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GEE Group Inc. - Quarter Report: 2019 December (Form 10-Q)

job_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended December 31, 2019

 

 

OR

 

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number 1-05707

 

GEE GROUP INC.

(Exact name of registrant as specified in its charter)

 

Illinois

36-6097429

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification Number)

 

7751 Belfort Parkway, Suite 150, Jacksonville, FL 32256

(Address of principal executive offices)

 

(630) 954-0400

(Registrant’s telephone number, including area code)

 

__________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value

JOB

NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

x

Smaller reporting company

x

 

Emerging Growth Company

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

The number of shares outstanding of the registrant’s common stock as of February 10, 2020 was 14,056,997.

 

 
 
 

 

GEE GROUP INC.

Form 10-Q

For the Quarter Ended December 31, 2019

INDEX

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

3

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

4

 

Condensed Consolidated Balance Sheets

 

4

 

Condensed Consolidated Statements of Operations

 

5

 

Condensed Consolidated Statements of Shareholders’ Equity

 

6

 

Condensed Consolidated Statements of Cash Flows

 

7

 

Notes to Condensed Consolidated Financial Statements

 

8

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

27

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

Item 4.

Controls and Procedures

 

35

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

36

 

Item 1A.

Risk Factors

 

36

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

36

 

Item 3.

Defaults Upon Senior Securities

 

36

 

Item 4.

Mine Safety Disclosures

 

36

 

Item 5.

Other Information

 

36

 

Item 6.

Exhibits

 

37

 

 

Signatures

 

38

 

 

 
2
 
 

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

 

As a matter of policy, the Company does not provide forecasts of future financial performance. The statements made in this quarterly report on Form 10-Q which are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements often contain or are prefaced by words such as "believe", "will" and "expect." These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. As a result of a number of factors, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause the Company's actual results to differ materially from those in the forward-looking statements include, without limitation, general business conditions, the demand for the Company's services, competitive market pressures, the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract assignments, the possibility of incurring liability for the Company's business activities, including the activities of its contract employees and events affecting its contract employees on client premises, and the ability to attract and retain qualified corporate and branch management, as well as those risks discussed in the Company's Annual Report on Form 10-K for the year ended September 30, 2019, and in other documents which we file with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date on which they are made, and the Company is under no obligation to (and expressly disclaims any such obligation to) and does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.

 

 
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PART I -FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS (unaudited)

 

GEE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In Thousands)

 

ASSETS

 

December 31,

2019

 

 

September 30,

2019

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash

 

$2,139

 

 

$4,055

 

Accounts receivable, less allowances ($242 and $515, respectively)

 

 

20,211

 

 

 

20,826

 

Prepaid expenses and other current assets

 

 

1,334

 

 

 

2,221

 

Total current assets

 

 

23,684

 

 

 

27,102

 

Property and equipment, net

 

 

830

 

 

 

852

 

Goodwill

 

 

72,293

 

 

 

72,293

 

Intangible assets, net

 

 

22,483

 

 

 

23,881

 

Right-of-use assets

 

 

5,470

 

 

 

-

 

Other long-term assets

 

 

396

 

 

 

353

 

TOTAL ASSETS

 

$125,156

 

 

$124,481

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$2,944

 

 

$3,733

 

Acquisition deposit for working capital guarantee

 

 

383

 

 

 

783

 

Accrued compensation

 

 

4,357

 

 

 

5,212

 

Short-term portion of term loan, net of discount

 

 

1,194

 

 

 

4,668

 

Subordinated debt

 

 

-

 

 

 

1,000

 

Current operating lease liabilities

 

 

1,555

 

 

 

-

 

Other current liabilities

 

 

2,999

 

 

 

3,172

 

Total current liabilities

 

 

13,432

 

 

 

18,568

 

Deferred taxes

 

 

358

 

 

 

300

 

Revolving credit facility

 

 

14,307

 

 

 

14,215

 

Term loan, net of discount

 

 

39,204

 

 

 

36,029

 

Subordinated debt

 

 

1,000

 

 

 

-

 

Subordinated convertible debt (includes $1,347 and $1,269, net of discount, respectively, due to related parties)

 

 

18,032

 

 

 

17,954

 

Noncurrent operating lease liabilities

 

 

4,389

 

 

 

-

 

Other long-term liabilities

 

 

136

 

 

 

595

 

Total long-term liabilities

 

 

77,426

 

 

 

69,093

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MEZZANINE EQUITY

 

 

 

 

 

 

 

 

Preferred stock; no par value; authorized - 20,000 shares -

 

 

 

 

 

 

 

 

Preferred series A stock; authorized -160 shares; issued and outstanding - none

 

 

-

 

 

 

-

 

Preferred series B stock; authorized - 5,950 shares; issued and outstanding - 5,566 and 5,566 at December 31, 2019 and September 30, 2019, respectively; liquidation value of the preferred series B stock is approximately $27,050 and $27,050 at December 31, 2019 and September 30, 2019, respectively

 

 

27,551

 

 

 

27,551

 

Preferred series C stock; authorized - 3,000 shares; issued and outstanding - 102 and 60 at December 31, 2019 and September 30, 2019, respectively; liquidation value of the preferred series C stock is approximately $102 and $60 at December 31, 2019 and September 30, 2019, respectively

