GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2021. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise.
Business context
GEE Group provides temporary contract staffing and direct-hire placement services, principally through Professional Staffing and Industrial Staffing segments. The company attributed improving demand to recovery from COVID-19 disruptions, while identifying industrial and finance, accounting and office end markets as particularly affected.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $38.1 | $26.6 | $107.4 | $98.8 |
| Gross profit | $13.8 | $9.7 | $37.3 | $34.2 |
| Gross margin | 36% | 36% | 35% | 35% |
| Operating income (loss) | $1.6 | $(1.7) | $4.2 | $(4.2) |
| Net income (loss) | $(0.9) | $7.2 | $(3.0) | $(1.8) |
| Operating cash flow | Not separately presented for the quarter | $(2.3) | $0.2 |
- Q3 revenue rose 43% year over year: professional contract services increased 40%, industrial contract services 31%, and direct-hire placement revenue 78%. Nine-month revenue increased 9%; professional contract revenue grew 11%, while industrial revenue was down 1% and direct-hire revenue increased 5%.
- Q3 operating margin was approximately 4.3% (operating income divided by revenue). Professional contract gross margin was 27% in both Q3 periods. Industrial gross margin was 15% versus 37%, but the prior-year comparison included larger workers’ compensation premium refunds; excluding these items, margins were approximately 15% versus 13%. Nine-month industrial margin likewise benefited from $1.337 million of premium refunds.
- Q3 net loss reflects a $2.047 million net loss on extinguishment of debt, including a $4.004 million write-off of unamortized debt costs, partly offset by PPP loan forgiveness gains. The prior-year quarter included $12.316 million of debt-extinguishment gains and a $24.475 million preferred-stock redemption gain attributable to common shareholders. These items make reported net income comparisons less indicative of operating performance.
- Nine-month interest expense declined to $5.759 million from $9.618 million. SG&A declined to $29.779 million from $34.299 million, while amortization fell to $3.074 million from $3.921 million.
Liquidity, debt and capital
- At June 30, cash was $7.359 million, down from $14.074 million at September 30, 2020. Working capital was $5.110 million, versus $13.351 million. Nine-month operating cash use was $2.276 million; investing cash use was $0.068 million and financing cash use was $4.371 million.
- The company repaid $56.022 million of former MGG revolving and term debt on April 20, using public-offering proceeds and available cash. The former debt carried high interest costs, including approximately 11% cash interest and an additional 5% PIK interest on the term loan.
- A new $20 million asset-based revolving facility with CIT Bank closed May 14, maturing in 2026 and secured by company and subsidiary assets. At quarter-end, borrowings were $16,000 and reported availability was $13.102 million, subject to a borrowing-base formula and facility terms.
- Quarter-end PPP loan balances were $10.966 million current and $6.953 million noncurrent, plus accrued interest as presented in the filing. Certain subsidiaries received forgiveness during the period; after quarter-end, Agile Resources received notice of forgiveness for $1.220 million. Forgiveness of remaining loans was not assured. The company also had $3.692 million of deferred payroll taxes due in installments by December 2021 and December 2022.
- The April public offering issued approximately 95.833 million shares at $0.60 per share, generating approximately $52.415 million net proceeds. Shares outstanding increased from 17.667 million at September 30, 2020 to 114.100 million at June 30, 2021, substantially diluting existing shareholders.
Outlook, risks and unusual items
The company does not provide forecasts. Management said it believed liquidity would be adequate for at least the next 12 months, conditional on COVID-19 effects not worsening and economic recovery continuing. It described recovery in its businesses and plans to grow professional contract and direct-hire services, manage costs, and selectively increase revenue-producing headcount.
Key risks include renewed or prolonged COVID-19 impacts, weaker client demand or delayed payments, workforce shortages and difficulty attracting qualified staff, competition, and the ability to offset revenue declines with cost reductions. Management noted that the pace of recovery remained uncertain. No pending legal proceeding was identified as expected to have a material adverse effect; the filing states there were no defaults upon senior securities. Management reported disclosure controls were effective as of June 30, 2021.
Important facts for investors to verify
- Whether remaining PPP loans and accrued interest are forgiven, and the timing and accounting for any further forgiveness.
- Actual liquidity and debt-service needs, including CIT borrowing availability under its borrowing-base and covenant provisions.
- Whether operating cash flow improves as revenue recovers and working-capital requirements change.
- How much reported industrial margin depends on workers’ compensation refunds, and whether underlying margins are sustained.
- The effect of the large share issuance on per-share results, future dilution, and the company’s ability to achieve profitable growth.