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 March 31, 2020, 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 March 31, 2020 Compared to the Three Months Ended March 31,
2019
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months
Ended March 31,
(in thousands) 2020 2019 Change Change
Professional contract services $ 25,794 $ 26,732 $ (938 ) -4 %
Industrial contract services 4,471 5,095 (624 ) -12 %
Total professional and industrial
contract services 30,265 31,827 (1,562 ) -5 %
Direct hire placement services 4,416 4,350 66 2 %
Consolidated net revenues $ 34,681 $ 36,177 $ (1,496 ) -4 %
Contract staffing services contributed $30,265 or approximately 87% of
consolidated revenue and direct hire placement services contributed $4,416, or
approximately 13%, of consolidated revenue for the three-month period ended
March 31, 2020. This compares to contract staffing services revenue of $31,827,
or approximately 88%, of consolidated revenue and direct hire placement revenue
of $4,350, or approximately 12%, of consolidated revenue for the three-month
period ended March 31, 2019.
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The overall decrease in contract staffing services revenues of $1,562, or 5%,
for the three months ended March 31, 2020 compared to the three months ended
March 31, 2019 was primarily attributable to coronavirus outbreak that resulted
in client closures, postponements in recruiting activities at some clients, and
layoffs. Reduction in temporary workforce requirements and reorganization of a
few key customers in the quarter ended March 31, 2020 contributed to the net
reduction in revenues. Additionally, jobseekers are more hesitant to enter the
process due to uncertain times and concerns over the face-to-face nature of the
recruiting process. We are striving to leverage our digital capabilities to
ensure we continue to recruit top talent for our clients. In addition to the
Coronavirus Pandemic-related weakness in demand for our services beginning in
approximately the last half of the month of March 2020, our professional
contract services segment finance, accounting and office end markets and our
industrial contract services segment experienced some contraction in customer
orders in the March 2020 quarter as compared with the March 2019 quarter, which
we estimate accounted for approximately $2,218 and $624, respectively, of the
decline. Offsetting these declines were increases in the Company's IT
professional services end markets; the largest component of our professional
contract services segment, which increased $1,279 in the March 2020 quarter as
compared with March 2019.
Direct hire placement revenue for the three months ended March 31, 2020
increased by $66, or approximately 2%, over the three months ended March 31,
2019.
Despite the relative performance of the contract and direct hire revenues in the
March quarters year over year, since the Coronavirus Pandemic outbreak in
approximately mid-March 2020, the Company has seen demand for its direct hire
services drop significantly.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes and employee
benefits of the Company's contract services employees, and certain other
contract employee-related costs, while working on contract assignments. Cost of
contract services for the three months ended March 31, 2020 decreased by
approximately 7% to $22,767 compared to $24,459 for the three months ended March
31, 2019. The $1,692 overall decrease in cost of contract services for the three
months ended March 31, 2020 compared to the three months ended March 31, 2019
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 March 31,
2020 2019
Professional contract services 26.6 % 25.0 %
Industrial contract services 14.1 % 13.6 %
Professional and industrial services combined 24.8 % 23.2 %
Direct hire placement services 100.0 % 100.0 %
Combined gross profit margin % (1) 34.4 % 32.4 %
________
(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, 2020 was approximately 34.4% as compared with approximately 32.4% for the
three-month period ended March 31, 2019.
In the professional contract staffing services segment, the gross margin
(excluding direct placement services) was approximately 26.6% for three-month
period ended March 31, 2020 compared to approximately 25.0% for the three-months
period ended March 31, 2019. This increase is primarily the result of increases
in the amounts and mix of higher margin contract services business in IT end
markets, including growth in several of the Company's higher end IT brands
during the fiscal quarter ended March 31, 2020, as compared with the same
quarter of the prior fiscal year.
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The Company's industrial staffing services gross margin for the three-month
period ended March 31, 2020 was approximately 14.1% versus approximately 13.6%
for the three-month period ended March 31, 2019. 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
• Compensation and benefits in the operating divisions, which includes
salaries, wages and commissions earned by the Company's employment
consultants and branch managers on permanent and temporary placements.
• Administrative compensation, which includes salaries, wages, payroll taxes
and employee benefits associated with general management and the operation
of the finance, legal, human resources and information technology
functions.
• Occupancy costs, which includes office rent, depreciation and
amortization, and other office operating expenses.
• Recruitment advertising, which includes the cost of identifying job
applicants.
• Other selling, general and administrative expenses, which includes travel,
bad debt expense, fees for outside professional services and other
corporate-level expenses such as business insurance and taxes.
