Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future performance.
However, future performance involves risks and uncertainties which may cause
actual results to differ materially from those expressed in the forward-looking
statements. Item 7 should be read in conjunction with the information contained
in "Forward-Looking Statements" at the beginning of this report and with the
consolidated financial statements and notes thereto included in Item 8.
References such as the "Company," "we," "our" and "us" refer to GEE Group Inc.
and its consolidated subsidiaries.
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Overview
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, and engineering professionals for direct hire and contract staffing for
our clients, data entry assistants (medical scribes) who specialize in EMR
services for emergency departments, specialty physician practices and clinics,
and provide temporary staffing services for our industrial clients. The
acquisitions of Agile Resources, Inc., a Georgia corporation ("Agile"), Access
Data Consulting Corporation, a Colorado corporation ("Access"), Paladin
Consulting Inc. ("Paladin") and SNI Companies, Inc., a Delaware corporation
("SNI") expanded our geographical footprint within the placement and contract
staffing verticals or end markets of information technology, accounting,
finance, office and engineering professionals.
The Company markets its services using the trade names General Employment
Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc.,
Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies
(including Staffing Now, Accounting Now, and Certes), Triad Personnel Services
and Triad Staffing. As of 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. We have offices or serve markets
remotely, as follows; (i) one office in each of Connecticut, Georgia, Minnesota,
and New Jersey, and one remote local market presence in Virginia; (ii) two
offices each in Illinois and Massachusetts; (iii) three offices in Colorado;
(iv) four offices and two additional local market presences in Texas; (v) six
offices and one additional local market presence in Florida; and (vi) seven
offices in Ohio.
Management has implemented a strategy which includes organic and acquisition
growth components. Management's organic growth strategy includes seeking out and
winning new client business, as well as expansion of existing client business
and on-going cost reduction and productivity improvement efforts in operations.
Management's acquisition growth strategy includes identifying strategic
acquisitions, financed primarily through a combination of cash and the issuance
of equity and/or debt to improve the overall profitability and cash flows of the
Company.
The Company's contract and placement services are principally provided under two
operating divisions or segments: Professional Staffing Services and Industrial
Staffing Services. We believe our current segments and array of businesses and
brands within our segments complement one another and position us for future
growth.
Network Security Incident and Risk
On February 1, 2022, the Company detected and stopped a network security
incident. An unauthorized third party gained access into our network, encrypted
various systems, and demanded money to decrypt the affected systems and to
delete and not publicly release stolen information. The Company's IT
professionals immediately disconnected and isolated the affected systems to
prevent any further compromise. The senior executive management team was
immediately notified who in turn reported the network security incident to the
Company's Audit Committee chairman who has board oversight authority for these
types of matters. The Company's audit committee and board of directors were
fully briefed and a special committee of the board of directors was appointed to
assist and oversee management in the investigations, response and full
remediation of the incident. The Company engaged third party cyber security
experts to assist its internal IT professionals and conducted a comprehensive
investigation to determine the extent of the unauthorized activity. The Company
also notified law enforcement and its cyber liability insurance carrier about
the incident.
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The Company's investigation determined that the unauthorized third party
acquired a relatively small amount of data maintained on the encrypted servers,
to include in some cases, individual personal information such as names, social
security numbers, passport and driver license information. Our forensic
investigation has been concluded and we believe we have reasonably determined
the scope of the incident. Individuals affected by this incident are in the
process of being notified in accordance with applicable state and federal laws.
The cost of investigating and resolving the incident has been immaterial. Based
on what management and the Company's third-party cyber security experts have
determined in their investigation, the Company also does not foresee this
incident having any future material detrimental effect on our business or
financial position. The Company has in place cyber liability insurance coverage,
subject to certain policy limitations and deductibles. The Company had also
immediately notified the cyber insurance carrier of the network security
incident, who worked with management and the Company's third-party cyber
security experts on this matter.
The Company's network environment is fully operational and additional security
measures have been added and/or are being evaluated to prevent further
intrusions. The Company has not observed any additional malicious activity on
the network to date. The Company's operations were only minimally impacted by
the incident, and we were able to serve our clients and other stakeholders
without issue throughout.
