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 March 31,For the quarterly period ended June 30, 2017

OR

o	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)

184 Shuman Blvd., Suite 420, Naperville, IL 60563

(Address of principal executive offices)

(630) 954-0400

(Registrant’s telephone number, including area code)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

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	¨	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. o

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

The number of shares outstanding of the registrant’s common stock as of May 15,August 11, 2017 was 9,878,892.

GEE GROUP INC.

Form 10-Q

For the Quarter Ended March 31,June 30, 2017

INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			3
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		4
	Condensed Consolidated Balance Sheets at March 31,June 30, 2017 and September 30, 2016		4
	Condensed Consolidated Statements of Operations for the three and sixnine months ended March 31,June 30, 2017 and March 31,June 30, 2016		5
	Condensed Consolidated Statements of Shareholders’ Equity for the sixnine months ended March 31,June 30, 2017 and year ended September 30, 2016		6
	Condensed Consolidated Statements of Cash Flows for the sixnine months ended March 31,June 30, 2017 and March 31,June 30, 2016		7
	Notes to Condensed Consolidated Financial Statements	8-25	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		33
Item 4.	Controls and Procedures		33

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 1A.	Risk Factors		34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3.	Defaults Upon Senior Securities		34
Item 4.	Mine Safety Disclosures		34
Item 5.	Other Information		34
Item 6.	Exhibits		35
	Signatures		36

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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, 2016, 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.

GEE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In Thousands)

GEE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands)
		June 30,				September 30,
		2017				2016
ASSETS
CURRENT ASSETS:
Cash		$	2,854			$	2,528
Accounts receivable, less allowances (June - $1,915 and September - $191)			24,040				11,569
Other current assets			2,539				1,500
Total current assets			29,433				15,597
Property and equipment, net			872				611
Other long-term assets			320				34
Goodwill			73,051				18,590
Intangible assets, net			37,286				11,094
TOTAL ASSETS		$	140,962			$	45,926
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving credit facility		$	8,142			$	7,073
Acquisition deposit for working capital guarantee			1,500				-
Accrued interest			1,700				54
Accounts payable			1,408				2,224
Accrued compensation			8,074				3,116
Other current liabilities			1,199				692
Short-term portion of subordinated debt			1,291				1,285
Short-term portion of term-loan, net of discount			4,554				-
Contingent consideration			-				1,750
Total current liabilities			27,868				16,194
Deferred rent			331				162
Deferred taxes			4,316				-
Term-loan, net of debt discounts			41,314				-
Subordinated debt			1,000				4,981
Subordinated convertible debt			16,685				-
Other long-term liabilities			40				56
Total long-term liabilities			63,686				5,199
Commitments and contingencies
Mezzanine Equity
Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - 5,926
Preferred series A stock, 160 authorized; issued and outstanding - none			-				-
Preferred series B stock; 5,950 authorized; issued and outstanding - 5,926
Liquidation value of the preferred series B stock is approximately $28,800			29,333				-
SHAREHOLDERS' EQUITY
Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 9,879
shares at June 30, 2017 and 9,379 shares at September 30, 2016, respectively			-				-
Additional paid in capital			39,255				37,615
Accumulated deficit			(19,180	)			(13,082	)
Total shareholders' equity			20,075				24,533
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	140,962			$	45,926

		March 31, 2017				September 30, 2016
ASSETS
CURRENT ASSETS:
Cash		$	1,562			$	2,528
Accounts receivable, less allowances (March and September - $191)			13,099				11,569
Other current assets			1,492				1,500
Total current assets			16,153				15,597
Property and equipment, net			527				611
Other long-term assets			34				34
Goodwill			18,590				18,590
Intangible assets, net			10,356				11,094
TOTAL ASSETS		$	45,660			$	45,926
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt		$	7,142			$	7,127
Accounts payable			1,263				2,224
Accrued compensation			3,281				3,116
Other current liabilities			1,240				692
Short-term portion of subordinated debt			1,357				1,285
Contingent consideration			480				1,750
Total current liabilities			14,763				16,194
Deferred rent			149				162
Subordinated debt			4,863				4,981
Other long-term liabilities			45				56
Total long-term liabilities			5,057				5,199
Commitments and contingencies
SHAREHOLDERS' EQUITY
Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none
Preferred series A stock, 160 authorized; issued and outstanding - none
Preferred series B stock, mandatorily convertible - 5,950 authorized; issued and outstanding - none			-				-
Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 9,879
shares at March 31, 2017 and 9,379 shares at September 30, 2016, respectively			-				-
Additional paid in capital			39,000				37,615
Accumulated deficit			(13,160	)			(13,082	)
Total shareholders' equity			25,840				24,533
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$	45,660			$	45,926

