UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended December 31, 2017

OR

Commission File Number 1-05707

184 Shuman Blvd.,7751 Belfort Parkway, Suite 420, Naperville, IL 60563150, 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:

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.

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 February 14, 201810, 2020 was 10,444,56714,056,997.

GEE GROUP INC.

Form 10-Q

For the Quarter Ended December 31, 20172019

INDEX

PART I. FINANCIAL INFORMATION

PART II. OTHER INFORMATION

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 reportAnnual Report on Form 10-K for the year ended September 30, 2017,2019, 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-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.STATEMENTS (unaudited)

GEE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In Thousands)

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)

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 SHAREHOLDERS' EQUITYOPERATIONS (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 CASH FLOWSSHAREHOLDERS’ 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.

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.

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(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 industrial and physician assistantindustrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, accounting, finance, office, engineering, medical and accountingmedical 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 footnotesnotes 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, 20172019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotesnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20172019 as filed on December 28, 2017.23, 2019.

Liquidity

The Company has experienced significant net losses for its most recent fiscal years ended September 30, 2019 and negative cash flows from2018, 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, inreduce costs and improve profitability and liquidity, and position the past. ManagementCompany for future growth. In addition, management has implemented a strategy which includes cost reduction efforts, consolidation of certain back office activitiessuccessfully negotiated waivers to gain efficienciesthe Credit Agreement (as defined below) with the Company’s current senior lenders, when needed, and six amendments to date as well as identifying strategic acquisitions, financed primarily through the issuance of preferred and common stock and convertible debt,management works to improve the overall profitabilityCompany’s operations and cash flows of the Company.

After the close of business on March 31, 2017,to refinance and restructure its current debt and equity capitalization. However, there can be no assurance that the Company andwill not fall into non-compliance with 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”).

Underloan covenants in the terms of the Credit Agreement,future or that its lenders will continue to provide waivers or amendments to the Company may borrow up to $73,750,000 consisting of a four-year term loan in the principal amountevent of $48,750,000future 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 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 ofrestructure the Company’s eligible accounts receivable, as describeddebt 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 Credit Agreement. The loans under the Credit Agreement mature on March 31, 2021.

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 “Amendment”) to the Revolving Credit, Term Loan and Security Agreement dated as of March 31, 2017 (the “Credit Agreement”) by and among the Loan Parties and the Lenders.

The 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 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.

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On November 14, 2017, the Company and its subsidiaries, as Borrowers, each subsidiary of the Company listed as a “Guarantor” on the signature pages thereto (together with each other Person joined thereto as a guarantor from time to time, collectively, the “Guarantors”, and each a “Guarantor”, and together with the Borrowers, collectively, the “Loan Parties” and each a “Loan Party”), certain lenders which now are or which thereafter become a party thereto that make Revolving Advances thereunder (together with their respective successors and assigns, collectively, the “Revolving Lenders” and each a “Revolving Lender”), the lenders which now are or which thereafter become a party thereto that made or acquire an interest in the Term Loans (together with their respective successors and assigns, collectively, the “Term Loan Lenders” and each a “Term Loan Lender”, and together with the Revolving Lenders, collectively, the “Lenders” and each a “Lender”), MGG, as administrative agent for the Lenders (together with its successors and assigns, in such capacity, the “Administrative Agent”), as collateral agent for the Lenders (together with its successors and assigns, in such capacity, the “Collateral Agent”), and as term loan agent (together with its successors and assigns, in such capacity, the “Term Loan Agent” and together with the Administrative Agent and the Collateral Agent, each an “Agent” and, collectively, the “Agents”), 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, $10,000,000 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 Borrowers also agreed to amend (i) the applicable minimum Fixed Charge Coverage Ratios required to be maintained by the Company as set forth in the Second Amendment, (ii) the minimum EBITDA required to be maintained by the Company, as set forth in the Second Amendment and (iii) the maximum senior leverage ratios required to be maintained by the Company, as set forth in the Second Amendment. The Borrowers agreed to pay to the Administrative Agent for the account of the Revolving Lenders, an amendment fee of $364,140, in connection with their execution and delivery of the Second Amendment. Such fee is payable on the earlier of (a) June 30, 2018 and (b) the first date on which all of the Obligations (as defined in the Credit Agreement) are paid in full in cash and the Total Commitment (as defined in the Credit Agreement) of the Lenders is terminated.

