GEE Group Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2020; filed May 15, 2020. Amounts are in thousands of dollars except per-share data. GEE Group provides professional and industrial temporary staffing and direct-hire placement services.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2020 | Prior year | Six months ended Mar. 31, 2020 | Prior year |
|---|---|---|---|---|
| Revenue | $34,681 | $36,177 | $72,237 | $74,720 |
| Gross profit | $11,914 | $11,718 | $24,508 | $24,449 |
| Operating loss | $(2,353) | $(821) | $(2,527) | $(803) |
| Net loss | $(5,428) | $(3,890) | $(8,991) | $(7,342) |
| Basic and diluted loss per share | $(0.38) | $(0.34) | $(0.66) | $(0.66) |
- Quarterly consolidated gross margin rose to 34.4% from 32.4%; six-month margin rose to 33.9% from 32.7%. Contract-services margins improved, while direct-hire placement revenue is presented at 100% gross margin.
- Six-month operating cash flow was $(2,066), versus $227 provided a year earlier. Investing cash use was $83; financing provided $473. Cash fell to $2,379 from $4,055 at September 30, 2019. Working capital was $9,517, compared with $8,534.
- At March 31, cash borrowings included $15,015 under the revolver and $41,578 principal under the term loan; the term loan’s carrying amount, net of discount, was $40,772. Subordinated debt totaled $19,113. The revolver had approximately $100 available. Cash interest rates were approximately 11% on most revolver borrowings and 11% on the term loan, with an additional 5% PIK interest on the term loan.
- Total assets were $121,198 and shareholders’ equity was $1,974; Series B and C preferred stock was classified as mezzanine equity. Accounts receivable was $17,262, net of a $2,250 allowance, versus a $515 allowance at September 30, 2019.
Material changes versus prior comparable periods
- Second-quarter revenue declined 4% year over year. Contract staffing revenue fell 5%; direct-hire placement revenue increased 2%. For the six months, revenue declined 3%, with contract staffing down 4% and direct hire approximately flat.
- Management attributed demand weakness to COVID-19 disruptions beginning around mid-March, client closures, postponed recruiting, layoffs and reduced temporary staffing needs. Industrial revenue fell 12% in the quarter; professional contract revenue fell 4%. IT professional services partly offset weakness in finance, accounting and office roles and industrial staffing.
- Despite lower revenue, gross profit increased slightly in both comparisons and reported gross margins improved, supported by service mix and higher estimated workers’ compensation return premiums.
- SG&A rose about $1,759 in the quarter and $1,813 for the half year. The increase included a doubtful-account provision related to an industrial-services customer that filed for bankruptcy, as well as COVID-related workforce and restructuring costs. The filing identifies $537 of quarterly and $1,057 of six-month personnel costs associated with employees laid off effective March 25.
- Losses widened, reflecting higher SG&A and continued substantial interest and intangible-asset amortization expenses. The company reported no goodwill or long-lived-asset impairment for the period.
Outlook, financing, and risks
- The company does not provide financial forecasts. Management said it believes liquidity can meet obligations for the foreseeable future, conditional on COVID-19 effects not worsening and economic recovery occurring. It also described PPP funding as critical to maintaining operations.
- After quarter-end, the April 28 Seventh Amendment extended senior credit-facility maturity to June 30, 2023, reduced cash interest by approximately five percentage points, postponed quarterly principal payments until June 30, 2021, and reduced scheduled quarterly principal payments. It also imposed restructuring and exit fees of $3,478 and $1,500, payable upon specified triggering events.
- The amendment requires the company to pursue conversion of all outstanding subordinated debt and preferred stock into common stock, with deadlines for agreements and completion. Failure to meet the condition could cause an event of default. If the condition is met, specified fees and accumulated PIK interest may be settled in cash or common stock under the amendment’s terms.
- After quarter-end, the company obtained $19,926 in aggregate PPP loans through nine subsidiary notes. These funds were not cash on the March 31 balance sheet; the filing does not establish whether the loans will be forgiven.
- COVID-19 risks include continuing demand declines, project terminations and hiring freezes, client payment delays or defaults, disruption to operations, and the possibility that cost reductions or government relief will not offset the impact. The company also reported that it failed its senior-credit financial covenants for the trailing four quarters ended March 31, 2020; it received a waiver, and future covenants were reset under subsequent amendments.
- Management reported no pending significant litigation it believes would materially affect financial position, and concluded disclosure controls were effective as of March 31, 2020.
Important facts for investors to verify
- Whether staffing demand, receivable collections and operating cash flow improved after March 31, particularly following the identified customer bankruptcy and COVID-related disruption.
- Whether the required subordinated-debt and preferred-stock conversions were completed on time, and whether any related credit-agreement default or lender relief occurred.
- The PPP loans’ repayment or forgiveness status, applicable conditions, and effect on liquidity and indebtedness.
- Compliance with amended credit covenants, remaining revolver availability, debt-service requirements, and potential triggering of the restructuring or exit fees.
- Whether the elevated doubtful-account allowance adequately reflects customer credit risk and whether further losses or impairment charges were recorded in subsequent periods.