UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

OR

Commission File Number 1-05707

7751 Belfort Parkway, Suite 150, Jacksonville, FL 32256

(Address of principal executive offices)

(630) 954-0400

(Registrant’s telephone number, including area code)

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

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

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 ☒ No ☐

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

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

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

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

The number of shares outstanding of the registrant’s common stock as of February 11, 2022 was 114,100,455.

GEE GROUP INC.

Form 10-Q

For the Quarter Ended December 31, 2021

INDEX

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, the negative effects of the Coronavirus Pandemic (“COVID-19”), including uncertainties regarding economic recovery and changed socioeconomic norms, 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, cyber risks, including network security intrusions and/or loss of information, 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, 2021, and in other documents which we file with the Securities and Exchange Commission. See additional risk factors included below in Part II – Other Information, Item 1A. 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.

Part I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (unaudited)

GEE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(In Thousands)

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

GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(In Thousands)

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

GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited)

(In Thousands)

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

GEE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(In Thousands)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

GEE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

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

Overview

GEE Group Inc. and its wholly material operating subsidiaries, Access Data Consulting Corporation, Agile Resources, Inc., BMCH, Inc., Paladin Consulting, Inc., Scribe Solutions, Inc., SNI Companies, Inc., Triad Logistics, Inc., and Triad Personnel Services, Inc. (collectively referred to as the “Company”, “us”, “our”, or “we”) are providers of permanent and temporary professional and industrial staffing and placement services in and near several major U.S cities. We specialize in the placement of information technology, accounting, finance, office, and engineering professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics, and provide temporary staffing services for our 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 verticals or end markets of information technology, accounting, finance, office and engineering professionals.

The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing. As of December 31, 2021, we operated twenty-seven (27) branch offices in downtown or suburban areas of major U.S. cities in eleven (11) states and additional local staff members working remotely serving four additional U.S. locations. We have offices or serve markets remotely, as follows; (i) one office in each of Connecticut, Georgia, Minnesota, New Jersey, and Virginia; (ii) two offices each in Illinois and Massachusetts; (iii) three offices in Colorado; (iv) three offices and one additional local market presence in Texas; (v) five offices and two additional local market presences in Florida; and (vi) seven offices in Ohio.

Management has implemented a strategy which includes organic and acquisition growth components. Management’s organic growth strategy includes seeking out and winning new client business, as well as expansion of existing client business and on-going cost reduction and productivity improvement efforts in operations. Management’s acquisition growth strategy includes identifying strategic acquisitions, financed primarily through a combination of cash and 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 and array of businesses and brands within our segments complement one another and position us for future growth.

Network Security Incident and Risk

On February 1, 2022, the Company detected and stopped a network security incident. An unauthorized third party gained access into our network, encrypted various systems, and has demanded money to decrypt the affected systems and to delete and not publicly release stolen information. The Company’s IT professionals immediately disconnected and isolated the affected systems to prevent any further compromise. The senior executive management team was immediately notified who in turn reported the network security incident to the Company’s audit committee chairman who has board oversight authority for these types of matters. The Company’s audit committee and board of directors have been fully briefed and a special committee of the board of directors has been appointed to participate with management in the on-going investigations, response and full remediation of the incident. The Company has engaged third party cyber security experts to assist its internal IT professionals and conduct a comprehensive investigation to determine the extent of the unauthorized activity. The Company has also notified law enforcement and its cyber liability insurance carrier about the incident.

To date, the Company’s investigation has determined the unauthorized third party acquired data maintained on the encrypted servers, to include some individual personal information such as name, social security number, passport and driver license information. Our forensic investigation will continue until we have determined, to the maximum extent practically possible, the full scope of the incident. Individuals affected by this incident will be notified in accordance with applicable state and federal laws. The Company’s investigation and analysis are on-going, therefore, management does not yet have a complete estimate of the likely total cost or damages stemming from this incident.  Based on what management now knows, the Company does not currently foresee this incident having a material detrimental effect on our business or financial position.  The Company had in place cyber liability insurance coverage, subject to certain policy limitations and deductibles. The Company immediately notified the carrier of the network security incident and is working with them on this matter. However, management does not know the full effects at this time, so there can be no assurance that the incident ultimately will not have material adverse effects on our business or financial position.

