GEE Group Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview GEE Group Inc. and its wholly owned material operating subsidiaries, Access Data Consulting Corporation, Agile Resources, Inc., BMCH, Inc., Paladin Consulting, Inc., Scribe Solutions, Inc., SNI Companies, Inc., Triad Logistics, Inc., and Triad Personnel Services, Inc. are providers of permanent and temporary professional and industrial staffing and placement services in and near several major U.S. cities. We specialize in the placement of information technology, accounting, finance, office, and engineering professionals for direct hire and contract staffing for our clients, data entry assistants (medical scribes) who specialize in electronic medical records (EMR) services for emergency departments, specialty physician practices and clinics, and provide temporary staffing services for our industrial clients. The acquisitions of Scribe Solutions, Inc., a Florida corporation (“Scribe”) in April 2015, Agile Resources, Inc., a Georgia corporation (“Agile”) in July 2015, Access Data Consulting Corporation, a Colorado corporation (“Access”) in October 2015, Paladin Consulting Inc. (“Paladin”) in January 2016, and SNI Companies, Inc., a Delaware corporation (“SNI”) in April 2017, expanded our geographical footprint within the professional placement and contract staffing verticals or end markets of information technology, accounting, finance, office, engineering professionals, and medical scribes. The Company markets its services using the trade names General Employment Enterprises, Omni One, Ashley Ellis, Agile Resources, Scribe Solutions Inc., Access Data Consulting Corporation, Paladin Consulting Inc., SNI Companies (including Staffing Now, Accounting Now, and Certes), Triad Personnel Services and Triad Staffing. As of December 31, 2024, we operated from locations in eleven (11) states, including twenty-three (23) branch offices in downtown or suburban areas of major U.S. cities and three (3) additional U.S. locations utilizing local staff members working remotely. We have offices or serve markets remotely, as follows; (i) one office in each of Connecticut, Georgia, Illinois, and New Jersey, and one remote local market presence in Virginia; (ii) two offices each in Massachusetts and Colorado; (iv) two offices and one additional local market presences in Texas; (v) six offices and one additional local market presence in Florida; and (vi) seven offices in Ohio. Management has an on-going business strategy, which includes organic and acquisition growth components. Management’s organic growth strategy includes seeking out and winning new client business, as well as expansion of existing client business and on-going cost reduction and productivity improvement efforts in operations. Management’s acquisition growth strategy includes identifying strategic, accretive acquisitions, financed primarily through a combination of cash and debt, including seller financing, the issuance of equity in appropriate circumstances, and the use of earn-outs where efficient to improve the overall profitability and cash flows of the Company. The Company’s contract and placement services are principally provided under two operating divisions or segments: Professional Staffing Services and Industrial Staffing Services. We believe our current segments and array of businesses and brands within our segments complement one another and position us for future growth. 19 Table of Contents Results of Operations Three Months Ended December 31, 2024 Compared to the Three Months Ended December 31, 2023 Summary and Outlook We have incurred a net loss of $(692) thousand for the fiscal first quarter ended December 31, 2024. The net loss is primarily attributable to declines in business resulting from negative economic and labor market conditions that began in 2023 and have continued throughout 2024. These conditions have negatively impacted the number of job orders received and the numbers of qualified candidates available to fill orders for placements across all of our lines of business. Likewise, the U.S. Staffing Industry, as a whole, has experienced material declines in overall volume and financial performance and the industry outlook is mixed as to when these conditions may be expected to definitively subside. On April 18, 2024, we announced that the Mergers and Acquisitions (“M&A”) committee of our Board of Directors had completed its review of strategic alternatives with the assistance of an outside investment banking firm. Management is now in the process of executing on the Company’s plans and budgets as comprehended in the M&A Committee’s strategic recommendations, which are contemplated to include making prudent investments in both organic and M&A growth. To effectively navigate this downturn and return to profitability as soon as possible, we implemented a comprehensive three-part strategic initiative aimed at fortifying our market position and driving sustainable growth. This included (1) proactive measures to streamline operations and enhance growth opportunities and cost-efficiency, including significant cost reductions, (2) building upon past acquisitions by taking advantage of current conditions and further integrating and consolidating operations and systems for further efficiencies and cost saving opportunities, and (3) capitalizing on acquisition opportunities arising from the economic downturn by identifying and with the objective of acquiring businesses at reduced multiples