 

 

102

 

 

 

60

 

Total mezzanine equity

 

 

27,653

 

 

 

27,611

 

SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 13,090 shares at December 31, 2019 and 12,538 shares at September 30, 2019, respectively

 

 

-

 

 

 

-

 

Additional paid in capital

 

 

50,989

 

 

 

49,990

 

Accumulated deficit

 

 

(44,344)

 

 

(40,781)

Total shareholders' equity

 

 

6,645

 

 

 

9,209

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$125,156

 

 

$124,481

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 
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GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In Thousands)

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

NET REVENUES:

 

 

 

 

 

 

Contract staffing services

 

$33,078

 

 

$34,014

 

Direct hire placement services

 

 

4,479

 

 

 

4,529

 

NET REVENUES

 

 

37,557

 

 

 

38,543

 

 

 

 

 

 

 

 

 

 

Cost of contract services

 

 

24,962

 

 

 

25,812

 

GROSS PROFIT

 

 

12,595

 

 

 

12,731

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

(including noncash stock-based compensation expense of $597 and $581, respectively)

 

 

10,914

 

 

 

9,786

 

Acquisition, integration and restructuring expenses

 

 

377

 

 

 

1,451

 

Depreciation expense

 

 

79

 

 

 

79

 

Amortization of intangible assets

 

 

1,398

 

 

 

1,396

 

(LOSS) INCOME FROM OPERATIONS

 

 

(173)

 

 

19

 

Interest expense

 

 

(3,219)

 

 

(2,948)

LOSS BEFORE INCOME TAX PROVISION

 

 

(3,392)

 

 

(2,929)

Provision for income tax

 

 

(171)

 

 

(523)

NET LOSS

 

$(3,563)

 

$(3,452)

NET LOSS ATTRIBUTABLE TO COMMON

 

 

 

 

 

 

 

 

STOCKHOLDERS

 

$(3,563)

 

$(3,452)

 

 

 

 

 

 

 

 

 

BASIC AND DILUTED LOSS PER SHARE

 

$(0.27)

 

$(0.32)

WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED

 

 

13,067

 

 

 

10,946

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 
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GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

(In Thousands)

 

 

 

Common

 

 

Additional

 

 

 

 

 

Total

 

 

 

Stock

 

 

Paid In

 

 

Accumulated

 

 

Shareholders'

 

 

 

Shares

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, September 30, 2019

 

 

12,538

 

 

$49,990

 

 

$(40,781)

 

$9,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

-

 

 

 

597

 

 

 

-

 

 

 

597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for interest

 

 

552

 

 

 

402

 

 

 

-

 

 

 

402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

(3,563)

 

 

(3,563)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

13,090

 

 

$50,989

 

 

$(44,344)

 

$6,645

 

 

 

 

 

Common

 

 

Additional

 

 

 

 

Total

 

 

 

Stock

 

 

Paid In

 

 

Accumulated

 

 

Shareholders'

 

 

 

Shares

 

 

 Capital

 

 

Deficit

 

 

Equity

 

Balance, September 30, 2018

 

 

10,783

 

 

$44,120

 

 

$(23,018)

 

$21,102

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

-

 

 

 

581

 

 

 

-

 

 

 

581

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for interest

 

 

171

 

 

 

401

 

 

 

-

 

 

 

401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred Series B to common stock

 

 

250

 

 

 

1,238

 

 

 

-

 

 

 

1,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

-

 

 

 

-

 

 

 

(3,452)

 

 

(3,452)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

 

 

11,204

 

 

$46,340

 

 

$(26,470)

 

$19,870

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 
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GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In Thousands)

  

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$(3,563)

 

$(3,452)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,477

 

 

 

1,475

 

Non-cash lease expense

 

 

430

 

 

 

-

 

Stock Compensation expense

 

 

597

 

 

 

581

 

Recovery for doubtful accounts

 

 

(273)

 

 

-

 

Deferred income taxes

 

 

58

 

 

 

523

 

Amortization of debt discount

 

 

279

 

 

 

195

 

Interest expense paid with common and preferred stock

 

 

444

 

 

 

401

 

Change in acquisition deposit for working capital guarantee

 

 

(400)

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

888

 

 

 

1,710

 

Accounts payable

 

 

(807)

 

 

333

 

Accrued compensation

 

 

(834)

 

 

(997)

Change in other assets, net of change in other liabilities

 

 

254

 

 

 

10

 

Net cash (used in) provided by operating activities

 

 

(1,450)

 

 

779

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(58)

 

 

(36)

Net cash used in investing activities

 

 

(58)

 

 

(36)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments on term loan

 

 

(500)

 

 

(1,087)

Net proceeds from subordinated debt

 

 

-

 

 

 

(107)

Payments on finance leases

 

 

-

 

 

 

(13)

Net proceeds from revolving credit

 

 

92

 

 

 

751

 

Net cash used in financing activities

 

 

(408)

 

 

(456)

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

(1,916)

 

 

287

 

 

 

 

 

 

 

 

 

 

Cash at beginning of period

 

 

4,055

 

 

 

3,213

 

 

 

 

 

 

 

 

 

 

Cash at end of period

 

$2,139

 

 

$3,500

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$2,497

 

 

$2,615

 

Cash paid for taxes

 

$45

 

 

$12

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Conversion of Series B Convertible Preferred Stock to common stock

 

$-

 

 

$1,238

 

Right-of-use assets, net of deferred rent

 

$5,900

 

 

$-

 

Operating Lease Liability

 

$6,341

 

 

$-

 

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

1. Description of Business

 

GEE Group Inc. (the “Company”, “us”, “our” or “we”) was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893. We are a provider of permanent and temporary professional and industrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, accounting, finance, office, engineering, and medical professionals for direct hire and contract staffing for our clients and provide temporary staffing services for our commercial clients.

