GEE Group Inc. 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 40 Table of Contents Item 8. Consolidated Financial Statements and Supplementary Data. Page Report of Independent Registered Public Accounting Firm for the year ended September 30, 2022 F-2 Report of Independent Registered Public Accounting Firm for the year ended September 30, 2021 F-4 Consolidated Balance Sheets as of September 30, 2022 and 2021 F-5 Consolidated Statements of Operations for the years ended September 30, 2022 and 2021 F-6 Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2022 and 2021 F-7 Consolidated Statements of Cash Flows for the years ended September 30, 2022 and 2021 F-8 Notes to Consolidated Financial Statements F-9 F-1 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders, Board of Directors, and Audit Committee GEE Group Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of GEE Group Inc. (the “Company”) as of September 30, 2022, the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended September 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for the year ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates. F-2 Table of Contents Goodwill Impairment Assessment At September 30, 2022, the Company’s goodwill was $61.29 million. As discussed in Notes 2 and 6 of the financial statements, the Company evaluates goodwill for impairment at the reporting unit level annually, as of September 30, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. During the first quarter of fiscal 2022, the Company determined that there had been an increase in the amount of discount inherent in the Company’s market capitalization as reported on the NYSE American exchange, when compared to net book value, since its last annual goodwill impairment assessment as of September 30, 2021; therefore, the Company performed an interim assessment of its goodwill for impairment as of December 31, 2021 by comparing the fair value of each reporting unit to its respective carrying value and this resulted in an impairment charge of $2.15 million as of December 31, 2021. The Step 1 analysis was updated as of September 30, 2022, for the Company’s annual impairment test, and the analysis noted no impairment of goodwill as of such date. The Company’s goodwill impairment analysis relies on assumptions and other factors, such as industry multiples applied to earnings, estimated future cash flows, the discount rates used to determine the present value of associated cash flows, and market comparable assumptions. These assumptions require significant judgement by the Company in their development. We identified the goodwill impairment assessment as a critical audit matter. The principal considerations for our determination are the high degree of auditor judgment and subjectivity in evaluating management’s significant assumptions used in the impairment analyses, particularly as it relates to industry multiples applied to earnings, estimated future cash flows, the discount rates used to determine the present value of associated cash flows, and market comparable assumptions. The primary procedures we performed to address this critical audit matter included: · Obtained an understanding of management’s process for developing fair value estimates including: o Tested the completeness, accuracy, and relevance of underlying data used in the Company’s analysis, and o Evaluated the significant management assumptions utilized in the estimated future cash flows by comparing revenues and performance in management’s forecast to periods incurred to-date subsequent to September 30, 2022, and assessed the forecasts of revenues and expenses and the gross margin impact in future periods. · Utilized personnel with specialized knowledge and skills in valuation to assist in: (i) assessing the appropriateness of the fair value methodology and estimation process, (ii) evaluating the reasonableness of certain assumptions used including assessing the appropriateness of the discount rate, industry multiples, and the market comparable assumptions, and (iii) testing the mathematical accuracy and completeness of the discounted cash flow models and the impairment assessment analyses. /s/ FORVIS, LLP We have served as the Company’s auditor since 2022. Tampa, Florida December 20, 2022 F-3 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of GEE Group Inc. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheet of GEE Group Inc. (the Company) as of September 30, 2021, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year ended September 30, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021, and the results of its operations and its cash flows for the year ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. /s/ Friedman LLP We have served as the Company’s auditor from 2012 to 2022. Marlton, New Jersey December 23, 2021 F-4 Table of Contents GEE GROUP INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands) September 30, ASSETS 2022 2021 CURRENT ASSETS: Cash $ 18,848 $ 9,947 Accounts receivable, less allowances ($ 738 and $ 286 , respectively) 22,770 23,070 Prepaid expenses and other current assets 604 668 Total current assets 42,222 33,685 Property and equipment, net 1,140 765 Goodwill 61,293 63,443 Intangible assets, net 11,285 14,754 Right-of-use assets 2,830 3,920 Other long-term assets 784 1,022 TOTAL ASSETS $ 119,554 $ 117,589 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,958 $ 2,257 Accrued compensation 5,750 6,413 Current Paycheck Protection Program loans - 16,741 Current operating lease liabilities 1,333 1,681 Other current liabilities 5,538 4,065 Total current liabilities 15,579 31,157 Deferred taxes 528 591 Noncurrent operating lease liabilities 1,889 3,006 Other long-term liabilities 555 2,066 Total liabilities 18,551 36,820 Commitments and contingencies (Note 13) SHAREHOLDERS' EQUITY: Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 114,450 shares at September 30, 2022 and 114,100 shares at September 30, 2021 112,051 111,416 Accumulated deficit ( 11,048 ) ( 30,647 ) Total shareholders' equity 101,003 80,769 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 119,554 $ 117,589 The accompanying notes are an integral part of these consolidated financial statements. F-5 Table of Contents GEE GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share data) Year Ended September 30, 2022 2021 