|
|
September 30,
|
|
Amounts in thousands
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
3,213
|
|
|
$
|
2,785
|
|
Accounts receivable, less allowances ($302 and $1,712, respectively)
|
|
|
20,755
|
|
|
|
23,178
|
|
Prepaid expenses and other current assets
|
|
|
2,266
|
|
|
|
3,014
|
|
Total current assets
|
|
|
26,234
|
|
|
|
28,977
|
|
Property and equipment, net
|
|
|
891
|
|
|
|
914
|
|
Goodwill
|
|
|
76,593
|
|
|
|
76,593
|
|
Intangible assets, net
|
|
|
29,467
|
|
|
|
35,049
|
|
Other long-term assets
|
|
|
416
|
|
|
|
282
|
|
TOTAL ASSETS
|
|
$
|
133,601
|
|
|
$
|
141,815
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,523
|
|
|
$
|
3,243
|
|
Acquisition deposit for working capital guarantee
|
|
|
883
|
|
|
|
1,500
|
|
Accrued compensation
|
|
|
5,212
|
|
|
|
7,394
|
|
Short-term portion of subordinated debt
|
|
|
106
|
|
|
|
1,225
|
|
Short-term portion of term loan, net of discount
|
|
|
2,331
|
|
|
|
3,433
|
|
Other current liabilities
|
|
|
2,064
|
|
|
|
2,690
|
|
Total current liabilities
|
|
|
13,119
|
|
|
|
19,485
|
|
Deferred taxes
|
|
|
146
|
|
|
|
958
|
|
Revolving credit facility
|
|
|
11,925
|
|
|
|
7,904
|
|
Term loan, net of discounts
|
|
|
40,253
|
|
|
|
42,018
|
|
Subordinated debt
|
|
|
1,000
|
|
|
|
1,000
|
|
Subordinated convertible debt
|
|
|
16,685
|
|
|
|
16,685
|
|
Other long-term liabilities
|
|
|
583
|
|
|
|
369
|
|
Total long-term liabilities
|
|
|
70,592
|
|
|
|
68,934
|
|
|
|
|
|
|
|
|
|
|
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 -
5,816 and 5,926 at September 30, 2018 and September 30, 2017, respectively;
liquidation value of the preferred series B stock is approximately $28,255 and
$28,800 at September 30, 2018 and September 30, 2017, respectively
|
|
|
28,788
|
|
|
|
29,333
|
|
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 10,783
|
|
|
|
|
|
|
|
|
shares at September 30, 2018 and 9,879 shares at September 30, 2017
|
|
|
-
|
|
|
|
-
|
|
Additional paid in capital
|
|
|
44,120
|
|
|
|
39,517
|
|
Accumulated deficit
|
|
|
(23,018
|
)
|
|
|
(15,454
|
)
|
Total shareholders' equity
|
|
|
21,102
|
|
|
|
24,063
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
133,601
|
|
|
$
|
141,815
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Year Ended September 30,
|
|
Amounts in thousands except per share data
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
NET REVENUES:
|
|
|
|
|
|
|
Contract staffing services
|
|
$
|
142,228
|
|
|
$
|
120,247
|
|
Direct hire placement services
|
|
|
23,056
|
|
|
|
14,731
|
|
NET REVENUES
|
|
|
165,284
|
|
|
|
134,978
|
|
|
|
|
|
|
|
|
|
|
Cost of contract services
|
|
|
106,352
|
|
|
|
90,003
|
|
GROSS PROFIT
|
|
|
58,932
|
|
|
|
44,975
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
47,406
|
|
|
|
39,498
|
|
Acquisition, integration and restructuring expenses
|
|
|
3,092
|
|
|
|
2,925
|
|
Depreciation expense
|
|
|
390
|
|
|
|
426
|
|
Amortization of intangible assets
|
|
|
5,582
|
|
|
|
3,527
|
|
INCOME (LOSS) FROM OPERATIONS
|
|
|
2,462
|
|
|
|
(1,401
|
)
|
Change in acquisition deposit for working capital guarantee
|
|
|
617
|
|
|
|
-
|
|
Loss on extinguishment of debt
|
|
|
-
|
|
|
|
(994
|
)
|
Interest expense
|
|
|
(11,502
|
)
|
|
|
(5,995
|
)
|
LOSS BEFORE INCOME TAX PROVISION
|
|
|
(8,423
|
)
|
|
|
(8,390
|
)
|
Provision for income tax
|
|
|
859
|
|
|
|
6,018
|
|
NET LOSS
|
|
$
|
(7,564
|
)
|
|
$
|
(2,372
|
)
|
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(7,564
|
)
|
|
$
|
(2,372
|
)
|
|
|
|
|
|
|
|
|
|
BASIC INCOME (LOSS) PER SHARE
|
|
$
|
(0.74
|
)
|
|
$
|
(0.25
|
)
|
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED
|
|
|
10,239
|
|
|
|
9,630
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional Paid
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
(In Thousands)
|
|
Shares
|
|
|
In Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2016
|
|
|
9,379
|
|
|
$
|
37,615
|
|
|
$
|
(13,082
|
)
|
|
$
|
24,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
902
|
|
|
|
-
|
|
|
|
902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock warrants
|
|
|
500
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,372
|
)
|
|
|
(2,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2017
|
|
|
9,879
|
|
|
|
39,517
|
|
|
|
(15,454
|
)
|
|
|
24,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
1,660
|
|
|
|
-
|
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock for interest
|
|
|
794
|
|
|
|
2,400
|
|
|
|
-
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred Series B to common stock
|
|
|
110
|
|
|
|
543
|
|
|
|
-
|
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,564
|
)
|
|
|
(7,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
|
10,783
|
|
|
$
|
44,120
|
|
|
$
|
(23,018
|
)
|
|
$
|
21,102
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
Year Ended September 30,
|
|
(In Thousands)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,564
|
)
|
|
$
|
(2,372
|
)
|
Adjustments to reconcile net loss to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,972
|
|
|
|
3,953
|
|
Loss on disposal of assets
|
|
|
73
|
|
|
|
-
|
|
Stock option expense
|
|
|
1,660
|
|
|
|
902
|
|
Provision for doubtful accounts
|
|
|
454
|
|
|
|
1,521
|
|
Deferred income taxes
|
|
|
(812
|
)
|
|
|
(6,012
|
)
|
Amortization of debt discount and non cash extinguishment of debt
|
|
|
767
|
|
|
|
1,198
|
|
Interest expense paid with common stock
|
|
|
1,209
|
|
|
|
-
|
|
Change in acquisition deposit for working capital guarantee
|
|
|
(617)
|
|
|
|
-
|
|
Changes in operating assets and liabilities -
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,969
|
|
|
|
(2,393
|
)
|
Acquisition deposit for working capital guarantee
|
|
|
-
|
|
|
|
1,500
|
|
Accounts payable
|
|
|
(720
|
)
|
|
|
446
|
|
Accrued compensation
|
|
|
(2,182
|
)
|
|
|
214
|
|
Other current items, net
|
|
|
1,291
|
|
|
|
1,240
|
|
Long-term liabilities
|
|
|
7
|
|
|
|
25
|
|
Net cash provided by operating activities
|
|
|
1,507
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
(324
|
)
|
|
|
(250
|
)
|
Acquisition payments, net of cash acquired
|
|
|
-
|
|
|
|
(25,356
|
)
|
Net cash used in investing activities
|
|
|
(324
|
)
|
|
|
(25,606
