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 |
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) |
Illinois | 36-6097429 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
7751 Belfort Parkway, Suite 150, Jacksonville, FL 32256
(Address of principal executive offices)
(630) 954-0400
(Registrant’s telephone number, including area code)
184 Shuman Blvd., Suite 420, Naperville, IL 60563
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, no par value | JOB | NYSE MKT |
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 August 9, 2018May 8, 2019 was 10,783,457.12,054,571.
Form 10-Q
For the Quarter Ended June 30, 2018March 31, 2019
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Condensed Consolidated Balance Sheets |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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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, 2017,2018, 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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Item 1. Financial Statements.PART I -FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (In Thousands) June 30, September 30, 2018 2017 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances (June - $897 and September - $1,712) Other current assets Total current assets Property and equipment, net Other long-term assets Goodwill Intangible assets, net TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Revolving credit facility Acquisition deposit for working capital guarantee Accrued interest Accounts payable Accrued compensation Other current liabilities Short-term portion of subordinated debt Short-term portion of term-note, net of discount Total current liabilities Deferred rent Deferred taxes Term-loan, net of debt discounts Subordinated debt Subordinated convertible debt Other long-term liabilities Total long-term liabilities Commitments and contingencies MEZZANINE EQUITY Preferred stock; no par value Preferred series A stock - 160 authorized; issued and outstanding - none Preferred series B stock - 5,950 authorized; issued and outstanding - 5,816 and 5,926 at June 30, 2018 and September 30, 2017, respectively Liquidation value of the preferred series B stock is approximately $28,265 and $28,800 at June 30, 2018 and September 30, 2017, respectively SHAREHOLDERS' EQUITY Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 10,609 and 9,879 at June 30, 2018 and September 30, 2017, respectively Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,637 $ 2,785 21,166 23,178 1,853 3,014 25,656 28,977 850 914 400 282 76,593 76,593 30,862 35,049 $ 134,361 $ 141,815 $ 10,200 $ 7,904 1,500 1,500 1,510 2,175 2,030 3,243 5,188 7,394 385 515 419 1,225 6,551 3,433 27,783 27,389 400 334 1,248 958 37,364 42,018 1,000 1,000 16,685 16,685 18 35 56,715 61,030 - - 28,788 29,333 - - 43,085 39,517 (22,010 ) (15,454 ) 21,075 24,063 $ 134,361 $ 141,815
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(In Thousands)
March 31, 2019 September 30, 2018 ASSETS CURRENT ASSETS: Cash Accounts receivable, less allowances ($302 and $302, respectively) Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Other long-term assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable Acquisition deposit for working capital guarantee Accrued compensation Short-term portion of subordinated debt Short-term portion of term loan, net of discount Other current liabilities Subordinated debt Total current liabilities Deferred taxes Revolving credit facility Term loan, net of discounts Subordinated debt Subordinated convertible debt Other long-term liabilities Total long-term liabilities 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 5,816 at March 31, 2019 and September 30, 2018, respectively; liquidation value of the preferred series B stock is approximately $27,050 and $28,255 at March 31, 2019 and September 30, 2018, respectively SHAREHOLDERS' EQUITY Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 11,721 shares at March 31, 2019 and 10,783 shares at September 30, 2018, respectively Additional paid in capital Accumulated deficit Total shareholders' equity TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,761 $ 3,213 19,992 20,755 2,382 2,266 25,135 26,234 843 891 76,593 76,593 26,674 29,467 354 416 $ 129,599 $ 133,601 $ 3,897 $ 2,523 883 883 4,836 5,212 - 106 1,194 2,331 2,174 2,064 1,000 - 13,984 13,119 648 146 13,147 11,925 40,100 40,253 - 1,000 16,685 16,685 553 583 71,133 70,592 - - 27,551 28,788 - - 47,291 44,120 (30,360 ) (23,018 ) 16,931 21,102 $ 129,599 $ 133,601
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In Thousands, Except Per Share Data) Three Months Ended Nine Months Ended June 30, June 30, 2018 2017 2018 2017 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services GROSS PROFIT Selling, general and administrative expenses Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets INCOME (LOSS) FROM OPERATIONS Loss on extinguishment of debt Interest expense LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE Income tax benefit (expense) NET LOSS NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS NET LOSS PER SHARE - BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED $ 33,879 $ 40,100 $ 107,860 $ 80,046 6,388 5,969 17,496 8,578 40,267 46,069 125,356 88,624 25,546 29,015 81,235 60,472 14,721 17,054 44,121 28,152 12,111 15,546 35,839 24,852 514 2,206 1,712 2,306 92 178 287 328 1,409 1,570 4,199 2,308 595 (2,446 ) 2,084 (1,642 ) - 994 - 994 2,889 2,378 8,381 3,130 (2,294 ) (5,818 ) (6,297 ) (5,766 ) 407 (202 ) (259 ) (332 ) $ (1,887 ) $ (6,020 ) $ (6,556 ) $ (6,098 ) $ (1,887 ) $ (6,020 ) $ (6,556 ) $ (6,098 ) $ (0.18 ) $ (0.61 ) $ (0.64 ) $ (0.64 ) 10,526 9,879 10,177 9,546
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended March 31, March 31, 2019 2018 2019 2018 NET REVENUES: Contract staffing services Direct hire placement services NET REVENUES Cost of contract services GROSS PROFIT Selling, general and administrative expenses (including noncash stock-based compensation expense of $549 and $336, and $1,130 and $629 respectively) Acquisition, integration and restructuring expenses Depreciation expense Amortization of intangible assets INCOME (LOSS) FROM OPERATIONS Interest expense LOSS BEFORE INCOME TAX PROVISION Provision for income tax NET LOSS NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS BASIC AND DILUTED LOSS PER SHARE WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED $ 31,827 $ 34,520 $ 65,840 $ 73,981 4,350 5,337 8,880 11,108 36,177 39,857 74,720 85,089 24,459 26,231 50,271 55,689 11,718 13,626 24,449 29,400 10,449 11,938 20,528 24,704 592 181 1,751 221 101 98 180 195 1,397 1,394 2,793 2,790 (821 ) 15 (803 ) 1,490 (3,085 ) (2,199 ) (6,033 ) (5,493 ) (3,906 ) (2,184 ) (6,836 ) (4,003 ) 16 (694 ) (506 ) (666 ) $ (3,890 ) $ (2,878 ) $ (7,342 ) $ (4,669 ) $ (3,890 ) $ (2,878 ) $ (7,342 ) $ (4,669 ) $ (0.34 ) $ (0.28 ) $ (0.65 ) $ (0.46 ) 11,414 10,426 11,047 10,165
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) (In Thousands) Total Common Stock Additional Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2016 Amortization of stock option expense Exercise of stock warrants Net loss �� Balance, September 30, 2017 Amortization of stock option expense Issuance of stock for interest Conversion of preferred B stock to common stock Net loss Balance, June 30, 2018 9,379 $ 37,615 $ (13,082 ) $ 24,533 - 902 - 902 500 1,000 - 1,000 - - (2,372 ) (2,372 ) 9,879 39,517 (15,454 ) 24,063 - 1,028 - 1,028 620 1,995 - 1,995 110 545 - 545 - - (6,556 ) (6,556 ) 10,609 $ 43,085 $ (22,010 ) $ 21,075
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)
(In Thousands)
Common Additional Total Stock Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2018 Share-based compensation Issuance of stock for interest Conversion of preferred Series B to common stock Net loss Balance, December 31, 2018 Share-based compensation Issuance of stock for interest Net loss Balance, March 31, 2019 10,783 $ 44,120 $ (23,018 ) $ 21,102 - 581 - 581 171 401 - 401 250 1,238 - 1,238 - - (3,452 ) (3,452 ) 11,204 $ 46,340 $ (26,470 ) $ 19,870 - 549 - 549 517 402 - 402 - - (3,890 ) (3,890 ) 11,721 $ 47,291 $ (30,360 ) $ 16,931
Common Additional Total Stock Paid Accumulated Shareholders' Shares In Capital Deficit Equity Balance, September 30, 2017 Share-based compensation Issuance of stock for interest Net loss Balance, December 31, 2017 Share-based compensation Issuance of stock for interest Conversion of preferred Series B to common stock Net loss Balance, March 31, 2018 9,879 $ 39,517 $ (15,454 ) $ 24,063 - 293 - 293 136 595 - 595 - - (1,791 ) (1,791 ) 10,015 $ 40,405 $ (17,245 ) $ 23,160 - 336 - 336 321 999 - 999 110 545 - 545 - - (2,878 ) (2,878 ) 10,446 $ 42,285 $ (20,123 ) $ 22,162
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In Thousands) Nine Months Ended June 30, 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization Stock option expense Provision for doubtful accounts Deferred income taxes Amortization of debt discount and non cash extinguishment of debt Changes in operating assets and liabilities: Accounts receivable Acquisition deposit for working capital guarantee Accrued interest Accounts payable Accrued compensation Other current items, net Long-term liabilities Net cash provided by (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Acquisition payments, net of cash acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Payments on the debt related to acquisitions Payments on term loan Proceeds from exercise of stock warrants Payments on capital lease Net proceeds from short-term debt Net proceeds from revolving credit Net cash provided by (used in) financing activities Net change in cash Cash at beginning of period Cash at end of period SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest Non-cash financing activities Stock paid for interest on subordinated note Stock paid for fees in connection with subordinated note Conversion of preferred to common Issuance of preferred stock for acquisition Issuance of note payable for acquisition Issuance of stock for extinguishment of debt $ (6,556 ) $ (6,098 ) 4,486 2,636 1,028 640 (815 ) 1,724 290 - 576 1,006 2,827 (3,458 ) - 1,500 1,332 1,700 (1,213 ) (1,006 ) (2,206 ) 251 1,016 278 (67 ) (16 ) 698 (843 ) (224 ) (79 ) - (25,256 ) (224 ) (25,335 ) (806 ) (1,219 ) (2,112 ) (19,951 ) - 1,000 - (17 ) - 45,676 2,296 1,015 (622 ) 26,504 (148 ) 326 2,785 2,528 $ 2,637 $ 2,854 $ 6,435 $ 1,122 $ 1,610 $ - $ 385 $ - $ 545 $ - $ - $ 29,333 $ - $ 12,500 $ - $ 385
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In Thousands)
Six Months Ended March 31, 2019 2018 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss Adjustments to reconcile net loss to cash provided by operating activities: Depreciation and amortization Stock Compensation expense Provision for doubtful accounts Deferred income taxes Amortization of debt discount Interest expense paid with common stock Changes in operating assets and liabilities: Accounts receivable Accrued interest Accounts payable Accrued compensation Other current items, net Long-term items, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Payment on term loan Payments on subordinated debt Payments on capital lease Net proceeds from revolving credit Net cash provided by (used in) financing activities Net change in cash Cash at beginning of period Cash at end of period SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest Cash paid for taxes Non-cash financing activities Conversion of Series B Convertible Preferred Stock to common stock Issuance of stock for extinguishment of debt Acquisition of equipment with capital lease $ (7,342 ) $ (4,669 ) 2,973 2,985 1,130 629 - (602 ) 502 668 398 384 803 1,209 763 3,182 - (23 ) 1,374 (607 ) (376 ) (2,968 ) (12 ) (170 ) 14 154 227 172 (83 ) (199 ) (83 ) (199 ) (1,687 ) (1,312 ) (107 ) (504 ) (24 ) - 1,222 1,996 (596 ) 180 (452 ) 153 3,213 2,785 $ 2,761 $ 2,938 $ 4,848 $ 4,547 $ 95 $ - $ 1,238 $ 545 $ - $ 385 $ 49 $ -
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)
(Dollar amounts in thousands except per share data, unless otherwise stated)
1. Description of Business
GEE Group Inc. (the “Company”, “us”, “our” or “we”) was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893. We are a provider of permanent and temporary professional and industrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, engineering, medical and accounting 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
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine-monthsix-month period ended June 30, 2018March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.2019. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20172018 as filed on December 28, 2017.27, 2018.
Liquidity
The Company experienced significant net losses for its most recent fiscal year ended September 30, 2017,2018, and for the first nine-months of 2018. Management has implemented a strategy which includes cost reductions and 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.
As explained more fully in Note 6, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) after the close of business onsix-month period ended March 31, 2017. 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.
On April 3, 2017, the Company borrowed $48,750,000 from term loans and borrowed approximately $7,476,316 from the Revolving Credit Facility for a total of $56,226,316, which was used by the Company to repay existing indebtedness, to pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of all of the outstanding stock of SNI Holdco Inc. pursuant to the Merger Agreement, as more fully disclosed in Note 11. Amounts borrowed under the Credit Agreement also may be used by the Company to partially fund capital expenditures, provide for on-going working capital needs and general corporate needs, and to fund future acquisitions subject to certain customary conditions of the lenders.2019.
