GEE GROUP INC. Management's discussion and analysis contains forward-looking statements that
are provided to assist in the understanding of anticipated future performance.
However, future performance involves risks and uncertainties which may cause
actual results to differ materially from those expressed in the forward-looking
statements. Item 7 should be read in conjunction with the information contained
in "Forward-Looking Statements" at the beginning of this report and with the
consolidated financial statements and notes thereto included in Item 8.
References such as the "Company," "we," "our" and "us" refer to
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Overview
The Company markets its services using the trade names
Management has implemented a 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 acquisitions, financed primarily through a combination of cash and the issuance of equity and/or debt 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
Network Security Incident and Risk
On
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The Company's investigation determined that the unauthorized third party acquired a relatively small amount of data maintained on the encrypted servers, to include in some cases, individual personal information such as names, social security numbers, passport and driver license information. Our forensic investigation has been concluded and we believe we have reasonably determined the scope of the incident. Individuals affected by this incident are in the process of being notified in accordance with applicable state and federal laws. The cost of investigating and resolving the incident has been immaterial. Based on what management and the Company's third-party cyber security experts have determined in their investigation, the Company also does not foresee this incident having any future material detrimental effect on our business or financial position. The Company has in place cyber liability insurance coverage, subject to certain policy limitations and deductibles. The Company had also immediately notified the cyber insurance carrier of the network security incident, who worked with management and the Company's third-party cyber security experts on this matter.
The Company's network environment is fully operational and additional security measures have been added and/or are being evaluated to prevent further intrusions. The Company has not observed any additional malicious activity on the network to date. The Company's operations were only minimally impacted by the incident, and we were able to serve our clients and other stakeholders without issue throughout.
Coronavirus Pandemic ("COVID-19")
Our businesses have recovered to a significant extent from COVID-19 during the
fiscal years ended
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(Amounts in thousands except per share data, unless otherwise stated)
Results of Operations
Fiscal year ended
Net Revenues
Consolidated net revenues are comprised of the following:
Fiscal
2022 2021 $ Change % Change
Professional contract services $ 122,562 $ 112,470 $ 10,092 9%
Industrial contract services 15,945 17,332 (1,387 ) -8% Total contract services revenues 138,507 129,802 8,705
7%
Direct hire placement services 26,605 19,078 7,527 39%
Consolidated net revenues $ 165,112 148,880 $ 16,232 11%
Contract staffing services contributed
The overall increase in contract staffing services revenue of
Management believes this trend is the result of post-COVID-19 recovery of the
Direct hire placement revenue for fiscal 2022 increased by
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(Amounts in thousands except per share data, unless otherwise stated)
Management believes that the significant net growth in revenues during fiscal
2022, compared to fiscal 2021, is generally in line with trends being
experienced in the overall
Cost of Contract Services
Cost of contract services includes wages and related payroll taxes, employee
benefits of the Company's contract services employees, and certain other
employee-related costs, while they work on contract assignments. Cost of
contract services for fiscal 2022 increased by approximately 7% to
Gross Profit percentage by service:
Fiscal
2022 2021
Professional contract services 26.6% 26.3%
Industrial contract services 15.4% 22.3%
Consolidated contract services 25.3% 25.8%
Direct hire placement services 100.0% 100.0% Combined gross profit margin (1) 37.4% 35.3%
(1) Includes gross profit from direct hire placements, for which all associated
costs are recorded as selling, general and administrative expenses.
The Company's combined gross profit margin, including direct hire placement services for fiscal 2022 was approximately 37.4% versus approximately 35.3% for fiscal 2021. In the professional contract staffing services segment, the gross margin excluding direct placement services was approximately 26.6% for fiscal 2022 compared to approximately 26.3% for fiscal 2021. The year-over-year improvement in our consolidated gross margin is mainly the result of the increase in mix of permanent placement business with 100% gross margins for fiscal 2022, from 13% to 16% of our consolidated revenues, or by approximately 3%, or 300 basis points.
