GEE Group Inc. — Form 10-Q Summary
Business and period: GEE Group provides temporary contract staffing and direct-hire placement services, principally in professional and light-industrial markets. This unaudited report covers the fiscal third quarter and nine months ended June 30, 2020; comparisons are with the periods ended June 30, 2019. Amounts below are in U.S. dollars.
Key financial results
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | $26.594 million, down 30% from $38.101 million | $98.831 million, down 12% from $112.821 million |
| Gross profit | $9.669 million; 36.4% combined margin versus 35.6% | $34.177 million; 34.6% combined margin versus 34.3% |
| Operating loss | $1.697 million versus $3.764 million | $4.224 million versus $4.567 million |
| Net income (loss) | $7.195 million versus a $6.834 million loss | $1.797 million loss versus a $14.176 million loss |
| Net income (loss) attributable to common stockholders | $31.670 million versus a $6.834 million loss | $22.678 million versus a $14.176 million loss |
| Cash from operating activities | Not provided separately for the quarter | $0.245 million provided, versus $0.551 million used |
- Quarterly contract-staffing revenue was $23.493 million, down 29%; direct-hire revenue was $3.101 million, down 37%. Nine-month contract and direct-hire revenue declined 12% and 13%, respectively.
- Quarterly SG&A fell to $10.208 million from $11.559 million, but rose to 38% of revenue from 30% as lower revenue reduced coverage of fixed and semi-variable costs. Nine-month SG&A was $34.299 million, approximately level year over year.
- Quarterly earnings included a $12.316 million gain on extinguishment of debt. Common-stockholder results also included a $24.475 million gain on preferred-stock redemption. These items, rather than improved underlying operating performance, drove reported positive earnings. The company remained loss-making from operations.
- At June 30, cash was $16.577 million, compared with $4.055 million at September 30, 2019; working capital was $6.880 million, down from $8.534 million. Total assets were $129.750 million and shareholders’ equity was $39.660 million.
- Operating cash flow for the nine months was $0.245 million; investing cash outflow was $0.105 million and financing cash inflow was $12.382 million. Financing included $19.927 million of Paycheck Protection Program (PPP) proceeds, partly offset by debt and restructuring-related payments.
- At June 30, the company reported $11.828 million outstanding on its revolving facility, $42.105 million of term-loan principal (shown net of discount at $36.767 million), and $19.927 million of PPP loans. The revolver and term loan carried approximately 11% cash interest; the term loan also accrued 5% annual paid-in-kind interest. The revolver had $0.697 million available.
Material changes and management commentary
- COVID-19 disruptions beginning in mid-March reduced client demand, delayed recruiting, caused layoffs and client closures, and weakened temporary and direct-hire placements. Management identified commercial/light-industrial and finance, accounting and office markets as particularly affected. A customer bankruptcy in the light-industrial segment contributed $1.653 million to the increase in doubtful-account allowance; the total allowance was $2.149 million at June 30.
- An April credit amendment extended senior-facility maturity to June 30, 2023, reduced cash interest by approximately five percentage points and postponed quarterly principal payments until June 2021. The company also agreed to 5% PIK interest on the term loan and to certain fees and excess-cash-flow repayments.
- On June 30, the company restructured subordinated debt and preferred stock through cash settlements and conversions into common shares. It reported eliminating approximately $19.685 million of subordinated indebtedness and $27.695 million of preferred stock. Common shares outstanding increased from 12.538 million at September 30, 2019 to 17.667 million at June 30, 2020.
- Management said it believes liquidity will be adequate for the foreseeable future provided COVID-19 impacts do not worsen and an economic recovery occurs. The filing provides no financial forecast; the company states that it does not provide forecasts of future performance.
- Management continued cost controls and restructuring while pursuing selective growth in professional staffing, including IT, engineering, healthcare, finance and accounting. No material adverse outcome was expected from ordinary-course litigation; the filing lists no significant pending legal proceedings.
Risks, contingencies and unusual items
- The pandemic’s duration and economic effects remain uncertain. Further client closures, hiring freezes, project reductions, delayed customer payments or inability to collect receivables could pressure revenue and liquidity. Management warned that cost savings may not offset revenue declines.
- The PPP loans were described as critical to maintaining operations; the filing does not establish whether or when they will be forgiven.
- Restructuring and credit-agreement fees totaling $4.978 million were payable by September 30, 2020, in cash or common shares, subject to the senior lender’s discretion under the amendment. The term loan also carries significant future principal obligations, including $39.438 million scheduled for fiscal 2023.
- Industrial gross margin was affected by Ohio workers’ compensation premium refunds. The reported quarterly industrial margin of 37.1% normalized to approximately 13%; the nine-month reported margin was 19.9%, versus approximately 14% normalized in both periods.
- The filing states that disclosure controls and procedures were effective as of June 30, 2020, and reports no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether revenue and staffing demand stabilized after June 30, particularly in the light-industrial and finance, accounting and office markets, and whether the large customer bankruptcy led to further collection losses.
- The PPP loans’ forgiveness status, repayment terms and any related restrictions or obligations.
- The cash or stock settlement of the $4.978 million credit-agreement fees, the effect of any share issuance, and compliance with amended loan covenants.
- The company’s ability to meet senior debt service and lease obligations as cash interest, PIK accruals and scheduled principal payments continue.
- The filing has an apparent net-loss figure inconsistency: the financial statements report a nine-month net loss of $1.797 million, while one MD&A passage gives $1.767 million. Investors should confirm the correct figure against the filed statements.