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Payment on term loan
|
|
|
(3,634
|
)
|
|
|
(19,951
|
)
|
Payments on the debt related to acquisitions
|
|
|
(1,118
|
)
|
|
|
(1,285
|
)
|
Payments on senior debt
|
|
|
-
|
|
|
|
(609
|
)
|
Proceeds from exercise of stock warrants
|
|
|
-
|
|
|
|
1,000
|
|
Payments on capital lease
|
|
|
(24
|
)
|
|
|
(21
|
)
|
Net proceeds from long-term debt
|
|
|
-
|
|
|
|
45,676
|
|
Net proceeds from revolving credit
|
|
|
4,021
|
|
|
|
831
|
|
Net cash (used in) provided by financing activities
|
|
|
(755
|
)
|
|
|
25,641
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
428
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
2,785
|
|
|
|
2,528
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
3,213
|
|
|
$
|
2,785
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
9,788
|
|
|
$
|
3,383
|
|
Cash paid for taxes
|
|
$
|
45
|
|
|
$
|
247
|
|
Non-cash financing activities
|
|
|
|
|
|
|
|
|
Conversion of Series B Convertible Preferred Stock to common stock
|
|
$
|
543
|
|
|
$
|
-
|
|
Issuance of preferred stock for acquisition
|
|
$
|
-
|
|
|
$
|
29,333
|
|
Issuance of note payable for acquisition
|
|
$
|
-
|
|
|
$
|
12,500
|
|
Issuance of stock for extinguishment of debt
|
|
$
|
-
|
|
|
$
|
385
|
|
Acquisition of equiment with capital leases
|
|
$
|
117
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these consolidated financial statements.
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.
The Company’s fiscal year begins on October 1 and ends on September 30 of each year. Fiscal 2018 and fiscal 2017 refer to the fiscal years ended September 30, 2018 and 2017, respectively.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and the rules of the United States Securities and Exchange Commission.
Liquidity
The Company experienced significant net losses in fiscal 2018 and fiscal 2017. Management has implemented a strategy which includes cost reductions and consolidation of certain operating activities to gain efficiencies as well as identifying strategic acquisitions, financed primarily through a combination of the issuance of equity and debt, to improve the overall profitability and cash flows of the Company.
As of September 30, 2018, the Company had cash of approximately $3.2 million which was an increase of approximately $0.4 million from approximately $2.8 million at September 30, 2017. Working capital at September 30, 2018 was approximately $13.1 million, as compared to working capital of approximately $9.5 million for September 30, 2017.
Management currently expects that the combination of future cash flow from operations and the availability under the Revolving Credit Facility will provide sufficient liquidity for the next 12 months. See Note 6, for a further discussion of the terms, conditions, status and related matters regarding the Company’s Revolving Credit, Term Loan and Security Agreement and subsequent amendments related to waivers of covenants.
Principles of Consolidation
The 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.
Estimates and Assumptions
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates.
Revenue Recognition
Direct hire placement service revenues are recognized when applicants accept offers of employment, less a provision for estimated losses due to applicants not remaining employed for the Company’s guarantee period. Contract staffing service revenues are recognized when services are rendered.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Falloffs and refunds during the period are reflected in the consolidated statements of operations as a reduction of placement service revenues and were approximately $2.1 million and $1.5 million in fiscal 2018 and fiscal 2017, respectively. Expected future falloffs and refunds are reflected in the consolidated balance sheet as a reduction of accounts receivable and were approximately $0.2 million and $1.0 million as of September 30, 2018 and September 30, 2017, respectively.
Cost of Contract Staffing Services
The cost of contract services includes the wages and the related payroll taxes, employee benefits of the Company’s contract service employees, and certain other employee-related costs, while they work on contract assignments.
Cash and Cash Equivalents
Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of September 30, 2018, and September 30, 2017, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a small accounts receivable allowance. As of September 30, 2018, and September 30, 2017 allowance for doubtful accounts was $0.3 million and $1.7 million, respectively. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The reserve includes permanent placement falloff reserves of $0.2 million and $1.0 million as of September 30, 2018 and 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. 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 fiscal 2018 and fiscal 2017.
Goodwill
Goodwill represents the excess of cost over the fair value of the net assets acquired in the various acquisitions. The Company evaluates 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.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Fair Value Measurement
The Company follows the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurement”, which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carrying value of the Company’s long-term liabilities represents their fair value based on level 3 inputs. The Company’s goodwill and other intangible assets are measured at fair value on a non-recurring basis using level 3 inputs, as discussed in Note 5.
Earnings and Loss per Share
Basic loss per share is computed by dividing net loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation.
Common stock equivalents excluded because their effect is anti-dilutive were 11.0 million and 10.2 million for fiscal 2018 and fiscal 2017, respectively.
Advertising Expenses
The Company expenses the costs of print and internet media advertising and promotions as incurred and reports these costs in selling, general and administrative expenses. Advertising expense totaled $2.3 million and $1.7 million for fiscal 2018 and fiscal 2017, respectively.