The Company's industrial staffing services gross margin for fiscal 2022 was
approximately 15.4% as compared with approximately 22.3% for fiscal 2021. The
decrease in industrial contract services gross margin is due to a decrease in
the amount of premium refunds the Company's industrial business is eligible to
receive under the
Selling, General and Administrative Expenses
Selling, general and administrative expenses include the following categories:
· Compensation and benefits in the operating divisions, which includes
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, payroll taxes
and employee benefits associated with general management and the operation
of corporate functions, including principally, finance, legal, human
resources and information technology functions;
· Occupancy costs, which includes office rent, depreciation and
amortization, 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.
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(Amounts in thousands except per share data, unless otherwise stated)
The Company's SG&A for fiscal 2022 increased by
SG&A also includes certain non-cash costs, expenses incurred related to
acquisition, integration and restructuring, non-recurring items, such as certain
corporate legal and general expenses associated with capital markets activities
that either are not directly associated with core business operations, and other
items that have been eliminated on a going forward basis or are of an isolated,
non-recurring nature. These costs were
Depreciation Expense
Depreciation expense was
Amortization Expense
Amortization expense was
Goodwill Impairment
The Company completed its most recent annual goodwill impairment assessment, as
of
Income from Operations
As the net result of the matters discussed regarding revenues and operating
expenses above, income from operations decreased by
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(Amounts in thousands except per share data, unless otherwise stated)
Gain/Loss on Debt Extinguishment
The company recorded a gain of
Interest Expense
Interest expense decreased by
Provision for Income Taxes
The Company recognized provisions for income tax expense of
Net Income
The Company's net income was
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 permanent employment candidates and borrowings available under its current and former asset-based senior secured revolving credit facilities. 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:
Fiscal
2022 2021
Cash flows provided by operating activities
As of
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(Amounts in thousands except per share data, unless otherwise stated)
Net cash provided by operating activities for fiscal 2022 and fiscal 2021 was
Cash flows used in investing activities for fiscal 2022 and fiscal 2021 was
Cash flows used in financing activities for fiscal 2021 totaled
On
On
On
Under the CIT Facility, advances will be subject to a borrowing base formula that is computed based on 85% of eligible accounts receivable of the Company and subsidiaries as defined in the CIT Facility, and subject to certain other criteria, conditions, and applicable reserves, including any additional eligibility requirements as determined by the administrative agent. The CIT Facility is subject to usual and customary covenants and events of default for credit facilities of this type. The interest rate, at the Company's election, will be based on either the Base Rate, as defined, plus the applicable margin; or the London Interbank Offering Rate ("LIBOR" or any successor thereto) for the applicable interest period, subject to a 1% floor, plus the applicable margin. The CIT Facility also contains provisions addressing the potential future replacement of LIBOR utilized and referenced in the loan agreement, in the event LIBOR becomes no longer available. In addition to interest costs on advances outstanding, the CIT Facility will provide for an unused line fee ranging from 0.375% to 0.50% depending on the amount of undrawn credit, original issue discount and certain fees for diligence, implementation, and administration.
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(Amounts in thousands except per share data, unless otherwise stated)
The Company had approximately
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
Management believes that the Company has adequate cash and working capital and can generate adequate liquidity to meet its obligations for the foreseeable future and at least for one year after the date this Annual Report on Form 10-K is filed.
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with accounting
principles generally accepted in
Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known.
Significant accounting and disclosure matters requiring the use of estimates and assumptions include, but may not be limited to, revenue recognition, accounts receivable allowances, determining fair values of financial assets and liabilities, deferred income tax valuation allowances, accounting for asset impairments, and accounting for derivative liabilities and beneficial conversion features. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made.
The following accounting policies are considered by management to be "critical" because of the judgments and uncertainties involved, and because different amounts would be reported under different conditions or using different assumptions.
Revenue Recognition
Our revenues are recognized when promised services are performed for customers, and in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Our revenues are recorded net of variable consideration such as sales adjustments or allowances. Direct hire placement service revenues from contracts with customers are recognized when employment candidates accept offers of employment, less a provision for estimated credits or refunds to customers as the result of applicants not remaining employed for the entirety of the Company's guarantee period (referred to as "falloffs"). The Company's guarantee periods for permanently placed employees generally range from 60 to 90 days from the date of hire.