 

2. Significant Accounting Policies and Estimates

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three-month period ended December 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2019 as filed on December 23, 2019.

 

Liquidity

 

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 that 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 (as defined below) 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.

 

As of December 31, 2019, the Company had cash of approximately $2,139, which was a decrease of approximately $1,916 from approximately $4,055 at September 30, 2019. Working capital at December 31, 2019 was approximately $10,252, as compared to working capital of approximately $8,534 for September 30, 2019.

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions are eliminated in consolidation.

 

Use of Estimates

 

Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the unaudited condensed consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Revenue Recognition

 

Revenues from contracts with customers are generated through the following services: direct hire placement services, temporary professional services staffing, and temporary light industrial staffing. Revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances.

 

Direct hire placement service revenues from contracts with customers are recognized when employment candidates accept offers of employment, less a provision for estimated credits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company's guarantee period (referred to as “falloffs”). The Company’s guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire. Fees associated with candidate placement are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates.

 

Temporary staffing service revenues from contracts with customers are recognized in amounts for which the Company has a right to invoice, as the services are rendered by the Company’s temporary employees. The Company records temporary staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a customer. The Company has the risk of identifying and hiring qualified employees, has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by customers.

 

Falloffs and refunds during the period are reflected in the unaudited condensed consolidated statements of operations as a reduction of placement service revenues and were approximately $266 and $701 for the three-month periods ended December 31, 2019 and 2018, respectively. Expected future falloffs and refunds are reflected in the unaudited condensed consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below.

 

See Note 14 for disaggregated revenues by segment.

 

Payment terms in our contracts vary by the type and location of our customer and the services offered. The terms between invoicing and when payments are due are not significant.

 

Cost of Contract Staffing Services

 

The cost of contract services includes the wages and the related payroll taxes, employee benefits and certain other employee-related costs of the Company’s contract service employees, while they work on contract assignments.

 

Cash and Cash Equivalents

 

Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of December 31, 2019 and September 30, 2019, there were no cash equivalents. The Company maintains deposits in financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.

 

Accounts Receivable

 

The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a relatively small accounts receivable allowance. As of December 31, 2019, and September 30, 2019, the allowance for doubtful accounts was $242 and $515, respectively. The Company charges off uncollectible accounts once the invoices are deemed unlikely to be collectible. The allowance also includes permanent placement falloffs of $137 and $197 as of December 31, 2019 and September 30, 2019.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Property and Equipment

 

Property and equipment are recorded at cost. Depreciation expense is calculated on a straight-line basis over estimated useful lives of five years for computer equipment and two to ten years for office equipment, furniture and fixtures. The Company capitalizes computer software purchased or developed for internal use and amortizes it over an estimated useful life of five years. The carrying value of property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that it may not be recoverable. If the carrying amount of an asset group is greater than its estimated future undiscounted cash flows, the carrying value is written down to the estimated fair value. There was no impairment of property and equipment for the three-month periods ended December 31, 2019 and 2018.

 

Leases

 

The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s unaudited condensed consolidated balance sheet. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All the Company’s real estate leases are classified as operating leases.

 

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have subleases. The Company does not currently have residual value guarantees or restrictive covenants in its leases.

 

Goodwill

 

In 2019, the Company early adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.

 

Fair Value Measurement

 

The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement”, which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

 

The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The fair value disclosures of the Company’s long-term liabilities approximates the fair value based on current yield for debt instruments with similar terms. The Company’s goodwill and other intangible assets are measured at fair value on a non-recurring basis using Level 3 inputs, as discussed in Note 6.

 

Earnings and Loss per Share

 

Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable and preferred stock to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation.

 

Common stock equivalents, which are excluded because their effect is anti-dilutive, were approximately 14,001 and 11,761 for the three-month periods ended December 31, 2019 and 2018, respectively.

 

Advertising Expenses

 

The Company expenses the costs of print and internet media advertising and promotions as incurred and reports these costs in selling, general and administrative expenses. For the three-month periods ended December 31, 2019 and 2018, advertising expense totaled $484 and $572, respectively.

 

Intangible Assets

 

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

 

Impairment of Long-lived Assets

 

The Company recognizes an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not recognize and record any impairments of long-lived assets used in operations during the three-month periods ended December 31, 2019 and 2018.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Beneficial Conversion Feature

 

The Company evaluates embedded conversion features within a convertible instrument under ASC 815 Derivatives and Hedging to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require treatment under ASC 815, the instrument is evaluated under ASC 470-20 Debt with Conversion and Other Options for consideration of any beneficial feature.