Coronavirus Pandemic ("COVID-19")
Our businesses have recovered to a significant extent from COVID-19 during the
fiscal years ended September 30, 2022 and 2021. While we have experienced
significant recovery and, in fiscal 2022, returned to or exceeded pre-COVID-19
levels of results and performance, the rate of future growth might still be
affected by potential resurgences and negative impacts of COVID-19 and its
variants.
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(Amounts in thousands except per share data, unless otherwise stated)
Results of Operations
Fiscal year ended September 30, 2022 ("fiscal 2022"), and fiscal year ended
September 30, 2021 ("fiscal 2021")
Net Revenues
Consolidated net revenues are comprised of the following:
Fiscal
2022 2021 $ Change % Change
Professional contract services $ 122,562 $ 112,470 $ 10,092 9%
Industrial contract services 15,945 17,332 (1,387 ) -8%
Total contract services revenues 138,507 129,802 8,705
7%
Direct hire placement services 26,605 19,078 7,527 39%
Consolidated net revenues $ 165,112 148,880 $ 16,232 11%
Contract staffing services contributed $138,507, or approximately 84%, of
consolidated revenue and direct hire placement services contributed $26,605, or
approximately 16%, of consolidated revenue for fiscal 2022. This compares to
contract staffing services revenue of $129,802, or approximately 87%, of
consolidated revenue and direct hire placement revenue of $19,078, or
approximately 13%, of consolidated revenue for fiscal 2021.
The overall increase in contract staffing services revenue of $8,705, or 7% for
fiscal 2022 compared to fiscal 2021 was primarily attributable to increased
demand for employment in our professional contract services markets, resulting
in an increase in revenues of $10,092, or 9%, as the U.S. economy and workforce
have continued to improve toward pre-COVID-19 conditions. Industrial staffing
services revenues decreased by $1,387, or 8%, due mainly to reoccurrence of
adverse conditions associated with COVID-19 variants, which caused significant
disruptions in the industrial markets we serve and resulting in a decrease in
demand for our industrial staffing services during the first half of fiscal
2022.
Management believes this trend is the result of post-COVID-19 recovery of the
U.S. economy, as well as actions taken by the Company to take advantage of
post-COVID-19 opportunities and trends and position the Company for growth.
Industrial contract services revenues decreased mainly due to resurgence of
adverse conditions associated with COVID-19 variants, which caused significant
disruptions in the industrial markets we serve and a decrease in demand during
the first half of fiscal 2022. Additionally, lingering workforce shortages that
have continued in the local markets served by our industrial segment, have
prevented our industrial contract services revenue for fiscal 2022 from fully
recovering to pre-COVID-19 levels. These labor shortages limited the Company's
ability to fill all its contract orders in its industrial segment as well as
some orders in the professional segment. Workforce volatility and shortages are
believed to be attributable, at least in part, to plentiful economic stimulus
and unemployment benefits.
Direct hire placement revenue for fiscal 2022 increased by $7,527 or 39% over
fiscal 2021, driven by a substantial increase in the demand for permanent
placements. The large increase in direct hire revenues appears to be driven, in
part, by continued volatility in the workforce leading some companies to staff
harder to fill positions with permanent employees, rather than contract
employees. It also is believed that the larger proportion of fully remote
workers in the workforce today is causing some employers to favor permanent
hires over contractors so that they may maintain direct access and control for
purposes of security over their networks and other assets. In particular, the
Company has been successful in growing direct hire revenues across its
information technology brands, in addition to its finance, accounting and office
brands.
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(Amounts in thousands except per share data, unless otherwise stated)
Management believes that the significant net growth in revenues during fiscal
2022, compared to fiscal 2021, is generally in line with trends being
experienced in the overall U.S. economy. The Company also continues to observe,
analyze and, where considered appropriate, make modifications and changes to its
business model and practices in response to the COVID-19 pandemic and related
health and safety concerns, including those associated with its variants. These
include, but are not limited to, implementation of preventative policies and
procedures in observance of Federal, state and/or local guidelines or
recommendations with regard to COVID-19 and its variants, use of personal
protective equipment (principally, protective masks), and others. The Company
also continues to take advantage of flexible and hybrid work-from-home
employment arrangements and has adopted the strategy of converting certain of
its branch office locations to virtual locations where efficiencies are
available.