The loans under the credit agreement for the period commencing on the Amendment No. 2 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 9.75% for Advances consisting of Domestic Rate Loans and 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 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.

The loans under the credit agreement for the period commencing on June 1, 2018 up to and including August 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 4.00 to 1.00, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, an amount equal to 9.75% for Advances consisting of Domestic Rate Loans and 10.75% for Advances consisting of LIBOR Rate Loans.

The loans under the credit agreement for the period 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, an amount equal to 14.00% for Advances consisting of Domestic Rate Loans and 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, an amount equal to 9.00% for Advances consisting of Domestic Rate Loans and 10.00% for Advances consisting of LIBOR Rate Loans.

At December 31, 2017, approximately $8,000,000 of the Revolving Credit facility was fixed for a three-month period at an interest of approximately 11.3%.

At December 31, 2017, the Company had approximately $5,800,000 available on the Revolving Credit facility.

The Company was in compliance with the newly amended financial covenants of the loan for December 31, 2017, the first measurement date under the Amendment.

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future.

As of December 31, 2017,2019, the Company had cash of approximately $3,480,000,$2,139, which was an increasea decrease of approximately $695,000$1,916 from approximately $2,785,000$4,055 at September 30, 2017.2019. Working capital at December 31, 20172019 was approximately $630,000,$10,252, as compared to working capital of approximately $1,588,000$8,534 for September 30, 2017. The net loss for the three months ended December 31, 2017, was approximately $1,791,000.

At December 31, 2017 there was approximately $999,000 of accrued interest that was payable with the Company’s common stock.

On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the accrued interest of approximately $105,000 on the subordinated note.

On January 4, 2018, the Company issued approximately 280,602 shares of common stock to the SNI Sellers related to accrued interest of approximately $894,000 on the subordinated note.

Management believes that the future cash flow from operations and the availability under the Revolving Credit Facility will have sufficient liquidity for the next 12 months.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 and Assumptions

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. If differences were to occur

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(Amounts 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, accounting for derivatives 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.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 applicantsemployment candidates accept offers of employment, less a provision for estimated losses duecredits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company's guarantee period. Contractperiod (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 whenin amounts for which the Company has a right to invoice, as the services are rendered.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 $625,000$266 and $90,000$701 for the three-month periodperiods ended December 31, 20172019 and 20162018, 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 were approximately $911,000 aslocation of December 31, 2017our customer and $997,000 as of September 30, 2017, respectively.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, and employee benefits and certain other employee-related costs of the Company'sCompany’s contract service employees, while they work on contract assignments.

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Cash and Cash Equivalents

Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. AtAs of December 31, 20172019 and September 30, 2017,2019, 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'scustomer’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'sCompany’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'smanagement’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. Based on management's reviewAs of accounts receivable, anDecember 31, 2019, and September 30, 2019, the allowance for doubtful accounts of approximately $1,659,000 is considered necessary as of December 31, 2017was $242 and $1,712,000 at September 30, 2017,$515, respectively. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The reserveallowance also includes the $911,000 reserve for permanent placement falloffs considered necessaryof $137 and $197 as of December 31, 20172019 and $997,000 as of September 30, 2017, respectively.2019.

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-monthsthree-month periods ended December 31, 20172019 and 2016.2018.

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

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 allowsIn 2019, the Company to first assess qualitative factors to determine whetherearly adopted ASU 2017-04, Intangibles — Goodwill and Other (Topic 350), Simplifying the existenceTest for Goodwill Impairment, which simplifies the subsequent measurement of eventsgoodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or circumstances leads to a determination that itinterim goodwill impairment testing is more likely than not thatperformed by comparing the fair value of a reporting unit is less thanwith 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 becharge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to the extentexceed the carrying value of goodwill exceeds its implied fair value.goodwill.

Fair Value Measurement

The Company follows the provisions of the accounting standardFinancial 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"“exit price”) in an orderly transaction between market participants at the measurement date.

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 onof 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'sCompany’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:

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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 carryingfair value disclosures of the Company’s long-term liabilities represents theirapproximates the fair value based on level 3 inputs.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 levelLevel 3 inputs, as discussed in Note 5.6.

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 share equivalents of approximately 546,118 was included in the computation of diluted earnings per share for the three months ended December 31, 2016. There were approximately 10,274,000 and 475,100 of common stock equivalents, which are excluded for the three months ended December 31, 2017 and December 31, 2016, respectively because their effect is anti-dilutive.anti-dilutive, were approximately 14,001 and 11,761 for the three-month periods ended December 31, 2019 and 2018, respectively.