 

The Company records a beneficial conversion feature (“BCF”) when the convertible instrument is issued with conversion features at fixed or adjustable rates that are below market value when issued. The BCF for convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.

 

The BCF for the convertible instrument is recorded as a reduction, or discount, to the carrying amount of the convertible instrument equal to the fair value of the conversion feature. The discount is then amortized as interest or deemed dividends over the period from the date of the convertible instrument’s issuance to the earliest redemption date, provided that the convertible instrument is not currently redeemable but probable of becoming redeemable in the future.

 

Stock-Based Compensation

 

The Company accounts for stock-based awards to employees in accordance with FASB ASC 718, “Compensation-Stock Compensation”, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee stock options, we recognize expense on an accelerated basis over the employee's requisite service period (generally the vesting period of the equity grant). The Company's option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.

 

Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with FASB ASC 718, “Compensation-Stock Compensation”. Such options are valued using the Black-Scholes option pricing model.

 

See Note 10 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation. Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.

 

Income Taxes

 

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, we determine deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

We recognize deferred tax assets to the extent that we believe that these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

 

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

 

We recognize and group interest and penalties, if any, with income tax expense in the accompanying consolidated statement of operations. As of December 31, 2019, and September 30, 2019, no material accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss. Approximately $292 was reclassified from selling, general and administration expenses to acquisition, integration and restructuring expenses reported for the fiscal quarter ended December 31, 2018, corresponding with the estimated effects of certain restructuring actions taken later during the fiscal year 2018.

 

Segment Data

 

The Company provides the following distinctive services: (a) direct hire placement services, and (b) temporary professional contract services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary contract light industrial staffing. The Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not entirely allocated among Industrial and Professional Staffing Services. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including type of business, type of employee, length of employment and revenue recognition are considered in determining the Company’s operating segments.

 

3. New Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

Lease Accounting. In February 2016, the FASB issued ASU 2016-02, Leases (“ASC 842”), which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous ASC 840 guidance. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. We adopted this guidance as of October 1, 2019 and elected the transition method provided under ASU 2018-11. This standard has a material effect on our consolidated balance sheets with the recognition of new right of use assets and lease liabilities for all operating leases, except for those leases where we elected the short-term lease recognition exemption, as these leases have a non-cancelable lease term of approximately one year or less. Adoption of the new standard did not have a material effect on the Company’s results of operations. As of the transition date, the ROU asset and total lease liability (current and long-term) were $5,900 and $6,341, respectively.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

The Company elected the package of practical expedients available under the transition provisions of the new lease standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) lease classification, and (iii) not revaluing initial direct costs for existing leases. Also, the Company elected the practical expedient which allows aggregation of non-lease components with the related lease components when evaluating accounting treatment. Lastly, the Company applied the modified retrospective adoption method, utilizing the simplified transition option available in the ASC 842, which allows entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption. See Note 5 for further discussion of leases.

 

Stock Compensation. In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (“ASC 718”), which simplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted (but no sooner than the adoption of Topic 606). The Company adopted the new guidance as of October 1, 2019. The adoption of this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

Current Expected Credit Losses Model. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (“ASC 326”), authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements and related disclosures.

 

No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements.

 

4. Property and Equipment

 

Property and equipment, net consisted of the following:

 

 

 

December 31,

2019

 

 

September 30,

2019

 

 

 

 

 

 

 

 

Computer software

 

$1,497

 

 

$1,497

 

Office equipment, furniture, fixtures and leasehold improvements

 

 

3,657

 

 

 

3,599

 

Total property and equipment, at cost

 

 

5,154

 

 

 

5,096

 

Accumulated depreciation and amortization

 

 

(4,324)

 

 

(4,244)

Property and equipment, net

 

$830

 

 

$852

 

 

Depreciation expense for three-month periods ended December 31, 2019 and 2018 was approximately $79 each.

 

5. Leases

 

The Company leases space for all its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods ranging from three to five years. The corporate office lease expires in 2020. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.

 

Operating lease expenses was approximately $660 and $760 for the three-month periods ended December 31, 2019 and 2018, respectively.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

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

 

 

 

Three Months

Ended

December 31,

2019

 

Cash paid for operating lease liabilities

 

$555

 

 

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

 

 

 

December 31,

2019

 

Weighted average remaining lease term for operating leases

 

2.8 years

 

Weighted average discount rate for operating leases

 

 

6.0%

 

The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the unaudited condensed consolidated balance sheet as of December 31, 2019, including certain closed offices are as follows:

 

Remainder of Fiscal 2020

 

$1,469

 

Fiscal 2021

 

 

1,597

 

Fiscal 2022

 

 

1,485

 

Fiscal 2023

 

 

1,007

 

Fiscal 2024

 

 

779

 

Thereafter

 

 

427

 

Less: Imputed interest

 

 

(820)

Present value of operating lease liabilities (a)

 

$5,944

 

__________ 

(a) Includes current portion of $1,555 for operating leases.

 

6. Intangible Assets

 

The following tables set forth the costs, accumulated amortization and net book value of the Company’s separately identifiable intangible assets as of December 31, 2019 and September 30, 2019 and estimated future amortization expense.