Currently, the Company’s network environment is being monitored around the clock by its IT professionals and third-party cyber security experts to mitigate a future compromise. The Company has not observed any additional malicious activity on the network to date. The Company’s operations have been minimally impacted to date, and it continues to serve our clients without issue.

Coronavirus Pandemic (“COVID-19”)

In approximately mid-March 2020, the Company began to experience the severe negative effects of the economic disruptions resulting from the Coronavirus Pandemic (“COVID-19”). These have included abrupt reductions in demand for the Company’s primary sources of revenue, its temporary and direct hire placements, and lost productivity due to business closings both by clients and at the Company’s own operating locations. Some effects of COVID-19 and the subsequent variants of the virus continue to be felt to an extent across all businesses, with the most severe impacts being felt in the industrial segment and, to a lesser extent, in the finance, accounting, and office clerical (“FA&O”) end markets within the professional segment. In response to the crisis, in April 2020 we took a series of proactive actions including a temporary 10% pay cut for full-time salaried employees, temporary furloughing and redeployment of some employees, reduction of discretionary expenses and projects, and obtaining funds under CARES Act Payroll Protection Program (“PPP”). These actions allowed us to generate cost savings and time with which to mitigate the impacts of the COVID-19 pandemic on our businesses and brands. Our businesses have continued their recoveries to a significant extent during our fiscal quarter ended December 31, 2021. While we have experienced significant recovery towards pre-COVID-19 levels of results and performance, the rate of future recovery and growth is still somewhat uncertain as potential resurgences and negative impacts of COVID-19 and variants thereof have continued to have negative impacts on the U.S. economy in 2021 and 2022, including in some cases, certain markets and clients we serve

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

Results of Operations

Three Months Ended December 31, 2021 Compared to the Three Months Ended December 31, 2020

Net Revenues

Consolidated net revenues are comprised of the following:

Contract staffing services contributed $36,684 or approximately 86% of consolidated revenue and direct hire placement services contributed $6,163, or approximately 14%, of consolidated revenue for the three-month period ended December 31, 2021. This compares to contract staffing services revenue of $31,248, or approximately 90%, of consolidated revenue and direct hire placement revenue of $3,395, or approximately 10%, of consolidated revenue for the three-month period ended December 31, 2020.

The overall increase in contract staffing services revenues of $5,436, or 17%, for the three months ended December 31, 2021 compared to the three months ended December 31, 2020, was attributable to increased demand for employment in our professional contract services markets, resulting in an increase in revenues of $6,458, or 25%, including staffing support for vaccination and testing facilities and locations established to respond to COVID-19 and its variants. Industrial staffing services for the quarter decreased by $1,022, or 20%, due mainly to reoccurrence of adverse conditions associated with COVID-19 variants, which caused significant disruptions in the markets we serve and resulting in a decrease in demand for our industrial staffing services. The COVID-19 pandemic caused declines in demand for our professional and industrial staffing services and revenue during 2020 due to client closures, postponements in projects and related needs for our services at some clients, significant travel restrictions, and corresponding decreases in the volume of contract services billable hours. 

Direct hire placement revenue for the three months ended December 31, 2021 increased by $2,768, or approximately 82%, over the three months ended December 31, 2020. Demand for the Company’s direct hire services also increased due to increased employment opportunities and placement orders in our professional services markets.

Management believes that the significant net growth in revenues during the three months ended December 31, 2021, compared to the three months ended December 31, 2020, is in line with the recovery trends being experienced in the overall U.S. economy. The Company continues to observe, analyze and make modifications and changes to its business model and practices in response to the COVID-19 pandemic and related health and safety concerns, including most recently, those associated with its variants.  These include, but are not limited to, implementation of preventative policies and procedures in observance of Federal, state and/or local guidelines with regard to COVID-19 and its variants, use of personal protective equipment (principally, protective masks), and others. The Company also continues to take advantage of flexible and hybrid work-from-home employment arrangements and has converted some of its former branch office locations to virtual locations and entered into its most recently established new market on a virtual basis.