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes, employee
benefits of the Company's contract services employees, and certain other
employee-related costs, while they work on contract assignments. Cost of
contract services for fiscal 2022 increased by approximately 7% to $103,434
compared to $96,339 for fiscal 2021. The $7,095 increase in cost of contract
services is consistent with the increase in revenues as discussed above.
Gross Profit percentage by service:
Fiscal
2022 2021
Professional contract services 26.6% 26.3%
Industrial contract services 15.4% 22.3%
Consolidated contract services 25.3% 25.8%
Direct hire placement services 100.0% 100.0%
Combined gross profit margin (1) 37.4% 35.3%
(1) Includes gross profit from direct hire placements, for which all associated
costs are recorded as selling, general and administrative expenses.
The Company's combined gross profit margin, including direct hire placement
services for fiscal 2022 was approximately 37.4% versus approximately 35.3% for
fiscal 2021. In the professional contract staffing services segment, the gross
margin excluding direct placement services was approximately 26.6% for fiscal
2022 compared to approximately 26.3% for fiscal 2021. The year-over-year
improvement in our consolidated gross margin is mainly the result of the
increase in mix of permanent placement business with 100% gross margins for
fiscal 2022, from 13% to 16% of our consolidated revenues, or by approximately
3%, or 300 basis points.
The Company's industrial staffing services gross margin for fiscal 2022 was
approximately 15.4% as compared with approximately 22.3% for fiscal 2021. The
decrease in industrial contract services gross margin is due to a decrease in
the amount of premium refunds the Company's industrial business is eligible to
receive under the Ohio Bureau of Workers' Compensation retrospectively rated
insurance program. The industrial services gross margin excluding the impact of
these items was level at approximately 14.9% for both fiscal 2022 and 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
· Compensation and benefits in the operating divisions, which includes
salaries, wages and commissions earned by the Company's employment
consultants, recruiters and branch managers on permanent and temporary
placements;
· Administrative compensation, which includes salaries, wages, payroll taxes
and employee benefits associated with general management and the operation
of corporate functions, including principally, finance, legal, human
resources and information technology functions;
· Occupancy costs, which includes office rent, depreciation and
amortization, and other office operating expenses;
· Recruitment advertising, which includes the cost of identifying and
tracking job applicants; and
· Other selling, general and administrative expenses, which includes travel,
bad debt expense, fees for outside professional services and other
corporate-level expenses such as business insurance and taxes.
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(Amounts in thousands except per share data, unless otherwise stated)
The Company's SG&A for fiscal 2022 increased by $10,262 as compared to fiscal
2021. SG&A for fiscal 2022 as a percentage of revenue was approximately 31%
versus 28% for fiscal 2021. This increase in SG&A is mainly the result the
significant growth of our revenues and improvements in our operating performance
resulting in additional incentive compensation and bonuses. Wage increases and a
recent spike in inflation also caused our SG&A expenses to increase in fiscal
2022. In addition, the increases in our SG&A expenses and ratio for fiscal 2022
were affected by an increase of $413 in bad debt expense associated with one of
the Company's industrial customers, a legal settlement of $975, and charges
associated with severance agreements totaling $838.
SG&A also includes certain non-cash costs, expenses incurred related to
acquisition, integration and restructuring, non-recurring items, such as certain
corporate legal and general expenses associated with capital markets activities
that either are not directly associated with core business operations, and other
items that have been eliminated on a going forward basis or are of an isolated,
non-recurring nature. These costs were $2,060 and $412 for fiscal 2022 and
fiscal 2021, respectively, and include the legal settlement and severance
agreements described above in addition to expenses associated with former closed
and consolidated locations.
Depreciation Expense
Depreciation expense was $371 and $311 for fiscal 2022 and 2021, respectively.
The increase in depreciation expense is due to fixed asset additions.
Amortization Expense
Amortization expense was $3,469, and $4,089 for fiscal 2022 and 2021,
respectively. The decrease is due to intangible assets related to certain
non-compete agreements and trade names becoming fully amortized.
Goodwill Impairment
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 reconciled 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 the first quarter of 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.
Income from Operations
As the net result of the matters discussed regarding revenues and operating
expenses above, income from operations decreased by $2,715 to $3,775 for fiscal
2022 from $6,490 for fiscal 2021. The decrease is due to factors described
above, including notably, increases of $413 in bad debt expense associated with
one of the Company's light industrial customers, a legal settlement of $975, and
charges associated with severance agreements totaling $838 during fiscal 2022.
