GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. The unaudited filing covers a staffing and placement-services provider operating Professional and Industrial Staffing segments. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Three months ended March 31, 2019 | Six months ended March 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $36.2 | $74.7 | $39.9; $85.1 |
| Gross profit | $11.7 | $24.4 | $13.6; $29.4 |
| Operating income (loss) | ($0.8) | ($0.8) | $0.0; $1.5 |
| Interest expense | $3.1 | $6.0 | $2.2; $5.5 |
| Net loss | ($3.9) | ($7.3) | ($2.9); ($4.7) |
| Loss per share | ($0.34) | ($0.65) | ($0.28); ($0.46) |
For the three- and six-month periods, respectively, combined gross margin was 32.4% and 32.7%, compared with 34.2% and 34.6%. Contract staffing accounted for about 88% of revenue; direct-hire placement accounted for about 12%.
- Cash flow: Six-month operating cash flow was $0.2 million, investing cash flow was ($0.1) million and financing cash flow was ($0.6) million. Cash declined to $2.8 million from $3.2 million at September 30, 2018.
- Liquidity: Working capital was $11.2 million, down from $13.1 million at September 30, 2018. The revolving facility had $13.1 million drawn and approximately $0.5 million available at March 31.
- Debt: Term-loan principal was $42.9 million and revolver borrowings were $13.1 million. Subordinated debt totaled $17.7 million, including $16.7 million classified long-term. Senior borrowing rates were approximately 17.5%–19.5%. The term loan matures March 31, 2021; scheduled principal includes $36.4 million in fiscal 2021.
- Balance sheet: Total assets were $129.6 million; shareholders’ equity was $16.9 million. Series B preferred stock was presented as mezzanine equity, with a stated liquidation value of approximately $27.1 million.
Changes versus the prior comparable periods
- Revenue fell 9% for the quarter and 12% for the six months. Professional contract revenue declined 9% and 12%, respectively; direct-hire placement revenue fell 18% and 20%. Industrial contract revenue was down 1% and 3%.
- Management attributed weaker revenue to reduced staffing needs at several key customers, bad weather, additional holiday workdays, and lingering effects of office closures, consolidations and workforce reductions. It also cited recession concerns as weighing on hiring in the first fiscal quarter.
- Gross margin narrowed, primarily because direct-hire revenue—which carries a 100% reported gross margin—declined disproportionately, and because professional staffing had a greater share of lower-margin VMS, MSP, MSA and volume-account work.
- Lower SG&A partially offset the revenue pressure: SG&A excluding depreciation, amortization and restructuring costs declined about $1.5 million in the quarter and $4.2 million for six months. Restructuring and acquisition-related expense rose to $0.6 million and $1.8 million, respectively, from $0.2 million in each comparable 2018 period.
- Interest expense increased 40% for the quarter and 10% for the six months, reflecting scheduled increases in senior-debt interest margins. The six-month net loss widened by $2.7 million.
Outlook, risks and notable items
- The company states that it does not provide forecasts. Management said its current projections indicated it could meet debt service and amended covenant requirements, while cautioning that projections depend on uncertain assumptions and that future covenant compliance or lender waivers are not assured.
- The company had a history of covenant noncompliance. A subsequent May 15, 2019 fifth amendment waived noncompliance as of March 31, 2019 and revised covenants and scheduled principal payments. A related letter requires an operating consultant acceptable to lenders if revolver commitments remain outstanding on September 30, 2019.
- Also on May 15, 2019, the company obtained $2.0 million of 8% subordinated promissory notes from senior management and directors, due October 3, 2021.
- Management’s strategy includes cost reductions and selective organic and acquisition growth, with an emphasis on professional staffing markets. Key risks include customer demand and concentration, recruiting and retaining qualified personnel, competition, contract-employee liabilities, high borrowing costs and dependence on lender cooperation.
- Interest on subordinated notes was partly settled in common shares, and 250,000 Series B preferred shares were converted to common stock during the six months. Common shares outstanding were 11.721 million at quarter-end and 12.055 million as of May 8, 2019.
- No legal proceedings were reported. Management concluded disclosure controls were effective as of March 31, 2019; no material change in internal control was reported. Revenue-recognition standard adoption had no material impact.
Investor facts to verify
- Review the May 15 covenant waiver, revised tests and repayment terms, and the terms of the required operating-consultant provision.
- Assess the company’s ability to generate enough cash to cover high-cost debt service, scheduled principal payments and lease obligations, given limited revolver availability.
- Monitor whether customer staffing demand and direct-hire placements recover, and whether declining margins and revenue are stabilizing.
- Track restructuring costs, cost savings, and whether management’s growth initiatives translate into sustainable operating profitability.
- Evaluate potential dilution from preferred-stock conversions, stock-settled interest and equity compensation, alongside the new subordinated financing.