  

 

 

December 31, 2019

 

 

September 30, 2019

 

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Book Value

 

 

Cost

 

 

Accumulated Amortization

 

 

Net Book Value

 

Customer relationships

 

$29,070

 

 

$11,038

 

 

$18,032

 

 

$29,070

 

 

$10,321

 

 

$18,749

 

Trade name

 

 

8,329

 

 

 

4,314

 

 

 

4,015

 

 

 

8,329

 

 

 

3,958

 

 

 

4,371

 

Non-Compete agreements

 

 

4,331

 

 

 

3,895

 

 

 

436

 

 

 

4,331

 

 

 

3,570

 

 

 

761

 

Total

 

$41,730

 

 

$19,247

 

 

$22,483

 

 

$41,730

 

 

$17,849

 

 

$23,881

 

Estimated Amortization Expense

 

 

 

Remaining Fiscal 2020

 

$3,640

 

Fiscal 2021

 

 

4,088

 

Fiscal 2022

 

 

3,469

 

Fiscal 2023

 

 

2,879

 

Fiscal 2024

 

 

2,879

 

Thereafter

 

 

5,528

 

 

 

$22,483

 

 
 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

The trade names are amortized on a straight – line basis over the estimated useful life of between five and ten years. Intangible assets that represent customer relationships are amortized on the basis of estimated future undiscounted cash flows or using the straight – line basis over estimated remaining useful lives of five to ten years. Non-compete agreements are amortized based on a straight-line basis over the term of the respective noncompete agreements, which are typically five years in duration.

 

The intangible assets amortization expense was $1,398 and $1,396 for each three-month periods ended December 31, 2019 and 2018, respectively.

 

7. Revolving Credit Facility and Term Loan

 

Revolving Credit, Term Loan and Security Agreement

 

After the close of business on March 31, 2017, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank National Association ("PNC"), and certain investment funds managed by MGG Investment Group LP ("MGG"). Initial funds were distributed on April 3, 2017 (the “Closing Date”) to repay existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.

 

Under the terms of the Credit Agreement, the Company may borrow up to $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.

 

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

 

Fixed Charge Coverage Ratio (“FCCR”). This is the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Fixed Charges, each of which is as defined in the Credit Agreement, as amended. The minimum FCCR requirements are: 1.00 to 1.00 for the trailing two fiscal quarters ending March 31, 2019; 0.60 to 1.00 for the trailing three fiscal quarters ending June 30, 2019; 0.70 to 1.00 for the trailing four fiscal quarters ending September 30, 2019; 0.75 to 1.00 for the trailing four fiscal quarters ending December 31, 2019; 0.85 to 1.00 for the trailing four fiscal quarters ending March 31, 2020; and 1.00 to 1.00 for each of the trailing four fiscal quarterly periods ending thereafter.

 

Minimum EBITDA. Minimum EBITDA, which is determined on a consolidated basis and measured on a trailing four (4) quarter basis, as defined in the Credit Agreement, as amended, are: $13,000 for the fiscal quarter ending March 31, 2019; $10,000 for the fiscal quarter ending June 30, 2019; $10,000 for the fiscal quarter ending September 30, 2019; $10,000 for the fiscal quarter ending December 31, 2019; and $11,000 for the fiscal quarter ending March 31, 2020, and each fiscal quarter thereafter.

 

Senior Leverage Ratio. This is the ratio of maximum Indebtedness, which is substantially comprised of consolidated senior indebtedness, to consolidated EBITDA, each of which is as defined under the Credit Agreement, as amended. The Senior Leverage Ratios are: 4.25 to 1.00 for the fiscal quarter ending March 31, 2019; 5.50 to 1.00 for the fiscal quarter ending June 30, 2019; 5.50 to 1.00 for the fiscal quarter ending September 30, 2019; 5.60 to 1.00 for the fiscal quarter ending December 31, 2019; and 5.00 to 1.00 for the fiscal quarter ended March 31, 2020, and for each fiscal quarter thereafter.

 

In addition to these financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.

 

On August 31, 2017, the Company entered into a Consent to Extension of Waiver to the Credit Agreement (the “Waiver”). Under the terms of the Waiver, the Lenders and the Agents agreed to extend to October 3, 2017 the deadline by which the Company must deliver updated financial information satisfactory to the lenders in order to amend the financial covenant levels, execute a fully executed amendment to the Credit Agreement, and any other terms and conditions required by the lenders in their sole discretion. Additionally, the Company paid a $700 consent fee to the Agents for the pro rata benefit of the lenders, in connection with the Waiver. On August 31, 2017, an additional waiver to the Credit Agreement (“Additional Waiver”), pursuant to which the due date for the Company to deliver the subordination agreement and an amended subordinated note, executed by one of the Company’s subordinated lenders was extended from August 31, 2017 to October 3, 2017, also was obtained.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

On October 2, 2017, the Company, the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC, and certain investment funds managed by MGG (collectively the (“Lenders”) entered into a First Amendment and Waiver (the “First Amendment”) to the Credit Agreement by and among the Loan Parties, and the Lenders. The First Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans. The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtedness under the Credit Agreement.

 

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

 

On November 14, 2017, the Company and its subsidiaries, as Borrowers, entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000 in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The Company also agreed to certain amendments to the loan covenants required to be maintained.