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

Cost of Contract Services

Cost of contract services includes wages and related payroll taxes and employee benefits of the Company's contract services employees, and certain other contract employee-related costs, while working on contract assignments. Cost of contract services for the three months ended December 31, 2021 increased by approximately 24% to $27,265 compared to $22,063 for the three months ended December 31, 2020. The $5,202 overall increase in cost of contract services for the three months ended December 31, 2021 compared to the three months ended December 31, 2020 is consistent with the increase in revenues as discussed further below.

The Company’s combined gross profit margin, including direct hire placement services (recorded at 100% gross margin) for the three-month period ended December 31, 2021 was approximately 36.4% as compared with approximately 36.3% for the three-month period ended December 31, 2020.

In the professional contract staffing services segment, the gross margin (excluding direct placement services) was approximately 27.0% for three-month period ended December 31, 2021 as compared with approximately 26.2% for the three-month period ended December 31, 2020. This increase is generally due to price increases associated with increased spreads for services performed in our Professional Services segment contract business, and also may be impacted by shifts in the amounts and mix of business between end markets and higher and lower billing rates and margins.

The Company’s industrial staffing services gross margin for the three-month period ended December 31, 2021 was approximately 15.3% versus approximately 45.5% for the three-month period ended December 31, 2020. The very large industrial staffing services gross margin reported for the three months ended December 31, 2020, was due to the significant amount of premium refunds and policyholder distributions the Company’s industrial business received from the Ohio Bureau of Workers’ Compensation retrospectively rated insurance program during that quarter. Gross profit for the Company’s industrial staffing services segment for the three months ended December 31, 2021, includes $18 of annual premium refunds from the Ohio Bureau of Workers Compensation insurance programs, as compared with the three months ended December 31, 2020, which included $1,537. The Industrial Services gross margins excluding the effects of these refunds and distributions were approximately 14.8% and 15.4% for the three months ended December 31, 2021 and 2020, respectively. The decrease, excluding the effects of the workers compensation premium refunds and distributions, is mainly attributable to the Industrial segment being heavily affected by new COVID-19 variants.

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses include the following categories:

The Company’s SG&A for the three-month period ended December 31, 2021 increased by $2,872 as compared to the three-month period ended December 31, 2020. SG&A for the three-month period ended December 31, 2021, as a percentage of revenues, was approximately 29% compared to approximately 27% for the three-month period ended December 31, 2020. The increase in SG&A expenses as a percentage of revenue is primarily attributable to additional incentive compensation and bonuses associated with growing revenue and higher non-recurring restructuring costs.

SG&A also includes certain non-cash costs and expenses incurred related to acquisition, integration and restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities that either are not directly associated with core business operations or have been eliminated on a going forward basis. These costs were estimated to be $514 and $142 for the three-month periods ended December 31, 2021 and 2020, respectively, and include mainly expenses associated with former closed and consolidated locations, and personnel costs associated with eliminated positions.

Depreciation Expense

Depreciation expense was $86 and $73 for the three-month period ended December 31, 2021, and 2020, respectively. The increase in depreciation expense is due to fixed asset additions. 

Amortization Expense

Amortization expense was $1,014 and $1,044 for the three-month period ended December 31, 2021 and 2020, respectively. The decrease is due to intangible assets related to non-compete agreements becoming fully amortized during fiscal 2021.