Additionally, the non-cash goodwill impairment charge of $2,150 taken during
fiscal 2022 offset increases in income from operations during the period.
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(Amounts in thousands except per share data, unless otherwise stated)
Gain/Loss on Debt Extinguishment
The company recorded a gain of $16,773 in fiscal 2022 related to forgiveness and
extinguishment of its remaining PPP loans. Net losses on debt extinguishment of
$(548) in fiscal 2021 were recorded due to a one-time non-cash charge of $4,004
which represents unamortized debt issue costs associated with its Former Credit
Agreement. This was offset in part by forgiveness and extinguishment of multiple
of the company's outstanding PPP loans in fiscal 2021 leading to a gain of
$3,456.
Interest Expense
Interest expense decreased by $5,501 to $377 for fiscal 2022 from $5,878 for
fiscal 2021. This decrease is mainly attributable to the elimination of interest
related to the Former Credit Agreement that contributed $4,684 in interest
expense for fiscal 2021. On April 20, 2021, the Company retired and fully repaid
its remaining principal and accrued interest balances under its Former Credit
Agreement
Provision for Income Taxes
The Company recognized provisions for income tax expense of $588 and $58 in
fiscal 2022 and 2021, respectively. Our effective tax rate for fiscals 2022 and
2021 is lower than the statutory rate primarily due to the effect of the
valuation allowance on the net deferred tax asset position.
Net Income
The Company's net income was $19,599 and $6 for fiscal 2022 and 2021,
respectively. In addition to the changes in income from operations as outlined
above, the increase is primarily due to gains of $16,773 from forgiveness and
extinguishment of the Company's remaining PPP loans during fiscal 2022 and the
decrease in interest expense of $5,501 year over year.
Liquidity and Capital Resources
The primary sources of liquidity for the Company are revenues earned and
collected from its clients for the placement of contract employees and permanent
employment candidates and borrowings available under its current and former
asset-based senior secured revolving credit facilities. Uses of liquidity
include primarily the costs and expenses necessary to fund operations, including
payment of compensation to the Company's contract and permanent employees and
employment-related expenses, operating costs and expenses, taxes and capital
expenditures.
The following table sets forth certain consolidated statements of cash flows
data:
Fiscal
2022 2021
Cash flows provided by operating activities $ 9,229 $ 370
Cash flows used in investing activities $ (328 ) $ (126 )
Cash flows used in financing activities $ - $ (4,371 )
As of September 30, 2022, the Company had $18,848 of cash which was an increase
of $8,901 from $9,947 as of September 30, 2021. The significant increase in cash
flows from operating activities is primarily the result of the elimination of
cash interest associated with the Company's former high-cost Senior Credit
Agreement, which was fully repaid and retired on April 20, 2021. As of September
30, 2022, the Company had working capital of $26,643 compared to $2,528 of
working capital as of September 30, 2021. The substantial increase in working
capital is mainly attributable to the generation of free cash flow of $8,901,
and the forgiveness of the Company's last remaining PPP loans and interest
during fiscal 2022, which were reflected in current liabilities in the aggregate
amount of $16,741 as of September 30, 2021.
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(Amounts in thousands except per share data, unless otherwise stated)
Net cash provided by operating activities for fiscal 2022 and fiscal 2021 was
$9,229 and $370, respectively. The revenue growth and other improvements in
operating results, including the significant reduction in interest expense,
described in management's discussion and analysis above contributed the cash
from operations for fiscal 2022.
Cash flows used in investing activities for fiscal 2022 and fiscal 2021 was $328
and $126, respectively. The use of cash for investing activities was for the
acquisition of property and equipment in fiscal 2022 and fiscal 2021.
Cash flows used in financing activities for fiscal 2021 totaled $4,371. This
activity was primarily attributable to the net effect of the transactions
described below, including the net proceeds from a follow-on securities offering
and a new credit facility and payments on the Former Credit Agreement. There
were no cash flows used in financing activities during fiscal 2022.