 

On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018. On August 10, 2018, the Company and its subsidiaries, as Borrowers, entered into a third amendment and waiver (the “Third Amendment and Waiver”) to the Credit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.

 

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

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

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 its 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.

 

Revolving Credit Facility

 

As of December 31, 2019, the Company had $14,307 in outstanding borrowings under the Revolving Credit Facility, of which approximately $11,989 was at an interest rate of approximately 16.8%, approximately $1,434 was at an interest rate of approximately 16.72%, and the remainder was at an interest rate of approximately 18.75%.

 

As of December 31, 2019, the Company had approximately $100 available on the Revolving Credit facility.

 

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

 

Term Loan

 

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

  

 

 

December 31,

2019

 

 

September 30,

2019

 

 

 

 

 

 

 

 

Term loan

 

$41,405

 

 

$41,905

 

Unamortized debt discount

 

 

(1,007)

 

 

(1,208)

Term loan, net of discount

 

 

40,398

 

 

 

40,697

 

Short term portion of term loan, net of discounts

 

 

1,194

 

 

 

4,668

 

Long term portion of term loan, net of discounts

 

$39,204

 

 

$36,029

 

 

The Term Loan is payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on June 30, 2021. Principal payments are required as follows: fiscal 2020 – $1,500 and fiscal 2021 - $39,905.

 

The Company also is required to prepay the outstanding amount of the Term Loan in an amount equal to the Specified Excess Cash Flow Amount (as defined in the agreement) for the immediately preceding fiscal year, commencing with the fiscal year ending September 30, 2019. The Company does not owe any amount as of December 31, 2019.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Interest

 

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

 

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

 

As of December 31, 2019, the Company had $41,405 in outstanding borrowings under the Term Loan Facility, of which approximately $35,254 was at an interest of approximately 16.8%, and approximately $6,151 was at an interest of approximately 16.79%.

 

Loan Fees and Amortization

 

In connection with the Credit Agreement, the Company agreed to pay an original discount fee of approximately $900, a closing fee for the term loan of approximately $100, a finder’s fee of approximately $1,600 and a closing fee for the revolving credit facility of approximately $500. The total of the loan fees paid is approximately $3,100. The Company has reported these direct loan-related costs in the form of a discount and reduction of the term loan in the accompanying consolidated balance sheets and is amortizing them as interest expense over the term of the loans. For the three-month periods ended December 31, 2019 and 2018, the Company amortized approximately $201 of debt discount each.

 

8. Accrued Compensation

 

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

 

9. Subordinated Debt – Convertible and Non-Convertible

 

The Company had outstanding balances under its Convertible and Non-Convertible Subordinated Debt agreements, as follows:

 

 

 

December 31,

 

 

September 30,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

10% Convertible Subordinated Note

 

$4,185

 

 

$4,185

 

Subordinated Promissory Note

 

 

1,000

 

 

 

1,000

 

9.5% Convertible Subordinated Note

 

 

12,500

 

 

 

12,500

 

8% Convertible Subordinated Notes, net of discount, due to related parties

 

 

1,347

 

 

 

1,269

 

Total subordinated debt, convertible and non-convertible

 

 

19,032

 

 

 

18,954

 

Short term portion of subordinated debt, convertible and non-convertible

 

 

-

 

 

 

(1,000)

Long term portion of subordinated debt, convertible and non-convertible

 

$19,032

 

 

$17,954

 

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

10% Convertible Subordinated Note

 

The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,200, and which was scheduled to become due on October 2, 2018.

 

On April 3, 2017, the Company and JAX Legacy amended and restated the Subordinated Note in its entirety in the form of a 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,200. The 10% Note matures on October 3, 2021 (the “Maturity Date”). The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. All or any portion of the 10% Note may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon. The Company agreed to issue to the investors in JAX Legacy approximately 77,775 shares of common stock, at a value of approximately $400 which was expensed as loss on the extinguishment of debt during the year ended September 30, 2017.

 

Total discount recorded at issuance of the original JAX Legacy subordinated note payable was approximately $600. Total amortization of debt discount for the year ended September 30, 2017 was approximately $100, and the remaining $300 was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.

 

The Company issued shares of common stock to JAX Legacy related to the conversion of the subordinated note and the interest approximately 149 shares and 40 shares for the three-month periods ended December 31, 2019 and 2018, respectively. The stock was valued at approximately $105 for the three-month periods ended December 31, 2019 and 2018.

 

On January 3, 2020 the Company issued 262 shares of common stock to Jax Legacy related to interest of $105 on the 10% Note.

 

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.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

9.5% Convertible Subordinated Notes

 

On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the acquisition of SNIH an aggregate of $12,500 in the form of 9.5% Convertible Subordinated Notes (the “9.5% Notes”). The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”). The 9.5% Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and is payable quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company under its Credit Agreement (see Note 6) pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.

 

The Company issued shares of common stock to the SNI Sellers related to interest of $297 on the 9.5% Notes approximately 403 shares and 131 shares for the three-month periods ended December 31, 2019 and 2018, respectively.

 

On January 3, 2020 the Company issued approximately 706 shares of common stock to the SNI Sellers related to interest of $297 on 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. 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.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

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 for the three-month periods ended December 31, 2019 and 2018, respectively.