Intangible Assets
Customer lists, non-compete agreements, customer relationships and trade names were recorded at their estimated fair value at the date of acquisition and are being amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Impairment of Long-lived Assets
The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. The Company did not record any impairment during fiscal 2018 and fiscal 2017.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with FASB ASC 718, “Compensation-Stock Compensation”, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee's requisite service period (generally the vesting period of the equity grant). The Company's option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with 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.
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 based on the differences between the financial statement and tax basis 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 interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2018, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Reclassification
Certain reclassifications have been made to the financial statements as of and for the years ended September 30, 2017 to conform to the current year presentation.
Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional contract services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary contract light industrial staffing. These distinct services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not entirely allocated among light industrial services and professional staffing services. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including type of business, type of employee, length of employment and revenue recognition are considered in determining these operating segments.
3. Recent Accounting Pronouncements
On May 28, 2014, the 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 most existing revenue recognition guidance in U.S. GAAP when it becomes effective. 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 for the Company beginning October 1, 2018. The adoption of this guidance does not have a material impact on the Company’s 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 its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. The new rules will be effective for the Company in the first quarter of 2021. Early adoption is 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.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
4. Property and Equipment
Property and equipment, net consisted of the following:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Computer software
|
|
$
|
1,447
|
|
|
$
|
1,447
|
|
Office equipment, furniture and fixtures and leasehold improvements
|
|
|
3,356
|
|
|
|
3,243
|
|
Total property and equipment, at cost
|
|
|
4,803
|
|
|
|
4,690
|
|
Accumulated depreciation and amortization
|
|
|
(3,912
|
)
|
|
|
(3,776
|
)
|
Property and equipment, net
|
|
$
|
891
|
|
|
$
|
914
|
|
Depreciation expense for fiscal 2018 and fiscal 2017 was $390.0 and $426.0 respectively. During fiscal 2018 the Company had $0.1 million of disposal on assets primarily related to the consolidation of assets related to the SNI acquisition.
5
. Goodwill and Intangible Assets
Goodwill
The following table sets forth activity in goodwill from September 30, 2016 through September 30, 2018. See Note 12 for details of the SNI acquisition that occurred during fiscal 2017.
Goodwill as of September 30, 2016
|
|
$
|
18,590
|
|
Acquisition of SNI Companies
|
|
|
58,003
|
|
Goodwill as of September 30, 2017
|
|
$
|
76,593
|
|
|
|
|
|
|
Goodwill as of September 30, 2018
|
|
$
|
76,593
|
|
During fiscal 2018 and fiscal 2017 the Company did not record any impairment of goodwill.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Intangible Assets
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
(in thousands)
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Net Book Value
|
|
Customer relationships
|
|
$
|
29,070
|
|
|
$
|
7,459
|
|
|
$
|
21,611
|
|
|
$
|
29,070
|
|
|
$
|
4,601
|
|
|
$
|
24,469
|
|
Trade names
|
|
|
8,329
|
|
|
|
2,537
|
|
|
|
5,792
|
|
|
|
8,329
|
|
|
|
1,115
|
|
|
|
7,214
|
|
Non-Compete agreements
|
|
|
4,331
|
|
|
|
2,267
|
|
|
|
2,064
|
|
|
|
4,331
|
|
|
|
965
|
|
|
|
3,366
|
|
Total
|
|
$
|
41,730
|
|
|
$
|
12,263
|
|
|
$
|
29,467
|
|
|
$
|
41,730
|
|
|
$
|
6,681
|
|
|
$
|
35,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Amortization Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
$
|
5,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
|
5,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2021
|
|
|
4,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2022
|
|
|
3,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2023
|
|
|
2,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
8,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
29,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The trade names are amortized on a straight – line basis over the estimated useful life of between 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 five to ten years. Non-compete agreements are amortized based on a straight-line basis over the term of the noncompete agreement, typically five years.
The amortization expense attributable to identifiable intangible assets was $5.5 million and $3.5 million for fiscal 2018 and fiscal 2017, respectively.
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 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 $73.8 million consisting of a four-year term loan in the principal amount of $48.8 million and revolving loans in a maximum amount up to the lesser of (i) $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: 1.25 to 1.00 for the trailing four quarters ended September 30, 2018; 0.80 to 1.00 for the quarter ending December 31, 2018; 1.00 to 1.00 for the two fiscal quarters ending March 31, 2019; 1.05 to 1.00 for the three fiscal quarters ending June 30, 2019; 1.05 to 1.00 for the four fiscal quarters ending September 30, 2019; and 1.25 to 1.00 for each fiscal quarter thereafter.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
Minimum EBITDA.
Minimum EBITDA, which is determined on a consolidated basis, as defined in the Credit Agreement, as amended, are: $13.3 million for the quarter ended September 30, 2018; $12.7 million for the fiscal quarter ended December 31, 2018; $13.0 million for the fiscal quarter ended March 31, 2019; $13.3 million for the fiscal quarter ended June 30, 2019; and $14.0 million for the fiscal quarter ending September 30, 2019 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: 4.00 to 1.00 for the quarter ended September 30, 2018; 4.40 to 1.00 for the fiscal quarter ended December 31, 2018; 4.25 to 1.00 for the fiscal quarter ended March 31, 2019; 4.10 to 1.00 for the fiscal quarter ended June 30, 2019; and 4.00 to 1.00 for the fiscal quarter ending September 30, 2019 and 2.50 to 1.00 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 $73.5 consent fee to the Agents for the pro rata benefit of the lenders, in connection with the Waiver. On August 31, 2017, an additional waiver to the Credit Agreement (“Additional Waiver”), pursuant to which the due date for the Company to deliver the subordination agreement and an amended subordinated note, executed by one of the Company’s subordinated lenders was extended from August 31, 2017 to October 3, 2017, also was obtained.
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, $10.0 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.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
The Company did not meet its financial loan covenants at September 30, 2018 or at June 30, 2018 or 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 waiver (the “Third Amendment and Waiver”) to the Credit Agreement. Pursuant to the Third Amendment and Waiver, the Lenders agreed to modify the definition of EBITDA in the Credit Agreement to allow for the recognition and exclusion of certain additional acquisition, integration and restructuring expenses not previously specified and to provide a temporary waiver for any Defaults and Events of Default under the Credit Agreement that have solely arisen by reason of the Company failing to comply with the financial covenants of the Credit Agreement for the period ending June 30, 2018.