The Company's SG&A for the three-month period ended March 31, 2020 increased by
approximately $1,759 as compared to the three-month period ended March 31, 2019.
SG&A for the three-month period ended March 31, 2020, as a percentage of
revenues was approximately 37% compared to approximately 31% for the three-month
period ended March 31, 2019. The increase in SG&A expenses is primarily
attributable to increases made in our allowance for doubtful accounts. A
significant portion of the increase is attributable to a single customer of our
industrial services segment who filed for bankruptcy protection during March
2020. Approximately $537 of the Company's SG&A incurred in the quarter ended
March 31, 2020, represents personnel-related costs associated with former
employees laid off, effective March 25, 2020, in response to the downturn
associated with the coronavirus outbreak.
SG&A also includes certain costs and expenses incurred related to acquisition,
integration and restructuring activities, including corporate legal and general
expenses associated with capital markets activities and not directly associated
with core business operations. These costs were $776 and $592 for the
three-month periods ended March 31, 2020 and 2019, respectively, and include
mainly expenses associated with former closed and consolidated locations,
personnel costs associated with eliminated positions, costs incurred related to
acquisitions and associated legal and professional costs. The net increase in
these costs for the three-month period ended March 31, 2020 compared to the
three-month period ended March 31, 2019 is primarily attributable to
costs incurred to align operational needs related to coronavirus outbreak.
Depreciation Expense
Depreciation expense was $69 for the three-month period ended March 31, 2020,
which remained approximately level compared to the three-month period ended
March 31, 2019.
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Amortization Expense
Amortization expense was $1,398 for the three-month period ended March 31, 2020,
which remained approximately level compared to the three-month period ended
March 31, 2019.
Loss from Operations
As the net result of the matters discussed regarding revenues and operating
expenses above, loss from operations increased by approximately $1,533 for the
three-month period ended March 31, 2020 compared to the three-month period ended
March 31, 2019. The increase is a function of a combination of factors discussed
above, including the increase in costs incurred to align operational needs
related to coronavirus outbreak, and recognition of provision for doubtful
accounts related to a key customer who filed for a bankruptcy.
Interest Expense
Interest expense was approximately $3,065 for the three-month period ended March
31, 2020, which remained approximately level compared to the three-month period
ended March 31, 2019.
Provision for Income Taxes
The Company recognized a tax expense of approximately $10 for the three-month
period ended March 31, 2020. Our effective tax rate for the three-month periods
ended March 31, 2020 and 2019, is lower than the statutory tax rate primarily
due to an increase in the deferred tax liability related to indefinite lived
assets. Other than the deferred tax liability relating to indefinite lived
asset, the Company is maintaining a valuation allowance against the remaining
net DTA position.
Net Loss
As the net result of the matters discussed regarding revenues and expenses
above, the Company incurred net losses for the three-month periods ended March
31, 2020 and 2019 of $5,428 and $3,890, respectively. In addition to the items
discussed above, other significant drivers of the Company's net loss have been
the interest costs associated with debt and the amortization expenses associated
with the Company identifiable intangible assets.
The Company 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 strategy entails both
internal and acquisition growth objectives to increase revenue in the
aforementioned higher margin and more profitable professional services sectors
of staffing.
In approximately mid-March 2020, the Company began to experience the severe
negative effects of the economic disruptions resulting from the Coronavirus
Pandemic ("COVID-19"). These have included abrupt reductions in demand for the
Company primary sources of revenue, its temporary and direct hire placements,
lost productivity due to business closings both by clients and at the Company's
own operating locations, and the significant disruptive impacts to many other
aspects of normal operations. These effects have and continue to be felt across
all businesses, with the most severe impacts being felt in the commercial (light
industrial) and finance, accounting and office clerical ("FA&O) end markets
within the professional segment.
On April 28, 2020, the Company and its subsidiaries entered into Seventh
Amendment, dated as of April 28, 2020 (the "Seventh Amendment"), to the
Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017
(as amended, amended and restated, restated, supplemented or otherwise modified
from time to time, the "Credit Agreement"). The Seventh Amendment represents the
most significant loan modification of the Company's Credit Agreement since
inception.