and favorable valuations. We estimate that the strategic actions we have taken to date will have the effect of reducing our future annualized selling, general and administrative (“SG&A”) expenses by approximately $3.0 million, pre-tax. It should be noted, however, that due to other potential changes in our SG&A costs in the normal course of business, including the effects of inflation, changes in the volume of business, and others, these cost reductions alone will not necessarily translate into a corresponding equal net reduction in our total future year over year SG&A expenses. Regarding the second initiative above, Management expects to spend between $500 thousand and $1.0 million on systems and software over the next 12 to 18 months. Regarding the third initiative above, Management has moved forward with the Company’s M&A target list as further discussed below. We paused share repurchases on December 31, 2023, having purchased 6.1 million shares of our common stock, or just over 5% of our outstanding shares at the beginning of the program. For now, our Board and Management have determined that it is prudent to discontinue share repurchases at least until we are able to gain more clarity on when the market conditions for the staffing industry will improve. If and when, we determine that a portion of our excess cash may be prudently utilized for share repurchases in the future, we will consider them once again, accordingly. Share repurchases will continue to be considered among alternative uses of our excess capital. However, in the context of our overall long-term growth strategy and goals it is not by itself a long-term growth strategy to achieve long-term growth goals of enterprise value, and therefore, shareholder value. Evaluation of alternative uses of our capital is an on-going priority and process and decisions always will be made with the objectives being optimizing growth in shareholder value and maximizing shareholder returns. Subsequent Events On January 3, 2025, we acquired Hornet Staffing, Inc., an Atlanta-based provider of staff augmentation services with national service capability. Hornet provides staffing solutions to markets serving large scale, "blue chip" companies in the information technology, professional and customer service staffing verticals. The acquisition is expected to be accretive to earnings. Under the terms of the stock purchase agreement, we acquired 100% of the Hornet common stock for consideration including cash and seller financing. Larry Bruce, Hornet’s Managing Director and Founder, will continue in his current capacity at Hornet and join the GEE Group National Sales Team to work with the Company's vertical leaders on new business development. 20 Table of Contents We expect the Hornet acquisition to enhance our ability to compete more effectively and anticipate it helping us secure new business from Fortune 1000 and other large users of contingent and outsourced labor. Its workforce solutions include significant expertise in working with MSPs and VMSs. According to Staffing Industry Analysts’ (“SIA”) recent Workforce Solutions Buyer Survey, approximately 58% of companies with one thousand employees or more engage a third-party firm to manage their staffing providers. These large businesses spend for contingent labor is typically managed by MSP and VMS providers which are evolving rapidly, driven by the increasing complexity of workforce management and to achieve economies of scale in today's business environment. In 2023 according to SIA, the global MSP/VMS market accounted for approximately $222 billion of temporary staffing spend under management. In light of the forgoing trends and in order to compete more efficiently and effectively on these and other engagements, staffing agencies are turning to offshore recruiting models which continue to gain momentum as an increasing number of organizations turn to MSP and VMS for managing their contract labor providers. According to SIA, offshore recruiting teams located in cost-effective regions of the world provide significant cost savings and can help reduce operational expenses by up to approximately 70%, without compromising on quality. Hornet has adopted this method of recruiting which we believe provides for faster hiring cycles tapping a vast, global talent pool; and, coupled with round-the-clock recruitment efforts, offshore recruiting can reduce hiring timelines by up to 40%, allowing staffing firms to attract top talent ahead of competitors. We plan to continue our on-shore relationship-based recruitment for select customers and leverage Hornet's offshore recruiting capability and technology across all of our staffing verticals on MSP, VMS and other large enterprise engagements. This is expected to give us additional flexibility and scalability to adjust hiring volumes based on project needs, ensuring efficiency without sacrificing quality. In addition, on January 3, 2025, we and FCB entered into Consent and Amendment No. 3 to the Facility, under which FCB permitted our acquisition of Hornet Staffing, Inc. 21 Table of Contents (Amounts in thousands except per share data, unless otherwise stated) Net Revenues Consolidated net revenues are comprised of the following: Three Months Ended December 31, 2024 2023 Change Change Professional contract services $ 21,514 $ 25,082 $ (3,568 ) -14% Industrial contract services 2,001 2,494 (493 ) -20% Total professional and industrial contract services 23,515 27,576 (4,061 ) -15% Direct