NET REVENUES: Contract staffing services $ 138,507 $ 129,802 Direct hire placement services 26,605 19,078 NET REVENUES 165,112 148,880 Cost of contract services 103,434 96,339 GROSS PROFIT 61,678 52,541 Selling, general and administrative expenses 51,913 41,651 Depreciation expense 371 311 Amortization of intangible assets 3,469 4,089 Goodwill impairment charge 2,150 - INCOME FROM OPERATIONS 3,775 6,490 Gain (loss) on extinguishment of debt 16,773 ( 548 ) Interest income 16 - Interest expense ( 377 ) ( 5,878 ) INCOME BEFORE INCOME TAX PROVISION 20,187 64 Provision for income tax expense 588 58 NET INCOME $ 19,599 $ 6 BASIC EARNINGS PER SHARE $ 0.17 $ 0.00 DILUTED EARNINGS PER SHARE $ 0.17 $ 0.00 WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 114,139 60,594 DILUTED 114,890 61,948 The accompanying notes are an integral part of these consolidated financial statements. F-6 Table of Contents GEE GROUP INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Amounts in thousands) Common Total Stock Common Accumulated Shareholders' Shares Stock Deficit Equity Balance, September 30, 2020 17,667 $ 58,031 $ ( 30,653 ) $ 27,378 Share-based compensation - 970 - 970 Issuance of stock for restricted stock 600 - - - Sale of common stock in public offering, net of costs 95,833 52,415 - 52,415 Net income - - 6 6 Balance, September 30, 2021 114,100 $ 111,416 $ ( 30,647 ) $ 80,769 Share-based compensation - 635 - 635 Issuance of stock for restricted stock 350 - - - Net income - - 19,599 19,599 Balance, September 30, 2022 114,450 $ 112,051 $ ( 11,048 ) $ 101,003 The accompanying notes are an integral part of these consolidated financial statements. F-7 Table of Contents GEE GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended September 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 19,599 $ 6 Adjustments to reconcile net income to cash provided by operating activities: (Gain) loss on extinguishment of debt ( 16,773 ) 548 Depreciation and amortization 3,840 4,400 Non-cash lease expense 1,384 1,344 Goodwill impairment charge 2,150 - Share-based compensation 635 970 Increase (decrease) in allowance for doubtful accounts 452 ( 546 ) Deferred income taxes ( 63 ) 161 Amortization of debt issuance costs 153 941 Paid in kind interest on term loan - 1,210 Changes in operating assets and liabilities: Accounts receivable ( 152 ) ( 6,477 ) Accounts payable 701 206 Accrued compensation ( 663 ) 907 Other assets 151 772 Other liabilities ( 2,185 ) ( 4,072 ) Net cash provided by operating activities 9,229 370 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ( 328 ) ( 126 ) Net cash used in investing activities ( 328 ) ( 126 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from the sale of common stock in public offering - 52,415 Payment on term loan - ( 44,194 ) Net payments on revolving credit - ( 11,828 ) Debt issue costs - ( 764 ) Net cash used in financing activities - ( 4,371 ) Net change in cash 8,901 ( 4,127 ) Cash at beginning of year 9,947 14,074 Cash at end of year $ 18,848 $ 9,947 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 192 $ 3,670 Cash paid for taxes 482 293 The accompanying notes are an integral part of these consolidated financial statements. F-8 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) 1. Description of Business GEE Group Inc. was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893. GEE Group Inc. and its wholly owned 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, engineering, and medical professionals for direct hire and contract staffing for our professional clients and provide temporary staffing services for our industrial clients. 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 September 30, 2022, we operated from locations in eleven (11) states, including twenty-eight (28) branch offices in downtown or suburban areas of major U.S. cities and four (4) additional U.S. locations utilizing local staff members working remotely. The Company’s fiscal year begins on October 1 and ends on September 30 of each year. Fiscal 2022 and fiscal 2021 refer to the fiscal years ended September 30, 2022 and 2021, respectively. Liquidity 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, payment of operating costs and expenses, payment of taxes, payment of interest, fees and principal under its debt agreements, and capital expenditures. 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 follow-on 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. On April 20, 2021, as the result of the completion of the public offering, the Company repaid $ 56,022 in aggregate outstanding indebtedness under the Former Credit Agreement, including accrued interest, using the net proceeds of its 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. F-9 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) On May 14, 2021, the Company 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”). 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. Additional information regarding the CIT Facility is presented in Note 9. Management believes that the Company has adequate cash and working capital and can generate adequate liquidity to meet its obligations for the foreseeable future and at least for one year after the date that these consolidated financial statements are issued. 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 a lesser extent, with the most severe impacts being felt in the industrial segment and, to a lesser extent, in the professional segment including finance, accounting and office clerical (“FAO”) contract staffing service end markets. 