As of June 30, 2018,March 31, 2019, the Company had cash of approximately $2,637,000,$2.8 million, which was a decrease of approximately $148,000$0.5 million from approximately $2,785,000$3.2 million at September 30, 2017. Negative working2018. Working capital at June 30, 2018March 31, 2019 was approximately $2,127,000,$11.2 million, as compared to working capital of approximately $1,588,000$13.1 million for September 30, 2017. The net loss for the nine months ended June 30, 2018, was approximately $6,556,000.2018.
Management believeshas taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
Based on its current projections, management expects that the Company can meet its future cash flowdebt service requirements and comply with its financial covenants and other commitments, as amended, and will continue to seek reasonable assistance from operationsthe Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no assurance that the availability underCompany will not fall into non-compliance with its loan covenants or that its Lenders will continue to provide waivers or amendments to the Revolving Credit Facility will provide sufficient liquidity forCompany in the next 12 months.
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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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 occur in a subsequent period, the Company will recognize those differences when they become 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.
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 ranges 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 $ 1,562,000$0.6 million and $1,515,000$0.4 million, and $1.3 million and $0.9 million for the nine-month periodsthree and six-month period ended June 30,March 31, 2019 and 2018, and 2017, 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 13 for disaggregated revenues by segment.
Payment terms in our contracts vary by the type and were approximately $342,000 aslocation of June 30, 2018our 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.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At June 30, 2018As of March 31, 2019 and September 30, 2017,2018, there were no cash equivalents. In some cases, theThe Company maintains cash on depositdeposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. The Company maintains its deposit accounts in a large, national, financial institution and, hasat times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Accounts Receivable
The Company extends credit to its various customers based on evaluation of theirthe customer’s financial condition and ability to pay the Company in accordance with establishedthe 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 servicesservice 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, aneach of March 31, 2019, and September 30, 2018 allowance for doubtful accounts of approximately $897,000 is considered necessary as of June 30, 2018 and $1,712,000 at September 30, 2017, respectively.was $0.3 million. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The reserveallowance also includes the $342,000 reserve for permanent placement falloffs considered necessaryof $0.2 million as of June 30, 2018March 31, 2019 and $997,000 as of September 30, 2017, respectively.
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. Leasehold improvements are amortized over the shorter of the lease or useful life. 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 nine-monthssix-month period ended June 30, 2018March 31, 2019 and 2017.2018.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions. The Company assessesevaluates 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 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.
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:
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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carrying valuesfair value disclosures of the Company’s long-term liabilities are believed to approximate theirapproximates the fair value based on level 3 inputs.current yield for debt instruments with similar terms. The fair value of the Company’s long-lived assets, including goodwill and other intangible assets are subject to measurementmeasured at fair value on a non-recurring basis using levelLevel 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 orand 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. There were approximately 10,513,000 and 10,902,000 of common
Common stock equivalents, which are excluded because their effect is anti-dilutive, were 11.7 million and 10.3 million each for the three and nine monthssix-month period ended June 30,March 31, 2019 and 2018, respectively, (which include common share equivalents of preferred stock, convertible debt, warrants and options) because their effect is anti-dilutive. There were approximately 10,111,000 and 3,743,000 of common stock equivalents excluded for the three and nine months ended June 30, 2017, respectively, (which include common share equivalents of preferred stock, convertible debt, warrants and options) because their effect is anti-dilutive.respectively.
Advertising Expenses
Most ofThe Company expenses the Company's advertising expense budget is used to support the Company's business consistingcosts of print and internet media with expenses recordedadvertising and promotions as they are incurred and are includedreports these costs in selling, general and administrative expenses in the unaudited condensed consolidated financial statements. Advertising expense was approximately $572,000 and $588,000, forexpenses. For the three monthsand six-month periods ended June 30,March 31, 2019 and 2018, advertising expense totaled $0.6 and 2017, respectively,$1.1 million, and approximately $1,737,000$0.6 and $1,092,000, for the nine months ended June 30, 2018 and 2017,$1.2 million, respectively.
Intangible Assets
IntangibleSeparately identifiable intangible assets includeheld in the form of customer lists, non-compete agreements, customer relationships, non-competemanagement agreements and trade names and were recorded at their estimated fair value at the date of acquisition. The trade namesacquisition and are amortized on a straight-line basis over thetheir estimated useful life of five and ten years. Customer relationships are amortized based on the future undiscounted cash flows or straight-line basis over estimated remaining useful lives of fiveranging from two to ten years. Non-compete agreements are amortized based on ayears using both accelerated and straight-line basis of three and five years, which is the term of the non-compete agreement.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 recordrecognize any impairmentimpairments during the nine monthssix-month period ended June 30, 2018March 31, 2019 and 2017.2018.
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, and restricted stock, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options or restricted 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.
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 9 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.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
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.
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 June 30, 2018March 31, 2019 and September 30, 2017,2018, no material accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
Reclassification
Certain reclassifications have been made to the financial statements as of and for the three and nine months ended June 30, 2017 to conform to the current year presentation. There is no effect on assets, liabilities, equity or net income.
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 entirely 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. Recent Accounting Pronouncements
On May 28, 2014, the Financial Accounting Standards Board (“FASB”)FASB issued 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 mostsuperseded the existing revenue recognition guidance inunder U.S. GAAP when it becomes effective.GAAP. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard from January 1, 2017 to January 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. This ASU permits the use of either the retrospective or cumulative effect transition method. The new standard is effective forwas adopted by the Company beginningunder the modified retrospective approach effective October 1, 2018. The Company is in the process of evaluating the impact of adoption of this guidancestandard did not have a material impact on its financial statements.
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 itsCompany’s financial statements.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
In February 2016 FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The amendment in the ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. ASU 2016-02 requires a modified retrospective approach for all eases existing at, or entered into after, the date of initial application, with an option to elect to use certain transition relief. In July 2018, the FASB issued ASU No. 2018-10, “Codification of Improvement to Topic 842 Leases.” The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. Also, in July 2018, the FASB issued ASU No. 2018-11 “Leases (Topic 842): Targeted Improvement” which now allows entities the option of recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings in the year of adoption while continuing to present all prior period under previous lease accounting guidance. The effective date and transition requirement for these two ASUs are the same as the effective date and transition requirement as ASU 2016-02. While the Company continues to assess all potential impacts of the standard, the Company currently believes the most significant impact relates to recording right-to-use assets and related operating lease liabilities on the condensed consolidated balance sheets.
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 permitted. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting (Topic 718)” that expands the scope to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements to nonemployee awards except for certain exemptions specified in the amendment. The guidance is effective for fiscal years beginning after December 15, 2018, including interim reporting periods within that fiscal year. Early adoption is permitted. The Company does not anticipate the adoption of ASU 2018-07 will have a material impact on the Company's financial condition or results of operations.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements.
4. Property and Equipment
Property and equipment, net consisted of the following:
(in thousands) |
| June 30, 2018 |
|
| September 30, 2017 |
| ||||||||||
|
| March 31, 2019 |
|
| September 30, 2018 |
| ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Computer software |
| $ | 1,447 |
| $ | 1,447 |
|
| $ | 1,447 |
| $ | 1,447 |
| ||
Office equipment, furniture and fixtures and leasehold improvements |
|
| 3,241 |
|
|
| 3,243 |
|
|
| 3,470 |
|
|
| 3,356 |
|
Total property and equipment, at cost |
| 4,688 |
| 4,690 |
|
| 4,917 |
| 4,803 |
| ||||||
Accumulated depreciation and amortization |
|
| (3,838 | ) |
|
| (3,776 | ) |
|
| (4,074 | ) |
|
| (3,912 | ) |
Property and equipment, net |
| $ | 850 |
|
| $ | 914 |
|
| $ | 843 |
|
| $ | 891 |
|
Depreciation expense for three monthsand six-month periods ended June 30,March 31, 2019 and 2018 and 2017 was approximately $92,000$0.1 and $178,000, respectively, and for the nine months ended June 30, 2018 and 2017 was approximately $287,000 and $328,000, respectively.$0.2 million each.
5. Goodwill and Intangible Assets
Goodwill
The following table setstables set forth activity in goodwill from September 2016 through June 30, 2018. See Note 11 for detailsthe costs, accumulated amortization and net book value of acquisitions that occurred during the year endedCompany’s separately identifiable intangible assets as of March 31, 2019 and September 30, 2017.
(in thousands) Goodwill as of September 30, 2016 Acquisition of SNI Companies Goodwill as of September 30, 2017 Goodwill as of June 30, 2018 $ 18,590 58,003 $ 76,593 $ 76,593
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During the nine months ended June 30, 2018 and the year ended September 30, 2017 the Company did not record any impairment of goodwill.GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
March 31, 2019 September 30, 2018 (in thousands) Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships Trade name Non-Compete agreements Total Estimated Amortization Expense Remainder of Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter Intangible Assets$ 29,070 $ 8,890 $ 20,180 $ 29,070 $ 7,459 $ 21,611 8,329 3,248 5,081 8,329 2,537 5,792 4,331 2,918 1,413 4,331 2,267 2,064 $ 41,730 $ 15,056 $ 26,674 $ 41,730 $ 12,263 $ 29,467 $ 2,794 5,038 4,088 3,469 2,879 8,406 $ 26,674
June 30,2018 September 30,2017 (in thousands) Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships Trade name Non-Compete agreements Total $ 29,070 $ 6,744 $ 22,326 $ 29,070 $ 4,601 $ 24,469 8,329 2,182 6,147 8,329 1,115 7,214 4,331 1,942 2,389 4,331 965 3,366 $ 41,730 $ 10,868 $ 30,862 $ 41,730 $ 6,681 $ 35,049
Estimated Amortization Expense |
| |||
Fiscal 2018 |
| $ | 1,396 |
|
Fiscal 2019 |
|
| 5,586 |
|
Fiscal 2020 |
|
| 5,038 |
|
Fiscal 2021 |
|
| 4,088 |
|
Fiscal 2022 |
|
| 3,469 |
|
Thereafter |
|
| 11,285 |
|
|
| $ | 30,862 |
|
The intangible assets amortization expense attributable to the amortization of identifiable intangible assets was approximately $1,409,000$1.4 million and $1,570,000$2.8 million for theeach three monthsand six-month periods ended June 30,March 31, 2019 and 2018, and 2017, respectively, and was approximately $4,199,000 and $2,308,000 for the nine months ended June 30, 2018 and 2017, respectivelyrespectively.
6. Revolving Credit Facility and Term Loan
Revolving Credit, Term Loan and Security Agreement
After the close of business on March 31, 2017, the Company and its subsidiaries, as borrowers, entered into a Revolving Credit, Term Loan and Security Agreement (the “Credit Agreement”) with PNC Bank National Association ("PNC"), and certain investment funds managed by MGG.MGG Investment Group LP ("MGG"). Initial funds were distributed on April 3, 2017 (the “Closing Date”) to repay existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000$73.8 million consisting of a four-year term loan in the principal amount of $48,750,000$48.8 million and revolving loans in a maximum amount up to the lesser of (i) $25,000,000$25.0 million 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 Credit Agreement, as amended, contains certain financial covenants, which are required to be maintained as of the last day of each fiscal quarter, including the following:
Fixed Charge Coverage Ratio (“FCCR”). This is the ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) to Fixed Charges, each of which is as defined in the Credit Agreement, as amended. The minimum FCCR requirements are: 1.00 to 1.00 for the trailing two fiscal quarters ending March 31, 2019; 0.60 to 1.00 for the trailing three fiscal quarters ending June 30, 2019; 0.70 to 1.00 for the trailing four fiscal quarters ending September 30, 2019; 0.75 to 1.00 for the trailing four fiscal quarters ending December 31, 2019; 0.85 to 1.00 for the trailing four fiscal quarters ending March 31, 2020; and 1.00 to 1.00 for each of the trailing four fiscal quarterly periods ending thereafter.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Minimum EBITDA. Minimum EBITDA, which is determined on a consolidated basis and measured on a trailing four (4) quarter basis, as defined in the Credit Agreement, as amended, are: $13 million for the fiscal quarter ending March 31, 2019; $10 million for the fiscal quarter ending June 30, 2019; $10.0 million for the fiscal quarter ending September 30, 2019; $10.0 million for the fiscal quarter ending December 31, 2019; and $11.0 million for the fiscal quarter ending March 31, 2020, and each fiscal quarter thereafter.