hire placement services 2,511 3,055 (544 ) -18% Consolidated net revenues $ 26,026 $ 30,631 $ (4,605 ) -15% Contract staffing services contributed $23,515 or approximately 90% of consolidated revenue and direct hire placement services contributed $2,511, or approximately 10%, of consolidated revenue for the three months ended December 31, 2024. This compares to contract staffing services revenue of $27,576, or approximately 90%, of consolidated revenue and direct hire placement revenue of $3,055, or approximately 10%, of consolidated revenue for the three months ended December 31, 2023. Economic weakness and uncertainties, including persistent inflation and the possibility of recession, continued to negatively impact the Company’s results through the three months ended December 31, 2024. Professional contract staffing services revenues decreased $3,568, or 14%, as compared to the three months ended December 31, 2023. Industrial contract staffing services revenues for the quarter decreased $493, or 20%, mainly due to decreases in orders from clients and competition for orders and temporary labor to fill orders, accordingly. Direct hire placement services revenues for the three months ended December 31, 2024 decreased by $544, or approximately 18%, over the three months ended December 31, 2023. Direct hire opportunities tend to be highly cyclical and demand dependent, tending to rise during economic recovery and decline during downturns. Demand for the Company’s direct hire services was higher in 2023, following record highs in 2022, driven by post-COVID employment recovery trends at that time, and is down for the three months ended December 31, 2024 due to challenging economic conditions. Staffing Industry Analysts, a leading industry trade organization, recently published in its September 2024 U.S. Staffing Industry Forecast update, that the U.S. Staffing Industry was expected to decline by 10% in 2024. This follows a 10% decline already experienced in 2023. The SIA report cites that the forecasted 2024 decline is expected due to widespread client caution and project delays, a depressed manufacturing sector, falling bill rates in sectors such as healthcare, and employer and worker heightened preferences for permanent positions over temporary positions. While our businesses service clients of all sizes, a substantial number of our clients are small and medium sized enterprises (“SMEs”), which have less financial flexibility to absorb rising costs and higher borrowing expenses, making them more likely to reduce or postpone usage of our services and contract employees. We believe this is a key reason why our 2024 revenue declines have exceeded those forecasted by SIA for the staffing industry overall. Cost of Contract Services Cost of contract services includes wages and related payroll taxes and employee benefits of the Company's contract services employees, and certain other contract employee-related costs, while working on contract assignments. Cost of contract services for the three months ended December 31, 2024 decreased by approximately 15% to $17,730 compared to $20,895 for the three months ended December 31, 2023. The $3,165 overall decrease in cost of contract services is consistent with the decrease in revenues as discussed above. 22 Table of Contents (Amounts in thousands except per share data, unless otherwise stated) Gross Profit percentage by service: Three Months Ended December 31, 2024 2023 Professional contract services 25.2% 25.0% Industrial contract services 18.5% 16.0% Professional and industrial services combined 24.6% 24.2% Direct hire placement services 100.0% 100.0% Combined gross profit margin (a) 31.9% 31.8% (a) Includes gross profit from direct hire placements, for which all associated costs are recorded as selling, general and administrative expenses. Unlike temporary contract staffing services, where the Company maintains primary responsibility for and controls the staff members that it provides to perform services for its clients, direct hire placement revenues are only recognized for the net amount of fees earned by the Company acting under an agency type of relationship. Accordingly, none of the Company’s costs associated with direct hire placement services are reportable as costs of services deducted from revenues to derive gross profit. The Company’s combined gross profit margin, including direct hire placement services, for the three-month periods ended December 31, 2024 and 2023 were approximately 31.9% and 31.8%, respectively. The Company’s professional staffing services gross margin (excluding direct hire placement services) was approximately 25.2% for three-month period ended December 31, 2024 as compared to approximately 25.0% for the three-month period ended December 31, 2023. The Company’s industrial staffing services gross margin for the three-month period ended December 31, 2024 was approximately 18.5% versus approximately 16.0% for the three-month period ended December 31, 2023. The net increases in our gross margins are mainly attributable to changes in the mix of our contract services businesses favoring higher spread temporary placements and margins. The Company has also enacted bill rate increases in its professional and industrial contract services business, where feasible, to offset recent inflationary rises of our SG&A costs, in addition to contractor payroll and related employment costs. The resulting improvements in our professional services and overall