On December 27, 2018, the Company and its subsidiaries, as Borrowers, entered into a fourth amendment and waiver (the “Fourth Amendment and Waiver”) to the Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017 (the “Credit Agreement”). Under the Fourth Amendment and Waiver, the Company and its Lenders have negotiated and agreed to a waiver for non-compliance with the financial covenants under the Credit Agreement as of September 30, 2018, and amendments to the financial covenants and to the remaining scheduled principal payments.
Management has taken definitive actions to improve operations, reduce costs and improve profitability, and position the Company for future growth. 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 in the Fourth Amendment. 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
As of September 30, 2018, the Company had $11.9 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $8.0 million was at an interest rate of approximately 17.34% and the remainder was at an interest rate of approximately 19.25%.
As of September 30, 2018, the Company had approximately $2.3 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.
Term Loan
The Company had outstanding balances under its Term Loan, as follows:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Term loan
|
|
$
|
44,505
|
|
|
$
|
48,141
|
|
Unamortized debt discount
|
|
|
(1,921
|
)
|
|
|
(2,690
|
)
|
Term loan, net of discount
|
|
|
42,584
|
|
|
|
45,451
|
|
Short term portion of term loan, net of discounts
|
|
|
2,331
|
|
|
|
3,433
|
|
Long term portion of term loan, net of discounts
|
|
$
|
40,253
|
|
|
$
|
42,018
|
|
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
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: fiscal 2019 – $3.1 million, fiscal 2020 – $8.3 million and fiscal 2021 - $33.1 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 September 30, 2018.
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 September 30, 2018, the Company had $11.9 million in outstanding borrowings under the Revolving Credit Facility, of which approximately $8.0 million was at an interest of approximately 17.34% and the remainder was at an interest of approximately 19.25%. Accrued interest is included in other current liabilities in the Consolidated Balance Sheets.
Loan Fees and Amortization
In connection with the Credit Agreement, the Company agreed to pay an original discount fee of approximately $0.9 million, a closing fee for the term loan of approximately $0.1 million, a finder’s fee of approximately $1.6 million and a closing fee for the revolving credit facility of approximately $0.5 million. The total of the loan fees paid is approximately $3.1 million. The Company has reported these direct loan-related costs in the form of a discount and reduction of the term loan in the accompanying consolidated balance sheets and is amortizing them as interest expense over the term of the loans. During fiscal 2018 and fiscal 2017, the Company amortized approximately $0.8 million and $0.5 million, respectively, of debt discount.
7. Accrued Compensation
Accrued Compensation includes accrued wages, the related payroll taxes, employee benefits of the Company's employees while they work on contract assignments, commissions earned and not yet paid and estimated commissions payable.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
8. Subordinated Debt
– Convertible and Non - Convertible
The Company had outstanding balances under its Convertible and Non-Convertible Subordinated Debt agreements, as follows:
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
10% Convertible Subordinated Note
|
|
$
|
4,185
|
|
|
$
|
4,185
|
|
Amended and Restated Non-negotiable promissory note
|
|
|
106
|
|
|
|
1,225
|
|
Subordinated Promissary Note
|
|
|
1,000
|
|
|
|
1,000
|
|
9.5% Convertible Subordinated Note
|
|
|
12,500
|
|
|
|
12,500
|
|
Total subordinated debt, convertible and non-convertible
|
|
|
17,791
|
|
|
|
18,910
|
|
Short term portion of subordinated debt, convertible and non-convertible
|
|
|
(106
|
)
|
|
|
(1,225
|
)
|
Long term portion of subordinated debt, convertible and non-convertible
|
|
$
|
17,685
|
|
|
$
|
17,685
|
|
10% Convertible Subordinated Note
The Company had a Subordinated Note payable to JAX Legacy – Investment 1, LLC (“JAX Legacy”), pursuant to a Subscription Agreement dated October 2, 2015, in the amount of $4.2 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 $4.2 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 77.8 shares of common stock, at a value of approximately $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.
During fiscal 2018 the Company issued approximately 264,280 shares of common stock to Jax Legacy related to interest of $0.9 million on 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 approximately $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 $3.0 million. The Company agreed to pay William Daniel Dampier and Carol Lee Dampier 12 equal installments of approximately $107.7, commencing on November 4, 2017 and ending on October 4, 2018. The entire loan is classified as current and subordinate to the senior debt.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
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 $250.0 in cash to the Sellers 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 $1.0 million (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 and principle 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 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).
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 12) an aggregate of $12.5 million in the form of 9.5% Convertible Subordinated Notes (the “9.5% Notes”). The 9.5% Notes mature on October 3, 2021 (the “Maturity Date”). The 9.5% Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to $5.83 per share. Interest on the 9.5% Notes accrues at the rate of 9.5% per annum and shall be paid quarterly in arrears on June 30, September 30, December 31 and March 31, beginning on June 30, 2017, on each conversion date with respect to the 9.5% Notes (as to that principal amount then being converted), and on the Maturity Date (each such date, an “Interest Payment Date”). At the option of the Company, interest may be paid on an Interest Payment Date either in cash or in shares of Common Stock of the Company, which Common Stock shall be valued based on the terms of the agreement, subject to certain limitations defined in the loan agreement. Each of the 9.5% Notes is subordinated in payment to the obligations of the Company under its Credit Agreement (see Note 6) pursuant to Subordination and Inter-creditor Agreements dated as of March 31, 2017 by and among the Company, the Credit Agreement lenders, and each of the holders of the 9.5% Notes.
Future minimum payments of all subordinated debt will total approximately as follows: fiscal 2019 - $0.1 million, fiscal 2020 - $1.0 million, fiscal 2021- $0 and fiscal 2022 - $16.7 million.
During fiscal 2018 the Company issued approximately 530,071 shares of common stock to the SNI Sellers related to interest of $1.5 million on the 9.5% Notes.
9. Equity and Share-based Compensation
During fiscal 2018 the Company issued 110,083 shares of common stock for the conversion of approximately 110,083 shares of Series B Convertible Preferred Stock (see Note 10).
