GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; filed August 14, 2018. GEE Group provides temporary and permanent staffing and placement services, primarily in professional and industrial markets. Year-over-year comparisons are affected by the April 2017 acquisition of SNI Companies.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2018 | $40.267 million | $125.356 million |
| Revenue, 2017 | $46.069 million | $88.624 million |
| Gross profit, 2018 | $14.721 million | $44.121 million |
| Operating income (loss), 2018 | $0.595 million | $2.084 million |
| Net loss, 2018 | $1.887 million | $6.556 million |
| Operating cash flow, 2018 | Not presented separately | $0.698 million |
- Quarterly change: Revenue fell 12.6% year over year. Contract staffing revenue declined to $33.879 million from $40.100 million; direct-hire revenue rose to $6.388 million from $5.969 million. Gross margin was 36.6%, compared with 37.0%; operating income improved from a $2.446 million loss. Net loss narrowed from $6.020 million.
- Nine-month change: Revenue rose 41.5%, primarily reflecting the SNI acquisition. Gross margin increased to 35.2% from 31.8%, while operating results improved from a $1.642 million loss. Net loss was $6.556 million versus $6.098 million. Interest expense rose to $8.381 million from $3.130 million.
- Costs and segment trends: Quarterly SG&A decreased about 22% to $12.111 million, reflecting headcount reductions, office consolidations, shared services, and other cost actions. Industrial revenue declined, and both industrial and professional contract gross margins weakened in the quarter. Direct-hire growth supported the nine-month consolidated margin improvement.
Balance sheet, debt, and liquidity
- At June 30, 2018, cash was $2.637 million; current assets were $25.656 million and current liabilities $27.783 million, resulting in negative working capital of approximately $2.127 million. Cash declined $0.148 million from September 30, 2017.
- Debt included $10.200 million drawn on the revolving facility, $46.029 million of term-loan principal before unamortized discounts, and $18.104 million of subordinated debt. The balance-sheet carrying amount of the term loan was $43.915 million; total debt carrying amounts were approximately $72.2 million. The revolver had approximately $2.9 million of availability.
- Term loan and revolver borrowings are secured by substantially all company assets. Interest rates increased under the agreement beginning June 1, 2018; certain revolver borrowings carried rates of LIBOR plus 15% or prime plus 14% at quarter-end. The term loan matures March 31, 2021.
- Nine-month operating cash flow was $0.698 million, versus cash used of $0.843 million a year earlier. Investing cash use was $0.224 million; financing cash use was $0.622 million. Cash paid for interest was $6.435 million.
Outlook, risks, and notable items
- GEE Group says it does not provide financial forecasts. Management expects operating cash flow and revolver availability to provide sufficient liquidity for the next 12 months, and expects to return to compliance with future loan covenants; management cautions that there is no assurance.
- The company failed to meet financial covenants at March 31 and June 30, 2018. A May 2018 waiver covered the March breach. On August 10, 2018, after quarter-end, lenders amended the EBITDA definition and temporarily waived defaults arising solely from the June 30 covenant failure. Continued covenant compliance, liquidity, and lender support are material risks.
- Management cited reduced demand from some industrial customers, competitive pricing and labor costs, and steps to reduce underperforming personnel and consolidate offices. Other stated risks include demand for staffing services, competition, and the ability to attract and retain qualified personnel.
- A $1.5 million SNI working-capital guarantee deposit remained subject to resolution with the sellers. The company reported no legal proceedings and no off-balance-sheet arrangements. It reported no goodwill or long-lived-asset impairment during the period.
- Share dilution is relevant: the company issued common shares for interest and debt-related items, and granted its CEO 600,000 restricted shares vesting over three years. Common shares outstanding were 10,609,000 at June 30 and 10,783,457 on August 9, 2018.
Most important facts for investors to verify
- Whether the August covenant waiver and revised EBITDA calculation are sufficient to restore compliance, and whether additional waivers or amendments may be needed.
- Available borrowing capacity under the receivables-based revolver, cash generation, and ability to meet approximately $7.738 million of principal payments in the following 12 months.
- Whether cost reductions can stabilize revenue and margins without impairing recruiting capacity, particularly given quarterly declines in contract staffing and industrial activity.
- Resolution of the $1.5 million SNI working-capital guarantee deposit and the timing and cash cost of debt service, including high-rate borrowings and subordinated obligations.
- Potential future dilution from stock-based compensation, shares issued for interest, convertible debt, preferred stock, options, and warrants.