contract services spreads and margins were offset by declines in our direct hire placement revenues, which have a 100% gross margin. Selling, General and Administrative Expenses Selling, general and administrative expenses (“SG&A”) include the following categories: · Compensation and benefits in the operating divisions, which include salaries, wages and commissions earned by the Company’s employment consultants, recruiters and branch managers on permanent and temporary placements; · Administrative compensation, which includes salaries, wages, share-based compensation, payroll taxes, and employee benefits associated with general management and the operation of corporate functions, including principally, finance, human resources, information technology and administrative functions; · Occupancy costs, which includes office rent, and other office operating expenses; · Recruitment advertising, which includes the cost of identifying and tracking job applicants; and · Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes. 23 Table of Contents (Amounts in thousands except per share data, unless otherwise stated) The Company’s SG&A for the three months ended December 31, 2024 decreased by $1,791, or 17%, as compared to the three months ended December 31, 2023. SG&A for the three months ended December 31, 2024, as a percentage of revenues, was approximately 33.9% compared to approximately 34.6% for the three months ended December 31, 2023. The decrease in SG&A expenses as a percentage of revenues during the three-month period ended December 31, 2024 was primarily the result of cost reduction initiatives taken by the Company during the prior sequential quarter to decrease fixed SG&A expenses, including fixed personnel-related expenses, occupancy costs, job boards and applicant tracking systems, that are not driven by revenues. The reduction in our SG&A expenses attributable to these measures were offset, in part, by the effect of the 15% reduction in our revenues for the three months ended December 31, 2024, as compared with revenues for the three months ended December 31, 2023. SG&A includes certain expenses incurred related to acquisition, integration, restructuring and other non-recurring activities, such as certain corporate legal and general expenses associated with capital markets activities, that either are not directly associated with core business operations or have been eliminated on a going forward basis. These costs were $91 and $548 for the three months ended December 31, 2024 and 2023, respectively, and include mainly expenses associated with former closed and consolidated locations, legal expenses related to other than routine matters, and personnel costs associated with eliminated positions. Amortization and Depreciation Expense Amortization expense was $205 and $720 for the three months ended December 31, 2024 and 2023, respectively. Depreciation expense was $57 and $84 for the three months ended December 31, 2024, and 2023, respectively. The significant decline in amortization expense is mainly due to impairment charges taken during the three months ended June 30, 2024, which eliminated or substantially reduced the remaining unamortized balances of the Company’s identifiable intangible assets and present amortization, accordingly. The reduction in depreciation expense is due to certain of the Company’s property and equipment having become fully depreciated since the three months ended December 31, 2023. Loss from Operations The loss from operations was $(781) and $(1,674) for the three months ended December 31, 2024 and 2023, respectively. This improvement is consistent with the decreases in SG&A expenses, including fixed expenses which do not fluctuate with revenues, and decreases in amortization and depreciation expenses, as discussed above. Interest Expense Interest expense was $66 and $71 for the three months ended December 31, 2024 and 2023, respectively, and is mainly attributable to unused availability and administrative fees on the Company’s Facility. Interest Income The Company holds a significant portion of its excess cash in interest bearing accounts on which interest income was $155 and $190 for the three-month periods ended December 31, 2024 and 2023, respectively. Provision for Income Taxes The Company did not recognize an income tax benefit for the loss reported for the three months ended December 31, 2024 because the Company is forecasting pre-tax income for the full year. The Company also did not recognize an income tax benefit for the three months ended December 31, 2023 as the Company then expected pre-tax income for the full year ended September 30, 2024. For each period, the tax benefit was not expected to be realized during the respective fiscal year thus was not recorded as a benefit in accordance with the provisions of ASC Topic 740, Income Taxes. Net Loss The Company’s net loss was $(692) and $(1,555) for the three months ended December 31, 2024 and 2023, respectively. The reduction in net loss of $863 is primarily a result of an improvement in SG&A expenses, and the decreases in amortization and depreciation expenses as explained in the preceding paragraphs. 