Senior Leverage Ratio. This is the ratio of maximum Indebtedness, which is substantially comprised of consolidated senior indebtedness, to consolidated EBITDA, each of which is as defined under the Credit Agreement, as amended. The Senior Leverage Ratios are: 4.25 to 1.00 for the fiscal quarter ending March 31, 2019; 5.50 to 1.00 for the fiscal quarter ending June 30, 2019; 5.50 to 1.00 for the fiscal quarter ending September 30, 2019; 5.60 to 1.00 for the fiscal quarter ending December 31, 2019; and 5.00 to 1.00 for the fiscal quarter ended March 31, 2020, and for each fiscal quarter thereafter.
In addition to these financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.
On August 31, 2017, the Company entered into a Consent to Extension of Waiver to the Credit Agreement (the “Waiver”). Under the terms of the Waiver, the Lenders and the Agents agreed to extend to October 3, 2017 the deadline by which the Company must deliver updated financial information satisfactory to the lenders in order to amend the financial covenant levels, execute a fully executed amendment to the Credit Agreement, and any other terms and conditions required by the lenders in their sole discretion. Additionally, the Company paid a $73,500$0.07 million consent fee to the Agents for the pro rata benefit of the lenders, in connection with the Waiver.
On August 31, 2017, an additional waiver to the Credit Agreement (“Additional Waiver”), pursuant to which the due date for the Company to deliver the subordination agreement and an amended subordinated note, executed by one of the Company’s subordinated lenders was extended from August 31, 2017 to October 3, 2017, also was also obtained.
On October 2, 2017, the Company, the other borrower entities and guarantor entities named therein (collectively, the “Loan Parties”), PNC, and certain investment funds managed by MGG (collectively the (“Lenders”) entered into a First Amendment and Waiver (the “First Amendment”) to the 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 First Amendment, which was effective as of October 2, 2017, modified the required principal repayment schedule with respect to the Term Loans. The Amendment also modified the ability of the Loan Parties to repay or make other payments with respect to certain other loans that are subordinated in right of payment to the indebtedness under the Credit Agreement.
Pursuant to the First Amendment the Lenders also waived any Event of Default arising out of the Loan Parties’ failure to deliver, on or before October 3, 2017, the materials satisfying the requirements of clauses (i) and (ii) of Section 5 of the Waiver to Revolving Credit, Term Loan and Security Agreement, dated as of August 14, 2017, as amended.
On November 14, 2017, the Company and its subsidiaries, as Borrowers, entered into a second amendment (the “Second Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”).
Pursuant to the Second Amendment the Borrowers agreed, among other things, to use commercially reasonable efforts to prepay, or cause to be prepaid, $10,000,000$10.0 million in principal amount of Advances (as defined in the Credit Agreement) outstanding, which amount shall be applied to prepay the Term Loans in accordance with the applicable terms of the Credit Agreement. Any prepayment to the term loan is contingent upon a future financing, non-operational cash flow or excess cash flow as defined in the agreement. The Company also agreed to certain amendments to the loan covenants required to be maintained.
The Credit Agreement contains certain financial covenants applicable to both the Revolving Credit Facility and Term Loan. In addition to these financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or at March 31, 2018, previously. On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018.
On August 10, 2018, the Company and its subsidiaries, as Borrowers, entered into a third amendment and third waiver (the “Third Amendment and Waiver”) to the Credit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders have agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.
Although
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
On December 27, 2018, the Company and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fourth Amendment and Waiver, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of September 30, 2018, and amendments to the financial covenants and to the remaining scheduled principal payments.
On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments.
Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
Based on its current projections, management expects that the Company can meet its future debt service requirements and comply with its financial covenants and other commitments, as amended, and will continue to seek reasonable assistance from the Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no absolute assurance management believes that the conditions that led to the inability to achieve compliance with the financial covenants of the Credit Agreement at June 30, 2018 and March 31, 2018 are improving and continues to forecast results that indicate that the Company will returnnot fall into non-compliance with its loan covenants or that its Lenders will continue to complianceprovide waivers or amendments to the Company in the event of future non-compliance with applicable future financial covenants.debt covenants or other possible events of default that could happen in the future.
Revolving Credit Facility
At June 30, 2018,As of March 31, 2019, the Company had $10,200,000$13.1 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $8,000,000$9.0 million was at an interest rate of approximately LIBOR plus 15%17.49%, approximately $3.7 million was at an interest rate of approximately 17.61%, and the remainder was at an interest rate of approximately prime plus 14%19.50%.
As of June 30, 2018,March 31, 2019, the Company had approximately $2,900,000$0.5 million available on the Revolving Credit facility.
The Revolving Credit Facility is secured by all the Company’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Term Loan
At June 30, 2018 and September 30, 2017, theThe Company had outstanding balances under its Term Loan, as follows:
June 30, 2018 September 30, 2017 (in thousands) Term loan Unamortized debt discount Short term portion of term loan Long term portion of term loan March 31, 2019 September 30, 2018 Term loan Unamortized debt discount Term loan, net of discount Short term portion of term loan, net of discount Long term portion of term loan, net of discount $ 46,029 $ 48,141 (2,114 ) (2,690 ) 43,915 45,451 (6,551 ) (3,433 ) $ 37,364 $ 42,018 $ 42,905 $ 44,505 (1,611 ) (1,921 ) 41,294 42,584 1,194 2,331 $ 40,100 $ 40,253
The Term Loan is payable as follows, subject to acceleration upon the occurrence of an Event of Default under the Credit Agreement or termination of the Credit Agreement and provided that all unpaid principal, accrued and unpaid interest and all unpaid fees and expenses shall be due and payable in full on March 31, 2021. Principal payments are required as follows: Remainder of Fiscal year 2018 – $1,523,438, Fiscal year 2019 – $7,727,776,$1.0 million, Fiscal year 2020 – $8,337,152$5.5 million and Fiscal year 2021 - $28,439,759.$36.4 million.
The Company also is required to prepay the outstanding amount of the Term Loan in an amount equal to the Specified Excess Cash Flow Amount (as defined in the agreement) for the immediately preceding fiscal year, commencing with the fiscal year ending September 30, 2018. The Company does not owe any amount as of March 31, 2019.
Interest
The loans under the Credit Agreement for the period commencing on the Second Amendment Effective Date up to and including May 31, 2018, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.75 to 1.00, an amount equal to prime plus 9.75% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.75 to 1.00, an amount equal to prime plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.
Commencing on 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, interest on the loans is payable in an amount equal to prime plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 4.00 to 1.00, interest is payable in an amount equal to prime plus 9.75% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.75% for Advances consisting of LIBOR Rate Loans.
Commencing on September 1, 2018 through the remainder of the Term, (i) so long as the Senior Leverage Ratio is equal to or greater than 3.50 to 1.00, interest on the loans is payable in an amount equal to prime plus 14.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 15.00% for Advances consisting of LIBOR Rate Loans and (ii) so long as the Senior Leverage Ratio is less than 3.50 to 1.00, interest is payable in an amount equal to prime plus 9.00% for Advances consisting of Domestic Rate Loans and LIBOR plus 10.00% for Advances consisting of LIBOR Rate Loans.
As of March 31, 2019, the Company had $42.9 million in outstanding borrowings under the Term Loan Facility, of which approximately $36.5 million was at an interest of approximately 17.5%, and approximately $6.4 million was at an interest of approximately 17.49%.
Loan Fees and Amortization
In connection with the Credit Agreement, the Company agreed to pay an original discount fee of approximately $901,300,$0.9 million, a closing fee for the term loan of approximately $75,000,$0.1 million, a finder’s fee of approximately $1,597,000$1.6 million and a closing fee for the revolving credit facility of approximately $500,000.$0.5 million. The total of the loan fees paid is approximately $3,073,300.$3.1 million. The Company has recorded this asreported these direct loan-related costs in the form of a discount and reduction of the term loan in the accompanying consolidated balance sheets and amortizedis amortizing them as interest expense over the term of the loans. DuringFor the periodsix months ended June 30,March 31, 2019 and March 31, 2018, the Company amortized approximately $576,000$0.4 million of the debt discount.discount each.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
7. Accrued Compensation
Accrued Compensation includes accrued wages, the related payroll taxes, employee benefits of the Company's employees, while they workincluding those working on contract assignments, commissions earned and not yet paid and estimated commissioncommissions and bonuses payable.
8. Subordinated Debt – Convertible and Non-Convertible
At June 30, 2018 and September 30, 2017, theThe Company had outstanding balances under its Convertible and Non-Convertible Subordinated Debt agreements, as follows:
|
| June 30, 2018 |
|
| September 30, 2017 |
|
| March 31, |
| September 30, |
| |||||
(in thousands) |
|
|
|
|
| |||||||||||
|
| 2019 |
|
| 2018 |
| ||||||||||
|
|
|
|
|
| |||||||||||
10% Convertible Subordinated Note |
| $ | 4,185 |
| $ | 4,185 |
|
| $ | 4,185 |
| $ | 4,185 |
| ||
Amended and Restaetd Non-negotiable promissory note |
| 419 |
| 1,225 |
| |||||||||||
Subordinated Promissary Note |
| 1,000 |
| 1,000 |
| |||||||||||
Amended and Restated Non-negotiable promissory note |
| - |
| 106 |
| |||||||||||
Subordinated Promissory Note |
| 1,000 |
| 1,000 |
| |||||||||||
9.5% Convertible Subordinated Note |
|
| 12,500 |
|
|
| 12,500 |
|
|
| 12,500 |
|
|
| 12,500 |
|
Total subordinated debt, convertible and non-convertible |
| 18,104 |
| 18,910 |
|
| 17,685 |
| 17,791 |
| ||||||
Short term portion of subordinated debt, convertible and non-convertible |
|
| (419 | ) |
|
| (1,225 | ) |
|
| (1,000 | ) |
|
| (106 | ) |
Long term portion of subordinated debt, convertible and non-convertible |
| $ | 17,685 |
|
| $ | 17,685 |
|
| $ | 16,685 |
|
| $ | 17,685 |
|
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to JaxJAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4,185,000,$4.2 million, and which was scheduled to become due on October 2, 2018.
On April 3, 2017, the Company and JAX Legacy amended and restated the Subordinated Note in its entirety in the form of a 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000.$4.2 million. The 10% Note matures on October 3, 2021 (the “Maturity Date”). The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. All or any portion of the 10% Note may be redeemed by the Company for cash at any time on or after April 3, 2018 that the average daily VWAP of the Company’s Common Stock reported on the principal trading market for the Common Stock exceeds the then applicable Conversion Price for a period of 20 trading days. The redemption price shall be an amount equal to 100% of the then outstanding principal amount of the 10% Note being redeemed, plus accrued and unpaid interest thereon. The Company agreed to issue to the investors in JAX Legacy approximately 77,775 shares of common stock, at a value of approximately $385,000$0.4 million which was expensed as loss on the extinguishment of debt during the year ended September 30, 2017.
Total discount recorded at issuance of the original JAX Legacy subordinated note payable was approximately $0.6 million. Total amortization of debt discount for the year ended September 30, 2017 was approximately $0.1 million, and the remaining $0.3 million was written off to loss on extinguishment of debt upon amendment and restatement resulting in the 10% Note.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
On December 13,November 27, 2017, the Company issued approximately 135,655 shares of common stock for bothto JAX Legacy related to the conversion of the subordinated note and paid in kindthe interest through September 30,October 4, 2017. The stock was valued at approximately $0.6 million.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.$0.1 million.
On AprilOctober 4, 2018 the Company issued approximately 42,50040,226 shares of common stock to JAXJax Legacy related to the interest of $0.1 million on the subordinated note through April 4, 2018. The stock was valued at approximately $105,000.10% Note.
On July 25, 2018,January 4, 2019 the Company issued 46,061approximately 148,834 shares of common stock to JAXJax Legacy related to the interest on the subordinated note through July 4, 2018. The stock was valued at approximately $105,000.
Total discount recorded at issuance of the original Jax subordinated note payable was approximately $647,000. Total amortization of debt discount for the year ended September 30, 2017 was approximately $107,000, and the remaining $322,000 was written off to loss$0.1 million on extinguishment of debt upon amendment and restatement resulting in the 10% Note.
Amended and Restated Non-Negotiable Promissory Note
On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier (sellers of Access Data Consulting Corporation) in the amount of $1,202,405approximately $1.2 million (the “Note”). This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000.$3.0 million. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of approximately $107,675, commencing on November 4, 2017 and ending on October 4, 2018. The entire loan is classified as current and subordinate tonote was paid off during the senior debt.three months ended December 31, 2018.
