GEE Group Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS (unaudited) GEE GROUP INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Amounts in thousands) ASSETS June 30, 2023 September 30, 2022 CURRENT ASSETS Cash $ 20,726 $ 18,848 Accounts receivable, less allowances ($ 703 and $ 738 , respectively) 19,943 22,770 Prepaid expenses and other current assets 709 604 Total current assets 41,378 42,222 Property and equipment, net 949 1,140 Goodwill 61,293 61,293 Intangible assets, net 9,126 11,285 Deferred tax assets, net 6,321 - Right-of-use assets 3,994 2,830 Other long-term assets 639 784 TOTAL ASSETS $ 123,700 $ 119,554 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 2,861 $ 2,958 Accrued compensation 4,954 5,750 Current operating lease liabilities 1,531 1,333 Other current liabilities 738 5,538 Total current liabilities 10,084 15,579 Deferred taxes - 528 Noncurrent operating lease liabilities 2,818 1,889 Other long-term liabilities 402 555 Total lliabilities 13,304 18,551 Commitments and contingencies (Note 13) SHAREHOLDERS' EQUITY Common stock, no-par value; authorized - 200,000 shares; 114,600 shares issued and 113,730 shares outstanding at June 30, 2023, and 114,450 shares issued and outstanding at September 30, 2022 112,727 112,051 Accumulated deficit ( 1,860 ) ( 11,048 ) Treasury stock, at cost - 870 shares at June 30, 2023 ( 471 ) - Total shareholders' equity 110,396 101,003 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 123,700 $ 119,554 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 4 Table of Contents GEE GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (Amounts in thousands, except basic and diluted earnings per share) Three Months Ended Nine Months Ended June 30, June 30, 2023 2022 2023 2022 NET REVENUES: Contract staffing services $ 32,980 $ 33,087 $ 102,357 $ 103,516 Direct hire placement services 5,191 8,026 15,821 20,073 NET REVENUES 38,171 41,113 118,178 123,589 Cost of contract services 24,518 24,612 76,918 76,992 GROSS PROFIT 13,653 16,501 41,260 46,597 Selling, general and administrative expenses 11,753 12,860 36,266 37,447 Depreciation expense 96 96 295 276 Amortization of intangible assets 720 720 2,159 2,749 Goodwill impairment charge - - - 2,150 INCOME FROM OPERATIONS 1,084 2,825 2,540 3,975 Gain on extinguishment of debt - - - 16,773 Interest expense ( 119 ) ( 96 ) ( 265 ) ( 301 ) Interest income 159 - 292 - INCOME BEFORE INCOME TAX PROVISION 1,124 2,729 2,567 20,447 Provision for income tax expense (benefit) ( 6,752 ) 96 ( 6,621 ) 59 NET INCOME $ 7,876 $ 2,633 $ 9,188 $ 20,388 BASIC EARNINGS PER SHARE $ 0.07 $ 0.02 $ 0.08 $ 0.18 DILUTED EARNINGS PER SHARE $ 0.07 $ 0.02 $ 0.08 $ 0.18 WEIGHTED AVERAGE SHARES OUTSTANDING: BASIC 114,250 114,100 114,384 114,100 DILUTED 114,984 115,642 115,145 115,609 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 5 Table of Contents GEE GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (unaudited) (Amounts in thousands) Common Total Stock Common Accumulated Treasury Shareholders' Shares Stock Deficit Stock Equity Balance, September 30, 2022 114,450 $ 112,051 $ ( 11,048 ) $ - $ 101,003 Share-based compensation - 374 - - 374 Net income - - 654 - 654 Balance, December 31, 2022 114,450 $ 112,425 $ ( 10,394 ) $ - $ 102,031 Share-based compensation - 126 - - 126 Net income - - 658 - 658 Balance, March 31, 2023 114,450 $ 112,551 $ ( 9,736 ) $ - $ 102,815 Purchase of treasury stock - - - ( 471 ) ( 471 ) Share-based compensation - 176 - - 176 Issuance of stock for restricted stock 150 - - - - Net income - - 7,876 - 7,876 Balance, June 30, 2023 114,600 $ 112,727 $ ( 1,860 ) $ ( 471 ) $ 110,396 Common Total Stock Common Accumulated Treasury Shareholders' Shares Stock Deficit Stock Equity Balance, September 30, 2021 114,100 $ 111,416 $ ( 30,647 ) $ - $ 80,769 Share-based compensation - 147 - - 147 Net income - - 16,668 - 16,668 Balance, December 31, 2021 114,100 $ 111,563 $ ( 13,979 ) $ - $ 97,584 Share-based compensation - 152 - - 152 Net income - - 1,087 - 1,087 Balance, March 31, 2022 114,100 $ 111,715 $ ( 12,892 ) $ - $ 98,823 Share-based compensation - 169 - - 169 Net income - - 2,633 - 2,633 Balance, June 30, 2022 114,100 $ 111,884 $ ( 10,259 ) $ - $ 101,625 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 6 Table of Contents GEE GROUP INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Amounts in thousands) Nine Months Ended June 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,188 $ 20,388 Adjustments to reconcile net income to cash provided by operating activities: Gain