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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 $19,926 in order to obtain needed relief funds for
allowable expenses under the CARES Act PPP. On May 5, 2020, the Company also
entered into Eighth Amendment, dated as of May 5, 2020 (the "Eighth Amendment")
to the Credit Agreement. The Eighth Amendment served as the conforming amendment
under the Credit Agreement to enable the Company and its subsidiaries to enter
into the PPP loans and additional permitted indebtedness in compliance with the
Credit Agreement. The CARES Act PPP relief funds are the only source of
financing available to our companies and businesses to help withstand the
significant downturn and disruptions we are now undergoing and are absolutely
critical to our ability to maintain operations, including the employment of our
temporary and full-time employees, in order to produce and meet our foreseeable
liquidity requirements in the midst of this continuing worldwide pandemic.
Management believes that the execution of the amendments to its senior Credit
Agreement and the CARES Act PPP loans and related funding will provide
significant needed relief to the otherwise negative effects of the present
Coronavirus Pandemic.
Six Months Ended March 31, 2020 Compared to the Six Months Ended March 31, 2019
Net Revenues
Consolidated net revenues are comprised of the following:
Six Months
Ended March 31,
(in thousands) 2020 2019 $ Change Change
Professional contract services $ 53,216 $ 55,125 (1,909 ) -3 %
Industrial contract services 10,126 10,715 (589 ) -5 %
Total professional and industrial
contract services 63,342 65,840 (2,498 ) -4 %
Direct hire placement services 8,895 8,880 15 0 %
Consolidated net revenues $ 72,237 $ 74,720 (2,483 ) -3 %
Contract staffing services contributed $63,342 or approximately 88% of
consolidated revenue and direct hire placement services contributed $8,895, or
approximately 12%, of consolidated revenue for the six-month period ended March
31, 2020. This compares to contract staffing services revenue of $65,840, or
approximately 88%, of consolidated revenue and direct hire placement revenue of
$8,880, or approximately 12%, of consolidated revenue for the six-month period
ended March 31, 2019.
The overall decrease in contract staffing services revenues of $2,498, or 4%,
for the six-month period ended March 31, 2020 compared to the six-month period
ended March 31, 2019 was primarily attributable to coronavirus outbreak that
resulted in client closures, postponements in recruiting activities at some
clients, and layoffs. Reduction in temporary workforce requirements and
reorganization of a few key customers in the quarter ended March 31, 2020
contributed to the net reduction in revenues. Additionally, jobseekers are more
hesitant to enter the process due to uncertain times and concerns over the
face-to-face nature of the recruiting process. We are striving to leverage our
digital capabilities to ensure we continue to recruit top talent for our
clients. In addition to the Coronavirus Pandemic-related weakness in demand for
our services beginning in approximately the last half of the month of March
2020, our professional contract services segment finance, accounting and office
end markets and our industrial contract services segment experienced some
contraction in customer orders in the first half of our 2020 fiscal year through
March 31, 2020, as compared with the first half of our 2019 fiscal year through
March 31, 2019, which we estimate accounted for approximately $4,658 and $589
respectively, of the decline. Offsetting these declines were increases in the
Company's IT professional services end markets; the largest component of our
professional contract services segment, which increased $2,748 in the first half
of our 2020 fiscal year through March 31, 2020, as compared with the first half
of our 2019 fiscal year through March 31, 2019.
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Direct hire placement revenue for the six-month period ended March 31, 2020
remained consistent with the six-month period ended March 31, 2019. Despite the
consistent performance of the direct hire revenues in the March quarters year
over year, since the Coronavirus Pandemic outbreak in approximately mid-March
2020, the Company has seen demand for its direct hire services drop
significantly.
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 six-month period ended March 31, 2020 decreased by
approximately 5% to $47,729 compared to $50,271 for the six-month period ended
March 31, 2019. The $2,542 overall decrease in cost of contract services for the
six-month period ended March 31, 2020 compared to the six-month period ended
March 31, 2019 was primarily attributable to and consistent with the
corresponding decline in revenues, which is discussed further below.
Gross Profit percentage by service:
Six Months
Ended March 31,
2020 2019
Professional contract services 26.5 % 25.6 %
Industrial contract services 15.0 % 13.7 %
Professional and industrial services combined 24.7 % 23.6 %
Direct hire placement services 100.0 % 100.0 %
Combined gross profit margin % (1) 33.9 % 32.7 %
________
(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 six-month period ended March
31, 2020 was approximately 33.9% as compared with approximately 32.7% for the
six-month period ended March 31, 2019.
In the professional contract staffing services segment, the gross margin
(excluding direct placement services) was approximately 26.5% for six-month
period ended March 31, 2020. The increase is primarily the result of increases
in the amounts and mix of higher margin contract services business in IT end
markets, including growth in several of the Company's higher end IT brands
during six-month period ended March 31, 2020, as compared with the same period
of the prior fiscal year.