Goodwill Impairment

The Company recently completed its annual goodwill impairment assessment, as of September 30, 2021, and determined that its goodwill was not impaired. The amount of discount inherent in the Company’s market capitalization as recently reported on the NYSE American exchange when compared with consolidated stockholders’ equity, or net book value, has increased since September 30, 2021; therefore, the Company has performed an interim impairment assessment as of December 31, 2021. As a result, the Company recognized a non-cash impairment charge of $2,150 during the quarter ended December 31, 2021. In reaching its most recent conclusion, management performed interim quantitative and qualitative analysis and adjusted the estimated fair values of its Professional Services and Industrial Services reporting units so that they reconcile more precisely with the Company’s market capitalization as of December 31, 2021, plus an assumed control premium.

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

Management also considered other circumstances that have occurred or changed since the Company’s most recent annual evaluation as of September 30, 2021. These included increases in its consolidated stockholders’ equity of $16,773, in aggregate, or 20%, as the result of net gains from the forgiveness of its last four remaining outstanding PPP loans by the SBA in December 2021.

Management also believes that the significant discount inherent in the Company’s market capitalization might be due to volatility in the Company’s stock since the large follow-on offering completed in April 2021, the presence of higher than usual minority pricing discounts in Company’s stock prices and the market, in general; and lingering effects and risks associated with the COVID-19 pandemic. The potential effects of these factors were assigned no weight for purposes of the impairment assessment and resulting charge taken as of December 31, 2021. Considering the Company’s outlook and these other factors, management believes that the excess of its consolidated stockholders’ equity over its market capitalization may be expected to lessen over the future. However, there can be no assurance that this will occur. Accordingly, if the excess of the Company’s consolidated stockholders’ equity over its market capitalization does not lessen, this may present a triggering event or other circumstances that require updated testing of goodwill, which in turn, might result in possible impairment charges in the future. 

(Loss) Income from Operations

The (loss) income from operations was $(27) and $1,976 for the three-month period ended December 31, 2021 and 2020, respectively. This decrease of $2,003 is mainly attributable to the non-cash goodwill impairment charge of $2,150. The increases in SG&A due to additional incentive compensation and bonuses associated with growing revenue and higher non-recurring restructuring costs discussed above also contributed to the loss from operations during the three-months ended December 31, 2021. Absent the effect of these items, SG&A and income from operations would have been more in line with the increases in revenue and gross profit for the three-month period ended December 31, 2021.

Interest Expense

Interest expense was $107 for the three-month period ended December 31, 2021, which decreased by $2,579 compared to the three-month period ended December 31, 2020. The decrease in interest expense for the three-month period ended December 31, 2021 is mainly attributable to the interest expense related to the Former Credit Agreement that was included in the three-month period ended December 31, 2020.  The Company’s Former Credit Agreement contributed $1,637 in cash interest and $547 in PIK interest during the three-month period ended December 31, 2020. On April 20, 2021, the Company retired and fully repaid its remaining principal and accrued interest and fee balances due and retired its Former Credit Agreement.

Provision for Income Taxes

The Company recognized income tax benefits of $29 and $395 for the three-month periods ended December 31, 2021 and 2020, respectively. Our effective tax rate for the three months ended December 31, 2021 is lower than the statutory rate primarily due to the effect of the recognition of gains on forgiveness of the Company’s last four PPP loans, which are exempt from taxation, and the valuation allowance on our net DTA position. Our effective tax rate for the three months ended December 31, 2020 is higher than the statutory tax rate primarily due to statutory changes that occurred at that time regarding the CARES Act Payroll Protection Program. Other than the deferred tax liability relating to indefinite lived asset, the Company is maintaining a valuation allowance against the remaining net DTA position.

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

Net Income (Loss)

The Company’s net income (loss) was $16,668 and $(315) for the three-month periods ended December 31, 2021 and 2020, respectively. The increase in net income for the three-month period ended December 31, 2021 is mainly attributable to gains of $16,773 from extinguishment of the Company’s remaining PPP loans.