Restricted Stock
In fiscal 2018, the Company granted 600,000 and 500,000 restricted shares of common stock to its Chairman and Chief Executive Officer and President, respectively. 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 $0.3 million and $0 million in fiscal 2018 and fiscal 2017, respectively. The fair values of the granted shares based upon the quoted market price of the Company’s common stock on the close of business on the date of grant of $2.39 per share was $2.4 million. As of September 30, 2018, there was approximately $2.1 million of unrecognized compensation expense related to restricted stock outstanding.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
A summary of restricted stock activity is presented as follows:
|
|
Number of Shares
|
|
Restricted stock outstanding as of September 30, 2017
|
|
|
-
|
|
Granted
|
|
|
1,100
|
|
Exercised
|
|
|
-
|
|
Restricted stock outstanding as of September 30, 2018
|
|
|
1,100
|
|
|
|
|
|
|
Restricted stock exercisable as of September 30,2018
|
|
|
-
|
|
Warrants
No warrants were granted or exercised during fiscal 2018.
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price Per Share
($)
|
|
|
Weighted Average Remaining Contractual Life
|
|
|
Total Intrinsic Value of Warrants ($)
|
|
Warrants outstanding as of September 30, 2016
|
|
|
997
|
|
|
|
2.92
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
(500
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
Warrants outstanding as of September 30, 2017
|
|
|
497
|
|
|
|
3.84
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Warrants outstanding as of September 30, 2018
|
|
|
497
|
|
|
|
3.84
|
|
|
|
2.87
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable as of September 30,2017
|
|
|
497
|
|
|
|
3.84
|
|
|
|
3.87
|
|
|
|
234
|
|
Warrants exercisable as of September 30,2018
|
|
|
497
|
|
|
|
3.84
|
|
|
|
2.87
|
|
|
|
67
|
|
Stock Options
As of September 30, 2018, there were stock options outstanding under the Company’s, Second Amended and Restated 1997 Stock Option Plan and the Company’s Amended and Restated 2013 Incentive Stock Plan. Both plans were approved by the shareholders. The plans granted specified numbers of options to non-employee directors, and they authorized the Compensation Committee of the Board of Directors to grant either incentive or non-statutory stock options to employees. Vesting periods are established by the Compensation Committee at the time of grant. All stock options outstanding as of September 30, 2018 and September 30, 2017 were non-statutory stock options, had exercise prices equal to the market price on the date of grant, and had expiration dates ten years from the date of grant.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
A summary of stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price per share
($)
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Total Intrinsic Value of Options
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2016
|
|
|
568
|
|
|
|
4.39
|
|
|
|
|
|
|
|
Granted
|
|
|
382
|
|
|
|
5.15
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(42
|
)
|
|
|
4.38
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2017
|
|
|
908
|
|
|
|
5.11
|
|
|
|
|
|
|
|
Granted
|
|
|
780
|
|
|
|
2.45
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(110
|
)
|
|
|
5.33
|
|
|
|
|
|
|
|
Options outstanding as of September 30, 2018
|
|
|
1,578
|
|
|
|
3.76
|
|
|
|
7.53
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2017
|
|
|
408
|
|
|
|
4.79
|
|
|
|
8.00
|
|
|
|
303
|
|
Exercisable as of September 30, 2018
|
|
|
512
|
|
|
|
5.08
|
|
|
|
7.30
|
|
|
|
1
|
|
The fair value of stock options granted was made using the Black-Scholes option pricing model and the following assumptions:
|
|
2018
|
|
|
2017
|
|
Weighted average fair value of options
|
|
$
|
2.24
|
|
|
$
|
4.63
|
|
Weighted average risk-free interest rate
|
|
|
2.68
|
%
|
|
|
2.20
|
%
|
Weighted average dividend yield
|
|
$
|
-
|
|
|
$
|
-
|
|
Weighted average volatility factor
|
|
|
105
|
%
|
|
|
104
|
%
|
Weighted average expected life (years)
|
|
|
10
|
|
|
|
10
|
|
Stock-based compensation expense attributable to stock options and warrants was $1.4 million and $0.9 million in fiscal 2018 and fiscal 2017, respectively. As of September 30, 2018, there was approximately $2.4 million of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.5 years.
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 Merger Consideration. 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.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
In the event that the Company declares or pays a dividend or distribution on its Common Stock, whether such dividend or distribution is payable in cash, securities or other property, including the purchase or redemption by the Company or any of its subsidiaries of shares of Common Stock for cash, securities or property, the Company is required to simultaneously declare and pay a dividend on the no par value, Series B Convertible Preferred Stock on a pro rata basis with the Common Stock determined on an as-converted basis assuming all shares had been converted as of immediately prior to the record date of the applicable dividend or distribution.
Except as set forth in the Resolution Establishing Series (as defined below) 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 fiscal 2018 the Company issued 110,083 shares of common stock for the conversion of approximately 110,083 shares of Series B Convertible Preferred Stock.
11. Income Taxes
On December 22, 2017, President Trump signed into law the “Tax Cuts and Jobs Act” ("U.S. Tax Reform Act"). The U.S. Tax Reform Act provides for significant changes in the U.S. Internal Revenue Code of 1986, as amended. Certain provisions of the U.S. Tax Reform Act became effective during our fiscal year ending September 30, 2018 with all provisions of the U.S. Tax Reform Act effective as of the beginning of our fiscal year ending September 30, 2019. As the U.S. Tax Reform Act was enacted after our year ending September 30, 2017, it had no impact on our fiscal 2017 financial results. The U.S. Tax Reform Act contains provisions with separate effective dates but is generally effective for taxable years beginning after December 31, 2017. Beginning on January 1, 2018, the U.S. Tax Reform Act lowers the US corporate income tax rate to 21% from that date and beyond, as a result, we are utilizing a blended rate of 24.5% for the current year rate for the year ending September 30, 2018, while all of our deferred tax assets and liabilities have been revalued at 21%, the tax rate the Company expects all the deferred tax assets and liabilities to reverse at.