On April 19, 2021, the Company completed the initial closing of a follow-on
public offering of 83,333 shares of common stock at a public offering price of
$0.60 per share. Gross proceeds of the offering totaled $50,000, which after
deducting the underwriting discount, legal fees, and offering expenses, resulted
in net proceeds of $45,478. On April 27, 2021, the underwriters of the Company's
April 19, 2021, public offering exercised in full their 15% over-allotment
option to purchase an additional 12,500 common shares (the "option shares") of
the Company at the public offering price of $0.60 per share. The Company closed
the transaction on April 28, 2021 and received net proceeds from the sale of the
option shares of approximately $6,937, after deducting the applicable
underwriting discount.
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. The Company took a one-time charge of $4,004 which represents
unamortized debt issue costs associated with its Former Credit Agreement.
On May 14, 2021, GEE Group Inc. and its subsidiaries, Agile Resources, Inc.,
Access Data Consulting Corporation, BMCH, Inc., GEE Group Portfolio, Inc.,
Paladin Consulting, Inc., Scribe Solutions, Inc., SNI Companies, Inc., Triad
Personnel Services, Inc., and Triad Logistics, Inc. entered a Loan, Security and
Guaranty Agreement for a $20 million asset-based senior secured revolving credit
facility with CIT Bank, N.A. (the "CIT Facility"). The CIT Facility is
collateralized by 100% of the assets of the Company and its subsidiaries who are
co-borrowers and/or guarantors. The CIT Facility matures on the fifth
anniversary of the closing date (May 14, 2026). Concurrent with the May 14, 2021
closing of the CIT Facility, the Company initially borrowed $5,326 and utilized
these funds to pay all remaining unpaid Exit and Restructuring Fees due to its
former senior lenders in the amount of $4,978, with the remainder going to
direct fees and costs associated with the CIT Facility.
Under the CIT Facility, advances will be subject to a borrowing base formula
that 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 the London Interbank Offering Rate ("LIBOR" or any successor thereto) for the
applicable interest period, subject to a 1% floor, plus the applicable margin.
The CIT Facility also contains provisions addressing the potential future
replacement of LIBOR utilized and referenced in the loan agreement, in the event
LIBOR becomes no longer available. In addition to interest costs on advances
outstanding, the CIT Facility will provide for an unused line fee ranging from
0.375% to 0.50% depending on the amount of undrawn credit, original issue
discount and certain fees for diligence, implementation, and administration.
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(Amounts in thousands except per share data, unless otherwise stated)
The Company had approximately $15,352 in availability for borrowings as of
September 30, 2022. There were no outstanding borrowings on the CIT Facility as
of September 30, 2022, or September 30, 2021, except for certain accrued
carrying fees and costs, which are included in other current liabilities in the
accompanying consolidated balance sheets.
All the Company's office facilities are leased. Minimum lease payments under all
the Company's lease agreements for the twelve-month period commencing after the
close of business on September 30, 2022, are approximately $1,472. There are no
minimum debt service principal payments due during the twelve-month period
commencing after the close of business on September 30, 2022.
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 this Annual Report on Form 10-K
is filed.
Off-Balance Sheet Arrangements
As of September 30, 2022, and 2021, and during the two fiscal years then ended,
there were no transactions, agreements, or other contractual arrangements to
which an unconsolidated entity was a party, under which the Company (a) had any
direct or contingent obligation under a guarantee contract, derivative
instrument or variable interest in the unconsolidated entity, or (b) had a
retained or contingent interest in assets transferred to the unconsolidated
entity.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America and the rules of
the United States Securities and Exchange Commission.
Management makes estimates and assumptions that can affect the amounts of assets
and liabilities reported as of the date of the consolidated financial
statements, as well as the amounts of reported revenues and expenses during the
periods presented. Those estimates and assumptions typically involve
expectations about events to occur subsequent to the balance sheet date, and it
is possible that actual results could ultimately differ from the estimates. If
differences were to occur in a subsequent period, the Company would recognize
those differences when they became known.
Significant accounting and disclosure matters requiring the use of estimates and
assumptions include, but may not be limited to, revenue recognition, accounts
receivable allowances, determining fair values of financial assets and
liabilities, deferred income tax valuation allowances, accounting for asset
impairments, and accounting for derivative liabilities and beneficial conversion
features. Management believes that its estimates and assumptions are reasonable,
based on information that is available at the time they are made.