The Company continues to seek opportunities to increase revenue and closely manage costs, including opportunities to selectively add revenue producing resources in key markets and industry verticals. The Company also seeks to organically grow its professional contract services revenue and direct hire placement revenue, including business from staff augmentation, permanent placement, statement of work (SOW) and other human resource solutions in the information technology, engineering, healthcare and finance and accounting higher margin staffing specialties. The Company’s strategic plans to achieve this goal involve setting aggressive new business growth targets, initiatives to increase services to existing customers, increasing its numbers of revenue producing core professionals, including primarily, business development managers and recruiters, and assessments of the effectiveness of compensation, commission and bonus plans to identify enhancements to incentivize producers. Senior management also has frequent interaction with the field and facilitates collaboration among brands and locations to identify and share growth opportunities, and to monitor and motivate growth. The Company’s strategic plan contains both internal and acquisition growth objectives to increase revenue in the aforementioned higher margin and more profitable professional services sectors of staffing.

Liquidity and Capital Resources

The primary sources of liquidity for the Company are revenues earned and collected from its clients for the placement of contractors and permanent employment candidates and borrowings available under its current and former asset-based senior secured revolving credit facilities. Uses of liquidity include primarily the costs and expenses necessary to fund operations, including payment of compensation to the Company’s contract and permanent employees and employment-related expenses, operating costs and expenses, taxes and capital expenditures.

The following table sets forth certain consolidated statements of cash flows data:

As of December 31, 2021, the Company had $12,127 of cash, which was an increase of $2,180 from $9,947 as of September 30, 2021. As of December 31, 2021, the Company had working capital of $20,575 compared to $2,528 of working capital as of September 30, 2021. The increase in working capital is mainly attributable to the forgiveness of the Company’s last remaining PPP loans and interest during the three months ended December 31, 2021, which were reflected in current liabilities in the aggregate amount of $16,741 as of September 30, 2021.

Net cash provided by operating activities for the three-month periods ended December 31, 2021 and 2020 was $2,264 and $47, respectively. The positive operating cash flow in the three-month period ended December 31, 2021 corresponds with positive income from operations and other net changes in working capital.

The primary uses of cash for investing activities were for the acquisition of property and equipment in the three-month periods ended December 31, 2021 and 2020.

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

There were no cash flows used in financing activities for the three-month period ended December 31, 2021 and 2020.

All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on December 31, 2021, are approximately $1,814. There are no minimum debt service principal payments due during the twelve-month period commencing after the close of business on December 31, 2021.

On April 19, 2021, the Company completed the initial closing of a follow-on public offering of 83,333 shares of common stock at a public offering price of $0.60 per share. Gross proceeds of the offering totaled $50,000, which after deducting the underwriting discount, legal fees, and offering expenses, resulted in net proceeds of $45,478. On April 27, 2021, the underwriters of the Company’s April 19, 2021, public offering exercised in full their 15% over–allotment option to purchase an additional 12,500 common shares (the “option shares”) of the Company at the public offering price of $0.60 per share. The Company closed the transaction on April 28, 2021 and received net proceeds from the sale of the option shares of approximately $6,937, after deducting the applicable underwriting discount. ThinkEquity, a division of Fordham Financial Management, Inc., acted as sole book-running manager for the offering.

On April 20, 2021, as the result of the completion of the public offering, the Company repaid $56,022 in aggregate outstanding indebtedness under its existing Revolving Credit, Term Loan and Security Agreement, dated as of March 31, 2017, including accrued interest, using the net proceeds of its recent underwritten public offering and available cash. The repaid debt was originally obtained from investors led by MGG Investment Group LP (“MGG”) on April 21, 2017 and had a maturity date of June 30, 2023. The MGG debt was comprised of a revolving credit facility with a principal balance on the date of repayment of approximately $11,828, which was subject to an annual interest rate comprised of the greater of the London Interbank Offering Rate (“LIBOR”) or 1%, plus a 10% margin (approximately 11% per annum), and a term loan with a principal balance on the date of repayment of approximately $43,735, which was subject to an annual interest rate of the greater of LIBOR or 1% plus a 10% margin. The term loan also had an annual payment-in-kind (“PIK”) interest rate of 5% in addition to its cash interest rate, which was being added to the term loan principal balance (cash and PIK interest rate combined of approximately 16% per annum). Accrued interest of approximately $459 was paid in connection with the principal repayments. The Company took a one-time charge of $4,004 which represents unamortized debt issue costs associated with its former senior debt.