24 Table of Contents (Amounts in thousands except per share data, unless otherwise stated) Liquidity and Capital Resources The primary sources of liquidity for the Company are revenues earned and collected from its clients for the placement of contract employees and independent contractors on a temporary basis and permanent employment candidates and borrowings available under its asset-based senior secured revolving credit facility. Uses of liquidity include primarily the costs and expenses necessary to fund operations, including payment of compensation to the Company’s contract and permanent employees, and employment-related expenses, operating costs and expenses, taxes and capital expenditures. The following table sets forth certain consolidated statements of cash flows data: Three Months Ended December 31, 2024 2023 Cash flows used in operating activities $ (1,117 ) $ (919 ) Cash flows used in investing activities (1 ) (26 ) Cash flows used in financing activities (16 ) (1,616 ) As of December 31, 2024, the Company had $19,694 of cash, a decrease of $1,134 from $20,828 as of September 30, 2024. As of December 31, 2024, the Company had working capital of $25,962 compared to $26,079 of working capital as of September 30, 2024. The decrease in working capital is mainly attributable to the effects of lower business volume on other components of working capital during the three-months ended December 31, 2024. The primary uses of cash for investing activities were for the acquisition of property and equipment, principally information technology equipment, during the three-month periods ended December 31, 2024 and 2023. Investing activities represent capital expenditures and did not include any major capital expenditures or capital improvements during either of the three-month periods ended December 31, 2024 and 2023. As described under the subheading, Subsequent Events , under the Results of Operations, Summary and Outlook section of this MD&A, on January 3, 2025, the Company completed the acquisition of 100% of the outstanding common stock of Hornet Staffing, Inc., which is now a wholly owned subsidiary of the Company. The Company paid $1,100 of cash consideration at closing on January 3, 2025, and entered into two 5% uncollateralized subordinated promissory notes with the sellers in the aggregate amount of $400, each payable in two equal annual installments due at the end of the two subsequent years following closing. The purchase price and the Company’s obligations under the subordinated promissory notes are subject to reduction in the event Hornet Staffing does not achieve agreed upon profit metrics during the two years subsequent to closing on a dollar-for-dollar basis. The cash flows used in financing activities were primarily for purchases of treasury stock during the three-months ended December 31, 2023, and payments made on finance leases during the three-month periods ended December 31, 2024 and 2023. The Company had $6,977 in availability for borrowings under its facility as of December 31, 2024. There were no outstanding borrowings on the Facility as of December 31, 2024, or September 30, 2024, except for certain accrued carrying fees and costs, which are included in other current liabilities in the accompanying unaudited condensed consolidated balance sheets. On April 27, 2023, the Company’s Board of Directors approved a share repurchase program authorizing the Company to purchase up to an aggregate of $20 million of the Company’s currently outstanding shares of common stock. The share repurchase program continued through December 31, 2023. The repurchase program did not obligate the Company to repurchase any number of shares of common stock. The share repurchase program was conducted in accordance with Rules 10b-5 and 10b-18 of the Securities Exchange Act of 1934, as amended. Subject to applicable rules and regulations, shares of common stock were purchased from time to time in the open market transactions and in amounts the Company deemed appropriate, based on factors such as market conditions, legal requirements, and other business considerations. During the three-months ended December 31, 2023, the Company repurchased 2,717 shares of its common stock at a total cost of $1,575. Upon conclusion of the share repurchase program, as of December 31, 2023, the Company repurchased 6,129 shares in aggregate (accounting for approximately 5.4% of our issued and outstanding common shares immediately prior to the program). 25 Table of Contents (Amounts in thousands except per share data, unless otherwise stated) On August 13, 2024, the Company re-issued 642 of its treasury shares to fulfill commitments for the issuance of previously granted restricted share awards that became fully vested and unrestricted. The treasury shares were reissued in lieu of issuing 642 new shares of our common stock, therefore, while the Company’s total number of outstanding shares of common stock increased by 642, its total number of issued shares of common stock did not increase as a result of the reissuance of treasury shares instead. All the Company’s office facilities are leased. Minimum lease payments under all the Company’s lease agreements for the twelve-month period commencing after the close of business on December 31, 2024, are approximately $1,214. There are no minimum debt service principal payments due during the twelve-month period commencing after the close of business on December 31, 2024. Management believes that the Company can generate adequate liquidity to meet its obligations for the foreseeable future and at least for the next twelve months. Off-Balance Sheet Arrangements As of December 31, 2024, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity. Item 3. Quantitative and Qualitative Disclosures About Market Risk . Not applicable.