The following accounting policies are considered by management to be "critical"
because of the judgments and uncertainties involved, and because different
amounts would be reported under different conditions or using different
assumptions.
Revenue Recognition
Our revenues are recognized when promised services are performed for customers,
and in an amount that reflects the consideration the Company expects to be
entitled to in exchange for those services. Our revenues are recorded net of
variable consideration such as sales adjustments or allowances. Direct hire
placement service revenues from contracts with customers are recognized when
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.
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(Amounts in thousands except per share data, unless otherwise stated)
Falloffs and refunds during the period, including estimates for future falloffs
associated with revenues that have been recognized, are reflected in the
consolidated statements of operations as a reduction of placement service
revenues and in the consolidated balance sheet, in combination with allowance
for uncollectible accounts, as a reduction of accounts receivable. Estimated
future falloffs are determined by analyzing recent historical trends of actual
falloffs and applying a formula comprised of average numbers of falloffs,
average falloff amounts, and average cycle times between billing and fall off
dates to derive an allowance for falloffs. Thus, the estimated allowance is
derived from observed trends in actual historical falloffs and assumes that
historical trends are indicative of future falloff activity.
Temporary staffing service revenues from contracts with customers are recognized
in amounts for which 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 as a principal versus on a net basis as an
agent in the presentation of revenues and expenses. The Company has concluded
that gross reporting is appropriate because the Company controls the specified
service before that service is performed for a customer. The Company has the
risk of identifying and hiring qualified employees, has the discretion to select
the employees and establish their price, and bears the risk for services that
are not fully paid for by customers.
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 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.
Fair Value Measurement
The Company follows the provisions of Financial Accounting Standards Board
("FASB"), Accounting Standards Codification ("ASC") 820, Fair Value Measurement,
which defines fair value, establishes a framework for measuring fair value and
enhances fair value measurement disclosure. Under these provisions, fair value
is defined as the price that would be received to sell an asset or paid to
transfer a liability (i.e., the "exit price") in an orderly transaction between
market participants at the measurement date.
The standard establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use 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. 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.
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 consolidated 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.
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(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.
Goodwill
The Company evaluates its goodwill for possible impairment as prescribed by FASB
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test
for Goodwill Impairment, at least annually and on an interim basis 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. An impairment charge is recognized for the amount by which the
carrying amount exceeds the reporting unit's fair value, not to exceed the
carrying value of goodwill.
The Company performed annual goodwill impairment testing effective as of
September 30, 2022, and allocates its goodwill among two reporting units: its
professional reporting unit and its industrial reporting unit for purposes of
evaluation for impairments. In determining the fair value of our two reporting
units, we use one or a combination of commonly accepted valuation methodologies:
(1) the income approach, which is based on the present value of discounted cash
flows projected for the reporting unit or, in certain instances, capitalization
of earnings, and (2) the market approach, which estimates a fair value based on
an appropriate revenue and/or earnings multiple(s) derived from comparable
companies. These valuation techniques rely upon assumptions and other factors,
such as the estimated future cash flows of our reporting units, the discount
rate used to determine the present value of future cash flows, and the market
multiples of comparable companies utilized. In applying our methods, we consider
and use averages and medians in the selection of assumptions derived from
comparable companies or market data, where applicable, and in the application of
the income and/or market approaches if we determine that this will provide a
more appropriate estimated fair value or range of fair value estimates of the
reporting units. Changes to input assumptions and other factors used or
considered in the analysis could result in materially different evaluations of
goodwill impairment.
For purposes of performing this goodwill impairment assessment, management
applied the valuation techniques and assumptions to its professional and
industrial segments as reporting units discussed 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.
As a result of the evaluation performed, the estimated fair values exceeded the
carrying values of its net assets of the Company's professional and industrial
reporting units as of September 30, 2022.
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(Amounts in thousands except per share data, unless otherwise stated)
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
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 assets used in operations,
other than goodwill, when events or circumstances indicate that these assets
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. In the event the net carrying value of the Company's long-lived
assets are determined not to be recoverable, they are reduced to fair value,
which is typically calculated using one or a combination of the relief from
royalty method, the multiple of excess cash flow method, and/or other applicable
adaptations of 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.
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 consolidated 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.
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.
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(Amounts in thousands except per share data, unless otherwise stated)
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.
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.
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