On May 14, 2021, GEE Group Inc. and its subsidiaries, Agile Resources, Inc., Access Data Consulting Corporation, BMCH, Inc., GEE Group Portfolio, Inc., Paladin Consulting, Inc., Scribe Solutions, Inc., SNI Companies, Inc., Triad Personnel Services, Inc., and Triad Logistics, Inc. entered a Loan, Security and Guaranty Agreement for a $20 million asset-based senior secured revolving credit facility with CIT Bank, N.A. (the “CIT Facility”). The CIT Facility is collateralized by 100% of the assets of the Company and its subsidiaries who are co-borrowers and/or guarantors. The CIT Facility matures on the fifth anniversary of the closing date (May 14, 2026). Concurrent with the May 14, 2021 closing of the CIT Facility, the Company borrowed $5,326 and utilized these funds to pay all remaining unpaid Exit and Restructuring Fees due to its former senior lenders in the amount of $4,978, with the remainder going to direct fees and costs associated with the CIT Facility.

Under the CIT Facility, advances will be subject to a borrowing base formula that will be computed based on 85% of eligible accounts receivable of the Company and subsidiaries as defined in the CIT Facility, and subject to certain other criteria, conditions, and applicable reserves, including any additional eligibility requirements as determined by the administrative agent. The CIT Facility is subject to usual and customary covenants and events of default for credit facilities of this type. The interest rate, at the Company’s election, will be based on either the Base Rate, as defined, plus the applicable margin; or the London Interbank Offering Rate (“LIBOR” or any successor thereto) for the applicable interest period, subject to a 1% floor, plus the applicable margin. The CIT Facility also contains provisions addressing the potential future replacement of LIBOR utilized and referenced in the loan agreement, in the event LIBOR becomes no longer available.  In addition to interest costs on advances outstanding, the CIT Facility will provide for an unused line fee ranging from 0.375% to 0.50% depending on the amount of undrawn credit, original issue discount and certain fees for diligence, implementation, and administration.

Management believes that the Company can generate adequate liquidity to meet its obligations for the foreseeable future or at least for the next twelve months.

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

Coronavirus Pandemic (“COVID-19”), Paycheck Protection Program Loans and Deferral of Federal Payroll Taxes under the CARES Act

In approximately mid-March 2020, the Company began to experience the severe negative effects of the economic disruptions resulting from COVID-19. These included abrupt reductions in demand for the Company’s primary sources of revenue, its temporary and direct hire placements, lost productivity due to business closings both by clients and at the Company’s own operating locations, and the significant disruptive impacts to many other aspects of normal operations. Some effects of COVID-19 and the subsequent variants of the virus continue to be felt, although to lesser extent, with the most severe impacts being felt in the commercial (Industrial) segment and, to a lesser extent, in the finance, accounting and office clerical (“FAO”) contract staffing services end markets within the professional segment.

Between April 29 and May 7, 2020, the Company and eight of its operating subsidiaries obtained loans in the aggregate amount of $19,927 from BBVA USA (now known as PNC Bank), as lender, pursuant to the Payroll Protection Plan (the “PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). These funds were the only source of financing available to our companies and businesses and were critical to our ability to maintain operations, including the employment of our temporary and full-time employees, in order to provide our services and meet our liquidity requirements in the midst of the worldwide Coronavirus Pandemic. The Company accounted for the PPP loans as a debt (See Note 9) in accordance with Accounting Standards Codification (“ASC”) Topic 470 Debt. Accordingly, the PPP loans were recognized as current debt in the Company’s accompanying unaudited condensed consolidated financial statements as of September 30, 2021.

