GEE Group Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; comparison is fiscal 2019. Unless stated otherwise, financial amounts below are in millions of dollars. This is an annual report, not a report for the fourth quarter alone.
Business context
GEE Group provides temporary and permanent staffing, principally in professional services (including IT, finance and accounting, engineering, and medical scribe staffing) and light industrial staffing, primarily in Ohio. Approximately 88% of FY2020 revenue came from contract staffing and 12% from direct-hire placements. The company operated 30 offices in 11 states. No customer represented more than 10% of revenue.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $129.835 | $151.674 |
| Gross profit | $44.704 | $52.021 |
| Combined gross margin | 34.4% | 34.3% |
| SG&A | $44.401 | $46.739 |
| Operating loss | $(13.833) | $(4.953) |
| Net loss | $(14.347) | $(17.763) |
| Net income (loss) attributable to common stockholders | $10.128 | $(17.763) |
| Cash used in operating activities | $(2.247) | $(0.394) |
| Cash used in investing activities | $(0.119) | $(0.209) |
| Cash provided by financing activities | $12.385 | $1.445 |
At September 30, 2020, cash was $14.074, versus $4.055 a year earlier; working capital was $13.351, versus $8.534. Accounts receivable, net, was $16.047, with an allowance of $2.072 (up from $0.515). Total assets were $120.013 and shareholders’ equity was $27.378.
Senior credit borrowings totaled approximately $54.474 at year-end: $11.828 under the revolver and $42.646 principal under the term loan. The term loan’s balance-sheet carrying value was $37.752 after discount. The company also had $19.927 of PPP loans outstanding. Senior loan rates were approximately 11%, with an additional 5% PIK interest on the term loan. Revolver availability was $1.592. Minimum principal debt service for the next 12 months was approximately $3.132.
Changes versus FY2019
- Revenue declined 14% overall. Professional contract revenue fell 13% to $96.966; industrial contract revenue fell 19% to $17.560; direct-hire revenue fell 17% to $15.309.
- Contract staffing costs declined 15% to $85.131, broadly tracking lower revenue. Combined gross margin edged up to 34.4% from 34.3%; professional contract margin improved to 26.4% from 26.0%, and industrial margin to 21.7% from 20.8%. Industrial margins included Ohio workers’ compensation premium refunds; normalized margin was approximately 14% in both years.
- SG&A decreased in dollars but rose to approximately 34.2% of revenue from 30.8%, as lower revenue reduced coverage of fixed and semi-variable costs. Bad-debt expense rose by approximately $1.765, including $1.653 related to a large light-industrial customer that filed for bankruptcy.
- Operating loss widened by $8.880, reflecting the revenue decline, higher bad debt, and a non-cash goodwill impairment charge of $8.850, compared with $4.300 in FY2019. Goodwill declined to $63.443 from $72.293.
- FY2020 net loss improved year over year, but common-stockholder income of $10.128 was driven by a $24.475 gain on preferred-stock redemption. The company also recorded a $12.316 gain on extinguishment of debt. These restructuring gains do not represent operating profitability.
- Cash increased primarily because of financing, including $19.927 in PPP proceeds; operating cash flow was negative. Common shares outstanding increased to 17.667 million from 12.538 million.
Outlook, material events, and risks
- Management said COVID-19 sharply reduced staffing demand from mid-March 2020, especially in light industrial and finance, accounting, and office markets. Quarterly revenue fell to $26.594 in the quarter ended June 30, then recovered to $31.004 in the September quarter. Management expected recovery to continue, potentially more gradually, conditional on the economic effects of COVID-19 not worsening. No specific forward revenue or earnings guidance was provided.
- Management reported monthly revenue rose from an approximately $8.248 low in May 2020 to $12.216 in October 2020, then was $10.560 in November; these figures are after fiscal year-end. The company shifted sales focus toward essential-service and PPE-related staffing and implemented workplace safety measures.
- In April 2020, the senior lender extended credit maturity to June 30, 2023, reduced cash debt service, and permitted 5% PIK interest on the term loan. The company settled subordinated debt and preferred stock in June, eliminating approximately $19.685 of subordinated debt and $27.695 of preferred stock, using cash and common shares. The transactions generated the gains noted above. The filing reports the company met its financial covenants at September 30, 2020, but also says it had obtained covenant waivers or amendments on ten occasions.
- The nine unsecured PPP loans bear 1% interest and may be forgiven in whole or part, subject to SBA review. The company intended to seek full forgiveness, but forgiveness was not assured; the loans were subject to SBA audit. If not forgiven, repayment would be required. The company also deferred $2.435 of payroll taxes, payable in installments by December 2021 and December 2022.
- Management believed liquidity would be adequate for the foreseeable future if COVID-19’s effects did not worsen and economic recovery continued. The company was seeking replacement financing, but disclosed no assurance refinancing would be available on acceptable terms. Debt covenants, high leverage, negative operating cash flow, future impairment risk, and customer credit losses are material risks.
- The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2020. The filing reported no material legal proceedings.
Important facts for investors to verify
- Whether PPP loan forgiveness was granted, and the resulting repayment obligations, including applicable interest.
- Subsequent refinancing, credit-agreement amendments, covenant compliance, lender fees, and available borrowing capacity.
- Whether the post-May revenue recovery continued, and how staffing demand, customer collections, and the bankrupt customer’s receivable affected cash flow.
- The quality of earnings: distinguish the operating loss and net loss from the debt-extinguishment and preferred-stock redemption gains; assess recurring costs and goodwill impairment assumptions.
- The effects of increased shares outstanding and any further potential dilution, along with the company’s ability to fund debt service from operating cash flow.