Subordinated Promissory Note
On January 20, 2017, the Company entered into Addendum No. 1 (the “Addendum”) to the Stock Purchase Agreement dated as of January 1, 2016 (the “Paladin Agreement”) by and among the Company and Enoch S. Timothy and Dorothy Timothy (collectively, the “Sellers”). Pursuant to the terms of the Addendum, the Company and the Sellers agreed (a) that the conditions to the “Earnouts” (as defined in the Paladin Agreement) had been satisfied or waived and (b) that the amounts payable to the Sellers in connection with the Earnouts shall be amended and restructured as follows: (i) the Company paid $250,000 in cash to the Sellers prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company shall issueissued to the Sellers a subordinated promissory note in the principal amount of $1,000,000$1.0 million (the “Subordinated Note”), The Subordinated Note shall bearbears interest at the rate of 5.5% per annum. Interest on the Subordinated Note shall beis payable monthly principleand principal can only be paid in stock until the term loan and Revolving Credit Facility are repaid. The Subordinated Note shall have a term of three yearsis due January 20, 2020 and may be prepaid without penalty. The principal of and interest on the Subordinated Note may be paid, at the option of the Company, either in cash or in shares of common stock of the Company or in any combination of cash and common stock. The Sellers have agreed that all payments and obligations under the Subordinated Note shall be subordinate and junior in right of payment to any “Senior Indebtedness” (as defined in the Paladin Agreement) now or hereafter existing to “Senior Lenders” (current or future) (as defined in the Paladin Agreement).
9.5% Convertible Subordinated Notes
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the Merger Consideration (see note 11)acquisition of SNIH an aggregate of $12.5 million in aggregate principal amountthe form of its 9.5% Convertible Subordinated Notes (the “9.5% Notes”). The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”). The 9.5% Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paidis payable quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company under its Credit Agreement (see Note 6) pursuant to the lenders parties to that certain Revolving Credit, Term LoanSubordination and Security Agreement,Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Company’s subsidiaries named as borrowers therein (collectively with the Company, the “Borrowers”), the seniorCredit Agreement lenders, named therein and PNC Bank, National Association, as administrative agent and collateral agent (the “Agent”) for the senior lenders (the “Senior Credit Agreement”), pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and each of the holders of the 9.5% Notes.
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None of the 9.5% Notes issued to the SNIH Stockholders are registered under the Securities Act of 1933, as amended (the “Securities Act”). Each of the SNIH Stockholders who received 9.5% Notes is an accredited investor. The issuance of the 9.5% Notes to such SNIH Stockholders is exempt from the registration requirements of the ActGEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in reliance on an exemption from registration provided by Section 4(2) of the Act.thousands except per share data, unless otherwise stated)
Future minimum payments of all subordinated debt will total approximately as follows: fiscal 2018 - $313,000, fiscal 2019 - $106,000,$0.0 million, fiscal 2020 - $1,000,000,$1.0 million, fiscal 2021- $0$0.0 and fiscal 2022 - $16,685,000.$16.7 million.
On January 4, 2018, the Company issued approximately 280,602 shares of common stock to the SNI Sellers related to the accrued interest of approximately $894,000$0.9 million on the subordinated note through January 4, 2018.
On October 4, 2018 the Company issued approximately 130,952 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
On January 4, 2019 the Company issued approximately 367,498 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
On April 4, 2019 the Company issued approximately 246,156 shares of common stock to the SNI Sellers related to interest of $0.3 million on the 9.5% Notes.
9. Equity
On January 25, 2018, the Company issued approximately 110,083 shares of common stock to a SNI Sellers for the conversion of approximately 110,083 shares of series B preferred shares.
On April 4,November 9, 2018 the Company issued approximately 120,654250,000 shares of common stock to the SNI Sellers related to the accrued interest of approximately $298,000 on the subordinated note through April 4, 2018.
On July 25, 2018, the Company issued approximately 128,815 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through July 4, 2018.
9. Equity
On March 31, 2017, the Company issued approximately 500,000 shares of common stock upon exercise of warrants by two officers and received cash of $1,000,000.
On November 27, 2017, the Company issued approximately 135,655 shares of common stock to JAX Legacy related to the conversion of the subordinated note and the interest through October 4, 2017. The stock was valued at approximately $595,000.
On January 4, 2018, the Company issued approximately 41,000 shares of common stock to JAX Legacy related to the interest on the subordinated note through January 4, 2018. The stock was valued at approximately $105,000.
On January 4, 2018, the Company issued approximately 280,602 shares of common stock to the SNI Sellers related to the accrued interest of approximately $894,000 on the subordinated note through January 4, 2018.
On January 25, 2018, the Company issued approximately 110,083 shares of common stock to a SNI Sellers for the conversion of approximately 110,083250,000 shares of seriesSeries B preferred shares.
On April 4, 2018, the Company issued approximately 120,654 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through April 4, 2018.
On April 4, 2018, the Company issued approximately 42,529 shares of common stock to JAX Legacy related to the interest on the subordinated note through April 4, 2018. The stock was valued at approximately $105,000.
On July 25, 2018, the Company issued approximately 128,815 shares of common stock to the SNI Sellers related to the accrued interest of approximately $297,000 on the subordinated note through July 4, 2018.
On July 25, 2018, the Company issued approximately 46,061 shares of common stock to JAX Legacy related to the interest on the subordinated note through July 4, 2018. The stock was valued at approximately $105,000.
Restricted Stock Stock Options and Warrants
The Company has recognized compensation expense in the amount of approximately $400,000 and $255,000 during the three months ended June 30, 2018 and 2017, respectively, related to the issuance of stock options. The Company has recognized compensation expense in the amount of approximately $1,028,000 and $641,000 during the nine months ended June 30, 2018 and 2017, respectively, related to the issuance of stock options.
During the nine-month periodsix months ended June 30, 2018, there were optionsMarch 31, 2019 no restricted stock was granted to purchase 780,000 shares of common stock with a weighted average price of approximately $2.45 per common share. This estimated value was made using the Black-Scholes Merton option pricing model and approximated $1,747,000. The stock options vest over a period between a one to a four-year period. The average expected life (years) of the options were 10 years, the estimated stock price volatility was 105% and the risk-free interest rate was between 2.2% and 2.9%. At June 30, 2018, there was approximately $2,802,000 of unamortized compensation.
At June 30, 2018, there were exercisable options to purchase approximately 590,000 shares of common stock and exercisable warrants to purchase approximately 497,000 shares of common stock.
Effective June 15, 2018, the Company granted 600,000 restricted shares of common stock to its Chairman and Chief Executive Officer.or exercised. The restricted shares are to be earned over a three-year period and cliff vest at the end of the third year from the date of grant. Stock-based compensation expense attributable to restricted stock was $0.2 and $0.4 million, and $0.0 and $0.0 million for the three and six months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was approximately $1.8 million of unrecognized compensation expense related to restricted stock outstanding.
A summary of restricted stock activity is presented as follows:
Number of Shares | ||||
Restricted stock outstanding as of September 30, 2018 | 1,100 | |||
Granted | - | |||
Exercised | - | |||
Restricted stock outstanding as of March 31, 2019 | 1,100 | |||
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Warrants
No warrants were granted or exercised during the six months ended March 31, 2019.
Number of Shares Weighted Average Exercise Price Per Share ($) Weighted Average Remaining Contractual Life Total Intrinsic Value of Warrants ($) Warrants outstanding as of September 30, 2018 Granted Exercised Forfeited Warrants outstanding as of December 31, 2018 Granted Exercised Forfeited Warrants outstanding as of March 31, 2019 Warrants exercisable as of September 30, 2018 Warrants exercisable as of March 31, 2019 497 3.84 2.87 67 - - - - (58 ) 2.00 439 4.09 2.48 - - - - - - 439 4.09 2.27 - 497 3.84 2.87 67 439 4.09 2.27 -
Stock Options
As of March 31, 2019, there were stock options outstanding under the Company’s Second Amended and Restated 1997 Stock Option Plan and the Company’s Amended and Restated 2013 Incentive Stock Plan. Both plans were approved by the shareholders. The totalplans granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees. Vesting periods are established by the Compensation Committee at the time of grant. All stock options outstanding as of March 31, 2019 and September 30, 2018 were non-statutory stock options, had exercise prices equal to the market price on the date of grant, and had expiration dates ten years from the date of grant.
Stock-based compensation expense attributable to stock options and warrants was $0.3 million and $0.7 million, and 0.3 million and $0.6 million for the three and six months ended March 31, 2019 and 2018, respectively. As of March 31, 2019 and March 31, 2018, there was approximately $2.3 million of unrecognized compensation expense related to unvested stock options outstanding each, and the weighted average vesting period for those options was 3.9 years.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
A summary of stock option activity is as follows: Number of Shares Weighted Average Exercise Price per share ($) Weighted Average Remaining Contractual Life (Years) Total Intrinsic Value of Options ($) Options outstanding as of September 30, 2018 Granted Forfeited/Expired Options outstanding as of December 31, 2018 Granted Exercised Forfeited/Expired Options outstanding as of March 31, 2019 Exercisable as of September 30, 2018 Exercisable as of March 31, 2019 1,578 3.76 7.53 142 394 1.91 (178 ) 3.89 1,794 3.34 8.58 - - - - - (48 ) 5.03 1,746 3.29 8.34 - 512 5.08 7.30 1 439 5.10 6.87 -
The fair value of stock options granted was approximately $1,326,000.made using the Black-Scholes option pricing model and the following assumptions:
Six Months Ended March 31, 2019 Weighted average fair value of options Weighted average risk-free interest rate Weighted average dividend yield Weighted average volatility factor Weighted average expected life (years) $ 1.75 3.03 % $ - 104 % 10
10. Mezzanine Equity
On April 3, 2017, the Company issued an aggregate of approximately 5.9 million shares of no par value, Series B Convertible Preferred Stock to certain of the SNIH Stockholders as part of the SNIH acquisition. The no par value, Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all "Junior Securities" (including the Company's Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
In the event that the Company declares or pays a dividend or distribution on its Common Stock, whether such dividend or distribution is payable in cash, securities or other property, including the purchase or redemption by the Company or any of its subsidiaries of shares of Common Stock for cash, securities or property, the Company is required to simultaneously declare and pay a dividend on the no par value, Series B Convertible Preferred Stock on a pro rata basis with the Common Stock determined on an as-converted basis assuming all shares had been converted as of immediately prior to the record date of the applicable dividend or distribution.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Except as set forth in the Resolution Establishing Series (as defined below) or as may be required by Illinois law, the holders of the no par value, Series B Convertible Preferred Stock have no voting rights. Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of no par value, Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the no par value, Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting).
Each share of Series B Convertible Preferred Stock is convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $4.86 per share, which is subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.
None of the shares of no par value, Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act. Each of the SNIH Stockholders who received shares of Series B Preferred Stock is an accredited investor. The issuance of the shares of no par value, Series B Preferred Stock to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
Based on the terms of the Series B Convertible Preferred Stock, if certain fundamental transactions were to occur, the Series B Convertible Preferred Stock would require redemption, which precludes permanent equity classification on the accompanying consolidated Balance Sheet.
During the six months ended March 31, 2019 the Company issued 250,000 shares of common stock for the conversion of approximately 250,000 shares of Series B Convertible Preferred Stock.
11. Income Tax
The following table presents the provision for income taxes and our effective tax rate for the three and nine months ended June 30, 2018March 31, 2019 and 2017:2018:
Three Months Ended Nine Months Ended (in thousands) June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017 Income tax benefit (expense) Effective tax rate % Three Months Ended, March 31, 2019 2018 Provision for Income Taxes Effective Tax Rate $ 407 $ (202 ) $ (259 ) $ (332 ) 18 % 3 % -4 6 % (16 ) 694 1 % -32%
The effective income tax rate on operations is based upon the estimated income for the year, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.
TheOur effective tax rate for the three months ended June 30,March 31, 2019 is lower than the statutory tax rate primarily due to a decrease in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
Our effective tax rate for the three months ended March 31, 2018 is higher than the statutory tax rate primarily due to a tax provision for state income taxes and an increase in the deferred tax liability related to indefinite lived assets.
