GEE Group Inc. — FY2019 Form 10-K Summary
Business context and reporting period. GEE Group provides U.S. professional and industrial staffing and placement services, including IT, engineering, healthcare, finance and accounting, and light industrial staffing. This is the fiscal year ended September 30, 2019, compared with fiscal 2018; it is not a standalone fourth-quarter report. The company reported two segments: Professional Staffing Services and Industrial Staffing Services.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $151.7 million | $165.3 million | Down 8.2% |
| Gross profit | $52.0 million | $58.9 million | Down $6.9 million |
| Combined gross margin | 34.3% | 35.7% | Down 1.4 percentage points |
| Operating income (loss) | $(5.0) million | $2.5 million | Declined $7.4 million |
| Net loss | $(17.8) million | $(7.6) million | Loss increased $10.2 million |
| Basic and diluted loss per share | $(1.50) | $(0.74) | |
| Operating cash flow | $(0.4) million | $1.5 million |
- Professional contract revenue was $111.4 million, down 7.6%; industrial contract revenue was $21.7 million, up 0.3%; direct-hire placement revenue was $18.5 million, down 19.6%.
- Contract services represented about 88% of revenue. Professional contract gross margin was 26.0% versus 26.5%; industrial gross margin rose to 20.8% from 17.9%, including an approximately $0.7 million benefit from workers’ compensation insurance return premiums and refunds.
- SG&A fell $4.9 million to $42.5 million, or 28.0% of revenue, while acquisition, integration and restructuring expenses rose to $4.3 million from $3.1 million.
- Interest expense increased to $12.4 million from $11.5 million. The company recorded a $4.3 million non-cash goodwill impairment after a sustained decline in its market capitalization.
Liquidity, debt and capital
- At September 30, 2019, cash was $4.1 million, total assets $124.5 million and shareholders’ equity $9.2 million. Working capital is reported as approximately $8.5 million in MD&A and $8.7 million in the financial-statement notes; the filing does not provide a consistent value.
- Senior credit borrowings totaled approximately $56.1 million: $14.2 million on the revolver and $41.9 million on the term loan. Only about $0.5 million remained available under the revolving facility. Reported borrowing rates were approximately 17% to 19%.
- Subordinated debt was approximately $19.0 million at face value, including $12.5 million of 9.5% convertible notes, $4.2 million of 10% convertible notes, a $1.0 million note, and $2.0 million of 8% notes issued to executives and directors. The 8% notes carry payment-in-kind interest and are convertible into Series C preferred shares.
- The senior credit facility matures March 31, 2021. The company disclosed about $6.5 million of scheduled principal payments for the twelve months after September 30, 2019; the term-loan schedule lists $5.5 million due in FY2020 and $36.4 million in FY2021.
- Cash flow from financing was $1.4 million, primarily from the 8% notes and revolver borrowings, offset by debt payments. Capital expenditures were $0.2 million. The filing also states minimum lease payments of about $2.0 million for the next twelve months.
Changes, outlook and risks
- Management attributed lower revenue mainly to office consolidations, closures and workforce reductions following the SNI acquisition, reduced temporary staffing demand from some large customers, and, to a lesser extent, worse weather in Midwest and Northeastern markets. Management also cited recession concerns as a factor cooling direct-hire demand.
- The company had missed senior-credit financial covenants in prior periods and received multiple amendments and waivers. After a May 2019 amendment and waiver, it reported meeting amended covenants for the quarters ended June 30 and September 30, 2019. The lenders could still refuse future waivers, and covenant default could permit acceleration of debt.
- Management said it was reducing costs, improving productivity, pursuing growth in higher-margin staffing specialties and seeking to refinance or restructure debt. It expressed confidence in near-term liquidity but gave no quantified revenue or earnings guidance and cautioned that refinancing and future liquidity were not assured.
- Major risks include recurring losses, high-cost and heavily secured debt, limited revolver availability, refinancing and covenant risk, staffing-demand and hiring cyclicality, competition, recruiting and retention, customer payment and credit risk, and potential limits on use of tax attributes. The company had not completed a study to determine whether ownership changes had limited its NOLs.
- Unusual items include the goodwill impairment and the related-party financing. The filing says CEO and board members participated in the $2.0 million 8% note issuance. It also reports that former President George Bajalia died in November 2019 and his 500,000 restricted shares vested upon his passing.
- No material legal proceedings were reported. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2019. The auditor issued an unqualified opinion on the financial statements but did not audit internal-control effectiveness.
Important facts for investors to verify
- Current borrowing availability, covenant headroom, lender waiver status and the company’s plan to refinance before the 2021 senior and subordinated debt maturities.
- Whether staffing revenue and operating cash flow stabilized after FY2019, particularly in professional contract and direct-hire services.
- The basis for the goodwill valuation and any further impairment exposure, given the decline in market capitalization and remaining goodwill of $72.3 million.
- The exact working-capital figure, given the $8.5 million and $8.7 million values disclosed in different sections.
- Potential dilution and priority claims from convertible notes, Series B and Series C preferred stock, options and other equity awards.