As of September 30, 2018, we have accounted for the relevant parts of the U.S. Tax Reform Act. The following summarizes the key aspects of the accounting required for the U.S. Tax Reform Act:
|
·
|
The current year provision is being calculated at a blended statutory rate of 24.5% due to our fiscal year end of September 30. The difference between using the 24.5% and the normal 34% rate is an estimated tax benefit of approximately $0.8 million.
|
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
|
·
|
Ending balances for all our deferred tax assets and liabilities have been revalued at the Federal statutory tax rate of 21%, which is the rate expected to apply when the deferred taxes reverse. The Company has also accounted for the related impacts to its applicable state tax rates. The overall impact of revaluing the ending deferred taxes at 21% was a reduction to the deferred tax asset balance of $0.8 million as of September 30, 2018, inclusive of the state tax impact. Including the impact of the rate change on the current year calculation noted above, the net impact of the rate change was approximately $41,000 which is reflected in the effective tax rate reconciliation below.
|
|
|
|
|
·
|
The Federal net operating loss (“NOL”) generated for the period ending September 30, 2018, can be carried forward indefinitely. Since the current year NOL has an indefinite carryforward, the Company is able to use its deferred tax liability relating to goodwill (see discussion below) as a source of income for its federal deferred tax position. As a result, the Company also has to released $1.0 million of valuation allowance at September 30, 2018. The remaining net deferred tax liability relates solely to the state deferred tax liability for goodwill. The $1.0 million reduction in the valuation allowance is included in the net change in the valuation allowance on the effective tax rate reconciliation below.
|
The components of the provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current benefit:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
|
-
|
|
State
|
|
|
(15
|
)
|
|
|
126
|
|
Total current benefit:
|
|
$
|
(15
|
)
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(898
|
)
|
|
|
(5,549
|
)
|
State
|
|
|
54
|
|
|
|
(595
|
)
|
Total deferred benefit:
|
|
$
|
(844
|
)
|
|
|
(6,144
|
)
|
|
|
|
|
|
|
|
|
|
Total income tax benefit:
|
|
$
|
(859
|
)
|
|
|
(6,018
|
)
|
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
A reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Income at US Statutory Rate
|
|
$
|
(2,064
|
)
|
|
$
|
(2,853
|
)
|
State Taxes, net of Federal benefit
|
|
|
(76
|
)
|
|
|
(633
|
)
|
Tax Credits
|
|
|
(176
|
)
|
|
|
(99
|
)
|
Acquisition Related Costs
|
|
|
(108
|
)
|
|
|
476
|
|
Statutory Rate Changes
|
|
|
41
|
|
|
|
(571
|
)
|
Valuation Allowance
|
|
|
1,167
|
|
|
|
(2,370
|
)
|
Other
|
|
|
357
|
|
|
|
32
|
|
|
|
$
|
(859
|
)
|
|
$
|
(6,018
|
)
|
The net deferred income tax asset balance related to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net Operating Losses
|
|
$
|
6,710
|
|
|
$
|
8,177
|
|
Stock Options
|
|
|
969
|
|
|
|
881
|
|
Allowance for Doubtful Accounts
|
|
|
140
|
|
|
|
958
|
|
Accrued & Prepaid Expenses
|
|
|
469
|
|
|
|
911
|
|
Tax Credit Carryforwards
|
|
|
404
|
|
|
|
171
|
|
Other
|
|
|
4
|
|
|
|
-
|
|
Total Deferred tax assets
|
|
$
|
8,696
|
|
|
$
|
11,098
|
|
Intangibles
|
|
$
|
(6,006
|
)
|
|
$
|
(10,308
|
)
|
Depreciation
|
|
|
(31
|
)
|
|
|
(110
|
)
|
Total deferred tax liability
|
|
$
|
(6,037
|
)
|
|
$
|
(10,418
|
)
|
Deferred tax asset
|
|
$
|
2,659
|
|
|
$
|
680
|
|
Valuation allowance
|
|
|
(2,805
|
)
|
|
|
(1,638
|
)
|
Net deferred tax liability
|
|
$
|
(146
|
)
|
|
$
|
(958
|
)
|
As of September 30, 2018, and 2017, the Company had federal and state net operating loss carryforwards of approximately $27.3 million and $23.7 million, respectively, which begin to expire in 2028 for federal and 2022 for state purposes.
Future realization of the tax benefits of existing temporary differences and net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period. As of September 30, 2018, and 2017, the Company performed an evaluation to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative, which included the results of operations for the current and preceding years. The Company also considered whether there was any currently available information about future years. Because long-term contracts are not a significant part of the Company’s business, future results cannot be reliably predicted by considering past trends or by extrapolating past results. Moreover, the Company’s earnings are influenced by national economic conditions and have been volatile in the past. Considering these factors, the Company determined that it was not possible to reasonably quantify future taxable income. The Company determined that it is more likely than not that all of the net deferred tax assets (deferred tax assets in excess of corresponding deferred tax liabilities) will not be realized. Accordingly, the Company maintained a full valuation allowance as of September 30, 2018 and 2017.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
With the passage of time, the Company will continue to generate additional deferred tax assets and liabilities related to amortization of acquired intangible assets for tax purposes. As goodwill, an indefinite-lived intangible asset, will not be amortized for financial reporting purposes under current accounting standards, any tax amortization related goodwill claimed by the Company in future years will give rise to an increasing deferred tax liability, which will only reverse at the time of a future impairment under current accounting rules or ultimate sale of the underlying intangible assets. Due to the uncertain timing of this reversal, the temporary difference cannot be considered as a source of future taxable income, but for the amount of indefinite federal NOL carryforwards available due to the U.S. Tax Reform Act as noted above, for purposes of determining a valuation allowance against the Company’s other net deferred tax assets. As a result, the Company’s net deferred tax position at September 30, 2018 and 2017, represents the tax impact of the cumulative tax amortization of goodwill, which is primarily attributable to historical tax deductible goodwill from SNI.
Under Internal Revenue Code 382, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income may be limited. We have not completed a study to assess whether an “ownership change” has occurred or whether there have been multiple ownership changes since we became a “loss corporation” as defined in Section 382. Future changes in our stock ownership, which may be outside of our control, may trigger an “ownership change”. In addition, future equity offerings or acquisitions that have equity as a component of the purchase price could result in an “ownership change.” If an “ownership change” has occurred or does occur in the future, utilization of the NOL carryforwards or other tax attributes may be limited, which could potentially result in increased future tax liability to us.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations for both federal taxes and the many states in which we operate or do business in. ASC 740 states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits.
We record tax positions as liabilities in accordance with ASC 740 and adjust these liabilities when our judgement changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the recognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of September 30, 2018, and 2017 we have not recorded any uncertain tax positions in our financial statements.