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Six Months Ended, March 31, 2019 2018 Provision for Income Taxes Effective Tax Rate % % 506 666 -7 -17
Our effective tax rate for the six months ended March 31, 2019 is lower than the statutory tax rate primarily due to an decrease in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
Our effective tax rate for the six months ended March 31, 2018 is lower than the statutory tax rate primarily due to an increase in the deferreda tax liability related to indefinite lived assets. The effective tax rateprovision for the nine months ended June 30, 2018 is lower than the statutory tax rate primarily due tostate income taxes and an increase in the deferred tax liability related to indefinite lived assets being offset by a discrete tax benefit recorded for the impact from the US Tax Reform. The tax provision for the ninesix months ended June 30,March 31, 2018 includes discrete tax benefit totaling $0.4 million relating to the US Tax Reform that was recorded in the period ending December 31, 2017.
The effective tax rate for the three and nine months ended June 30, 2017 was higher than the statutory rate primarily due to a change in the valuation allowance.
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” ("US Tax Reform"). The US Tax Reform provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the US Tax Reform will become effective during our fiscal year ending September 30, 2018 with all provisions of the US Tax Reform effective as of the beginning of our fiscal year ending September 30, 2019. As the US Tax Reform was enacted after our year end of September 30, 2017, it had no impact on our fiscal 2017 financial results. The US Tax Reform contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017.
Beginning on January 1, 2018, the US Tax Reform lowers the US corporate income tax rate to 21% from that date and beyond. We estimate that the revaluation of our US deferred tax assets and liabilities to the 21% corporate tax rate will reduce our net deferred tax liability by approximately $0.4 million and is reflected as a tax benefit in our results for the quarter ending December 31, 2017.
Although we believe we have accounted for the parts of the US Tax Reform that will have the most significant impact on our financials, the ultimate impact of the US Tax Reform on our reported results in 2018 may differ from the estimates provided herein, due to, among other things, changes in interpretations and assumptions we have made, guidance that may be issued, and other actions we may take as a result of the US Tax Reform different from that presently contemplated.
11. Acquisitions
SNI
The Company entered into an Agreement and Plan of Merger dated as of March 31, 2017 (the “Merger Agreement”) whereby it has acquired 100% of the outstanding capital stock of SNI Companies, Inc., a Delaware corporation and a wholly-owned subsidiary of SNI Holdco (“SNI Companies” and collectively with SNI Holdco, the “Acquired Companies”). The aggregate consideration paid for the shares of SNI Holdco (the “Merger Consideration”) was approximately $66,300,000.
Consolidated pro-forma unaudited financial statements
The following unaudited pro forma combined financial information is based on the historical financial statements of the Company and SNI Companies, Inc., after giving effect to the Company’s acquisition as if the acquisition occurred on October 1, 2016.
The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisitions occurred on October 1, 2016, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the nine months ended June 30, 2017, as if the acquisition occurred on October 1, 2016. The pro forma results of operations for the nine months ended June 30, 2017 only include SNI Companies, as all other acquisitions either occurred prior to October 1, 2016 or had an immaterial effect on pro forma balances. Operating expenses have been increased for the amortization expense associated with the fair value adjustment of definite lived intangible assets of approximately $2,009,000 for the nine months ended June 30, 2017 for the SNI acquisition.
Nine Months Ended (in thousands, except per share data) June 30, 2017 Net sales Cost of sales Operating expenses Net loss Basic and dilutive income per common share $ 142,795 $ 90,286 $ 50,203 $ (4,387 ) (0.47 )
The Company's consolidated financial statements for the three and nine months ended June 30, 2018 include the actual results of all acquisitions.
12. Commitments and Contingencies
Leases
The Company leases space for all its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods ranging from three to five years. The corporate office lease expires in 2020. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.
Rent expense was approximately $892,000$0.7 million and $345,000$1.5 million, and $0.9 million and $1.7 million for the three month period ended June 30, 2018 and 2017, respectively, and approximately $2,447,000 and $1,029,000 nine monthsix-month periods ended June 30,March 31, 2019 and 2018, and 2017, respectively.
As of June 30, 2018,March 31, 2019 future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices are as follows:
(in thousands) Fiscal 2018 Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Thereafter Total $ 605 2,283 1,294 668 622 988 $ 6,460
Working Capital Deposit
Remainder of Fiscal 2019 Fiscal 2020 Fiscal 2021 Fiscal 2022 Fiscal 2023 Thereafter Total The Company retained approximately $1,500,000 of the purchase price, in cash, as a guarantee from the sellers of the SNI Companies that SNI would provide a minimum of $9,200,000 of working capital, as defined in the purchase agreement. As of June 30, 2018, the Company and the sellers of the SNI Companies have not agreed to the provided working capital and the cash continues to be retained by the Company with a corresponding liability reported in its consolidated balance sheet, pending final determination and resolution among the parties.$ 1,080 1,649 1,043 979 769 918 $ 6,438
13. 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 distinctCompany’s services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Some selling, general and administrative expenses are not fully allocated among light industrial services and professional staffing services.
Unallocated Corporate expenses primarily include, certain executive compensation expenses and salaries, certain administrative salaries, corporate legal expenses, stock amortization expenses, consulting expenses, audit fees, corporate rent and facility costs, board fees, acquisition, integration and restructuring expenses and interest expense.
Three Months Ended Nine Months Ended (in thousands) June 30 June 30 2018 2017 2018 2017 Industrial Staffing Services Industrial services revenue Industrial services gross margin Operating income Depreciation & amortization Accounts receivable – net Intangible assets Goodwill Total assets Professional Staffing Services Permanent placement revenue Placement services gross margin Professional services revenue Professional services gross margin Operating income Depreciation and amortization Accounts receivable – net Intangible assets Goodwill Total assets Unallocated Expenses Corporate administrative expenses Corporate facility expenses Stock option amortization expense Board related expenses Acquisition, integration and restructuring expenses Total unallocated expenses Consolidated Total revenue Operating income Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 5,166 $ 6,718 $ 16,165 $ 18,824 13.06 % 14.08 14.15 % 14.69 % $ 31 $ 365 $ 315 $ 954 65 43 197 184 3,386 3,967 3,386 3,967 526 745 526 745 1,084 1,084 1,084 1,084 $ 5,555 $ 8,484 $ 5,555 $ 8,484 $ 6,388 $ 5,969 $ 17,496 $ 8,578 100 % 100 % 100 % 100 % $ 28,713 $ 33,382 $ 91,695 $ 61,222 26.67 % 29.29 % 26.54 % 26.87 % $ 2,301 $ 535 $ 5,861 $ 2,659 1,436 1,705 4,289 2,452 17,780 20,073 17,780 20,073 30,336 36,541 30,336 36,541 75,509 71,967 75,509 71,967 $ 128,806 $ 132,478 $ 128,806 $ 132,478 $ 686 $ 900 $ 1,065 $ 2,135 139 80 287 223 399 255 1,028 640 - - - 38 514 2,206 1,712 2,306 $ 1,738 $ 3,441 $ 4,092 $ 5,342 $ 40,267 $ 46,069 $ 125,356 $ 88,624 595 (2,446 ) 2,084 (1,642 ) 1,501 1,748 4,486 2,636 21,166 24,040 21,166 24,040 30,862 37,286 30,862 37,286 76,593 73,051 76,593 73,051 $ 134,361 $ 140,962 $ 134,361 $ 140,962
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GEE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands except per share data, unless otherwise stated)
Three Months Ended Six Months Ended March 31, March 31, (in thousands) 2019 2018 2019 2018 Industrial Staffing Services Industrial services revenue Industrial services gross margin Operating income Depreciation & amortization Accounts receivable – net Intangible assets Goodwill Total assets Professional Staffing Services Permanent placement revenue Placement services gross margin Professional services revenue Professional services gross margin Operating income Depreciation and amortization Accounts receivable – net Intangible assets Goodwill Total assets Unallocated Expenses Corporate administrative expenses Corporate facility expenses Stock Compensation expense Acquisition, integration and restructuring expenses Total unallocated expenses Consolidated Total revenue Operating income (loss) Depreciation and amortization Total accounts receivables – net Intangible assets Goodwill Total assets $ 5,095 $ 5,127 $ 10,715 $ 10,999 13.6 % 13.6 % 13.7 % 14.7 % $ 82 $ 62 $ 337 $ 316 66 66 130 132 3,084 3,425 3,084 3,425 359 583 359 583 1,084 1,084 1,084 1,084 $ 4,527 $ 4,080 $ 4,527 $ 4,080 $ 4,350 $ 5,337 $ 8,880 $ 11,108 100 % 100 % 100 % 100 % $ 26,732 $ 29,393 $ 55,125 $ 62,982 25.0 % 25.8 % 25.6 % 26.5 % $ 1,413 $ 1,326 $ 3,632 $ 3,762 1,432 1,426 2,843 2,853 16,908 17,173 16,908 17,173 26,315 31,676 26,315 31,676 75,509 75,509 75,509 75,509 $ 125,072 $ 131,017 $ 125,072 $ 131,017 $ 1,103 $ 752 $ 1,713 $ 1,529 72 104 178 209 549 336 1,130 629 592 181 1,751 221 $ 2,316 $ 1,373 $ 4,772 $ 2,588 $ 36,177 $ 39,857 $ 74,720 $ 85,089 (821 ) 15 (803 ) 1,490 1,498 1,492 2,973 2,985 19,992 20,598 19,992 20,598 26,674 32,259 26,674 32,259 76,593 76,593 76,593 76,593 $ 129,599 $ 135,097 $ 129,599 $ 135,097
14. Subsequent Events
On May 15, 2019, the Company obtained subscription agreements from members of its senior executive management team and board of directors for the private issuance of $2,000,000 of its 8% Subordinated Promissory Notes Payable due October 3, 2021.
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
We specialize in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics and provide temporary staffing services for our light industrial clients. The acquisitions of Agile Resources, Inc., a Georgia corporation (“Agile”), Access Data Consulting Corporation, a Colorado corporation (“Access”), Paladin Consulting Inc. (“Paladin”) and SNI Companies, Inc.a Delaware corporation (“SNI”) expanded our geographical footprint within the placement and contract staffing of information technology.
The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies, Inc., Triad Personnel Services and Triad Staffing. As of June 30, 2018,March 31, 2019, we operated thirty-fivethirty-four branch offices in downtown or suburban areas of major U.S. cities in sixteenthirteen states. We have one office located in each of Arizona, Connecticut, Georgia, Minnesota, New Jersey, Virginia and Washington DC, and Virginia, three offices in Illinois and Massachusetts, four offices in Colorado and Illinois, four offices in Massachusetts and Texas, six offices in Ohio and seven offices in Ohio and Florida.
Management has implemented a strategy which includedincludes cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of equity and debt to improve the overall profitability and cash flows of the Company. The Company’s contract and placement services are principally provided under two operating divisions or segments: Professional Staffing Services and Industrial Staffing Services. We believe our current segments complement one another and position us for future growth.
Results of Operations –
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017
Results of OperationsMarch 31, 2018
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months Ended (in thousands) June 30, 2018 June 30, 2017 $ Change % Change Direct hire placement services Professional contract services % Industrial contract services % Consolidated net revenues % $ 6,388 $ 5,969 $ 419 7.02 % 28,713 33,382 (4,669 ) -13.99 5,166 6,718 (1,552 ) -23.10 $ 40,267 $ 46,069 $ (5,802 ) -12.59
Three Months Ended March 31, (in thousands) 2019 2018 $ Change % Change Professional contract services Industrial contract services Total professional and industrial contract services Direct hire placement services Consolidated net revenues The Company reported consolidated revenue of approximately $40.3 million for the fiscal third quarter ended June 30, 2018 compared to revenue of approximately $46.1 million for the fiscal third quarter ended June 30, 2017.$ 26,732 $ 29,393 (2,661 ) (9 ) 5,095 5,127 (32 ) (1 ) 31,827 34,520 (2,693 ) (8 ) 4,350 5,337 (987 ) (18 ) $ 36,177 $ 39,857 (3,680 ) (9 )
Contract staffing services contributed approximately $33.9$31.8 million or approximately 84%88% of consolidated revenue and direct hire placement services contributed approximately $6.4$4.4 million, or approximately16%approximately 12%, of consolidated revenue for the fiscal quarterthree months ended June 30, 2018.March 31, 2019. This compares to contract staffing services revenue of approximately $40.1$34.5 million, or approximately 87%, of consolidated revenue and direct hire placement revenue of approximately $6$5.3 million, or approximately 13%, of consolidated revenue respectively, for the fiscal third quarterthree months ended June 30, 2017.March 31, 2018.