 

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, Except Per Share Data)

		Three Months Ended March 31,								Six Months Ended March 31,
		2017				2016				2017				2016
NET REVENUES:
Contract staffing services		$	20,090			$	19,607			$	39,946			$	35,606
Direct hire placement services			1,459				2,059				2,609				3,685
NET REVENUES			21,549				21,666				42,555				39,291
Cost of contract services			15,894				15,630				31,457				27,967
GROSS PROFIT			5,655				6,036				11,098				11,324
Selling, general and administrative expenses			4,811				5,143				9,306				9,651
Acquisition, integration and restructuring expenses			77				122				100				568
Depreciation expense			71				76				150				142
Amortization of intangible assets			369				435				738				772
INCOME FROM OPERATIONS			327				260				804				191
Change in contingent consideration			-				156				-				156
Interest expense			(392	)			(409	)			(752	)			(734	)
INCOME (LOSS) BEFORE INCOME TAX PROVISION			(65	)			7				52				(387	)
Provision for income tax			(64	)			-				(130	)			-
NET INCOME (LOSS)		$	(129	)		$	7			$	(78	)		$	(387	)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(129	)		$	7			$	(78	)		$	(387	)
BASIC INCOME (LOSS) PER SHARE		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.04	)
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC			9,384				9,256				9,382				9,252
DILUTED INCOME (LOSS) PER SHARE		$	(0.01	)		$	0.00			$	(0.01	)		$	(0.04	)
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED			9,384				9,779				9,382				9,252

GEE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)
		Three Months Ended June 30,								Nine Months Ended June 30,
		2017				2016				2017				2016
NET REVENUES:
Contract staffing services		$	40,100			$	20,311			$	80,046			$	55,917
Direct hire placement services			5,969				1,671				8,578				5,356
NET REVENUES			46,069				21,982				88,624				61,273
Cost of contract services			29,015				15,708				60,472				43,675
GROSS PROFIT			17,054				6,274				28,152				17,598
Selling, general and administrative expenses			15,546				5,205				24,852				14,856
Acquisition, integration and restructuring expenses			2,206				29				2,306				597
Depreciation expense			178				103				328				245
Amortization of intangible assets			1,570				415				2,308				1,187
INCOME (LOSS) FROM OPERATIONS			(2,446	)			522				(1,642	)			713
Change in contingent consideration			-				425				-				581
Loss on extinguishment of debt			(994	)			-				(994	)			-
Interest expense			(2,378	)			(418	)			(3,130	)			(1,152	)
INCOME (LOSS) BEFORE INCOME TAX PROVISION			(5,818	)			529				(5,766	)			142
Provision for income tax			(202	)			(1	)			(332	)			(1	)
NET INCOME (LOSS)		$	(6,020	)		$	528			$	(6,098	)		$	141
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(6,020	)		$	528			$	(6,098	)		$	141
BASIC INCOME (LOSS) PER SHARE		$	(0.61	)		$	0.06			$	(0.64	)		$	0.02
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC			9,879				9,373				9,546				9,292
DILUTED INCOME (LOSS) PER SHARE		$	(0.61	)		$	0.05			$	(0.64	)		$	0.01
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED			9,879				9,857				9,546				9,866

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 Stock				Additional Paid				Preferred Stock				Preferred				Accumulated				Total Shareholders'
		Shares				In Capital				Shares				Stock				Deficit				Equity
Balance, September 30, 2015			8,833			$	33,492				-			$	-			$	(14,255	)		$	19,237
Shares issued for JAX Legacy debt			95				589				-				-				-				589
Issuance of common stock for contingent consideration related to the acquisition of Access Data Consulting Corporation			123				544				-				-				-				544
Amortization of stock option expense			-				793				-				-				-				793
Issuance of common stock for acquisition of Access Data Consulting Corporation			328				2,197				-				-				-				2,197
Net income			-				-				-				-				1,173				1,173
Balance, September 30, 2016			9,379			$	37,615				-			$	-			$	(13,082	)		$	24,533
Amortization of stock option expense			-				385				-				-				-				385
Exercise of stock warrants			500				1,000				-				-				-				1,000
Net loss			-				-				-				-				(78	)			(78	)
Balance, March 31, 2017			9,879			$	39,000				-			$	-			$	(13,160	)		$	25,840

 