We recognize interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2018, and 2017, no accrued interest or penalties are included on the related tax liability line in the consolidated balance sheet.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from September 30, 2014, to the present. Earlier years may be examined to the extent that the net operating loss carryforwards form those earlier years are used in future periods. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
12. Acquisitions
SNI
The Company entered into an Agreement and Plan of Merger dated as of March 31, 2017 (the “Merger Agreement”) by and among the Company, GEE Group Portfolio, Inc., a Delaware corporation and a wholly owned subsidiary of the Company, (“GEE Portfolio”), SNI Holdco Inc., a Delaware corporation (“SNIH”), Smith Holdings, LLC a Delaware limited liability company, Thrivent Financial for Lutherans, a Wisconsin corporation, organized as a fraternal benefits society (“Thrivent”), Madison Capital Funding, LLC, a Delaware limited liability company (“Madison”) and Ronald R. Smith, in his capacity as a stockholder (“Mr. Smith” and collectively with Smith Holdings, LLC, Thrivent and Madison, the “Principal Stockholders”) and Ronald R. Smith in his capacity as the representative of the SNIH Stockholders (“Stockholders’ Representative”). The Merger Agreement provided for the merger subject to the terms and conditions set forth in the Merger Agreement of SNI Holdco with and into GEE Portfolio pursuant to which GEE Portfolio would be the surviving corporation (the “Merger”). The Merger was consummated on April 3, 2017 (the “Closing”) and did not require stockholder approval in order to be completed. As a result of the merger, GEE Portfolio became the owner of 100% of the outstanding capital stock of SNI Companies, a Delaware corporation and a wholly-owned subsidiary of SNI Holdco (“SNI Companies” and collectively with SNI Holdco, the “Acquired Companies”).
SNI Companies, formerly led by co-founder and then current Chairman and CEO Ron Smith, is a premier provider of recruitment and staffing services specializing in administrative, finance, accounting, banking, technology, and legal professions. Through its Staffing Now ®, Accounting Now ®, SNI Technology ®, SNI Financial ®, Legal Now ®, SNI Energy ® and SNI Certes ® divisions, SNI Companies delivers staffing solutions on a temporary/contract, temporary contract-to hire, full time and direct hire basis, across a wide range of disciplines and industries including finance, accounting, banking, technical, software, tax, human resources, legal, engineering, construction, manufacturing, natural resources, energy and administrative professional. SNI Companies has offices in Colorado, Connecticut, Washington DC, Illinois, Massachusetts, Minnesota, New Jersey, Texas and Virginia.
Merger Consideration and Closing Payments
The aggregate consideration paid for the shares of SNI Holdco (the “Merger Consideration”) was approximately $66.3 million,
plus or minus
the “NWC Adjustment Amount” or the difference in the book value of the Closing Net Working Capital (as defined in Merger Agreement) of the Acquired Companies as compared to the Benchmark Net Working Capital (as defined in the Merger Agreement) of the Acquired Companies of $9.2 million.
On the date of the Closing the Company made the following payments:
|
·
|
Cash Payment to Stockholders of SNIH (the “SNIH Stockholders”) or as directed by SNIH Stockholders.
At the Closing, the Company paid approximately an aggregate of $23.0 million in cash to the SNIH Stockholders.
|
|
|
|
|
·
|
Issuance of 9.5% Convertible Subordinated Notes.
At the Closing, the Company issued and paid to certain SNIH Stockholders an aggregate of $12.5 million in aggregate principal amount of its 9.5% Notes.
|
|
|
|
|
·
|
Issuance of Series B Convertible Preferred Stock.
At the Closing, the Company agreed to issue to certain SNIH Stockholders upon receipt of duly executed letters of transmittal an aggregate of approximately 5,926,000 shares of its Series B Convertible Preferred Stock (with an approximate value of $29.3 million based on the closing stock price of GEE Group, Inc. common stock of $4.95 on March 31, 2017).
|
|
|
|
|
·
|
Working Capital Reserve Fund
. At the Closing, $1.5 million of the cash of the Merger Consideration was retained by the Company (the “Working Capital Reserve Fund”) and is subject to payment and adjustment as follows. The Merger Consideration will be adjusted (positively or negatively) based upon the difference in the book value of the Closing Net Working Capital (as defined in the Merger Agreement) as compared to the Benchmark Net Working Capital (as defined in the Merger Agreement) of $9.2 million (such difference to be called the “NWC Adjustment Amount”). If the NWC Adjustment Amount is positive, the Merger Consideration will be increased by the NWC Adjustment Amount. If the NWC Adjustment Amount is negative, the Merger Consideration will be decreased by the NWC Adjustment Amount. If the Merger Consideration increases, then the Company will pay the Stockholders’ Representative account for payment to SNIH Stockholders the amount of the increase plus the Working Capital Reserve Fund in immediately available funds within three (3) business days of a final determination thereof. If the Merger Consideration decreases, then SNIH Stockholders will pay the amount of the decrease to the Company within three (3) business days of a final determination thereof, which first shall be funded from the Working Capital Reserve Fund (which shall be credited to the SNIH Stockholders). If the amount of the Merger Consideration decrease exceeds the Working Capital Reserve Fund, then the SNIH Stockholders, will pay the difference to the Company, severally, not jointly, in accordance with their SNIH Ownership Proportion (as defined in the Merger Agreement), in immediately available funds within twenty (20) days of a final determination. If the Working Capital Reserve Fund exceeds the payment due from SNIH Stockholders then the remaining balance of those funds after the payment to the Company shall be paid to the Stockholders’ Representative’s account for payment to the SNIH Stockholders in immediately available funds
.
See Note 13 for update to the Working Capital Reserve Fund.
|
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
The intangibles which consist primarily of customer lists, trade names and a non-compete agreement with the Company’s co-founder, Mr. Smith, and goodwill were recorded based on the Company's estimate of their fair values. Identifiable intangibles with definite lives are being amortized over their estimated lives, which range from five to ten years.
|
|
April 3,
2017
|
|
Assets purchased
|
|
$
|
12,989
|
|
Liabilities assumed
|
|
|
32,174
|
|
Net liabilities assumed
|
|
|
19,185
|
|
Purchase price
|
|
|
66,300
|
|
Intagible Asset from purchase
|
|
$
|
85,485
|
|
|
|
|
|
|
Intangible asset detail
|
|
|
|
|
|
|
|
|
|
Intangible asset customer list
|
|
$
|
18,312
|
|
Intangible asset trade name
|
|
|
5,900
|
|
Intangible asset non-compete agreement
|
|
|
3,270
|
|
Goodwill
|
|
|
58,003
|
|
Intangible asset from purchase
|
|
$
|
85,485
|
|
All goodwill and intangibles related to the acquisition of SNI companies will not be deductible for tax purposes. An additional deferred tax liability of approximately $11.0 million was created with the merger.