The overall decrease in contract staffing services revenue of approximately $6.2$2.7 million, or 8%, for the 2018 fiscal third quarterthree months ended March 31, 2019 compared to the comparable prior year fiscal third quarterthree months ended March 31, 2018 was primarily dueattributable to a reductionreductions in the temporary workforce requirements of a few key customers in the professional and industrial services divisiondivisions and, the strategic actions instituted by management primarilyto a lesser extent, higher incidences of bad weather in mid-west and northeastern markets and additional holiday workday in the professional services division to reduce the number of unproductive or underperforming full time personnel including recruiters, account representatives, sales professionals and related administrative support staff.quarter ended March 31, 2019. In addition, some of the decline in revenue was a natural resultis attributable to the residual effects of certain office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.
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Direct hire placement revenue for the fiscal third quarterthree months ended June 30, 2018 increasedMarch 31, 2019 decreased by approximately $419,000$1 million over the comparable prior year fiscal third quarter due to increased productivity from a smaller number of dedicatedthree months ended March 31, 2018. The decrease in direct hire placement personnel. GEE Group expectsrevenues also is attributable to the residual effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.
The Company continues to pursue opportunities to selectively increase revenue producingrevenue-producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue together with theand direct hire placement revenue, for the quarter includesincluding business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. GEE Group’sThe Company’s strategic plans to achieve this goal involve, setting aggressive new business growth targets, initiatives to increase services to existing customers, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing, which represents approximately 87% of total revenue for the 2018 fiscal third quarter.
Industrial contract services revenue decreased by approximately $1.5 million for the fiscal third quarter ended June 30, 2018 to approximately $5.2 million from $6.7 million reported for the 2017 fiscal third quarter. To improve overall performance in the industrial services division, the Company has implemented an aggressive sales incentive program, streamlined branch operations and increased its focus on obtaining better pricing from new and existing accounts. GEE Group expects that the aforementioned actions coupled with new and expanded services offered to customers will contribute to enhanced financial performance from that segment.staffing.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes, and employee benefits of the Company's contract services employees, and certain other employee-related costs, while they workworking on contract assignments. Cost of contract services for the three-month periodthree months ended June 30, 2018March 31, 2019 decreased by approximately 12%7% to approximately $25.5$24.5 million compared to the three months ended March 31, 2018 of $26.2 million. The $1.8 million overall decrease in cost of contract services for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily attributable to and consistent with the three-month period ended June 30, 2017 of approximately $29.0 million.corresponding declines in revenues, which is discussed further below.
Three Months Ended March 31, 2019 March 31, 2018 Professional contract services Industrial contract services Professional and industrial services combined Direct hire placement services Combined gross profit margin %(1) Gross Profit percentage by segment:25.0 % 25.8 % 13.6 % 13.6 % 23.2 % 24.0 % 100.0 % 100.0 % 32.4 % 34.2 %
Three Months Ended June 30, 2018 June 30, 2017 Direct hire placement services % Industrial contract services Professional contact services Combined Gross Profit Margin % (1) 100 100 % 13.06 % 14.08 % 26.26 % 29.29 % 36.56 % 37.02 %
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| (1) | Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. |
GEE Group’s overall staffing servicesThe Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the fiscal third quarterthree months ended June 30, 2018March 31, 2019 was approximately 36.6%32.4% versus approximately 37%34.2% for the prior year’s fiscal third quarter.three months ended March 31, 2018. The change in the overall gross margin from the comparable prior year quarterthree months ended period was principally due to an overall changethe greater reduction in direct hire placement services revenue mix forproportionally and which have 100% gross margin than the 2018 fiscal third quarter.reduction in contract professional services.
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In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26.7%25.0% for the 2018 fiscal third quarterthree months ended March 31, 2019 compared to approximately 29.3%25.8% for the 2017 fiscal third quarter.three months ended March 31, 2018. The change in professional contract staffing services gross margin was primarily due to increasedproportionally higher revenue from VMS, MSP, MSAVendor Management Systems (“VMS”), Managed Service Providers (“MSP”), Master Service Agreements (“MSA”) and other volume corporate accounts that occurred in the three months ended March 31, 2019, all of which typically have lower gross margins and lower costsmargins. Other differences in the composition of delivery and specialty revenue mix compositionrevenues among the specialties served by the Company (information technology, (IT), engineering, healthcare, and finance and accounting).accounting and others) also contributed to the change in the professional contract services gross profit and margin.
The Company’s industrial staffing services gross margin for the fiscal third quarterthree months ended June 30, 2018March 31, 2019 was approximately 13.1% versus approximately 14.1% for13.6%, which is consistent with the prior year’s fiscal third quarter. The decrease in industrial services gross margin in the 2018 fiscal third quarter was due to several factors including customer revenue mix, competitive pricing and contract labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
| ¨ | Compensation and benefits in the operating divisions, |
| ¨ | Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. |
| ¨ | Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. |
| ¨ | Recruitment advertising, which includes the cost of identifying job applicants. |
| ¨ | Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. |
GEE’sIn addition to depreciation and amortization, which are broken out and reported separately in the consolidated statement of operations from other selling, general and administrative expenses (SG&A), the Company separately reports SG&A expenses incurred that are related to acquisition, integration and restructuring activities. These include expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and other costs incurred related to acquisitions, including associated legal and professional costs. Management believes reporting these expenses separately from other SG&A provides useful information considering the Company’s dual track growth strategy of internal (organic) growth and growth by acquisitions and when comparing and considering the Company’s operating results and activities with other entities.
The Company’s SG&A for the fiscal third quarterthree months ended June 30, 2018March 31, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, decreased by approximately $1.5 million as compared to the three months ended March 31, 2018. SG&A for the three months ended March 31, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, as a percentage of revenue and was approximately 30%29%, compared to approximately 34% of revenue forwhich is consistent with the fiscal third quarterthree months ended June 30, 2017. SG&A for the fiscal third quarter ended June 30, 2018 decreased approximately $3.4 million, or 22%, as compared to the prior year’s fiscal third quarter. The net decrease in SG&A was primarily related to strategic initiatives implemented by corporateMarch 31, 2018.
Acquisition, Integration and regional management to lower personnel costs by rightsizing the number of sales and recruitment full time employees (FTE’s) and related ancillary costs, consolidation of various office locations resulting in a reduction in rent and other expenses, leverage from implementation of shared services, economies of scale gained from reduced pricing obtained from vendors, continued integration of the SNI acquisition and by streamlining field operations and related expenses. Management continues efforts to reduce SG&A as the Company obtains synergies from further back office consolidation and related efficiencies.Restructuring Expenses
The Company classifies and reports costs incurred related to acquisition, integration and restructuring activities separately from other SG&A within its operating expenses. These costs were $0.6 million and $0.2 million for the three months ended March 31, 2019 and 2018, respectively. These costs include operatingmainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs. These costs were approximately $514,000 in the fiscal third quarter ended June 30, 2018 and decreased by approximately $1.7 million from the approximately $2.2 million reported in the prior year’s fiscal third quarter.
Total operating expenses
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Depreciation Expense
Depreciation expense was $0.1 for the fiscal third quarterthree months ended June 30, 2018, including SG&A, acquisition, integration and restructuring expenses, and depreciation and amortization, decreased by approximately $5.4 million, or approximately 27.6%, from those reported in the fiscal third quarter ended June 30, 2017, also primarily relatedMarch 31, 2019, which remained level compared to the strategic productivity and cost saving initiatives described above.three months ended March 31, 2018.
Amortization Expense
Amortization expense was $1.4 for the three months ended June 30, 2018, decreased $161,000, or 10%March 31, 2019, which remained level compared to the three months ended June 30, 2017, primarily asMarch 31, 2018.
Loss from Operations
As a result of some intangible assets fully amortized.the matters discussed regarding revenues and operating expenses above, income from operations decreased $0.9 million for the three months ended March 31, 2019 from income of approximately $15,000 for the three months ended March 31, 2018.
Interest Expense
Interest expense for the three months ended June 30, 2018,March 31, 2019, increased by approximately $511,000$0.9 million or 21%40% compared to the three months ended June 30, 2017 primarily as a result of the newly obtained long-term debt, theMarch 31, 2018. The increase in interest expense and fees associated with acquisition payments, and higher average borrowings relatedis attributable to a scheduled increase in the new acquisitions.required interest margin under the Company’s senior credit facilities of approximately 500 basis points (5%) annually, that began as of June 1, 2018. Interest expense includes non-cash payments in kind ("PIK"(“PIK”) of the Company'sCompany’s common stock of approximately $402,000$401,500 for the three months ended June 30, 2018.March 31, 2019.
Provision for Income Taxes
The Company recognized a tax provision of approximately $0.02 million for the three months ended March 31, 2019. Our effective tax rate for the three months ended March 31, 2019 is lower than the statutory tax rate primarily due to a decrease in the deferred tax liability related to indefinite lived assets. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a full valuation allowance against the remaining net DTA position.
Our effective tax rate for the three months ended March 31, 2018 is higher than the statutory tax rate primarily due to a tax provision for state income taxes and an increase in the deferred tax liability related to indefinite lived assets.
Net Loss
As a result of the matters discussed regarding revenues and expenses above, the Company incurred net losses for the three months ended March 31, 2019 and 2018 of $3.9 million and $2.9 million, respectively.
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Results of Operations – NineSix Months Ended June 30, 2018March 31, 2019 Compared to the NineSix Months Ended June 30, 2017
Results of OperationsMarch 31, 2018
Net Revenues
Consolidated net revenues are comprised of the following:
Nine Months Ended (in thousands) June 30, 2018 June 30, 2017 $ Change % Change Direct hire placement services Professional contract services Industrial contract services % Consolidated net revenues $ 17,496 $ 8,578 $ 8,918 103.96 % 91,695 61,222 30,473 49.77 % 16,165 18,824 (2,659 ) -14.13 $ 125,356 $ 88,624 $ 36,732 41.45 %
Six Months Ended March 31, (in thousands) 2019 2018 $ Change % Change Professional contract services Industrial contract services Total professional and industrial contract services Direct hire placement services Consolidated net revenues The Company reported consolidated revenue of approximately $125.4 million for the fiscal nine month period ended June 30, 2018 compared to revenue of approximately $88.6 million for the fiscal nine month period ended June 30, 2017.$ 55,125 $ 62,982 (7,857 ) (12 ) 10,715 10,999 (284 ) (3 ) 65,840 73,981 (8,141 ) (11 ) 8,880 11,108 (2,228 ) (20 ) $ 74,720 $ 85,089 (10,369 ) (12 )
Contract staffing services contributed approximately $107.8$65.8 million or approximately 86%88% of consolidated revenue and direct hire placement services contributed approximately $17.5$8.9 million, or approximately14%approximately 12%, of consolidated revenue for the fiscal nine month periodsix months ended June 30, 2018.March 31, 2019. This compares to contract staffing services revenue of approximately $80$74.0 million, or approximately 90%87%, of consolidated revenue and direct hire placement revenue of approximately $8.6$11.1 million, or approximately 10%13%, of consolidated revenue respectively, for the fiscal nine month periodsix months ended June 30, 2017.March 31, 2018.
The overall increasedecrease in contract staffing services revenue of approximately $27.8$8.1 million, or 11%, for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019 compared to the comparable fiscal nine month periodsix months ended June 30, 2017March 31, 2018 was primarily attributable to the acquisition of SNI, which increased the direct hire placement and professional contract services significantly in the nine months ended June 30, 2018. Offsetting these increases relative the Company’s pro forma results for the fiscal nine month period ended June 30, 2018 including SNI, were the effects of a reductionreductions in the temporary workforce requirements of a few key customers in the professional and industrial services divisiondivisions, and the strategic actions instituted by management primarilyto a lesser extent, higher incidences of bad weather in mid-west and northeastern markets, an additional holiday workdays in the professional services division to reduce the number of unproductive or underperforming full time personnel including recruiters, account representatives, sales professionalssix months ended March 31, 2019 and related administrative support staff.December 31, 2018. In addition, some of the decline in revenue was a natural resultis attributable to the residual effects of certain office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability.
Direct hire placement revenue for the fiscal nine month periodsix months ended June 30, 2018 increasedMarch 31, 2019 decreased by approximately $8.9$2.2 million over the comparable fiscal nine month periodsix months ended June 30, 2017 due to the acquisition of SNI and during the most recent quarter, increased productivity from a smaller number of dedicatedMarch 31, 2018. The decrease in direct hire placement personnel. GEE Group expectsrevenues also is attributable to the residual effects of office consolidations and office closures and other reductions in its core workforce that were undertaken by the Company to maximize productivity, reduce overall field costs and improve profitability. In addition, management believes market speculation of an impending recession in the U.S economy during the first fiscal quarter of 2019 had a cooling effect on hiring, especially around the holiday season.