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 Paycheck Protection Program (“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, to provide our services and meet our liquidity requirements in the midst of the worldwide Coronavirus Pandemic. The PPP loans were used primarily to restore employee pay-cuts, recall furloughed or laid-off employees, support the payroll costs for existing employees, hire new employees, and for other allowable purposes including interest costs on certain business mortgage obligations, rent and utilities. The Company received notice of forgiveness for some of these loans and their accrued interest during fiscal 2021 in the amount of $ 3,456 while the remaining loans were forgiven in fiscal 2022 totaling $ 16,773 (see Note 10). The Company accounted for the remaining PPP loans as current debt in the Company’s accompanying consolidated financial statements as of September 30, 2021 in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt . The Company and its subsidiaries, under the CARES Act, also were eligible to defer paying $ 3,654 , in aggregate, of applicable payroll taxes incurred during fiscal 2020. One half of the deferred deposits of the employer’s share of Social Security tax were required to be paid on or before December 31, 2021 to be considered timely and avoid a failure to deposit penalty, and the remaining fifty percent (50%) of the eligible deferred amounts are required to be paid similarly by December 31, 2022. The first half of the required deferred deposits payments totaling $ 1,827 , in aggregate, were paid prior to December 31, 2021, as required. The remaining deferred amounts are included in other current liabilities on the accompanying consolidated financial statements as of September 31, 2022. These amounts will be paid prior to their due date, December 31, 2022, as required. 2. Significant Accounting Policies and Estimates Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for financial information and with the instructions to Article 8 of Regulation S-X. F-10 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) 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. Use of Estimates The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenues from contracts with customers are generated from direct hire placement services, professional contract services, and industrial contract services. Revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances. Payment terms in our contracts vary by the type and location of our customer and the services offered. The terms between invoicing and when payments are due are not significant. Direct hire placement service revenues from contracts with customers are recognized when employment candidates accept offers of employment, less a provision for estimated credits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company’s guarantee period (referred to as “falloffs”). The Company’s guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire. Fees associated with candidate placement are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates. Temporary staffing service revenues from contracts with customers are recognized in amounts the Company has a right to invoice as the services are rendered by the Company’s temporary employees. The Company records temporary staffing revenue on a gross basis rather than on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company maintains primary responsibility for and controls the staff members that it provides to perform services for its clients. The Company has the risk of identifying and hiring qualified employees (as opposed to client employees), has the discretion to select the employees and establish their price, is responsible for compensating them, and bears the risk for services that are not fully paid for by customers. Falloffs and refunds during the period are reflected in the consolidated statements of operations as a reduction of placement service revenues and were approximately $ 2,297 in fiscal 2022 and $ 1,598 in fiscal 2021. Expected future falloffs and refunds are estimated and reflected in the consolidated balance sheet as a reduction of accounts receivable as described under Accounts Receivable, below. See Note 14 for disaggregated revenues by segment. Cost of Contract Staffing Services The cost of contract services includes the wages and the related payroll taxes, employee benefits and certain other employee-related costs of the Company’s contract service employees while they work on contract assignments. Cash and Cash Equivalents Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. As of September 30, 2022, and September 30, 2021, there were no cash equivalents. F-11 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) Cash deposit accounts are maintained at financial institutions and, at times, balances may exceed federally insured limits guaranteed by the Federal Deposit Insurance Corporation. 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 doubtful accounts is recorded as a charge to bad debt expense where collection is considered to be doubtful due to credit issues. An allowance for placement falloffs also is recorded as a reduction of revenues for estimated losses due to applicants not remaining employed for the Company’s guarantee period. 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. Management believes that the nature of the contract service business, wherein client companies are generally dependent on our contract employees in the same manner as permanent employees for their production cycles and the conduct of their respective businesses contributes to a relatively small accounts receivable allowance. As of September 30, 2022 and September 30, 2021 allowance for doubtful accounts was $ 738 and $ 286 , respectively. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. The allowance also includes permanent placement falloff reserves of $ 190 and $ 115 as of September 30, 2022 and September 30, 2021, 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 2022 and fiscal 2021. Leases The Company determines if a contractual arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and noncurrent operating lease liabilities on the Company’s consolidated balance sheet. The Company evaluates and classifies leases as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option which result in an economic penalty. All the Company’s real estate leases are classified as operating leases. Also, the Company elected the practical expedient which allows aggregation of non-lease components with the related lease components when evaluating accounting treatment. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. The lease payments included in the present value are fixed lease payments. As most of the Company’s leases do not provide an implicit rate, the Company estimates its collateralized incremental borrowing rate, based on information available at the commencement date, in determining the present value of lease payments. The Company applies the portfolio approach in applying discount rates to its classes of leases. The operating lease ROU assets include any payments made before the commencement date. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company does not currently have subleases. The Company does not currently have residual value guarantees or restrictive covenants in its leases. F-12 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) Goodwill The Company evaluates its goodwill for possible impairment as prescribed by FASB ASC 350, Intangibles — Goodwill and Other: Goodwill, at least annually, and more frequently when one or more triggering events or circumstances indicate that the goodwill might be impaired. Under this guidance, annual or interim goodwill impairment testing is performed by comparing the estimated fair value of a reporting unit with its carrying amount. The Company allocates its goodwill among two reporting units: its Professional Services reporting unit and its Industrial Services reporting unit for purposes of evaluation for impairments. An impairment charge is recognized for the amount by which the carrying amount exceeds a reporting unit’s estimated fair value, not to exceed the carrying value of goodwill. In testing for impairments, management applies one or more valuation techniques to estimate the fair values of the reporting units, individual assets or groups of individual assets, as required under the circumstances. These valuation techniques rely on assumptions and other factors, such as industry multiples applied to earnings, estimated future cash flows, the discount rates used to determine the present value of associated cash flows, and market comparable assumptions. These assumptions and factors require significant judgement by the Company in their development. Intangible Assets Separately identifiable intangible assets held in the form of customer relationships and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods. Impairment of Long-lived Assets (other than Goodwill) The Company recognizes an impairment of long-lived intangible 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. For purposes of testing the long-lived assets other than goodwill, long-lived assets are grouped and considered with other assets and liabilities within the Professional and Industrial reporting units. The Company did not record any impairments to its long-lived assets during fiscal 2022 and 2021. Fair Value Measurement The Company follows the provisions of FASB 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 of 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 when observable inputs are not available. 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. F-13 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) The fair value of the Company’s current assets and current liabilities approximate their carrying values due to their short-term nature. The carrying value disclosures of the Company’s long-term liabilities approximate their respective fair values based on current yield for debt instruments with similar terms. The Company has no assets or liabilities which are measured at fair value on a recurring basis. Fair value measurements utilized in evaluating the Company’s goodwill and other intangible assets for impairments are measured at fair value on a non-recurring basis using a combination of Level 2 and Level 3 inputs. Earnings per Share Basic earnings per share are computed by dividing net income attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the vesting of restricted shares granted but unissued, exercise of stock options and warrants. The dilutive effect of the common stock equivalents is reflected in earnings per share by use of the treasury stock method. The weighted average dilutive incremental shares, or common stock equivalents, included in the calculations of dilutive shares were 752 and 1,354 for fiscal 2022 and 2021, respectively. Common stock equivalents, which are excluded because their effect is anti-dilutive, were approximately 942 and 1,536 for fiscal 2022 and 2021, 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 $ 1,981 and $ 1,771 for fiscal 2022 and fiscal 2021, respectively. Share-Based Compensation The Company accounts for share-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 or restricted stock grants. The grant date fair value of stock options is determined using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee stock options and restricted stock grants, the Company recognizes expense over the employee's requisite service period (generally the vesting period of the equity grant) and records an estimate for forfeitures. The Company's option pricing model requires the input of subjective assumptions, including the expected stock price volatility, and expected term. Any changes in these subjective assumptions significantly impact our share-based compensation expense. See Note 11 for the assumptions used to calculate the fair value of share-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 The Company accounts for income taxes under the asset and liability method, FASB ASC 740, Income Taxes , 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, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. F-14 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) The Company recognizes deferred tax assets to the extent that it is believed these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event it is determined that the Company would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. The Company records uncertain tax positions on the basis of a two-step process in which (1) determines 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, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Interest and penalties related to unrecognized tax benefits are recognized on the income tax expense line in the accompanying consolidated statement of operations. As of September 30, 2022 and 2021, no accrued interest or penalties are included on the related tax liability line in the accompanying consolidated balance sheet. 3. Recent Accounting Pronouncements Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses , authoritative guidance amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company has not yet determined the impact of the new guidance on its consolidated financial statements and related disclosures. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes . This ASU simplifies accounting for income taxes by removing the following exceptions: (1) exception to the incremental approach for intra-period tax allocation, (2) exceptions to accounting for basis differences when there are ownership changes in foreign investments, and (3) exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also improves financial statement preparers’ application of income tax related guidance for franchise taxes that are partially based on income; transactions with a government that result in a step up in the tax basis of goodwill; separate financial statements of legal entities that are not subject to tax; and enacted changes in tax laws in interim periods. The ASU is effective for public business entities for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. ASU 2019-12 became effective as of October 1, 2021 and had no material impact on our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . This ASU provides temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This ASU is effective for all entities beginning as of its date of effectiveness, March 12, 2020. The guidance is temporary and can be applied through December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope , to provide supplemental guidance and to further clarify the scope of the amended guidance. The guidance has not impacted the consolidated financial statements to date. The Company will continue to monitor the impact of the ASU on our consolidated financial statements in the future. F-15 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future financial statements. 4. Property and Equipment Property and equipment, net, consisted of the following: September 30, 2022 September 30, 2021 Computer software $ 481 $ 462 Office equipment, furniture, fixtures and leasehold improvements 3,739 3,042 Total property and equipment, at cost 4,220 3,504 Accumulated depreciation and amortization ( 3,080 ) ( 2,739 ) Property and equipment, net $ 1,140 $ 765 5. Leases The Company occasionally acquires equipment under finance leases including hardware and software used by our IT department to improve security and capacity, vehicles used by our Industrial Segment, and certain furniture for our offices. Terms for these leases generally range from two to six years. Supplemental cash flow information related to finance leases consisted of the following: Fiscal 2022 Fiscal 2021 Cash paid for finance lease liabilities $ 168 $ 95 Acquisition of equipment with finance lease $ 420 $ 76 Supplemental balance sheet information related to finance leases consisted of the following: Fiscal 2022 Fiscal 2021 Weighted average remaining lease term for finance leases 3.3 years 3.5 years Weighted average discount rate for finance leases 7.3 % 9.9 % The table below reconciles the undiscounted future minimum lease payments under non-cancelable finance lease agreements to the total finance lease liabilities recognized on the consolidated balance sheet as of September 30, 2022: Fiscal 2023 $ 242 Fiscal 2024 166 Fiscal 2025 108 Fiscal 2026 105 Fiscal 2027 21 Less: Imputed interest ( 69 ) Present value of finance lease liabilities (a) $ 573 (a) Includes current portion of $ 208 for finance leases. F-16 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) 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 2026 . The Company’s leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities. Operating lease expenses were $ 2,163 and $ 2,191 for fiscal 2022 and 2021, respectively. Supplemental cash flow information related to operating leases consisted of the following: Fiscal 2022 Fiscal 2021 Cash paid for operating lease liabilities $ 1,994 $ 1,893 Right-of-use assets obtained in exchange for new operating lease liabilities $ 294 $ 656 Supplemental balance sheet information related to operating leases consisted of the following: Fiscal 2022 Fiscal 2021 Weighted average remaining lease term for operating leases 1.8 years 2.7 years Weighted average discount rate for operating leases 5.9 % 5.9 % The table below reconciles the undiscounted future minimum lease payments under non-cancelable operating lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the consolidated balance sheet as of September 30, 2022, including certain closed offices are as follows: Fiscal 2023 $ 1,472 Fiscal 2024 1,172 Fiscal 2025 602 Fiscal 2026 194 Fiscal 2027 29 Less: Imputed interest ( 247 ) Present value of operating lease liabilities (a) $ 3,222 (b) Includes current portion of $ 1,333 for operating leases. F-17 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) 6. Goodwill and Intangible Assets Goodwill Goodwill assets as of September 30, 2022 and 2021, consisted of the following: September 30, 2022 September 30, 2021 Acquisition Value Accumulated Impairment Net Book Value Acquisition Value Accumulated Impairment Net Book Value Goodwill $ 76,593 $ ( 15,300 ) $ 61,293 $ 76,593 $ ( 13,150 ) $ 63,443 For purposes of performing its annual goodwill impairment assessment as of September 30, 2022 and 2021, the Company applied the valuation techniques and assumptions to its professional and industrial segments as reporting units discussed in Note 2, above; and also considered recent trends in the Company’s stock price, implied control or acquisition premiums, earnings, and other possible factors and their effects on estimated fair value of the Company’s reporting units. The Company completed its most recent annual goodwill impairment assessment, as of September 30, 2022, and determined that its goodwill was not impaired. During the first fiscal quarter of 2022, the amount of discount inherent in the Company’s market capitalization as reported on the NYSE American exchange when compared with consolidated stockholders’ equity, or net book value, had increased since the annual goodwill impairment assessment as of September 30, 2021; therefore, the Company performed an interim assessment of its goodwill for impairment as of December 31, 2021. The estimated fair values of its Professional Services and Industrial Services reporting units were adjusted based on qualitative and quantitative analysis so that they reconcile more precisely with the Company’s market capitalization as of December 31, 2021, plus an assumed control premium. As a result, the Company recognized a non-cash impairment charge of $ 2,150 during fiscal 2022. Upon completion of the prior annual goodwill impairment assessment as