on extinguishment of debt - ( 16,773 ) Depreciation and amortization 2,454 3,025 Non-cash lease expense 1,042 1,046 Goodwill impairment charge - 2,150 Share-based compensation 676 468 Increase (decrease) in allowance for doubtful accounts ( 35 ) 488 Deferred income taxes ( 6,849 ) ( 69 ) Amortization of debt discount 115 115 Changes in operating assets and liabilities: Accounts receivable 2,862 1,431 Accounts payable ( 97 ) 317 Accrued compensation ( 796 ) ( 492 ) Other assets ( 105 ) ( 101 ) Other liabilities ( 5,849 ) ( 4,062 ) Net cash provided by operating activities 2,606 7,931 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment ( 104 ) ( 225 ) Net cash used in investing activities ( 104 ) ( 225 ) CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock ( 471 ) - Payments on finance leases ( 153 ) ( 113 ) Net cash used in financing activities ( 624 ) ( 113 ) Net change in cash 1,878 7,593 Cash at beginning of period 18,848 9,947 Cash at end of period $ 20,726 $ 17,540 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 150 $ 154 Cash paid for taxes 359 396 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 7 Table of Contents GEE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) 1. B asis of Presentation The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine-month period ended June 30, 2023 are not necessarily indicative of the results that may be expected for the year ending September 30, 2023. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2022 as filed on December 20, 2022. Certain reclassifications have been made to the prior year’s condensed consolidated financial statements and/or related disclosures to conform to the current year’s presentation. 2. Allowance for Doubtful Accounts and Falloffs 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. Falloffs and refunds during the period are reflected in the unaudited condensed consolidated statements of operations as a reduction of placement service revenues and were approximately $ 191 and $ 521 for the three-month periods and $ 624 and $ 2,018 for the nine-month periods ended June 30, 2023 and 2022, respectively. Expected future falloffs and refunds are estimated and reflected in the consolidated balance sheet as a reduction of accounts receivable as described below. An allowance for doubtful accounts is recorded as a charge to bad debt expense when collection is considered to be doubtful due to credit issues. The Company charges off uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. 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. The combined allowance for doubtful accounts and falloffs were $ 703 and $ 738 as of June 30, 2023 and September 30, 2022, respectively. The allowance consists of $ 586 and $ 548 for doubtful accounts and $ 117 and $ 190 for falloffs as of June 30, 2023 and September 30, 2022, respectively. 3. 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 expenses totaled $ 541 and $ 484 for the three-month periods and $ 1,683 and $ 1,485 for the nine-month periods ended June 30, 2023 and 2022, respectively. 4. 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, which is computed using shares issued less treasury shares repurchased by the Company. 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. 8 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) The weighted average dilutive incremental shares, or common stock equivalents, included in the calculations of dilutive shares were 734 and 1,542 for the three-month periods and 762 and 1,508 for the nine-month periods ended June 30, 2023 and 2022, respectively. Common stock equivalents excluded because their effect is anti-dilutive were 3,473 and 2,483 for the three-month periods and 3,463 and 1,983 for the nine-month periods ended June 30, 2023 and 2022, respectively. 5. Share Repurchase Program On April 27, 2023, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to an aggregate of $ 20 million of the Company’s currently outstanding shares of common stock. The share repurchase program will continue through December 31, 2023, may be suspended or discontinued at any time and does not obligate the Company to repurchase any number of shares of common stock. The share repurchase program is to be conducted in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Subject to applicable rules and regulations, the shares of common stock may be purchased from time to time in the open market transactions and in amounts as the Company deems appropriate, based on factors such as market conditions, legal requirements, and other business considerations. During the three-months ended June 30, 2023, the Company repurchased 870 shares of its common stock for $ 471 at an average price of $ 0.52 per share. 