The Company continues to pursue opportunities to selectively increase revenue producing headcount in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue together with theand direct hire placement revenue, for the quarter includesincluding business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. GEE Group’sThe Company’s strategic plans to achieve this goal involve, setting aggressive new business growth targets, initiatives to increase services to existing customers, changes to compensation, commission and bonus plans to better incentivize producers, and frequent interaction with the field to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing, which represents approximately 87% of total revenue for the fiscal nine month period ended June 30, 2018.
Industrial contract services revenue decreased by approximately $2.7 million for the fiscal nine month period ended June 30, 2018 to approximately $16.2 million from $18.8 million reported for the fiscal nine month period ended June 30, 2017. To improve overall performance in the industrial services division, the Company has implemented an aggressive sales incentive program, streamlined branch operations and increased its focus on obtaining better pricing from new and existing accounts. GEE Group expects that the aforementioned actions coupled with new and expanded services offered to customers will contribute to enhanced financial performance from that segment.staffing.
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Cost of Contract Services
Cost of contract services includes wages and related payroll taxes, and employee benefits of the Company's contract services employees, and certain other employee-related costs, while they workworking on contract assignments. Cost of contract services for the ninesix months ended June 30, 2018 increasedMarch 31, 2019 decreased by approximately 34%10% to approximately $81.2$50.3 million compared with approximately $60.5 million forto the ninesix months ended June 30, 2017.March 31, 2018 of $55.7 million. The $5.4 million overall increasedecrease in cost of contract services of approximately $20.7 million for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019 compared to the comparable fiscal nine month periodsix months ended June 30, 2017March 31, 2018 was mainlyprimarily attributable to and consistent with the acquisition of SNI.corresponding declines in revenues, which is discussed further below.
Gross Profit percentage by segment:service:
|
| Nine months ended |
|
| Six Months Ended |
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|
| June 30, 2018 |
|
| June 30, 2017 |
|
| March 31, 2019 |
|
| March 31, 2018 |
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Direct hire placement services |
| 100.00 | % |
| 100.00 | % | ||||||||||
Professional contract services |
| 14.15 | % |
| 14.69 | % |
| 25.6 | % |
| 26.5 | % | ||||
Industrial contract services |
|
| 26.55 | % |
|
| 26.87 | % |
| 13.7 | % |
| 14.7 | % | ||
Comined Gross Profit Margin %(1) |
|
| 35.19 | % |
|
| 31.77 | % | ||||||||
Professional and industrial services combined |
| 23.6 | % |
| 24.7 | % | ||||||||||
|
|
|
|
|
| |||||||||||
Direct hire placement services |
| 100.0 | % |
| 100.0 | % | ||||||||||
Combined gross profit margin %(1) |
| 32.7 | % |
| 34.6 | % | ||||||||||
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| (1) | Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. |
GEE Group’s overall staffing servicesThe Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019 was approximately 35.2%32.7% versus approximately 31.8%34.6% for the fiscal nine month periodsix months ended June 30, 2017.March 31, 2018. The change in the overall gross margin from the comparable prior six months ended period was principally due to an overall change in revenue mix for the fiscal nine month period ended June 30, 2018, led by the significant increasegreater reduction in direct hire placement revenues.services revenue proportionally and which have 100% gross margin than the reduction in contract professional services.
In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 26.6%25.6% for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019 compared to approximately 26.9%26.5% for the fiscal nine month periodsix months ended June 30, 2017.March 31, 2018. The change in professional contract staffing services gross margin was primarily due to increasedproportionally higher revenue from VMS, MSP, MSAVendor Management Systems (“VMS”), Managed Service Providers (“MSP”), Master Service Agreements (“MSA”) and other volume corporate accounts that occurred in this year’s fiscal third quarter,the six months ended March 31, 2019, all of which typically have lower gross margins and lower costsmargins. Other differences in the composition of delivery and specialty revenue mix compositionrevenues among the specialties served by the Company (information technology, (IT), engineering, healthcare, and finance and accounting).accounting and others) also contributed to the change in the professional contract services gross profit and margin.
The Company’s industrial staffing services gross margin for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019 was approximately 14.2%13.7% versus approximately 14.7% for the fiscal nine month periodsix months ended June 30 2017. The decrease in industrial services gross margin was due to several factors including customer revenue mix, competitive pricing and contract labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
| ¨ | Compensation and benefits in the operating divisions, |
| ¨ | Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. |
| ¨ | Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. |
| ¨ | Recruitment advertising, which includes the cost of identifying job applicants. |
| ¨ | Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. |
GEE’s
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In addition to depreciation and amortization, which are broken out and reported separately in the consolidated statement of operations from other selling, general and administrative expenses (SG&A), the Company separately reports SG&A expenses incurred that are related to acquisition, integration and restructuring activities. These include expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and other costs incurred related to acquisitions, including associated legal and professional costs. Management believes reporting these expenses separately from other SG&A provides useful information considering the Company’s dual track growth strategy of internal (organic) growth and growth by acquisitions and when comparing and considering the Company’s operating results and activities with other entities.
The Company’s SG&A for the fiscal nine month periodsix months ended June 30, 2018March 31, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, decreased by approximately $4.2 million as compared to the six months ended March 31, 2018. SG&A for the six months ended March 31, 2019, excluding depreciation, amortization and acquisition, integration and restructuring expenses, as a percentage of revenue and was approximately 28.6%28%, compared to approximately 28% of revenue forwhich is consistent with the fiscal nine month periodsix months ended June 30, 2017. SG&A for the fiscal nine month period ended June 30, 2018 increased by approximately $11 million as compared to the fiscal nine month period ended June 30, 2017 primarily as the result of the acquisition of SNI. The increase in SG&A for the fiscal nine month period ended June 30, 2018 over SG&A reported the fiscal nine month period ended June 30, 2017 attributable to the SNI acquisition has been offset by lower SG&A reported in the fiscal third quarter ended June 30, 2018 of approximately $3.4 million, or 22%, as compared to the prior year’s fiscal third quarter. This decrease in the quarter was primarily related to strategic initiatives implemented by corporateMarch 31, 2018.
Acquisition, Integration and regional management to lower personnel costs by rightsizing the number of sales and recruitment full time employees (FTE’s) and related ancillary costs, consolidation of various office locations resulting in a reduction in rent and other expenses, leverage from implementation of shared services, economies of scale gained from reduced pricing obtained from vendors, continued integration of the SNI acquisition and by streamlining field operations and related expenses. Management continues efforts to reduce SG&A as the Company obtains synergies from further back office consolidation and related efficiencies.Restructuring Expenses
The Company classifies and reports costs incurred related to acquisition, integration and restructuring activities separately from other SG&A within its operating expenses. These costs were $1.8 million and $0.2 for the six months ended March 31, 2019 and 2018, respectively. These costs include operatingmainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, costs incurred related to acquisitions and associated legal and professional costs. These costs were approximately $1.7 million
Depreciation Expense
Depreciation expense was $0.2 for the fiscal nine month periodsix months ended June 30, 2018 and decreased by approximately $600,000 from approximately $2.3 million reported in the fiscal nine month period ended June 30, 2017.
Total operating expenses for the fiscal nine month period ended June 30, 2018, including SG&A, acquisition, integration and restructuring expenses, and depreciation and amortization, increased by approximately $12.2 million, primarily as the result of the SNI acquisition. This increase was partially offset by a net decrease reported during the fiscal third quarter ended June 30, 2018 of approximately $5.4 million, or approximately 27.6%, from those reported in the fiscal third quarter ended June 30, 2017, also primarily relatedMarch 31, 2019, which remained level compared to the strategic productivity and cost saving initiatives described above.six months ended March 31, 2018.
Amortization Expense
Amortization expense was $2.8 for the ninesix months ended June 30, 2018, increased $1,891,000, or 82%March 31, 2019, remained level compared withto the prior period, primarily assix months ended March 31, 2018.
Loss from Operations
As a result of the acquisitionmatters discussed regarding revenues and operating expenses above, income from operations decreased $2.3 million, to a loss of SNI in April 2017 andapproximately $0.8 million for the related amortizationsix months ended March 31, 2019 from income of their identified intangible assets.approximately $1.5 million for the six months ended March 31, 2018.
Interest Expense
Interest expense for the ninesix months ended June 30, 2018,March 31, 2019, increased by approximately $5,251,000$0.5 million or 168%10% compared withto the same period last year primarily as a result of the newly obtained long-term debt, thesix months ended March 31, 2018. The increase in interest expense is attributable to a scheduled increase in the required interest margin under the Company’s senior credit facilities of approximately 500 basis points (5%) annually, that began as of June 1, 2018.
Provision for acquisition payments and higher average borrowingsIncome Taxes
The Company recognized a tax expense of approximately $0.5 million for the six months ended March 31, 2019. Our effective tax rate for the six months ended March 31, 2019 is lower than the statutory tax rate primarily due to an increase in the deferred tax liability related to indefinite lived assets. Other than the new acquisitions. Interest expense includes non-cash payments in kind ("PIK") ofdeferred tax liability relating to indefinite lived asset, the Company's common stock of approximately $1,997,000 forCompany is maintaining a full valuation allowance against the fiscal 2018 nine months ended June 30, 2018.remaining net DTA position.
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Our effective tax rate for the six months ended March 31, 2018 is lower than the statutory tax rate primarily due to a tax provision for state income taxes and an increase in the deferred tax liability related to indefinite lived assets being offset by a discrete tax benefit recorded for the impact from the US Tax Reform. The tax provision for the six months ended March 31, 2018 includes discrete tax benefit totaling $0.4 million relating to the US Tax Reform that was recorded in the period ending December 31, 2017.
Net Loss
As a result of the matters discussed regarding revenues and expenses above, the Company incurred net losses for the six months ended March 31, 2019 and 2018 of $7.3 million and $4.7 million, respectively.
Liquidity and Capital Resources
The principal sources of cash and liquidity used in operations by the Company are revenues from clients who contract for its staffing and placement services and temporary borrowings under its Revolving Credit Facility. Principal uses of cash are for the payment of cost of contract services, which are principally comprised of compensation and benefits, including salaries, bonuses and commissions to contract personnel and for the payment sales, general and administrative expenses, income taxes and related items, and principal and interest payments on borrowings.
The following table sets forth certain consolidated statements of cash flows data:
Nine Months Ended (in thousands) June 30, 2018 June 30, 2017 Cash flows provided by (used in) operating activities Cash flows used in investing activities Cash flows (used in) provided by financing activities $ 698 $ (843 ) $ (224 ) $ (25,335 ) $ (622 ) $ 26,504
Six Months Ended (in thousands) March 31, 2019 March 31, 2018 Cash flows provided by operating activities Cash flows used in investing activities Cash flows provided by (used in) financing activities The Company experienced significant net losses for it most recent fiscal year ended September 30, 2017, and for the nine months ended June 30, 2018. Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of subordinated debt, preferred stock and/or common stock, to improve the overall profitability and cash flows of the Company.$ 227 $ 172 $ (83 ) $ (199 ) $ (596 ) $ 180
As of June 30, 2018,March 31, 2019, the Company had cash$2.8 million of approximately $2,637,000,cash which was a decrease of approximately $148,000$0.5 million from approximately $2,785,000 at$3.2 million as of September 30, 2017. Negative working capital at June 30, 2018 was approximately $2,127,000, as compared to2018. As of March 31, 2019, the Company had working capital of approximately $1,588,000 for$11.2 million compared to $13.1 million of working capital as of September 30, 2017. The net loss for the nine months ended June 30, 2018, was approximately $6,556,000.2018.
Net cash provided by (used in) operating activities for the ninesix months ended June 30, 2018 and 2017March 31, 2019 was approximately $698,000 and $(843,000), respectively. The positive operating cash flow inconsistent with the fiscal ninesix month period ended June 30, 2018 corresponds with positive income from operations and other net changes in working capital.March 31, 2018.
At June 30, 2018, there was approximately $403,000The primary uses of accrued interest that was payable withcash for investing activities were for the Company’s common stock.acquisition of property and equipment in the six months ended March 31, 2019 and 2018.
Net cashCash flow used in investingfinancing activities for the ninesix months ended June 30, 2018 and 2017March 31, 2019 was approximately $(224,000) and $(25,335,000), respectively. The primary use of cash duringprimarily for payments on our term loan offset by proceeds from advances taken on the nine months ended June 30, 2018 was for acquisition of furniture and equipment. The primary use of cash for the nine months ended June 30, 2017 was associated with the acquisition of SNI.
Net cash flows (used in)revolving credit facility. Cash flow provided by financing activities for the ninesix months ended June 30,March 31, 2018 was approximately $(622,000) compared to approximately $26,504,000 in the nine months ended June 30, 2017. Fluctuations in financing activities are attributable to theprimarily from net borrowings of the revolving credit facility,Revolving Credit Facility offset by payments on other debt.payment of term loan.