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, after giving effect to the Company's acquisition as if the acquisition occurred on October 1, 2016.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
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 fiscal 2017 as if the acquisition occurred on October 1, 2016. Operating expenses have been increased for the amortization expense associated with the estimated fair value adjustment as of each acquisition during the respective period for the expected definite lived intangible assets.
Pro Forma, unaudited
|
|
Fiscal 2017
|
|
|
|
|
|
Net sales
|
|
$
|
189,149
|
|
Cost of sales
|
|
$
|
119,817
|
|
Operating expenses
|
|
$
|
68,794
|
|
Net income (loss)
|
|
$
|
(2,670
|
)
|
Basic income (loss) per common share
|
|
$
|
(0.28
|
)
|
Dilutive income (loss) per common share
|
|
$
|
(0.28
|
)
|
The proforma results of operations for the year ended September 30, 2017, included approximately $54.2 million of sales, respectively, and approximately $2.6 million of net income, respectively of SNI Companies for the period October 1, 2016 through (approximately) April 3, 2017, the consumption date of the Merger.
13. Commitment 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 $3.1 million and $2.6 million for fiscal 2018 and fiscal 2017, respectively.
As of September 30, 2018, 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:
Fiscal 2019
|
|
|
2,247
|
|
Fiscal 2020
|
|
|
1,308
|
|
Fiscal 2021
|
|
|
668
|
|
Fiscal 2022
|
|
|
622
|
|
Fiscal 2023
|
|
|
426
|
|
Thereafter
|
|
|
562
|
|
Total
|
|
$
|
5,833
|
|
SNI Merger Consideration Held in the Working Capital Reserve Fund
As of September 30, 2018, the SNI Merger Consideration held in the Working Capital Reserve Fund of $1.5 million was reduced by $0.6 million (“NWC Adjustment Amount”), following completion of the process provided for in the Merger Agreement, in which an independent accounting firm (the “firm”) was engaged to review related working capital-related claims made by the Company against such funds. As a result of the firm’s findings, the Company has recognized and reported a corresponding gain in its consolidated statement of operations for the fiscal year ended September 30, 2018.
14. Segment Data
The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, medical, and accounting, and (c) temporary light industrial staffing. These distinct services can be divided into two reportable segments, Industrial Staffing Services and Professional Staffing Services. Selling, general and administrative expenses are not completely separately allocated among light industrial services and professional staffing services.
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.
GEE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousands except per share data, unless otherwise stated
|
|
|
Year Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Industrial Staffing Services
|
|
|
|
|
|
|
Industrial services revenue
|
|
$
|
21,648
|
|
|
$
|
24,851
|
|
Industrial services gross margin
|
|
|
17.9
|
%
|
|
|
16.5
|
%
|
Operating income
|
|
$
|
1,338
|
|
|
$
|
1,625
|
|
Depreciation & amortization
|
|
|
259
|
|
|
|
268
|
|
Accounts receivable – net
|
|
|
3,450
|
|
|
|
3,959
|
|
Intangible assets
|
|
|
471
|
|
|
|
691
|
|
Goodwill
|
|
|
1,084
|
|
|
|
1,084
|
|
Total assets
|
|
$
|
5,005
|
|
|
$
|
9,271
|
|
|
|
|
|
|
|
|
|
|
Professional Staffing Services
|
|
|
|
|
|
|
|
|
Permanent placement revenue
|
|
$
|
23,056
|
|
|
$
|
14,731
|
|
Placement services gross margin
|
|
|
100
|
%
|
|
|
100
|
%
|
Professional services revenue
|
|
$
|
120,580
|
|
|
$
|
95,396
|
|
Professional services gross margin
|
|
|
26.5
|
%
|
|
|
27.4
|
%
|
Operating income
|
|
$
|
8,885
|
|
|
$
|
4,275
|
|
Depreciation and amortization
|
|
|
5,713
|
|
|
|
3,685
|
|
Accounts receivable – net
|
|
|
17,305
|
|
|
|
19,219
|
|
Intangible assets
|
|
|
28,996
|
|
|
|
34,358
|
|
Goodwill
|
|
|
75,509
|
|
|
|
75,509
|
|
Total assets
|
|
$
|
128,596
|
|
|
$
|
132,544
|
|
|
|
|
|
|
|
|
|
|
Unallocated Expenses
|
|
|
|
|
|
|
|
|
Corporate administrative expenses
|
|
$
|
2,754
|
|
|
$
|
3,285
|
|
Corporate facility expenses
|
|
|
255
|
|
|
|
301
|
|
Stock option amortization expense
|
|
|
1,660
|
|
|
|
902
|
|
Board related expenses
|
|
|
-
|
|
|
|
38
|
|
Acquisition, integration and restructuring expenses
|
|
|
3,092
|
|
|
|
2,775
|
|
Total unallocated expenses
|
|
$
|
7,761
|
|
|
$
|
7,301
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
165,284
|
|
|
$
|
134,978
|
|
Operating income
|
|
|
2,462
|
|
|
|
(1,401
|
)
|
Depreciation and amortization
|
|
|
5,972
|
|
|
|
3,953
|
|
Total accounts receivables – net
|
|
|
20,755
|
|
|
|
23,178
|
|
Intangible assets
|
|
|
29,467
|
|
|
|
35,049
|
|
Goodwill
|
|
|
76,593
|
|
|
|
76,593
|
|
Total assets
|
|
$
|
133,601
|
|
|
$
|
141,815
|
|
15. Subsequent Events
On October 4, 2018 the Company issued approximately 40,226 shares of common stock to Jax Legacy related to interest of $0.9 million on the 10% Note.
On October 4, 2018 the Company issued approximately 130,952 shares of common stock to the SNI Sellers related to interest of $1.5 million on the 9.5% Notes.
On November 9, 2018, the Company issued 250,000 shares of common stock to a SNI Seller for the conversion of 250,000 shares of Series B Convertible Preferred Stock.
None.