of September 30, 2021, it was determined that the Company’s goodwill was not impaired. Intangible Assets The following tables set forth the costs, accumulated amortization and net book value of the Company’s separately identifiable intangible assets as of September 30, 2022 and September 30, 2021 and estimated future amortization expense. September 30, 2022 September 30, 2021 Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships $ 29,070 $ ( 18,482 ) $ 10,588 $ 29,070 $ ( 15,844 ) $ 13,226 Trade names 8,329 ( 7,632 ) 697 8,329 ( 6,801 ) 1,528 Total $ 37,399 $ ( 26,114 ) $ 11,285 $ 37,399 $ ( 22,645 ) $ 14,754 Estimated Amortization Expense Fiscal 2023 $ 2,879 Fiscal 2024 2,879 Fiscal 2025 2,741 Fiscal 2026 1,870 Fiscal 2027 916 $ 11,285 F-18 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) Intangible assets that represent customer relationships are amortized on the basis of estimated future undiscounted cash flows or using the straight-line basis over estimated remaining useful lives of five to ten years. Trade names are amortized on a straight-line basis over their respective estimated useful lives of between five and ten years. 7. Accrued Compensation Accrued Compensation is comprised of accrued wages, the related payroll taxes, employee benefits of the Company's employees, including those working on contract assignments, commissions earned and not yet paid and estimated commissions and bonuses payable. 8. Former Revolving Credit Facility and Term Loan The Company and its subsidiaries, as borrowers, were parties to a Revolving Credit, Term Loan and Security Agreement (the “Former Credit Agreement”) with certain investment funds managed by MGG. The principal and remaining unpaid accrued interest and fee balances under the Revolving Credit Facility and Term Loan balances outstanding under the Former Credit Agreement, as amended, were fully repaid and the Former Credit Agreement was retired on April 20, 2021. Additional information regarding the repayment of the Former Credit Agreement is presented in Note 1. 9. Senior Bank Loan, Security and Guarantee Agreement On May 14, 2021, the Company and its subsidiaries 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 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 ). As of September 30, 2022, the Company had no outstanding borrowings and $ 15,352 available for borrowing under the terms of the CIT Facility. The Company also had $ 561 in unamortized debt issue cost associated with the CIT Facility. The amortization expense of these debt costs totaled $ 153 and $ 51 for fiscal 2022 and 2021, respectively. Under the CIT Facility, advances will be subject to a borrowing base formula that is 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 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. The unused line fees incurred and included in interest expense totaled $ 101 and $ 39 in fiscal 2022 and 2021, respectively. 10. CARES Act Payroll Protection Program Loans Between April 29 and May 7, 2020, the Company obtained PPP loans for each of its operating subsidiaries. The PPP loans were used primarily to restore employee pay-cuts, recall furloughed or laid-off employees, support the payroll costs for existing employees, hire new employees, and for other allowable purposes including interest costs on certain business mortgage obligations, rent and utilities. Each of the Company’s subsidiaries executed a separate promissory note evidencing unsecured loans under the PPP. The following promissory notes were executed by the Company and its subsidiaries: GEE Group Inc. for $ 1,992 ; Scribe Solutions, Inc. for $ 277 ; Agile Resources, Inc. for $ 1,206 ; Access Data Consulting Corporation for $ 1,456 ; Paladin Consulting, Inc. for $ 1,925 ; SNI Companies, Inc. for $ 10,000 ; Triad Personnel Services, Inc. for $ 404 ; Triad Logistics, Inc. for $ 78 ; and BMCH, Inc. for $ 2,589 . F-19 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) The Company and its operating subsidiaries have been granted forgiveness of their respective PPP loans by the SBA. During fiscal 2021, the PPP loans and interest were forgiven for Access Data Consulting Corporation, Agile Resources, Inc., Scribe Solutions Inc., Triad Logistics, Inc., and Triad Personnel Services, Inc., in the amounts of $ 1,470 , $ 1,220 , $ 279 , $ 79 , and $ 408 , respectively. The Company’s remaining four PPP loans and interest for GEE Group Inc., BMCH, Inc., Paladin Consulting, Inc., and SNI Companies, Inc. were forgiven in fiscal 2022 in the amounts of $ 2,024 , $ 2,630 , $ 1,956 , and $ 10,163 , respectively. As a result, the Company recognized aggregate gains of $ 16,773 and $ 3,456 during fiscal 2022 and 2021, respectively. The former PPP loans obtained by GEE Group Inc., and its operating subsidiaries together as an affiliated group, exceeded the $ 2,000 audit threshold established by the SBA, and therefore, 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. 11. Equity On April 19, 2021, the Company completed the initial closing of 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 . As part of the offering, the Company granted the underwriters a 45-day option to purchase up to an additional 12,500 shares of the Company's common stock to cover over-allotments, if any, at the public offering price, less the underwriting discount. ThinkEquity, a division of Fordham Financial Management, Inc., acted as sole book-running manager for the offering. On or about April 19, 2021, six (6) directors and officers of the Company individually acquired shares of the Company’s common stock either by directly participating in the Company’s 2021 follow-on public offering of its common shares, as subscribers, or by purchasing Company common shares in the open market. These six officers and directors collectively acquired a total of 679 shares of the Company’s common stock at that time. 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. Preferred Stock The Company has authorized 20,000 shares of preferred stock of which 1,000 shares have been designated Series A Preferred Stock, and no shares were issued or are outstanding; 5,950 shares have been designated Series B Preferred Stock, of which 5,926 shares were issued and none remain outstanding, and 3,000 shares have been designated Series C Preferred Stock, of which 2,093 shares were issued and none remained outstanding as of September 30, 2022 and 2021. 