 

The BCF for the 8% Notes is recorded as a discount to their carrying value and is equal to the fair value of the conversion feature. The discount will be amortized as interest over the period from the date of issuance to maturity. The total BCF recorded was approximately $841. For the three-month periods ended December 31, 2019 and 2018, the Company amortized approximately $78 and $0 of debt discount, respectively.

 

Future minimum payments of all subordinated debt will total approximately as follows: fiscal 2020 - $0, fiscal 2021- $0.0 and fiscal 2022 - $19,700.

 

10. Equity

 

During three-month period 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, respectively (See Note 11). 

 

Restricted Stock

 

The Company did not grant or exercise restricted stock during the three-month periods ended December 31, 2019 and 2018. Stock-based compensation expense attributable to restricted stock was $757 and $203 during the three-month periods ended December 31, 2019 and 2018, respectively. As of December 31, 2019, there was approximately $827 of unrecognized compensation expense related to restricted stock outstanding. On November 23, 2019, 500 shares of restricted common stock held by the Company’s former president became fully vested upon his passing.

 

A summary of restricted stock activity is presented as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Weighted

Average

Fair

Value ($)

 

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

 

 

1,500

 

 

 

1.76

 

Granted

 

 

-

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

Vested

 

 

(500)

 

 

2.21

 

Non-vested restricted stock outstanding as of December 31, 2019

 

 

1,000

 

 

 

1.53

 

 

 

 

 

 

 

 

 

 

Vested restricted stock outstanding as of December 31, 2019

 

 

500

 

 

 

2.21

 

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Warrants

 

No warrants were granted or exercised during the three-month period ended December 31, 2019.

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price Per

Share ($)

 

 

Weighted

Average

Remaining

Contractual

Life

 

 

Total

Intrinsic

Value of

Warrants ($)

 

Warrants outstanding as of September 30, 2019

 

 

439

 

 

 

4.09

 

 

 

1.39

 

 

 

-

 

Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Exercised/Forfeited

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Warrants outstanding as of December 31, 2019

 

 

439

 

 

 

4.09

 

 

 

1.14

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants exercisable as of September 30, 2019

 

 

439

 

 

 

4.09

 

 

 

1.39

 

 

 

-

 

Warrants exercisable as of December 31, 2019

 

 

439

 

 

 

4.09

 

 

 

1.14

 

 

 

-

 

 

Stock Options

 

As of December 31, 2019, there were stock options outstanding under the Company’s Second Amended and Restated 1997 Stock Option Plan and the Company’s Amended and Restated 2013 Incentive Stock Plan. Both plans were approved by the shareholders. The plans granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees. Vesting periods are established by the Compensation Committee at the time of grant. All stock options outstanding as of December 31, 2019 and September 30, 2019 were non-statutory stock options, had exercise prices equal to the market price on the date of grant, and had expiration dates ten years from the date of grant.

 

Stock-based compensation expense attributable to stock options and warrants was $(160) and $378 for the three-month periods ended December 31, 2019 and 2018, respectively. As of December 31, 2019, there was approximately $1,238 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.96 years.

 

A summary of stock option activity is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Number

of Shares

 

 

Weighted

Average

Exercise

Price per

share ($)

 

 

Weighted

Average

Remaining Contractual

Life (Years)

 

 

Total

Intrinsic

Value of

Options ($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding as of September 30, 2019

 

 

1,734

 

 

 

3.22

 

 

 

7.84

 

 

 

-

 

Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Forfeited/Expired

 

 

(202)

 

 

2.79

 

 

 

 

 

 

 

 

 

Options outstanding as of December 31, 2019

 

 

1,532

 

 

 

3.27

 

 

 

7.80

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercisable as of September 30, 2019

 

 

720

 

 

 

4.24

 

 

 

6.50

 

 

 

-

 

Exercisable as of December 31, 2019

 

 

794

 

 

 

4.00

 

 

 

7.18

 

 

 

-

 

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

11. Mezzanine Equity

 

Series A Convertible Preferred Stock

 

On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series A Preferred Stock with the State of Illinois. (the Resolution Establishing Series”). Pursuant to the Resolution Establishing Series, the Company designated 160 shares of its authorized preferred stock as Series A Preferred Stock. There are no shares issued and outstanding under this designation.

 

Series B Convertible Preferred Stock

 

On April 3, 2017, the Company issued an aggregate of approximately 5,900 shares of no-par value, Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the SNIH acquisition. The no par value, Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all "Junior Securities" (including the Company's Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

 

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 no par value, 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.

 

Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the no par value, 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 no par value, Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the no par value, Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting).

 

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

 

None of the shares of no par value, Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act. Each of the SNIH Stockholders who received shares of Series B Preferred Stock is an accredited investor. The issuance of the shares of no par value, Series B Preferred Stock to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.

 

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

 

During three-month period 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.