The Company's industrial staffing services gross margin for the six-month period
ended March 31, 2020 was approximately 15.0% versus approximately 13.7% for the
six-month period ended March 31, 2019. 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.
The Company's SG&A for the six-month period ended March 31, 2020 increased by
approximately $1,813 as compared to the six-month period ended March 31, 2019.
SG&A for the six-month period ended March 31, 2020, as a percentage of revenues
was approximately 33% compared to approximately 30% for the six-month period
ended March 31, 2019. The increase in SG&A expenses is primarily attributable to
a recognition of provision for doubtful accounts related to a key customer who
filed for a bankruptcy protection during March 2020. Approximately $1,057 of the
Company's SG&A incurred in the six months ended March 31, 2020, represents
personnel-related costs associated with former employees laid off, effective
March 25, 2020, in response to the downturn associated with the coronavirus
outbreak.
SG&A also includes certain costs and expenses incurred related to acquisition,
integration and restructuring activities, including corporate legal and general
expenses associated with capital markets activities and not directly associated
with core business operations. These costs were $633 and $1,751 for the
six-month periods ended March 31, 2020 and 2019, respectively, and include
mainly expenses associated with former closed and consolidated locations,
personnel costs associated with eliminated positions, costs incurred related to
acquisitions and associated legal and professional costs. The decline of
approximately $1,118 of these costs, is primarily the result of lessening
acquisition, integration and restructuring activities in the first half of our
2020 fiscal year as compared with the first half of our 2019 fiscal year.
Depreciation Expense
Depreciation expense was $148 for the six-month period ended March 31, 2020,
which remained approximately level compared to the six-month period ended March
31, 2019.
Amortization Expense
Amortization expense was $2,795 for the six-month period ended March 31, 2020,
which remained approximately level compared to the six-month period ended March
31, 2019.
Loss from Operations
As the net result of the matters discussed regarding revenues and operating
expenses above, income from operations decreased by approximately $1,723 for the
six-month period ended March 31, 2020 compared to the six-month period ended
March 31, 2019. The decrease is a function of a combination of factors discussed
above, mainly due to recognition of provision for doubtful accounts related to a
key customer who filed for a bankruptcy.
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Interest Expense
Interest expense for the six-month period ended March 31, 2020, increased by
approximately $251 compared to the six-month period ended March 31, 2019. The
increase in interest expense is attributable to an increase in the loan balances
under the Credit Agreement for the six-month period ended March 31, 2019.
Provision for Income Taxes
The Company recognized a tax expense of approximately $181 for the six-month
period ended March 31, 2020. Our effective tax rate for the six-month periods
ended March 31, 2020 and 2019, is lower than the statutory tax rate primarily
due to an increase in the deferred tax liability related to indefinite lived
assets. Other than the deferred tax liability relating to indefinite lived
asset, the Company is maintaining a valuation allowance against the remaining
net DTA position.
Net Loss
As the net result of the matters discussed regarding revenues and expenses
above, the Company incurred net losses for the six-month periods ended March 31,
2020 and 2019 of $8,991 and $7,342, respectively. In addition to the items
discussed above, other significant drivers of the Company's net loss have been
the interest costs associated with debt and the amortization expenses associated
with the Company identifiable intangible assets.
The Company 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.
In approximately mid-March 2020, the Company began to experience the severe
negative effects of the economic disruptions resulting from the Coronavirus
Pandemic ("COVID-19"). These have included abrupt reductions in demand for the
Company primary sources of revenue, its temporary and direct hire placements,
lost productivity due to business closings both by clients and at the Company's
own operating locations, and the significant disruptive impacts to many other
aspects of normal operations. These effects have and continue to be felt across
all businesses, with the most severe impacts being felt in the commercial (light
industrial) and finance, accounting and office clerical ("FA&O) end markets
within the professional segment.
On April 28, 2020, the Company and its subsidiaries entered into Seventh
Amendment, dated as of April 28, 2020 (the "Seventh Amendment"), to the
Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017
(as amended, amended and restated, restated, supplemented or otherwise modified
from time to time, the "Credit Agreement"). The Seventh Amendment represents the
most significant loan modification of the Company's Credit Agreement since
inception.