6. Property and Equipment Property and equipment, net consisted of the following: June 30, 2023 September 30, 2022 Computer software $ 481 $ 481 Office equipment, furniture, fixtures and leasehold improvements 3,843 3,739 Total property and equipment, at cost 4,324 4,220 Accumulated depreciation and amortization ( 3,375 ) ( 3,080 ) Property and equipment, net $ 949 $ 1,140 7. 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: Nine Months Ended June 30, 2023 2022 Cash paid for finance lease liabilities $ 153 $ 113 Acquisition of equipment with finance lease - 320 Supplemental balance sheet information related to finance leases consisted of the following: June 30, 2023 September 30, 2022 Weighted average remaining lease term for finance leases 3.0 years 3.3 years Weighted average discount rate for finance leases 6.7 % 7.3 % 9 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) 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 unaudited condensed consolidated balance sheets, included in other current liabilities and other long-term liabilities, as of June 30, 2023: Remainder of Fiscal 2023 $ 50 Fiscal 2024 167 Fiscal 2025 108 Fiscal 2026 105 Fiscal 2027 21 Less: Imputed interest ( 42 ) Present value of finance lease liabilities (a) $ 409 (a) Includes current portion of $ 163 for finance leases. The Company leases space for all its branch offices, which are generally located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods ranging from three to five years. The corporate office lease expires in 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 $ 542 and $ 548 for the three-month periods and $ 1,685 and $ 1,625 for the nine-month periods ended June 30, 2023 and 2022, respectively. Supplemental cash flow information related to leases consisted of the following: Nine Months Ended June 30, 2023 2022 Cash paid for operating lease liabilities $ 1,312 $ 1,490 Right-of-use assets obtained in exchange for new operating lease liabilities 2,206 294 Supplemental balance sheet information related to leases consisted of the following: June 30, 2023 September 30, 2022 Weighted average remaining lease term for operating leases 2.3 years 1.8 years Weighted average discount rate for operating leases 5.7 % 5.9 % The table below reconciles the undiscounted future minimum lease payments under non-cancelable lease agreements having initial terms in excess of one year to the total operating lease liabilities recognized on the unaudited condensed consolidated balance sheet as of June 30, 2023, including certain closed offices are as follows: Remainder of Fiscal 2023 $ 458 Fiscal 2024 1,669 Fiscal 2025 1,111 Fiscal 2026 700 Fiscal 2027 544 Thereafter 302 Less: Imputed interest ( 435 ) Present value of operating lease liabilities (a) $ 4,349 (a) Includes current portion of $ 1,531 for operating leases. 8. Goodwill and Intangible Assets Goodwill The Company completed its most recent annual goodwill impairment assessment, as of September 30, 2022, and determined that its goodwill was not impaired. As of March 31, 2023, 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 Company’s most recent annual goodwill impairment assessment indicating a possible triggering event. In response, the Company performed an interim goodwill impairment assessment as of March 31, 2023. As a result of this interim assessment as of March 31, 2023 and an internal review as of June 30, 2023, it was determined that no goodwill impairment was present. As previously disclosed, the Company incurred a goodwill impairment charge in the amount of $ 2,150 during the nine months ended June 30, 2022. 10 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) 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 June 30, 2023 and September 30, 2022 and estimated future amortization expense. June 30, 2023 September 30, 2022 Cost Accumulated Amortization Net Book Value Cost Accumulated Amortization Net Book Value Customer relationships $ 29,070 $ ( 20,460 ) $ 8,610 $ 29,070 $ ( 18,482 ) $ 10,588 Trade names 8,329 ( 7,813 ) 516 8,329 ( 7,632 ) 697 Total $ 37,399 $ ( 28,273 ) $ 9,126 $ 37,399 $ ( 26,114 ) $ 11,285 Remainder of Fiscal 2023 $ 720 Fiscal 2024 2,879 Fiscal 2025 2,741 Fiscal 2026 1,870 Fiscal 2027 916 $ 9,126 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. 