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 would preclude permanent equity classification on the accompanying consolidated balance sheets. The Series C Convertible Preferred Stock has a Liquidation Value equal to $ 1.00 per share and ranks pari passu with the Company’s Series B Convertible Preferred Stock and 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. F-20 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) Amended and Restated 2013 Incentive Stock Plan As of September 30, 2022, there were restricted stock shares and stock options outstanding under the Company’s Amended and Restated 2013 Incentive Stock Plan (“Incentive Stock Plan”). During fiscal 2021, the Incentive Stock Plan was amended to increase the total shares available for restricted stock and stock options grants by 10,000 to a total of 15,000 ( 7,500 restricted stock shares and 7,500 stock option shares). The Incentive Stock Plan authorizes 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. As of September 30, 2022, there were 9,931 shares remained available to be granted under the Plan ( 5,073 shares available for stock option grants and 4,858 shares available for restricted stock grants). Restricted Stock The Company granted 100 and 642 shares of restricted common stock in fiscal 2022 and 2021, respectively. Share-based compensation expense attributable to restricted stock was $ 293 and $ 525 in fiscal 2022 and 2021, respectively. As of September 30, 2022, there was approximately $ 322 of unrecognized compensation expense related to restricted stock outstanding, and the weighted average vesting period for those grants was 3.08 years. On August 21, 2022, 350 shares of restricted common stock held by the Company’s executive officers and board of directors became fully vested. On June 15, 2021, 600 shares of restricted common stock held by the Company’s Chairman and Chief Executive Officer became fully vested. A summary of restricted stock activity is presented as follows: Number of Shares Weighted Average Fair Value ($) Non-vested restricted stock outstanding as of September 30, 2020 1,450 1.32 Granted 642 0.46 Forfeited ( 50 ) 0.52 Vested ( 600 ) 2.21 Non-vested restricted stock outstanding as of September 30, 2021 1,442 0.60 Granted 100 0.53 Vested ( 350 ) 0.52 Non-vested restricted stock outstanding as of September 30, 2022 1,192 0.61 Warrants The Company had 77 warrants outstanding as of September 30, 2022 and September 30, 2021 with a weighted average exercise price per share of $ 2 . The outstanding warrants had a weighted average remaining contractual life of 2.50 and 3.50 as of September 30, 2022 and 2021, respectively. No warrants were granted or expired during fiscal 2022 and 2021. Stock Options All stock options outstanding as of September 30, 2022 and September 30, 2021 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. The Company granted 940 and 525 stock options in fiscal 2022 and 2021, respectively. The stock options generally vest on annual schedules during periods ranging from two to four years from the date of grant. Share-based compensation expense attributable to stock options was $ 342 and $ 445 in fiscal 2022 and fiscal 2021, respectively. As of September 30, 2022, there was approximately $ 585 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.79 years. F-21 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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, 2020 1,254 2.85 7.34 7 Granted 525 0.57 - 42 Forfeited ( 107 ) 2.79 - - Options outstanding as of September 30, 2021 1,672 2.14 7.35 49 Granted 940 0.59 - 39 Forfeited ( 185 ) 1.05 - - Options outstanding as of September 30, 2022 2,427 1.54 7.65 88 Exercisable as of September 30, 2021 890 3.14 6.08 7 Exercisable as of September 30, 2022 1,111 2.58 5.82 21 The fair value of stock options granted was made using the Black-Scholes option pricing model and the following assumptions: 2022 2021 Weighted average fair value of options $ 0.55 $ 0.54 Weighted average risk-free interest rate 2.8 % 1.6 % Weighted average volatility factor 112 % 114 % Weighted average expected life (years) 10 10 12. Income Taxes The components of the provision for income taxes is as follows: Year Ended September 30, 2022 2021 Current expense (benefit): Federal $ - $ - State 578 ( 103 ) Total current expense (benefit): $ 578 $ ( 103 ) Deferred expense: Federal $ 4 $ 115 State 6 46 Total deferred expense: $ 10 $ 161 Total income tax expense: $ 588 $ 58 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, 2022 2021 Income at US statutory rate $ 4,239 $ 28 State taxes, net of federal benefit 490 ( 468 ) Tax credits ( 209 ) ( 143 ) Stock compensation 270 - Goodwill impairment 342 - PPP related matters ( 3,522 ) ( 4,910 ) Valuation allowance ( 885 ) 5,384 Other ( 137 ) 167 $ 588 $ 58 F-22 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) The net deferred income tax asset balance related to the following: Year Ended September 30, 2022 2021 Net operating loss carryforwards $ 4,255 $ 4,765 Stock options 1,566 1,728 Allowance for doubtful accounts 183 70 Accrued & prepaid expenses 730 968 Tax credit carryforwards 1,034 825 ROU liability 723 1,100 Interest 3,204 3,708 Other 8 6 Total deferred tax assets $ 11,703 $ 13,170 Intangibles $ ( 4,002 ) $ ( 4,342 ) ROU asset ( 615 ) ( 895 ) Depreciation ( 33 ) ( 58 ) Total deferred tax liability $ ( 4,650 ) $ ( 5,295 ) Deferred tax asset $ 7,053 $ 7,875 Valuation allowance ( 7,581 ) ( 8,466 ) Net deferred tax liability $ ( 528 ) $ 591 ) As of September 30, 2022, the Company had federal and state net operating loss carryforwards of approximately $ 17.7 million and $ 14.6 million, respectively, which begin to expire in tax years 2031 for federal and 2022 for state purposes. Of the $ 17.7 million of federal net operating losses, $ 6.2 million can be carried indefinitely. 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, 2022 and 2021, 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 valuation allowance as of September 30, 2022 and 2021. 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, 2022 and 2021, 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. F-23 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) 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, 2022, and 2021 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, 2022, and 2021, 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, 2019, 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. 