The Company and its operating subsidiaries have been granted forgiveness of their respective outstanding PPP loans, including the Company’s last four remaining PPP loans and interest for GEE Group Inc., BMCH, Inc., Paladin Consulting, Inc., and SNI Companies, Inc., in the amounts of $2,024, $2,630, $1,956, and $10,163, respectively, which were forgiven by the SBA in December 2021. The Company recognized net gains of $16,773, in aggregate, during the three months ended December 31, 2021 as a result of the forgiveness of its last four PPP loans.

The PPP loans obtained by GEE Group Inc., and its operating subsidiaries together as an affiliated group, have exceeded the $2,000 audit threshold established by the SBA, and therefore, also will be subject to audit by the SBA in the future. If any of the nine forgiven PPP loans are reinstated in whole or in part as the result of a future audit, a charge or charges would be incurred, accordingly, and they would need to be repaid. If the companies are unable to repay the portions of their PPP loans that ultimately may be reinstated from available liquidity or operating cash flow, we may be required to raise additional equity or debt capital to repay the PPP loans.

The Company and its subsidiaries, under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, also were eligible to defer paying $3,692, in aggregate, of applicable payroll taxes incurred during fiscal 2020. The deferred deposits of the employer’s share of Social Security tax are required be paid to be considered timely (and avoid a failure to deposit penalty) by December 31, 2021, fifty (50) percent of the eligible deferred amount, and the remaining amount by December 31, 2022. During the three-month period ending December 31, 2021, the first payments on these deferred amounts were made totaling $1,827, in aggregate. The remaining deferred amounts are included in short-term liabilities on the accompanying unaudited condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of December 31, 2021, 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.

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

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As of December 31, 2021, the Company's management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act"). Based on that evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company's three-month period ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Subsequent Event, Network Security Incident and Risks

As disclosed in the Note 15 to our consolidated financial statements and elsewhere in this section, on February 1, 2022, the Company detected and stopped a network security incident.  The senior executive management team was immediately notified who in turn reported the network security incident to the audit committee chairman who has board oversight authority for these types of matters. The Company’s audit committee and board of directors have been fully briefed and a special committee of the board of directors has been appointed to participate with management in the on-going investigations, response and full remediation of the incident.  Currently, the Company’s network environment is being monitored around the clock by our IT professionals and third-party cyber security experts to mitigate a future compromise. No additional malicious activity has been observed on the network to date. The Company’s operations were minimally impacted, and we continue to serve our clients without issue.  

The Company’s investigation and analysis of the incident are underway and on-going. The scope of investigation and analysis of the incident include identification of vulnerabilities or weaknesses in our security and the design and implementation of additional protective measures and controls to prevent future incidents such as this one.  Based on our current assessments, we have not identified any material weaknesses in our internal controls, including our disclosure controls and procedures as a result of the incident.

PART II – OTHER INFORMATION.

Item 1. Legal Proceedings. 

None.

Item 1A. Risk Factors. 

In evaluating us and our common stock, in addition to the risk factor below, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (“2021 Form 10-K”), and filed with the SEC on December 23, 2021. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. of Part I of our 2021 Form 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

We recently experienced a network security incident affecting our IT network, information systems and stored information. Network security incidents affecting our systems and information technology such as this one or others could adversely impact our ability to operate and have wider-reaching material adverse effects on our business and financial position and results.

Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or other problems in the delivery of our services or security of our proprietary and confidential information, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock. We face threats to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code, organized cyber-attacks and other security problems and system disruptions, including possible unauthorized access to our and our clients' proprietary or classified information. We rely on industry-accepted security measures and technology to securely maintain all confidential and proprietary information on our information systems and to detect and isolate suspicious activity. While we devote significant resources to the security of our computer systems, we are still vulnerable to these threats. Our controls, therefore, include technology to detect and isolate suspicious activity and disclosure controls and procedures in place to communicate any such threats or activity detected to responsible personnel, including our senior officers and directors, for timely response. 