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(Amounts in thousands except per share data, unless otherwise stated)
Falloffs and refunds during the period, including estimates for future falloffs associated with revenues that have been recognized, are reflected in the consolidated statements of operations as a reduction of placement service revenues and in the consolidated balance sheet, in combination with allowance for uncollectible accounts, as a reduction of accounts receivable. Estimated future falloffs are determined by analyzing recent historical trends of actual falloffs and applying a formula comprised of average numbers of falloffs, average falloff amounts, and average cycle times between billing and fall off dates to derive an allowance for falloffs. Thus, the estimated allowance is derived from observed trends in actual historical falloffs and assumes that historical trends are indicative of future falloff activity.
Temporary staffing service revenues from contracts with customers are recognized in amounts for which the Company has a right to invoice, as the services are rendered by the Company's temporary employees. The Company records temporary staffing revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company controls the specified service before that service is performed for a customer. The Company has the risk of identifying and hiring qualified employees, has the discretion to select the employees and establish their price, and bears the risk for services that are not fully paid for by customers.
Accounts Receivable
The Company extends credit to its various customers based on evaluation of the customer's financial condition and ability to pay the Company in accordance with the payment terms. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. An allowance for placement falloffs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company's guarantee period. These allowances together reflect management's estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. Management believes that the nature of the contract service business, wherein client companies are generally dependent on our contract employees in the same manner as permanent employees for their production cycles and the conduct of their respective businesses contributes to a relatively small accounts receivable allowance.
Fair Value Measurement
The Company follows the provisions of
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
Income Taxes
The Company accounts for income taxes under the asset and liability method, FASB ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
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(Amounts in thousands except per share data, unless otherwise stated)
The Company recognizes deferred tax assets to the extent that it is believed these assets are more likely than not to be realized. In making such a determination, all available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event it is determined that the Company would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions on the basis of a two-step process in which (1) determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
Interest and penalties related to unrecognized tax benefits are recognized on
the income tax expense line in the accompanying consolidated statement of
operations. As of
Goodwill
The Company evaluates its goodwill for possible impairment as prescribed by FASB
ASU 2017-04, Intangibles -
The Company performed annual goodwill impairment testing effective as of
For purposes of performing this goodwill impairment assessment, management applied the valuation techniques and assumptions to its professional and industrial segments as reporting units discussed above; and also considered recent trends in the Company's stock price, implied control or acquisition premiums, earnings, and other possible factors and their effects on estimated fair value of the Company's reporting units.
As a result of the evaluation performed, the estimated fair values exceeded the
carrying values of its net assets of the Company's professional and industrial
reporting units as of
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(Amounts in thousands except per share data, unless otherwise stated)
During the first fiscal quarter of 2022, the amount of discount inherent in the
Company's market capitalization as reported on the NYSE American exchange when
compared with consolidated stockholders' equity, or net book value, had
increased since the annual goodwill impairment assessment as of
Intangible Assets
Separately identifiable intangible assets held in the form of customer relationships and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.
Impairment of Long-lived Assets (other than
The Company recognizes an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that these assets might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. In the event the net carrying value of the Company's long-lived assets are determined not to be recoverable, they are reduced to fair value, which is typically calculated using one or a combination of the relief from royalty method, the multiple of excess cash flow method, and/or other applicable adaptations of the discounted cash flow method. For purposes of testing the long-lived assets other than goodwill, long-lived assets are grouped and considered with other assets and liabilities within the professional and industrial reporting units. The Company did not record any impairments to its long-lived assets during fiscal 2022 and 2021.
Share-Based Compensation
The Company accounts for share-based awards to employees in accordance with FASB ASC 718, Compensation-Stock Compensation, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the consolidated financial statements based on a determination of the fair value of the stock options or restricted stock grants. The grant date fair value of stock options is determined using the Black-Scholes-Merton ("Black-Scholes") pricing model. For all employee stock options and restricted stock grants, the Company recognizes expense over the employee's requisite service period (generally the vesting period of the equity grant) and records an estimate for forfeitures. The Company's option pricing model requires the input of subjective assumptions, including the expected stock price volatility, and expected term. Any changes in these subjective assumptions significantly impact our share-based compensation expense.
See Note 11 for the assumptions used to calculate the fair value of share-based employee and non-employee compensation. Upon the exercise of options, it is the Company's policy to issue new shares rather than utilizing treasury shares.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In
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(Amounts in thousands except per share data, unless otherwise stated)
In
In
No other recent accounting pronouncements were issued by FASB and the
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