GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; filed February 13, 2020. Financial amounts below are in thousands of dollars unless stated otherwise. GEE Group provides professional and industrial staffing and placement services through 33 offices in 14 states.
Financial performance and position
| Metric | Three months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|
| Revenue | $37,557 | $38,543 |
| Gross profit | $12,595 | $12,731 |
| Operating income (loss) | $(173) | $19 |
| Interest expense | $3,219 | $2,948 |
| Net loss | $(3,563) | $(3,452) |
| Basic and diluted loss per share | $(0.27) | $(0.32) |
| Operating cash flow | $(1,450) | $779 in cash flow statement |
- Combined gross margin rose to 33.5% from 33.0%. Contract staffing revenue was $33.1 million (about 88% of revenue); direct-hire placement revenue was $4.5 million (about 12%).
- Professional contract revenue declined 3% to $27.4 million; industrial contract revenue increased 1% to $5.7 million. Direct-hire revenue declined 1% to $4.5 million.
- At December 31, cash was $2.1 million, down $1.9 million from September 30. Working capital was $10.3 million, compared with $8.5 million at fiscal year-end. Current assets were $23.7 million and current liabilities $13.4 million.
- Debt included $14.3 million drawn on the revolving facility, $41.4 million principal on the term loan, and $19.0 million of subordinated debt. The term loan’s carrying amount, net of discount, was $40.4 million. Revolver availability was approximately $100,000.
- Cash used in investing and financing activities was $58,000 and $408,000, respectively. Capital expenditures were $58,000. Total assets were $125.2 million; shareholders’ equity was $6.6 million, alongside $27.7 million of mezzanine equity.
Changes versus the prior-year quarter
- Revenue fell 3%, mainly due to fewer workdays from holidays and weather, client closures, lower temporary staffing requirements, and reorganization at some customers. Management also cited postponements in recruiting activity for direct hire.
- Gross margin improved in both professional contract staffing (26.4% versus 26.1%) and industrial staffing (15.6% versus 13.9%). Management attributed professional improvement to higher-margin IT mix and industrial improvement to estimated Ohio workers’ compensation insurance return premiums.
- SG&A increased $1.1 million to $10.9 million, or approximately 29% of revenue versus 25%. The filing cites sales-related incentive compensation, audit and compliance fees, and a prior-year workers’ compensation premium benefit. Acquisition, integration and restructuring expense decreased to $377,000 from $1.5 million.
- Operating results moved from $19,000 of income to a $173,000 loss; net loss increased by $111,000. Interest expense rose $271,000, which management attributed to higher Credit Agreement loan balances. Interest costs and intangible amortization remained significant contributors to the net loss.
- Operating cash flow declined from positive cash flow in the prior-year quarter to a $1.45 million use, attributed to lower operating cash generation and working-capital changes. The filing’s MD&A reports prior-year operating cash flow of $766,000, while its cash flow statement reports $779,000.
Outlook, risks and notable items
- GEE Group says it does not provide forecasts. Management aims to grow professional staffing and direct-hire services through recruiting and business-development hiring, customer expansion, revised incentives, and selective acquisitions.
- Management believes liquidity will be adequate for the foreseeable future, but warns that continued losses, future covenant noncompliance, lender support, refinancing, and the ability to meet operating and debt-service needs are uncertain. The company had previously obtained covenant waivers and amendments; it reported compliance with amended covenants for the quarters ended June 30, September 30 and December 31, 2019.
- Borrowing costs were high: reported revolving balances bore rates of approximately 16.72%–18.75%, and term-loan balances approximately 16.79%–16.8%. The filing estimates roughly $2.0 million of principal debt service and $1.9 million of lease payments over the 12 months after December 31, 2019.
- After quarter-end, a February 12, 2020 amendment changed scheduled principal payments and extended the senior Credit Agreement maturity to June 30, 2021. A February 8 amendment extended the $1.0 million subordinated promissory note maturity to January 20, 2022.
- The company adopted lease accounting on October 1, 2019, recognizing right-of-use assets and lease liabilities; adoption materially affected the balance sheet but not results of operations. The filing reports no pending significant litigation expected by management to materially affect financial position.
- Common shares increased from 12.538 million at September 30 to 13.090 million at December 31, including 552,000 shares issued for interest. The cover reports 14,056,997 shares outstanding on February 10, 2020. The company also issued shares for interest after quarter-end and recorded accelerated vesting of 500,000 restricted shares held by its former president.
Key facts for investors to verify
- Reconcile the prior-year operating cash flow discrepancy: $779,000 in the financial statements versus $766,000 in MD&A.
- Review the February 2020 senior-credit amendment, revised payment schedule, remaining covenant requirements, and the very limited revolver availability.
- Assess cash generation against debt service, lease payments, high borrowing rates, and management’s stated refinancing and liquidity risks.
- Track share issuance for interest, preferred and convertible securities, and other potential dilution; compare the December 31 share count with the February 10 cover-page count.
- Evaluate whether staffing demand, customer requirements, and the cited margin improvements are sustainable; some improvement reflects insurance-premium estimates and some reported expenses were unusual or noncash.