		Common Stock				Additional Paid				Accumulated				Total Shareholders'
		Shares				In Capital				Deficit				Equity
Balance, September 30, 2015			8,833			$	33,492			$	(14,255	)		$	19,237
Shares issued for JAX Legacy debt			95				589				-				589
Issuance of common stock for contingent consideration related to the acquisition of Access Data Consulting Corporation			123				544				-				544
Amortization of stock option expense			-				793				-				793
Issuance of common stock for acquisition of Access Data Consulting Corporation			328				2,197				-				2,197
Net income			-				-				1,173				1,173
Balance, September 30, 2016			9,379			$	37,615			$	(13,082	)		$	24,533
Amortization of stock option expense			-				640				-				640
Exercise of stock warrants			500				1,000				-				1,000
Net loss			-				-				(6,098	)			(6,098	)
Balance, June 30, 2017			9,879			$	39,255			$	(19,180	)		$	20,075

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)

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Unaudited)

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, industrial and physician assistant staffing and placement services in and near several major U.SU.S. cities. We specialize in the placement of information technology, engineering, medical and accounting professionals for direct hire and contract staffing for our clients, and provide temporary staffing services for our commercial clients. Through our acquisition of Scribe Solutions in April 2015, we also offer data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics.

2. Significant Accounting Policies and Estimates

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 footnotes 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 and six-month periodnine-month periods ended March 31,June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending September 30, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2016 as filed on December 22, 2016.

Liquidity 

The Company has experienced significant losses and negative cash flows from operations in the past. Management has implemented a strategy which included cost reduction efforts, consolidation of certain back office activities to gain efficiencies as well as identifying strategic acquisitions, financed primarily through the issuance of preferred and common stock and convertible debt, to improve the overall profitability and cash flows of the Company.

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”). All funds were distributed on April 3, 2017 (the “Closing Date”).

Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000 consisting of a four-year term loan in the principal amount of $48,750,000 and revolving loans in a maximum amount up to the lesser of (i) $25,000,000 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 mature on March 31, 2021.

The loans under the Credit Agreement will bear interest at rates at the Company’s option of LIBOR rate plus 10% or PNC’s floating base rate plus 9%. At June 30, 2017, the interest rate of the Revolving Credit Facility was 13.25% and there was approximately $9,900,000 available. At June 30, 2017, approximately $6,000,000 of the Revolving Credit facility was fixed for a three-month period at an interest of approximately 11.3%. Although the Company was not in compliance with the financial covenants of this loan, management was able to obtain a waiver for this period and expect to regain compliance before the end of the next quarter. Management believes that the future cash flow from operations, cash on hand and the availability under the Revolving Credit Facility will provide sufficient liquidity for the next 12 months.

Principles of Consolidation

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

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Estimates and Assumptions

Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. 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. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, deferred income tax valuation allowances, accounts receivable allowances, accounting for acquisitions, and evaluation of impairment. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.

Revenue Recognition

Direct hire placement service revenues are recognized when applicants accept offers of employment, less a provision for estimated losses due to applicants not remaining employed for the Company's guarantee period. Contract staffing service revenues are recognized when services are rendered.

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 $125,000$1,515,000 and $218,000$374,000 for the six-monthnine-month period ended March 31,June 30, 2017 and 2016 respectively. Expected future falloffs and refunds are reflected in the consolidated balance sheet as a reduction of accounts receivable and were approximately $1,454,000 and $60,000 as of March 31,June 30, 2017 and September 30, 2016, respectively.

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Cost of Contract Staffing Services

The cost of contract services includes the wages and the related payroll taxes and employee benefits of the Company's 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. At March 31,June 30, 2017 and September 30, 2016, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. 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 small accounts receivable allowance. Based on management's review of accounts receivable, an allowance for doubtful accounts of approximately $191,000$1,915,000 is considered necessary as of March 31,June 30, 2017 and $191,000 at September 30, 2016, respectively. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The reserve includes the $1,454,000 and $60,000 reserve for permanent placement falloffs considered necessary as of March 31,June 30, 2017 and September 30, 2016, respectively.

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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 six-monthsnine-months ended March 31,June 30, 2017 and 2016.

Goodwill

Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions. The Company assesses goodwill for impairment at least annually. Testing goodwill for impairment allows the Company to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value.

Fair Value Measurement

The Company follows the provisions of the accounting standard 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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The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on 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 carrying value of the Company's long-term liabilities represents their fair value based on level 3 inputs, as further discussed in note 8.notes 7 and 9. The Company's goodwill and other intangible assets are measured at fair value on a non-recurring basis using level 3 inputs.