13. Commitment and Contingencies Litigation and Claims On March 23, 2022, the Company settled a legal matter involving two separate, but related lawsuits, filed by plaintiff Sands Brothers Venture Capital II, LLC. These two lawsuits and others in which the Company was not a named party, involved a dispute amongst certain former affiliate and non-affiliate entities, and certain former officers and directors of the Company, stemming from a series of transactions that allegedly occurred during the period 2008 through 2010. The Company was sued in 2014 and 2017, based on the allegation that it was a participant and aided and abetted in the fraudulent conveyance of funds. The plaintiff was a creditor of an unaffiliated now defunct entity whose assets the Company is alleged to have received. Given the facts and circumstances of the case, it has been the Company’s belief and assessment that the lawsuits were meritless, and that the likelihood of a material adverse resolution was remote. The Company’s ongoing legal expenses including depositions, court filings, etc. incurred over the years to defend itself from the claims made by the plaintiff in the respective lawsuits, have, for the most part, been either paid directly to the law firms or reimbursed by insurance. The Company continues to believe that its defenses were meritorious and that the final results of litigation would, overall, have been favorable on the merits. However, given the age of the matter, the potential future significant ongoing uninsured portions of legal and other costs to be incurred, including the extraordinary expenses of flying and housing witnesses and experts for the trial, and the future time, attention and effort necessary by management to satisfactorily resolve the matter through the courts, the Company made the business decision to take advantage of an opportunity to settle the case. In this regard, the Company entered into a Confidential Settlement Agreement and Mutual Release, dated March 23, 2022, with the plaintiff for both lawsuits. Under the terms of the agreement and release, neither the plaintiff nor the Company have admitted or conceded to any wrongdoing, and the matter has been settled in its entirety for a one-time payment to the plaintiff of approximately $ 1,175 , of which the Company’s portion is $ 975 , with insurance paying the balance. This payment was due and paid by April 8, 2022, and the expense has been recognized as a pre-tax charge in the Company’s consolidated financial statements for fiscal 2022. F-24 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) The Company and its subsidiaries are involved in various other litigation that arises in the ordinary course of business. There are no other pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position. 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, accounting, finance and office, engineering, and medical, and (c) temporary industrial staffing. These services can be divided into two reportable segments: Industrial Staffing Services and Professional Staffing Services. Some selling, general and administrative expenses are not fully allocated among these segments. Unallocated corporate expenses primarily include certain executive compensation expenses and salaries, certain administrative salaries, corporate legal expenses, share-based compensation expenses, consulting expenses, audit fees, corporate rent and facility costs, board related fees, acquisition, integration and restructuring expenses, and interest expense. F-25 Table of Contents GEE GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share data, unless otherwise stated) Year Ended September 30, 2022 2021 Industrial Staffing Services Contract services revenue $ 15,945 $ 17,332 Contract services gross margin 1 15.4 % 22.3 % Income from operations $ 873 $ 1,646 Depreciation and amortization 64 77 Accounts receivable – net 1,991 2,546 Intangible assets - - Goodwill 1,083 1,083 Total assets 3,817 3,917 Professional Staffing Services Permanent placement revenue $ 26,605 $ 19,078 Placement services gross margin 100 % 100 % Contract services revenue $ 122,562 $ 112,470 Contract services gross margin 26.6 % 26.3 % Income from operations $ 11,523 $ 11,600 Depreciation and amortization 3,776 4,323 Accounts receivable – net 20,779 20,524 Intangible assets 11,285 14,754 Goodwill 60,210 62,360 Total assets 115,737 113,672 Unallocated Expenses Corporate administrative expenses 2 $ 7,464 $ 5,280 Corporate facility expenses 379 370 Share-based compensation expense 635 970 Board related expenses 143 136 Total unallocated expenses $ 8,621 $ 6,756 Consolidated Total revenue $ 165,112 $ 148,880 Income from operations 3,775 6,490 Depreciation and amortization 3,840 4,400 Total accounts receivables – net 22,770 23,070 Intangible assets 11,285 14,754 Goodwill 61,293 63,443 Total assets 119,554 117,589 1 Includes credits of $ 78 and $ 1,270 for annual premium refunds from the Ohio Bureau of Workers Compensation in fiscal 2022 and 2021, respectively. The Industrial Services gross margin excluding the impact of these items was approximately 14.9 % for both fiscal 2022 and 2021. 2 Includes certain costs and expenses incurred related to restructuring activities, including corporate legal and general expenses associated with capital markets activities and not directly associated with core business operations. These costs were $ 2,060 and $ 412 for fiscal 2022 and 2021, respectively, and include mainly expenses associated with former closed and consolidated locations, personnel costs associated with eliminated positions, and legal and professional costs. 15. Defined Contribution Plan The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible core and field personnel, including those assigned to provide staffing services for clients. The 401(k) Plan allows participants to make contributions subject to applicable statutory limitations. The Company matches participants’ contributions with 10% of the first 10% of a participant’s contribution . The Company match contributed $ 92 and $ 68 from continuing operations to the 401(k) Plan for fiscal 2022 and 2021, respectively. F-26 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.