GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2019; filed August 14, 2019. GEE Group provides professional and industrial temporary staffing and permanent placement services.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2019 | $38.1 million | $112.8 million |
| Revenue, 2018 | $40.3 million | $125.4 million |
| Operating income (loss), 2019 | $(3.8) million | $(4.6) million |
| Net loss, 2019 | $(6.8) million | $(14.2) million |
| Net loss, 2018 | $(1.9) million | $(6.6) million |
| Basic and diluted loss per share, 2019 | $(0.57) | $(1.22) |
- Quarterly revenue fell 5% year over year; nine-month revenue fell 10%. Direct-hire placement revenue declined 24% in the quarter and 21% for the nine months. Contract staffing revenue declined 2% and 8%, respectively.
- Gross profit was $13.6 million for the quarter and $38.7 million for the nine months. Combined gross margin, including direct placement, was 35.6% and 34.3%, versus 36.6% and 35.2% in the prior-year periods.
- Quarterly operating results included a $4.3 million noncash goodwill impairment charge, following a sustained decline in the company’s market capitalization. Interest expense was $3.2 million for the quarter and $9.2 million for the nine months, up from $2.9 million and $8.4 million.
- Cash from operations was $(0.6) million for the nine months, compared with $0.7 million generated in 2018. Investing cash use was $0.1 million; financing provided $1.6 million. Cash increased to $4.2 million from $3.2 million at September 30, 2018.
- Working capital was $11.4 million, down from $13.1 million at September 30, 2018. Current assets were $27.4 million and current liabilities $15.9 million.
Debt, liquidity and capital
- At June 30, the company reported $13.9 million outstanding on its revolving facility, with approximately $1.0 million available, and $42.4 million of term-loan principal. Subordinated debt totaled $18.9 million. The term loan and revolver mature March 31, 2021; scheduled term-loan principal payments include $5.5 million in fiscal 2020 and $36.4 million in fiscal 2021.
- Borrowing costs were high: most disclosed revolver and term-loan balances bore interest of approximately 17.4%; a smaller revolver balance bore approximately 19.5%. The filing attributes higher interest expense partly to scheduled increases in the senior facility’s interest margin.
- Management disclosed prior financial-covenant noncompliance and repeated lender waivers and amendments, most recently a May 15, 2019 waiver for noncompliance as of March 31, 2019. Management expects to meet debt service and amended covenants based on its projections, but cautions there is no assurance of future compliance or further lender waivers.
- In May 2019, the company issued $2.0 million of 8% convertible subordinated notes to members of executive management and the Board. Interest is paid in kind through Series C preferred shares; the notes mature in October 2021 and are subordinated to senior debt.
- Common shares outstanding were 12.054 million at June 30, compared with 10.783 million at September 30, 2018; 12.538 million were outstanding August 8, 2019. The company also issued common shares to satisfy interest on existing convertible notes.
Changes, management commentary and risks
- Management cited reduced staffing needs at several key customers, office consolidations and closures, and workforce reductions as factors behind lower revenue. It also attributed weaker direct-hire placements partly to cautious hiring amid recession concerns.
- Industrial staffing margins improved materially, but were supported by estimated Ohio workers’ compensation insurance return premiums and experience refunds: approximately $0.6 million in the quarter and $1.3 million for the nine months. These items contributed 11.5 and 8.2 percentage points, respectively, to the reported year-over-year industrial margin improvement.
- Management says it is reducing costs and pursuing organic and acquisition growth, particularly in professional staffing. The company does not provide financial forecasts.
- Key risks include continued losses, negative operating cash flow, high-cost debt, limited revolver availability, covenant compliance and dependence on lender cooperation. Staffing demand, competition, retaining qualified personnel, and potential liabilities involving contract employees are also identified risks.
- The filing reports no pending significant litigation believed likely to materially harm financial position, no defaults upon senior securities in Part II, and effective disclosure controls as of June 30. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the company met each amended financial covenant at June 30 and whether additional lender waivers or amendments were required.
- Whether management’s liquidity and debt-service projections remain achievable given cash from operations, high interest costs and scheduled principal payments.
- How much of the improved industrial gross margin reflects insurance return premiums and whether similar recoveries are expected.
- The continuing impact of customer staffing reductions and lower direct-hire placements on revenue, profitability and cash generation.
- The dilution and priority implications of interest paid in shares, convertible subordinated debt, and Series B and Series C preferred stock.