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 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. There were approximately 1,038,60210,111,000 and 619,7003,743,000 of common stock equivalents excluded for the sixthree and nine months ended March 31,June 30, 2017 (which include common share equivalents of preferred stock, convertible debt, warrants and 2016, respectively,options) because their effect is anti-dilutive.anti-dilutive, respectively. Common share equivalents of approximately 523,000575,000 and 484,000 were included in the computation of diluted earnings per share for the nine months and three months ended March 31, 2016.June 30, 2016, respectively. There were approximately 1,053,421392,000 and 428,000 of common stock equivalents excluded for the three and nine months ended March 31, 2017,June 30, 2016, respectively because their effect is anti-dilutive.

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Advertising Expenses

Most of the Company's advertising expense budget is used to support the Company's business. Most of the advertisements are in print or internet media, with expenses recorded as they are incurred. For the three and sixnine months ended March 31,June 30, 2017 and 2016, included in selling, general and administrative expenses was advertising expense totaling approximately $216,000$588,000 and $504,000,$1,092,000, and approximately $251,000$233,000 and $549,000,$781,000, respectively.

Intangible Assets

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 records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during the sixnine months ended March 31,June 30, 2017 and 2016.

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Stock-Based Compensation

The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, 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 over the requisite service period 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 applicable accounting principles. Such options are valued using the Black-Scholes option pricing model.

Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.

Income Taxes

We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.

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Due to the private sale of shares of common stock to LEED HR during fiscal 2012 and the resulting change in control, the Company may be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.

Due to the issuance of convertible preferred shares related to the Scribe acquisition,and SNI acquisitions, the Company may be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.

Reclassification

Certain reclassifications have been made to the financial statements as of and for the three and sixnine months ended March 31,June 30, 2016 to conform to the current year presentation. There is no effect on assets, liabilities, equity or net income.

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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, engineering, medical, and accounting, and (c) temporary light industrial staffing. These distinct services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not completely separately allocated among light industrial services 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 these operating segments.

3. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that provides companies with a single model for use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific revenue guidance. The new guidance requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The guidance permits companies to either apply the requirements retrospectively to all prior periods presented, or apply the requirements in the year of adoption, through a cumulative adjustment. The amended guidance also requires additional quantitative and qualitative disclosures. In March 2016, amended guidance was issued to clarify implementation guidance on principal versus agent consideration. In April 2016, an amendment provided clarifications on determining whether a promised license provides a customer with a right to use or a right to access an entity’s intellectual property. In May 2016, an amendment provided narrow scope improvements and practical expedients to reduce the potential diversity, cost and complexity of applying new revenue standard. These amendments, as well as the original guidance, are all effective for annual and interim periods beginning after December 15, 2017. The new standard will be effective for the Company beginning January 1, 2018 and the Company intends to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.

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In November 2015, the FASB issued authoritative guidance which changes how deferred taxes are classified on a company's balance sheet. The new guidance eliminates the current requirement for companies to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent. The new guidance is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). If applied prospectively, entities are required to include a statement that prior periods were not retrospectively adjusted. If applied retrospectively, entities are also required to include quantitative information about the effects of the change on prior periods. Except for balance sheet classification requirements related to deferred tax assets and liabilities, the Company does not expect this guidance to have an effect on its financial statements. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. And the ability to elect to recognize forfeitures as they occur rather than estimating then at the time of grant. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2016-09 on its financial statements and related disclosures.

In February 2016, the FASB issued authoritative guidance which changes financial reporting as it relates to leasing transactions. Under the new guidance, lessees will be required to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted for all entities upon issuance. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.

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In August 2016, the FASB issued authoritative guidance designed to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including: i) contingent consideration payments made after a business combination; ii) proceeds from the settlement of insurance claims; and iii) proceeds from the settlement of corporate-owned life insurance policies. The new guidance is effective for the Company for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period. The Company believes the adoption of this guidance will not have a material impact on its financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard will be effective for the Company in the first quarter of 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is permittedpermitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

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

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4. Property and Equipment

Property and equipment, net consisted of the following:

Leasehold improvements are amortized over the term of the lease.

Depreciation expense for the three and sixnine month periods ended March 31,June 30, 2017 and 2016 was approximately $71,000$178,000 and $150,000,$328,000, and approximately $76,000$103,000 and $142,000,$245,000, respectively.

5. Goodwill and Intangible Assets

Goodwill

The following table sets forth activity in goodwill from September 2015 through June 30, 2017. See Note 11 for details of acquisitions that occurred during the years ended September 30, 2016 and the nine months ended June 30, 2017. (in thousands)