On February 1, 2022, GEE Group Inc. detected, stopped, and isolated a network security incident. An unauthorized third party gained access into our network, encrypted some of our systems, and has demanded money to decrypt the affected systems and to delete and not publicly release stolen information. Our IT director and team of IT professionals immediately disconnected and isolated the affected systems to prevent any further compromise. The senior executive management team was immediately notified who in turn reported the network security incident to GEE Group’s audit committee chairman who has board oversight authority for these types of matters. The Company’s audit committee and board of directors have been fully briefed and a special committee of the board of directors has been appointed to participate with management in the on-going investigations, response and full remediation of the incident. We have engaged third party cyber security experts to assist our internal IT professionals and conduct a comprehensive investigation to determine the extent of the unauthorized activity. We have also notified law enforcement and the Company’s cyber liability insurance carrier about the incident.

To date, our investigation has determined the unauthorized third party acquired data maintained on the encrypted servers, to include some individual personal information such as name, social security number, passport and driver license information. Our forensic investigation will continue until we have determined, to the maximum extent practically possible, the full scope of the incident. Individuals affected by this incident will be notified in accordance with applicable state and federal laws. Our investigation and analysis are on-going, therefore, we do not yet have a complete estimate of the likely total cost or damages stemming from this incident. Based on what we now know, we do not currently foresee this incident having a material detrimental effect on our business or financial position. GEE Group Inc. had in place cyber liability insurance coverage, subject to certain policy limits and deductibles. The Company immediately notified the carrier of the network security incident and is working with them on this matter. However, we do not know the full effects of the breach at this time so there can be no assurance that the network security incident ultimately will not have material adverse effects on our business or financial position.

Currently, our network environment is being monitored around the clock by our IT professionals and third-party cyber security experts with applicable software to detect and mitigate a future compromise. We have not observed any additional malicious activity on the network to date. Our business operations were minimally impacted, and we continue to serve our clients without issue.

Unauthorized users who circumvent data security measures, including the threat actors involved in our recently experienced network security incident, may access and possibly misappropriate confidential or proprietary information, including information regarding us, our personnel and/or our clients, or cause interruptions or malfunctions in operations. As a result, we may be required to expend significant resources to protect against the threat of these system disruptions and security breaches or to alleviate problems caused by these disruptions and breaches. Any of these events could possibly damage our reputation and potentially have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the aggregate impact of the aforementioned incident on our operations and financial condition has not been material to date, it is reasonable to expect that the prevalence of cyber security threats and breaches of systems utilized by businesses will continue or even accelerate as the level of sophistication and knowledge of the perpetrators increases.

Our business, results of operations, and financial condition have been and may continue to be adversely impacted in material respects by the coronavirus pandemic, and future adverse impacts could be material and difficult to predict.

Our business, results of operations, and financial condition have been, and may continue to be, adversely impacted in material respects by COVID-19 and by related government actions (including declared states of emergency and quarantine, “shelter in place” orders, or similar orders), non-governmental organization recommendations, and public perceptions, all of which have led and may continue to lead to disruption in global economic and labor markets. These effects have had a significant impact on our business, including reduced demand for our services and workforce solutions, early terminations or reductions in projects, and hiring freezes, and a shift of a majority of our workforce to remote operations, all of which have contributed to a decline in revenues and other significant adverse impacts on our financial results. Other potential impacts of COVID-19 may include continued or expanded closures or reductions of operations with respect to our client partners’ operations or facilities, the possibility our client partners will not be able to pay for our services or workforce solutions, or that they will attempt to defer payments owed to us, either of which could materially impact our liquidity, the possibility that the uncertain nature of the pandemic may not yield the increase in certain of our workforce solutions that we have historically observed during periods of economic downturn, and the possibility that various government-sponsored programs to provide economic relief may be inadequate. Further, we may continue to experience adverse financial impacts, some of which may be material, if we cannot offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives, or otherwise. As a result of these observed and potential developments, we expect our business, results of operations, and financial condition to continue to be negatively affected. 

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

Not required.

Item 3.  Defaults Upon Senior Securities. 

None.

Item 4.  Mine Safety Disclosures. 

Not Applicable.

Item 5.  Other Information. 

None.

Item 6. Exhibits 

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

SIGNATURES

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