On May 5, 2020 the Company and its subsidiaries entered into nine (9) unsecured
promissory notes payable under CARES Act Payroll Protection Program ("PPP") and
received net funds totaling $19,926 in order to obtain needed relief funds for
allowable expenses under the CARES Act PPP. On May 5, 2020, the Company also
entered into Eighth Amendment, dated as of May 5, 2020 (the "Eighth Amendment")
to the Credit Agreement. The Eighth Amendment served as the conforming amendment
under the Credit Agreement to enable the Company and its subsidiaries to enter
into the PPP loans and additional permitted indebtedness in compliance with the
Credit Agreement. The CARES Act PPP relief funds are the only source of
financing available to our companies and businesses to help withstand the
significant downturn and disruptions we are now undergoing and are absolutely
critical to our ability to maintain operations, including the employment of our
temporary and full-time employees, in order to produce and meet our foreseeable
liquidity requirements in the midst of this continuing worldwide pandemic.
Management believes that the execution of the amendments to its senior Credit
Agreement and the CARES Act PPP loans and related funding will provide
significant needed relief to the otherwise negative effects of the present
Coronavirus Pandemic.
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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:
Six Months
Ended March 31,
(in thousands) 2020 2019
Cash flows (used in) provided by operating activities $ (2,066 ) $ 227
Cash flows used in investing activities
$ (83 ) $ (83 )
Cash flows provided by (used in) financing activities $ 473 $ (596 )
As of March 31, 2020, the Company had $2,379 of cash, which was a decrease of
approximately $1,676 from approximately $4,055 as of September 30, 2019. As of
March 31, 2020, the Company had working capital of approximately $9,517 compared
to approximately $8,534 of working capital as of September 30, 2019.
Net cash (used in) provided by operating activities for the six-month periods
ended March 31, 2020 and 2019 was approximately $(2,066) and $227, respectively.
The negative operating cash flow in the six-month period ended March 31, 2020 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 six-month periods ended March 31, 2020 and 2019.
Cash flow provided by (used in) financing activities for the six-month periods
ended March 31, 2020 and 2019 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 March 31, 2020, are approximately $0. 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, 2020, are approximately $1,921.
The Company experienced significant net losses for the six-month periods ended
March 31, 2020 and 2019, and for its most recent fiscal years ended September
30, 2019 and 2018, which also have 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, the
Company has begun to see its operations and business stabilize. Effective April
28, 2020, the Company successfully negotiated and entered into the Seventh
Amendment to the Credit Agreement with its senior lenders. The Seventh Amendment
(as defined below) is the most significant modification of the Company's senior
credit facilities since inception and provides several important concessions and
features, including extending the maturity by two years to June 30, 2023, and
adjusting (reducing) cash debt service and thereby improving the Company's
ability to generate liquidity.
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In approximately mid-March 2020, the Company began to experience the severe
negative effects of the economic disruptions resulting from the Coronavirus
Pandemic ("COVID-19"). These have included abrupt reductions in demand for the
Company primary sources of revenue, its temporary and direct hire placements,
lost productivity due to business closings both by clients and at the Company's
own operating locations, and the significant disruptive impacts to many other
aspects of normal operations. These effects have and continue to be felt across
all businesses, with the most severe impacts being felt in the commercial (light
industrial) and finance, accounting and office clerical ("FA&O) end markets
within the professional segment.
On 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 $19,926 in order to obtain needed relief funds for
allowable expenses under the CARES Act PPP. On May 5, 2020, the Company also
entered into Eighth Amendment, dated as of May 5, 2020 (the "Eighth Amendment")
to the Credit Agreement. The Eighth Amendment served as the conforming amendment
under the Credit Agreement to enable the Company and its subsidiaries to enter
into the PPP loans and additional permitted indebtedness in compliance with the
Credit Agreement. The CARES Act PPP relief funds are the only source of
financing available to our companies and businesses to help withstand the
significant downturn and disruptions we are now undergoing and are absolutely
critical to our ability to maintain operations, including the employment of our
temporary and full-time employees, in order to produce and meet our foreseeable
liquidity requirements in the midst of this continuing worldwide pandemic.
Management believes that the Company can generate adequate liquidity to meet its
obligations for the foreseeable future assuming the negative economic effects of
COVID-19 do not worsen, and that economic recovery occurs.
Off-Balance Sheet Arrangements
As of March 31, 2020, there were no transactions, agreements or other
contractual arrangements to which an unconsolidated entity was a party, under
which the Company (a) had any direct or contingent obligation under a guarantee
contract, derivative instrument or variable interest in the unconsolidated
entity, or (b) had a retained or contingent interest in assets transferred to
the unconsolidated entity.
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GEE GROUP INC. 