Advertising Expenses

MostThe Company expenses the costs of the Company's advertising expense budget is used to support the Company's business. Most of the advertisements are in print orand internet media with expenses recordedadvertising and promotions as they are incurred. For the three months ended December 31, 2017incurred and 2016, includedreports these costs in selling, general and administrative expenses wasexpenses. For the three-month periods ended December 31, 2019 and 2018, advertising expense totaling approximately $599,000totaled $484 and $288,000,$572, respectively.

Intangible Assets

CustomerSeparately 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 recordsrecognizes 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 impairmentimpairments of long-lived assets used in operations during the three monthsthree-month periods ended December 31, 20172019 and 2016.2018.

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 applicable accounting principles,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”("Black-Scholes") pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee’semployee's requisite service period (generally the vesting period of the equity grant). The Company’sCompany'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.

 

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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.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.

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, related to unrecognized tax benefits on theif any, with income tax expense line in the accompanying consolidated statement of operations. As of December 31, 20172019, and September 30, 2017,2019, no material accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.

Reclassification

Certain reclassificationsamounts in the prior period financial statements have been made to the financial statements as of and for the three months ended December 31, 2016reclassified to conform to the presentation of the current year presentation. There isperiod financial statements. These reclassifications had no effect on assets, liabilities, equity orthe previously reported net income.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. These distinctThe Company’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not completely separatelyentirely allocated among light industrial servicesIndustrial and professional staffing services.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 thesethe Company’s operating segments.

3. RecentNew Accounting Pronouncements

On May 28, 2014, the FinancialRecently Adopted Accounting Standards Board (“FASB”) issuedPronouncements

Lease Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.. In August 2015,February 2016, the FASB issued ASU No. 2015-14, Revenue from Contracts2016-02, 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 Customers (Topic 606): Deferral of the Effective Date,earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which delayedincludes 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 from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adoptdid not have a material effect on the standard asCompany’s results of operations. As of the original effective date. This ASU permitstransition date, the use of either the retrospective or cumulative effect transition method. The new standard is effective for the Company beginning October 1, 2018. The Company is in the process of evaluating the impact of adoption of this guidance on its financial statements.ROU asset and total lease liability (current and long-term) were $5,900 and $6,341, respectively.

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 November 2015,June 2018, the FASB issued authoritative guidanceASU 2018-07, Compensation-Stock Compensation (“ASC 718”), which changes how deferred taxes are classified onsimplifies the accounting for nonemployee share-based payment transactions. The amendments specify that Topic 718 applies to all share-based payment transactions in which a company’s balance sheet. The new guidance eliminates the current requirement for companiesgrantor acquires goods or services to present deferred tax liabilities and assets as current and noncurrentbe used or consumed in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent.grantor’s own operations by issuing share-based payment awards. The new guidanceupdate is effective for annual reporting periods beginning after December 15, 2016. Early2018, including interim periods within those reporting periods, with early adoption is permitted for all entities(but no sooner than the adoption of Topic 606). The Company adopted the new guidance 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.October 1, 2019. The adoption of this guidance had nodid not have a material effectimpact on the Company as of December 31, 2017.Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements Not Yet Adopted

Current Expected Credit Losses Model. In FebruaryJune 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 changes financial reporting as it relates to leasing transactions. Under theis a new guidance, lessees will be required to recognize a lease liability, measuredimpairment model based on a discounted basis; and a right-of-use asset, for the lease term.expected losses. The new guidance is effective for interim and annual and interimreporting 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.

In March 2016, the FASB issued 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. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this guidance had no effect on the Company as of December 31, 2017.

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.2022. The Company is currently evaluating the impact of adopting this ASUthe new guidance on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwillstatements 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 permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.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.

 

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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.

		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 the three- monththree-month periods ended December 31, 20172019 and 20162018 was approximately $97,000 and $79,000, respectively.$79 each.

5. GoodwillLeases

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.

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

Goodwill

The following table setstables set forth activity in goodwill from September 2016 through December 31, 2017. See Note 12 for detailsthe costs, accumulated amortization and net book value of acquisitions that occurred during the year ended September 30, 2017. (in thousands)

During the three months ended December 31, 2017 and the year ended September 30, 2017 the Company did not record any impairment of goodwill.

Intangible Assets

AsCompany’s separately identifiable intangible assets as of December 31, 20172019 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