 

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 shares of its authorized preferred stock as “Series C 8% Cumulative Convertible Preferred Stock”, without par value. The Series C Preferred Stock has a Liquidation Value equal to $1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock (“Series B Preferred Stock”) and senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. Holders of shares of Series C Preferred Stock are entitled to receive an annual non-cash (“PIK”) dividend of 8% of the Liquidation Value per share. Such dividend shall be payable quarterly on June 30, September 30, December 31 and March 31 of each year commencing on June 30, 2019, in preference to any dividend paid on or declared and set aside for the Series B Preferred Stock or any Junior Securities and shall be paid-in-kind in additional shares of Series C Preferred Stock. Except as set forth in the Resolution Establishing Series or as may be required by Illinois law, the holders of the Series C Preferred Stock have no voting rights.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of Series C Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks superior to the Series C Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting). Each share of Series C Preferred Stock shall be convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $1.00 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.

 

The Company issued approximately 42 shares and 0 shares of Series C Preferred Stock to Investors related to interest of $42 and $0 on the 8% Notes during three-month periods ending December 31, 2019 and 2018, respectively.

 

12. Income Tax

 

The following table presents the provision for income taxes and our effective tax rate for the three-month periods ended December 31, 2019 and 2018:

 

 

 

Three Months Ended,
December 31,

 

 

 

2019

 

 

2018

 

Provision for Income Taxes

 

 

171

 

 

 

523

 

Effective Tax Rate

 

 

-4

%

 

 

-17

%

 

The effective income tax rate on operations is based upon the estimated income for the year, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

 

Our effective tax rate for the three months 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.

 

13. Commitments and Contingencies

 

Litigation and Claims

 

The Company and its subsidiaries are involved in various litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position.

 

 
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GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts in thousands except per share data, unless otherwise stated)

 

14. Segment Data

 

The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, accounting, finance, office, engineering, and medical, and (c) temporary light industrial staffing. These Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Some selling, general and administrative expenses are not fully allocated among light industrial services and professional staffing services.

 

Unallocated corporate expenses primarily include, certain executive compensation expenses and salaries, certain administrative salaries, corporate legal expenses, stock compensation expenses, consulting expenses, audit fees, corporate rent and facility costs, board fees, acquisition, integration and restructuring expenses, and interest expense.

 

 

 

Three Months Ended

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

Industrial Staffing Services

 

 

 

 

 

 

Industrial services revenue

 

$5,655

 

 

$5,620

 

Industrial services gross margin

 

 

15.6%

 

 

13.9

%

Operating income

 

$281

 

 

$255

 

Depreciation & amortization

 

$69

 

 

$64

 

 

 

 

 

 

 

 

 

 

Professional Staffing Services

 

 

 

 

 

 

 

 

Permanent placement revenue

 

$4,479

 

 

$4,529

 

Placement services gross margin

 

 

100%

 

 

100

%

Professional services revenue

 

$27,423

 

 

$28,394

 

Professional services gross margin

 

 

26.4%

 

 

26.1

%

Operating income

 

$1,562

 

 

$2,219

 

Depreciation and amortization

 

$1,408

 

 

$1,411

 

 

 

 

 

 

 

 

 

 

Unallocated Expenses

 

 

 

 

 

 

 

 

Corporate administrative expenses

 

$952

 

 

$609

 

Corporate facility expenses

 

 

90

 

 

 

106

 

Stock Compensation expense

 

 

597

 

 

 

581

 

Acquisition, integration and restructuring expenses

 

 

377

 

 

 

1,159

 

Total unallocated expenses

 

$2,016

 

 

$2,455

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

Total revenue

 

$37,557

 

 

$38,543

 

Operating (loss) income

 

 

(173)

 

 

19

 

Depreciation and amortization

 

$1,477

 

 

$1,475

 

 

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

 

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,

2019

 

 

December 31,

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

 

(in thousands)

 

December 31,

2019

 

 

December 31,

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk. 

 

Not applicable.

 

Item 4. Controls and Procedures. 

 

Disclosure Controls and Procedures

 

As of December 31, 2019, the Company's management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act"). Based on that evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2019.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company's three-month period ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION.

 

Item 1. Legal Proceedings. 

 

None.

 

Item 1A. Risk Factors. 

 

Not required.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 

 

Not required.

 

Item 3.  Defaults Upon Senior Securities. 

 

None.

 

Item 4.  Mine Safety Disclosures. 

 

Not Applicable.

 

Item 5.  Other Information. 

 

None.

 

 
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Item 6. Exhibits 

 

The following exhibits are filed as a part of Part I of this report:

 

No.

 

Description of Exhibit

 

 

 

10.01*

 

Six Amendment, dated as of February 12, 2020, to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017, as amended, by and among GEE Group, Inc., the other borrower entities and guarantor entities named therein, and certain investment funds managed by MGG Investment Group LP.

 

 

 

10.02*

 

First Amendment to the Subordinated Promissory Note dated as of February 8, 2020 by and among GEE Group, Inc., Enoch S. Timothy and Dorothy Timothy.

 

31.01*

 

Certifications of the principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

31.02*

 

Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

 

32.01**

 

Certifications of the principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code.

 

32.02**

 

Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code.

 

101.INS

 

Instance Document

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

 

**

Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

GEE GROUP INC.

 

(Registrant)

 

 

 

Date: February 13, 2020

By:

/s/ Derek Dewan

 

 

Derek Dewan

 

 

Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

 

By:

/s/ Kim Thorpe

 

 

Kim Thorpe

 

 

Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

 
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