AfterMinimum debt service payments (principal) for the twelve-month period commencing after the close of business on March 31, 2019, are approximately $2.2 million. All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on March 31, 2019, are approximately $2 million.
In recent years, the Company has incurred significant net losses. Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. In addition, the Company’s senior lenders have worked with management in providing amendments and waivers to the Company’s senior credit facilities as management works towards improving the Company’s operations and restructuring its current debt and equity capitalization.
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Based on its current projections, management expects that the Company can meet its future debt service requirements and comply with its financial covenants and other commitments, as amended, and will continue to seek reasonable assistance from the Company’s senior lenders, as necessary. However, the Company’s projections are based on assumptions and estimates about future performance and events, which are subject to change or other unforeseen conditions or uncertainties. As such, there can be no assurance that the Company will not fall into non-compliance with its loan covenants or that its Lenders will continue to provide waivers or amendments to the Company in the event of future non-compliance with debt covenants or other possible events of default that could happen in the future.
Revolving Credit Facility and Term Loan
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.MGG Investment Group LP (“MGG”). Initial funds were distributed on April 3, 2017, (the “Closing Date”)the closing date to repay the existing indebtedness, pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of the SNI Companies.
Under the terms of the Credit Agreement, the Company may borrow up to $73,750,000$73.8 million consisting of a four-year term loan in the principal amount of $48,750,000$48.8 million and revolving loans in a maximum amount up to the lesser of (i) $25,000,000$25.0 million 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.
On the Closing Dateclosing date of the Credit Agreement, the Company borrowed $48,750,000$48.8 million from term loans and borrowed approximately $7,476,316$7.5 million from the Revolving Credit Facility for a total of $56,226,316,$56.2 million, which was used by the Company to repay existing indebtedness, to pay fees and expenses relating to the Credit Agreement, and to pay a portion of the purchase price for the acquisition of all of the outstanding stock of SNI Holdco Inc. pursuant to the Merger Agreement. Amounts borrowed under the Credit Agreement also may be used by the Company to partially fund capital expenditures, provide for on-going working capital needs and general corporate needs, and to fund future acquisitions subject to certain customary conditions of the lenders.
The Credit Agreement contains certain financial covenants applicable to both the Revolving Credit Facility and Term Loan. In addition to thesethe financial covenants, the Credit Agreement includes other restrictive covenants. The Credit Agreement permits capital expenditures up to a certain level and contains customary default and acceleration provisions. The Credit Agreement also restricts, above certain levels, acquisitions, incurrence of additional indebtedness, and payment of dividends.
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or at March 31, 2018, previously. On May 15, 2018, the Company obtained a temporary waiver from its lenders for the missed financial covenants at March 31, 2018.
On August 10, 2018, the Company and its subsidiaries, as Borrowers, entered into a third amendment and third waiver (the “Third Amendment and Waiver”) to the Credit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders have agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.
Although there can be no absolute assurance, management believes thatOn December 27, 2018, the conditions that ledCompany and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to the inabilityRevolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fourth Amendment and Waiver, the Company and its Lenders negotiated and agreed to achieve compliancea temporary waiver for non-compliance with the financial covenants ofunder the Credit Agreement at Juneas of September 30, 2018, and amendments to the financial covenants and to the remaining scheduled principal payments.
On May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a fifth amendment and waiver (the “Fifth Amendment”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 20182017 (the “Credit Agreement”). Under the Fifth Amendment, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of March 31, 2019, and amendments to the financial covenants and to the remaining scheduled principal payments.
On May 15, 2019, in connection with the Fifth Amendment, the Company and its subsidiaries, as Borrowers, entered into a Letter Agreement (the “Letter Agreement”) which is the “Specified Agreement” referred to in the Credit Agreement. Under the Letter Agreement, if the Revolving Commitments (as defined in the Credit Agreement) remain outstanding on September 30, 2019, then on the following business day the Company will be required to hire an operating consultant reasonably acceptable to the Lenders to act in an advisory capacity to the Company.
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Subordinated Debt – Convertible and Non-Convertible
On October 2, 2015, the Company issued and sold a Subordinated Note in the aggregate principal amount of $4,185,000 to JAX Legacy – Investment 1, LLC (“JAX”) pursuant to a Subscription Agreement dated October 2, 2015 between the Company and Jax. On April 3, 2017, the Company and JAX amended and restated the Subordinated Note in its entirety in the form of the 10% Convertible Subordinated Note (the “10% Note”) in the aggregate principal amount of $4,185,000. The 10% Note matures on October 3, 2021. The 10% Note is convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share (subject to adjustment as provided in the 10% Note upon any stock dividend, stock combination or stock split or upon the consummation of certain fundamental transactions) (the “Conversion Price”). The 10% Note is subordinated in payment to the obligations of the Company to the lending parties to the Credit Agreement, pursuant to a Subordination and Inter-creditor Agreements, dated as of March 31, 2017 by and among the Company, the Borrowers, the Agent and JAX. The 10% Note issued to JAX is not registered under the Securities Act of 1933, as amended (the “Securities Act”). JAX is an accredited investor. The issuance of the 10% Note to JAX is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
On October 4, 2017, the Company executed an Amended and Restated Non-Negotiable Promissory Note in favor of William Daniel Dampier and Carol Lee Dampier in the amount of $1,202,405 (the “Note”). This Note amends and, as so amended, restates in its entirety and replaces that certain Subordinated Nonnegotiable Promissory Note dated October 4, 2015, issued by the Company to William Daniel Dampier and Carol Lee Dampier in the original principal amount of $3,000,000. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of $107,675, commencing on November 4, 2017 and ending on October 4, 2018.
On January 20, 2017, the Company entered into Addendum No. 1 (the “Addendum”) to the Paladin Agreement Pursuant to the terms of the Addendum, the Company and the Sellers agreed (a) that the conditions to the “Earnouts” (as defined in the Paladin Agreement) had been satisfied or waived and (b) that the amounts payable to the Sellers in connection with the Earnouts shall be amended and restructured as follows: (i) the Company shall pay $250,000 in cash to the Sellers on or prior to January 31, 2017 (the “Earnout Cash Payment”) and (ii) the Company shall issue to the Sellers a subordinated promissory note in the principal amount of $1,000,000 (the “Subordinated Note”), The Subordinated Note shall bear interest at the rate of 5.5% per annum. Interest on the Subordinated Note shall be payable monthly. The Subordinated Note shall have a term of three years and may be prepaid without penalty. The principal of and interest on the Subordinated Note may be paid, at the option of the Company, either in cash or in shares of common stock of the Company or in any combination of cash and common stock. The Sellers have agreed that all payments and obligations under the Subordinated Note shall be subordinate and junior in right of payment to any “Senior Indebtedness” (as defined in the Paladin Agreement) now or hereafter existing to “Senior Lenders” (current or future) (as defined in the Paladin Agreement). The Company has paid the $250,000 cash payment to the Sellers.
On April 3, 2017, the Company issued and paid to certain SNIH Stockholders as part of the SNIH acquisition an aggregate of $12.5 million in aggregate principal amount of its 9.5% Notes. The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”). The 9.5% Notes are improvingconvertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and continuesshall be paid quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to forecast resultsthe 9.5% Notes (as to that indicateprincipal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company to the lending parties to the Credit Agreement, pursuant to those certain Subordination and Inter-creditor Agreements, each dated as of March 31, 2017 by and among the Company, the other borrowers under the Credit Agreement, the Agent under the Credit Agreement and each of the holders of the 9.5% Notes.
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Series B Convertible Preferred Stock
On April 3, 2017, the Company agreed to issue to certain SNIH Stockholders upon receipt of duly executed letters of transmittal as part of the SNIH acquisition, an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock has a liquidation preference equal to $4.86 per share and ranks senior to all “Junior Securities” (including the Company’s Common Stock) with respect to any distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. In the event that the Company will returndeclares or pays a dividend or distribution on its Common Stock, whether such dividend or distribution is payable in cash, securities or other property, including the purchase or redemption by the Company or any of its subsidiaries of shares of Common Stock for cash, securities or property, the Company is required to compliancesimultaneously declare and pay a dividend on the Series B Convertible Preferred Stock on a pro rata basis with the Common Stock determined on an as-converted basis assuming all Shares had been converted as of immediately prior to the record date of the applicable future financial covenants.dividend or distribution. On April 3, 2017, the Company filed a Statement of Resolution Establishing its Series B Convertible Preferred Stock with the State of Illinois. (the “Resolution Establishing Series”). Except as set forth in the Resolution Establishing Series, the holders of the Series B Convertible Preferred Stock have no voting rights. Pursuant to the Resolution Establishing Series, without the prior written consent of holders of not less than a majority of the then total outstanding Shares of Series B Convertible Preferred Stock, voting separately as a single class, the Company shall not create, or authorize the creation of, any additional class or series of capital stock of the Company (or any security convertible into or exercisable for any class or series of capital stock of the Company) that ranks pari passu with or superior to the Series B Convertible Preferred Stock in relative rights, preferences or privileges (including with respect to dividends, liquidation or voting). Each share of Series B Convertible Preferred Stock is convertible at the option of the holder thereof into one share of Common Stock at an initial conversion price equal to $4.86 per share, each as subject to adjustment in the event of stock splits, stock combinations, capital reorganizations, reclassifications, consolidations, mergers or sales, as set forth in the Resolution Establishing Series.
Minimum debt service payments (principal)None of the shares of Series B Preferred Stock issued to the SNIH Stockholders are registered under the Securities Act. Each of the SNIH Stockholders who received shares of Series B Preferred Stock is an accredited investor. The issuance of the shares of Series B Preferred Stock to such SNIH Stockholders is exempt from the registration requirements of the Act in reliance on an exemption from registration provided by Section 4(2) of the Act.
During the six months ended March 31, 2019, the Company issued 250,000 shares of common stock for the twelve-month period commencing after the closeconversion of business on June 30, 2018, are approximately $7,738,000. All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close250,000 shares of business on June 30, 2018, are approximately $2,442,000.
Management believes that the future cash flow from operations and the availability of borrowings under the Revolving Credit Facility will provide sufficient liquidity for the next 12 months.Series B Convertible Preferred Stock.
Off-Balance Sheet Arrangements
As of June 30, 2018,March 31, 2019, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.
Item 3.Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
Disclosure Controls and Procedures
As of June 30, 2018,March 31, 2019, the Company's management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act"). Based on that evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2018.March 31, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company's third quarterthree months ended June 30, 2018,March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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None.
Not required.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds. |
Not required.
None.
Not Applicable
On August 10, 2018,May 15, 2019, the Company and its subsidiaries, as Borrowers, entered into a thirdfifth amendment and third waiver (the “Third Amendment and Waiver”“Fifth Amendment”) to the Revolving Credit, Agreement. Pursuant toTerm Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the ThirdFifth Amendment, the Company and Waiver, theits Lenders have negotiated and agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Defaultnon-compliance with the financial covenants under the Credit Agreement that have solely arisen by reasonas of the Company failingMarch 31, 2019, and amendments to comply with the financial covenants ofand to the Credit Agreement for the period ending June 30, 2018.remaining scheduled principal payments. A copy of the ThirdFifth Amendment, and Waiver together with the Deposit Account Control Agreement, dated as of August 8, 2018 areMay 15, 2019 is filed as ExhibitsExhibit 10.1 and 10.2 to this quarterly report on Form 10-Q.
On May 15, 2019, in connection with the Fifth Amendment, the Company and its subsidiaries, as Borrowers, entered into a Letter Agreement (the “Letter Agreement”) which is the “Specified Agreement” referred to in the Credit Agreement. Under the Letter Agreement, if the Revolving Commitments (as defined in the Credit Agreement) remain outstanding on September 30, 2019, then on the following business day the Company will be required to hire an operating consultant reasonably acceptable to the Lenders to act in an advisory capacity to the Company. A copy of the Letter Agreement, dated as of May 15, 2019 is filed as Exhibit 10.2 to this quarterly report on Form 10-Q.
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The following exhibits are filed as a part of Part I of this report:
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101.INS |
| Instance Document |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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* | Filed herewith. |
** | Furnished herewith. This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filings of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GEE GROUP INC. |
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(Registrant) |
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Date: | By: | /s/ Derek Dewan |
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| Derek Dewan |
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| Chief Executive Officer |
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By: | /s/ Kim Thorpe |
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| Kim Thorpe |
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| Chief Financial Officer (Principal Financial and Accounting Officer) |
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