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 June 30, 2023, the Company had no outstanding borrowings and $ 12,434 available for borrowing under the terms of the CIT Facility. The Company also had $ 446 in unamortized debt issuance costs associated with the CIT Facility. The amortization expense of these debt costs totaled $ 38 for the three-month periods and $ 115 for the nine-month periods ended June 30, 2023 and 2022. 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, was based on either the Base Rate, as defined, plus the applicable margin; or the London Interbank Offered Rate (“LIBOR”), or any successor thereto, for the applicable interest period, subject to a 1% floor, plus the applicable margin. On May 18, 2023, the Company entered into a Consent and Amendment No. 1 to the Loan and Security and Guarantee Agreement (the “Amendment”), by and among the Company, certain subsidiaries of the Company as Borrowers, the Guarantors, the financial institutions party to the agreement from time to time as the Lenders, and CIT BANK, a division of First-Citizen Bank & Trust Company (successor by merger to CIT Bank, N.A.), as Agent for the Lenders. Pursuant to the terms of the Amendment and subject to the terms and conditions set forth in the Amendment, CIT, and Lenders consented to the Company’s previously announced 2023 Stock Repurchase Program (as defined in the Amendment), which program will continue through December 31, 2023; provided that (i) the aggregate amount paid for all such repurchase transactions shall not exceed $20,000,000 , and (ii) no Default or Event of Default (as defined in the Amendment) exists or would exist after giving effect to each repurchase transaction consummated thereunder. In addition, effective as of the date of the Amendment, the London interbank offered rate, LIBOR, is no longer used as a benchmark rate or otherwise operative within the Amendment and was replaced with the Secured Overnight Financing Rate, SOFR, as well as other conforming changes. In addition to interest costs on advances outstanding, the CIT Facility will provide an unused line fee ranging from 0.37 % 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 $ 25 for both the three-month periods and $ 76 for both the nine-month periods ended June 30, 2023 and 2022, respectively. 11 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) 10. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) Payroll Protection Program Loans During April and May 2020, the Company obtained Payroll Protection Program loans (“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. The Company and its operating subsidiaries were granted forgiveness of their respective PPP loans by the SBA during fiscals 2021 and 2022. The Company’s remaining PPP loans and interest were forgiven in December 2021 and corresponding gains in the aggregate amount of $ 16,773 were recognized during the nine months ended June 30, 2022. 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. Share-based Compensation Amended and Restated 2013 Incentive Stock Plan, as amended As of June 30, 2023, there were vested and unvested shares of restricted stock and stock options outstanding under the Company’s Amended and Restated 2013 Incentive Stock Plan, as amended (“Incentive Stock Plan”). During fiscal 2021, the Incentive Stock Plan was amended to increase the total shares available for restricted stock and stock options 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 June 30, 2023, there were 8,885 shares available to be granted under the Plan ( 4,098 shares available for restricted stock grants and 4,787 shares available for stock option grants). Restricted Stock The Company granted 760 shares of restricted stock during the nine months ended June 30, 2023. On September 27, 2022, the Company adopted a new annual incentive compensation program (“AICP”) for its executives to be administered under the Company’s Incentive Stock Plan. The AICP includes a long-term incentive (“LTI”) compensation plan in the form of restricted stock awards comprised of two components: one that vests based on future service only, and a second that vests based on future service and performance. Initial awards under both service-only and service plus performance-based components of the AICP LTI plan are determined based on financial performance measures for the immediately preceding fiscal year. During the nine months ended June 30, 2023, 551 of the 760 restricted shares were granted based on actual results for fiscal 2022, as measured against corresponding financial targets for that year, and will cliff vest as of December 2, 2025. 