GEE Group Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended December 31, 2021. Financial amounts below are in millions of dollars unless otherwise noted. The company provides professional and industrial staffing and placement services in the U.S.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2021 | Prior-year quarter |
|---|---|---|
| Revenue | $42.847 | $34.643 |
| Gross profit / margin | $15.582 / 36.4% | $12.580 / 36.3% |
| Operating income (loss) | $(0.027) | $1.976 |
| Net income (loss) | $16.668 | $(0.315) |
| Diluted EPS | $0.14 | $(0.02) |
| Cash from operating activities | $2.264 | $0.047 |
- Revenue rose 24%. Professional contract staffing revenue increased 25% to $32.595 million; direct-hire revenue increased 82% to $6.163 million. Industrial staffing revenue fell 20% to $4.089 million.
- Professional contract gross margin improved to 27.0% from 26.2%. Industrial margin was 15.3%, versus 45.5% reported a year earlier; excluding workers’ compensation refunds, the respective margins were 14.8% and 15.4%. Consolidated gross margin was nearly unchanged.
- SG&A increased to $12.359 million from $9.487 million, or approximately 29% of revenue versus 27%. Operating results included a $2.150 million noncash goodwill impairment charge.
- Net income primarily reflects a $16.773 million gain from forgiveness of the remaining PPP loans. The gain was exempt from taxation; the reported income tax benefit was $0.029 million.
- Cash was $12.127 million at quarter-end, up from $9.947 million at September 30, 2021. Working capital was $20.575 million, compared with $2.528 million at fiscal year-end; the improvement primarily reflects removal of $16.741 million of current PPP liabilities upon forgiveness.
- Operating cash flow was $2.264 million; investing cash use was $0.084 million, and there were no financing cash flows. Cash flow should be distinguished from reported net income, which was substantially affected by noncash debt forgiveness.
- The former MGG credit agreement was repaid and retired in April 2021. At December 31, 2021, the company reported $0.026 million drawn on its $20 million CIT asset-based revolver and $13.319 million available to borrow, subject to its borrowing-base terms. The facility matures May 14, 2026. Management said liquidity should be adequate for at least the next 12 months.
Material changes and management commentary
- Revenue recovery was led by professional staffing and direct hire, while industrial staffing remained pressured. Management attributed professional growth to stronger hiring demand, including staffing support for COVID-19 vaccination and testing operations; industrial weakness reflected COVID-19 variant disruptions.
- Reported industrial margin in the prior-year quarter included $1.537 million of Ohio workers’ compensation refunds and distributions, compared with $0.018 million this quarter. Normalized industrial margins were broadly comparable.
- SG&A included estimated nonrecurring acquisition, integration, restructuring and related costs of $0.514 million, compared with $0.142 million a year earlier. Management cited incentive compensation and restructuring costs among the drivers of higher SG&A.
- The company recorded a $2.150 million goodwill impairment after its market capitalization discount to book equity increased. Management said further impairment testing may be required if the discount does not lessen; future charges are possible.
- The company does not provide forecasts of future financial performance. Management described plans to pursue organic and acquisition growth, emphasizing professional staffing, direct hire, and higher-margin specialties, while managing costs.
Risks, contingencies and unusual items
- PPP forgiveness review: The SBA may audit the forgiven loans. If any forgiveness is reversed, the company could have to repay amounts reinstated; management says additional capital might be needed if liquidity or operating cash flow is insufficient.
- Cybersecurity incident after quarter-end: On February 1, 2022, an unauthorized party accessed the network, encrypted systems, demanded payment, and acquired data that included personal information such as Social Security, passport and driver-license information. The investigation and cost estimate remained incomplete. The company reported minimal operational impact to date, notified law enforcement and its insurer, and cautioned that material effects could not be ruled out. Insurance is subject to limits and deductibles.
- COVID-19: Management said the recovery had been significant but remained uncertain, with variants and economic disruption continuing to affect demand, particularly in industrial staffing and some finance, accounting and office markets.
- The company deferred $3.692 million of payroll taxes under the CARES Act and paid $1.827 million during the quarter; remaining deferred amounts were included in short-term liabilities and are due under the statutory schedule.
- Management reported no pending significant litigation expected to materially adversely affect the company. Disclosure controls were assessed as effective at December 31, 2021, and management reported no material control change during the quarter.
Important facts for investors to verify
- Whether the SBA audits or otherwise challenges any PPP loan forgiveness, and the amount, if any, subject to repayment.
- The full scope, remediation costs, insurance recovery and potential legal or regulatory consequences of the February 2022 cyber incident.
- Whether professional staffing growth continues and whether industrial demand and margins stabilize as COVID-related effects change.
- Revolver borrowing availability under the CIT borrowing base, covenant compliance, and the company’s cash and working-capital needs.
- Whether the market-capitalization discount that prompted the goodwill impairment narrows or leads to additional impairment charges.