9.5% Notes (as to that
principal amount then being converted), and on the Maturity Date (each such
date, an "Interest Payment Date"). At the option of the Company, interest may be
paid on an Interest Payment Date either in cash or in shares of Common Stock of
the Company, which Common Stock shall be valued based on the terms of the
agreement, subject to certain limitations defined in the loan agreement. Each of
the 9.5% Notes is subordinated in payment to the obligations of the Company to
the lending parties to the Credit Agreement, pursuant to those certain
Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by
and among the Company, the other borrowers under the Credit Agreement, the Agent
under the Credit Agreement and each of the holders of the 9.5% Notes.
8% Convertible Subordinated Notes to Related Parties
On May 15, 2019, the Company issued and sold to members of its executive
management and Board of Directors (the "Investors") $2,000 in aggregate
principal amount of its 8% Notes. The 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.
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The Company may, at its option, prepay any portion of the principal amount of
the 8% Notes without the prior consent of the holders thereof; provided,
however, that any prepayments of the 8% Notes shall be made on a pro rata basis
to all holders of 8% Notes based on the aggregate principal amount of 8% Notes
held by such holders. The Company shall be required to prepay the 8% Notes
together with accrued and unpaid PIK interest thereon upon the consummation by
the Company of any Change of Control. For purposes of the 8% Notes, a Change of
Control of the Company shall mean any of the following: (A) the Company effects
any sale of all or substantially all of its assets in one transaction or a
series of related transactions or (B) the consummation of any transaction
(including, without limitation, any merger or consolidation), the result of
which is that any person or entity together with their affiliates, becomes the
beneficial owner, directly or indirectly, of more than 50% of the Common Stock
of the Company. Each of the 8% Notes is subordinated in payment to the
obligations of the Company to the lenders parties to that certain Revolving
Credit, Term Loan and Security Agreement, dated as of March 31, 2017, as
amended, by and among the Company, the Company's subsidiaries named as borrowers
therein (collectively with the Company, the "Borrowers"), the senior lenders
named therein and MGG Investment Group LP, as administrative agent and
collateral agent (the "Agent") for the senior lenders (the "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.
Series B Convertible Preferred Stock
On April 3, 2017, the Company agreed to issue to certain SNIH Stockholders upon
receipt of duly executed letters of transmittal as part of the SNIH acquisition,
an aggregate of approximately 5,926 shares of its Series B Convertible Preferred
Stock. The Series B Convertible Preferred Stock has a liquidation preference
equal to $4.86 per share and ranks senior to all "Junior Securities" (including
the Company's Common Stock) with respect to any distribution of assets upon
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary. In the event that the Company declares or pays a dividend or
distribution on its Common Stock, whether such dividend or distribution is
payable in cash, securities or other property, including the purchase or
redemption by the Company or any of its subsidiaries of shares of Common Stock
for cash, securities or property, the Company is required to simultaneously
declare and pay a dividend on the Series B Convertible Preferred Stock on a pro
rata basis with the Common Stock determined on an as-converted basis assuming
all Shares had been converted as of immediately prior to the record date of the
applicable dividend or distribution. On April 3, 2017, the Company filed a
Statement of Resolution Establishing its Series B Convertible Preferred Stock
with the State of Illinois. (the "Resolution Establishing Series"). Except as
set forth in the Resolution Establishing Series, the holders of the Series B
Convertible Preferred Stock have no voting rights. Pursuant to the Resolution
Establishing Series, without the prior written consent of holders of not less
than a majority of the then total outstanding Shares of Series B Convertible
Preferred Stock, voting separately as a single class, the Company shall not
create, or authorize the creation of, any additional class or series of capital
stock of the Company (or any security convertible into or exercisable for any
class or series of capital stock of the Company) that ranks pari passu with or
superior to the Series B Convertible Preferred Stock in relative rights,
preferences or privileges (including with respect to dividends, liquidation or
voting). Each share of Series B Convertible Preferred Stock is convertible at
the option of the holder thereof into one share of Common Stock at an initial
conversion price equal to $4.86 per share, each as subject to adjustment in the
event of stock splits, stock combinations, capital reorganizations,
reclassifications, consolidations, mergers or sales, as set forth in the
Resolution Establishing Series.
None of the shares of Series B Preferred Stock issued to the SNIH Stockholders
are registered under the Securities Act. Each of the SNIH Stockholders who
received shares of Series B Preferred Stock is an accredited investor. The
issuance of the shares of Series B Preferred Stock to such SNIH Stockholders is
exempt from the registration requirements of the Act in reliance on an exemption
from registration provided by Section 4(2) of the Act.
During the three months ended December 31, 2018, the Company issued 250 shares
of common stock for the conversion of approximately 250 shares of Series B
Convertible Preferred Stock.
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Series C Convertible Preferred Stock
On May 17, 2019, the Company filed a Statement of Resolution Establishing its
Series C Preferred Stock with the State of Illinois. (the Resolution
Establishing Series"). Pursuant to the Resolution Establishing Series, the
Company designated 3,000 of its authorized preferred stock as "Series C 8%
Cumulative Convertible Preferred Stock", without par value. The Series C
Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari
passu with the Company's Series B Convertible Preferred Stock ("Series B
Preferred Stock") and senior to all "Junior Securities" (including the Company's
Common Stock) with respect to any distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
Holders of shares of Series C Preferred Stock shall be entitled to receive an
annual non-cash ("PIK") dividend of 8% of the Liquidation Value per share. Such
dividend shall be payable quarterly on June 30, September 30, December 31 and
March 31 of each year commencing on June 30, 2019, in preference to any dividend
paid on or declared and set aside for the Series B Preferred Stock or any Junior
Securities and shall be paid-in-kind in additional shares of Series C Preferred
Stock. Except as set forth in the Resolution Establishing Series or as may be
required by Illinois law, the holders of the Series C Preferred Stock have no
voting rights. Pursuant to the Resolution Establishing Series, without the prior
written consent of holders of not less than a majority of the then total
outstanding Shares of Series C Preferred Stock, voting separately as a single
class, the Company shall not create, or authorize the creation of, any
additional class or series of capital stock of the Company (or any security
convertible into or exercisable for any class or series of capital stock of the
Company) that ranks superior to the Series C Preferred Stock in relative rights,
preferences or privileges (including with respect to dividends, liquidation or
voting). Each share of Series C Preferred Stock shall be convertible at the
option of the holder thereof into one share of Common Stock at an initial
conversion price equal to $1.00 per share, each as subject to adjustment in the
event of stock splits, stock combinations, capital reorganizations,
reclassifications, consolidations, mergers or sales, as set forth in the
Resolution Establishing Series.
During the three months ended December 31, 2019 and 2018, the Company issued
approximately 42 shares and 0 shares of Series C Preferred Stock to Investors
related to interest of $42 and $0 on the 8% Notes, respectively.
Off-Balance Sheet Arrangements
As of December 31, 2019, 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.
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