12 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) The remaining 209 of the 760 restricted shares were also granted based on fiscal 2022 results, and as further adjusted for the probable outcome with regard to the financial targets set by the Company’s board of directors for fiscal 2023. These restricted shares are subject to adjustment over their corresponding fiscal 2023 reporting period, based on probability of achieving the fiscal 2023 performance conditions. The final number of fiscal 2022 service plus performance-based restricted shares granted will be determined once the actual financial performance of the Company is determined for fiscal 2023, and will cliff vest on December 2, 2025, the third anniversary from their date of grant. Under the AICP LTI plan, the service plus performance-based grants of 209 restricted shares during the nine months ended June 30, 2023, represent the first tranche of a three-year schedule of awards. The next two tranches of up to 262 shares each (up to an additional 524 restricted shares in total) are scheduled to become effective as the Company’s financial plans and targets are set by the board of directors prior to each anniversary date for each of the two subsequent fiscal years, respectively. As the vesting of the two subsequent tranches will be based in part on performance conditions that have not yet been determined, the grant dates and fair values of these scheduled awards will be established in the future. The end of the requisite service periods for the entire 760 restricted shares granted during the nine months ended June 30, 2023, plus the additional 524 restricted shares eligible to be granted in the future, once the performance conditions are determined for fiscal 2024 and fiscal 2025, is December 2, 2025. Therefore, the remaining two tranches of the fiscal 2022 service plus performance-based awards may be expected to have grant dates corresponding with the establishment of the fiscal 2024 and fiscal 2025 financial performance targets by the Company’s board of directors. However, all final shares determined for each of the two subsequent annual tranches also will cliff vest on December 2, 2025. Share-based compensation expense attributable to restricted stock was $ 119 and $ 76 for the three-month periods and $ 294 and $ 224 for the nine-month periods ended June 30, 2023 and 2022, respectively. As of June 30, 2023, there was approximately $ 610 of unrecognized compensation expense related to restricted stock outstanding and the weighted average vesting period for those grants was 3.06 years. Number of Shares Weighted Average Fair Value ($) Non-vested restricted stock outstanding as of September 30, 2022 1,192 0.61 Granted 760 0.79 Vested - - Non-vested restricted stock outstanding as of December 31, 2022 1,952 0.69 Granted - - Vested - - Non-vested restricted stock outstanding as of March 31, 2023 1,952 0.69 Granted - - Vested ( 150 ) 0.54 Non-vested restricted stock outstanding as of June 30, 2023 1,802 0.69 Warrants The Company had 77 warrants outstanding as of June 30, 2023 and September 30, 2022 with a weighted average exercise price per share of $ 2 and a weighted average remaining contractual life of 1.76 and 2.50 , respectively. No warrants were granted or expired during the nine months ended June 30, 2023. Stock Options All stock options outstanding as of June 30, 2023 and September 30, 2022 were non-qualified 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 435 stock options during the nine months ended June 30, 2023. The stock options generally vest on annual schedules during periods ranging from two to four years, although some options are fully vested upon grant. Share-based compensation expense attributable to stock options was $ 57 and $ 93 for the three-month periods and $ 382 and $ 244 for the nine-month periods ended June 30, 2023 and 2022, respectively. As of June 30, 2023, there was approximately $ 453 of unrecognized compensation expense related to unvested stock options outstanding, and the weighted average vesting period for those options was 3.79 years. 13 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (Amounts in thousands except per share data, unless otherwise stated) Number of Shares Weighted Average Exercise Price per share ($) Weighted Average Fair Value per share ($) Weighted Average Remaining Contractual Life (Years) Total Intrinsic Value of Options ($) Options outstanding as of September 30, 2022 2,427 1.54 1.26 7.65 - Granted 435 0.78 0.63 - - Forfeited ( 24 ) 0.72 0.57 - - Options outstanding as of December 31, 2022 2,838 1.43 1.17 7.77 - Granted - - - - - Forfeited ( 55 ) 1.06 0.97 - - Options outstanding as of March 31, 2023 2,783 1.44 1.17 7.52 - Granted - - - - - Forfeited ( 70 ) 0.96 0.88 - - Options outstanding as of June 30, 2023 2,713 1.45 1.18 7.25 - Exercisable as of September 30, 2022 1,111 2.58 2.02 5.82 - Exercisable as of June 30, 2023 1,885 1.82 1.46 6.55 - 12 . Income Tax The following table presents the provision for income taxes and our effective tax rate for the three and nine-month periods ended June 30, 2023 and 2022: Three Months Ended, June 30, Nine Months Ended, June 30, 2023 2022 2023 2022 Provision (benefit) for income taxes $ ( 6,752 ) $ 96 $ ( 6,621 ) $ 59 Effective tax rate - 601 % 3 % - 258 % 0 % The effective income tax rate on operations is based upon the estimated income for the year and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies. Our effective tax rate for the three and nine-month periods ended June 30, 2023 and 2022, is lower than the statutory tax rate primarily due to the effect of the valuation allowance on the net deferred tax asset (“DTA”) position. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of June 30, 2023, in part due to the fact that in the current year we achieved three years of cumulative pretax income in the U.S. federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that the deferred taxes are realizable. As a result, the Company released $ 6,938 of the valuation allowance accordingly during the three-month period ended June 30, 2023. 13. Commitments and Contingencies Litigation and Claims As previously disclosed, on March 23, 2022, the Company settled the Sands Brothers Venture Capital II, LLC lawsuit. Under the terms of the agreement and release, neither the plaintiff nor the Company have admitted or conceded to any wrongdoing and the matter was settled in its entirety for a one-time payment to the plaintiff of approximately $ 1,175 , of which the Company’s portion was $ 975 , with insurance paying the balance. This payment was due and paid by April 8, 2022, and recorded in selling, general, and administrative expenses as a pre-tax charge in the Company’s condensed consolidated financial statements during the nine-month period ended June 30, 2022. 14 Table of Contents G EE GROUP INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (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: Professional Staffing Services and Industrial Staffing Services. Some selling, general and administrative expenses are not fully allocated among Industrial Services and Professional Staffing Services. Unallocated corporate expenses primarily include certain executive and administrative salaries and related expenses, 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. Three Months Ended Nine Months Ended June 30, June 30, 2023 2022 2023 2022 Industrial Staffing Services Contract services revenue $ 3,183 $ 4,120 $ 10,027 $ 11,944 Contract services gross margin (a) 17.7 % 16.6 % 16.5 % 15.5 % Income from operations $ 43 $ 136 $ 80 $ 828 Depreciation and amortization 14 17 43 48 Professional Staffing Services Permanent placement revenue $ 5,191 $ 8,026 $ 15,821 $ 20,073 Permanent placement services gross margin 100 % 100 % 100 % 100 % Contract services revenue $ 29,797 $ 28,967 $ 92,330 $ 91,572 Contract services gross margin 26.5 % 26.9 % 25.8 % 26.9 % Income from operations $ 2,891 $ 3,928 $ 7,409 $ 8,566 Depreciation and amortization 802 799 2,411 2,977 Unallocated Expenses Corporate administrative expenses $ 1,484 $ 937 $ 3,698 $ 4,566 Corporate facility expenses 108 99 329 283 Share-based compensation expense 176 169 676 468 Board related expenses 82 34 246 102 Total unallocated expenses $ 1,850 $ 1,239 $ 4,949 $ 5,419 Consolidated Total revenue $ 38,171 $ 41,113 $ 118,178 $ 123,589 Income from operations 1,084 2,825 2,540 3,975 Depreciation and amortization 816 816 2,454 3,025 (a) Credits related to estimated annual premium refunds from the Ohio Bureau of Workers Compensations totaling $ 17 and $ 46 are included in the three-month periods ended June 30, 2023 and 2022, respectively; and $ 19 and $ 83 for the nine-month periods ended June 30, 2023 and 2022, respectively. The Industrial Services gross margin normalized for the effects of these items were approximately 17.2 % and 15.5 % for the three-month periods ended June 30, 2023 and 2022, respectively; and 16.3 % and 14.8 % for the nine-month periods ended June 30, 2023 and 2022, respectively. 15 Table of Contents