GEE Group Inc.: Form 10-Q for the period ended Mar 31, 2024

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 March 31, 2024, we operated from locations in eleven (11) states, including twenty-five (25) 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, Minnesota, and New Jersey, and one remote local market presence in Virginia; (ii) two offices in Massachusetts; (iii) three offices in Colorado; (iv) two offices and one additional local market presence in Texas; (v) six offices and one additional local market presence in Florida; and (vi) seven offices in Ohio.

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, 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.

16

Table of Contents

Results of Operations

Summary and Outlook

Results for the second quarter and first half of fiscal 2024, ended March 31, 2024, have declined from those of the comparable second quarter and first half of fiscal 2023, primarily as the result of negative economic and labor market conditions that began in 2023 and have continued into 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 declines in overall volume and financial performance and the industry outlook is mixed as to when these conditions may be expected to definitively subside.

We are cautiously optimistic about the potential for improvements in our results for the remainder of the current fiscal year. Although we still expect our results for the full fiscal year ending September 30, 2024 to be lower than those reported for our most recent fiscal year ended September 30, 2023, we are seeing some positive leading indicators in the current quarter and are hopeful for continuing improvement of the demand environment. Revenues and orders for the month of April were up, as was our metric for revenue per billing day.

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 formulating the Company’s plans and budgets with which to execute on the M&A Committee’s and DC Advisory’s recommendations, which are contemplated to include making prudent investments in both organic and M&A growth. With the amount of excess cash over that necessary to support the Company’s current operations, and potential available financing, management already has begun prudently recruiting, hiring and training new professional producers and initiating new marketing and sales campaigns. Management also is working on moving forward with the Company’s M&A target list and socializing with several targets at this stage.

The Company paused share repurchases on December 31, 2023, having purchased 6.1 million shares of JOB 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 for the time being at least until we are able to gain more clarity on when the market conditions for the staffing industry will improve; and in the meantime, how much of our excess cash should be held in reserve. Share repurchases will continue to be considered among alternative uses of our excess capital, if and when prudent. However, in the context of our overall growth strategy and goals it is not, by itself, a long-term growth strategy. Evaluation of alternative uses of GEE Group's 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.

17

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

Net Revenues

Consolidated net revenues are comprised of the following:

Contract staffing services contributed $25,595 or approximately 91% of consolidated revenue and direct hire placement services contributed $2,455, or approximately 9%, of consolidated revenue for the three months ended March 31, 2024. This compares to contract staffing services revenue of $33,976, or approximately 87%, of consolidated revenue and direct hire placement revenue of $4,883, or approximately 13%, of consolidated revenue for the three months ended March 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 March 31, 2024. Professional contract staffing services revenues decreased $7,617, or 25%, as compared to the three months ended March 31, 2023. Industrial staffing services for the quarter decreased by $764, or 24%, mainly due to decreases in orders from clients and competition for orders and temporary labor to fill orders, accordingly.

Direct hire placement revenue for the three months ended March 31, 2024 decreased by $2,428, or approximately 50%, over the three months ended March 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 the first quarter of fiscal 2023, following record highs in fiscal 2022, driven by post-COVID employment recovery trends at that time, and is down for the three months ended March 31, 2024 due to challenging economic conditions.

Similar contract and direct hire services performance challenges as those experienced by the Company since 2022 are also being experienced in the broader U.S. staffing industry.

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 March 31, 2024 decreased by approximately 25% to $19,283 compared to $25,643 for the three months ended March 31, 2023. The $6,360 overall decrease in cost of contract services is consistent with the decrease in revenues as discussed above.

18

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

Gross profit percentage by service:

(a) 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 (recorded at 100% gross margin) for the three-month periods ended March 31, 2024 and 2023 were approximately 31.3% and 34.0%, respectively.

In the professional contract services segment, the gross margin (excluding direct hire placement services) was approximately 25.7% for three-month period ended March 31, 2024 compared to approximately 25.4% for the three-month period ended March 31, 2023. The increase in professional contract staffing services gross margin is mainly due to more favorable shifts in the mix of business and respective spreads.

The Company’s industrial contract services gross margin for the three-month period ended March 31, 2024 was approximately 15.2% versus approximately 16.5% for the three-month period ended March 31, 2023. The decrease is driven mainly by competition in the labor markets served by Company’s Industrial segment requiring the Company to offer more competitive rates and contractor pay to win business.

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.

The Company’s SG&A for the three-month period ended March 31, 2024 decreased by $1,699 as compared to the three-month period ended March 31, 2023. SG&A for the three-month period ended March 31, 2024, as a percentage of revenues, were approximately 35.7% compared to approximately 30.1% for the three-month period ended March 31, 2023. The increase in SG&A expenses as a percentage of revenues during the three-month period ended March 31, 2024, was primarily attributable to the declines in revenues in relation to the level of fixed SG&A expenses, including fixed personnel-related expenses, occupancy costs, job boards and applicant tracking systems, and to the presence of certain non-cash and/or non-operational and other expenses described below.

19

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

SG&A includes certain non-cash costs and 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 $452 and $65 for the three-month periods ended March 31, 2024 and 2023, respectively, and include mainly expenses associated with legal proceedings, former closed and consolidated locations, and advisory fees.

Amortization and Depreciation Expense

Amortization expense was $719 for both three-month periods ended March 31, 2024 and 2023. Depreciation expense was $77 and $98 for the three months ended March 31, 2024, and 2023, respectively.

Income (Loss) from Operations

Income (loss) from operations was $(2,035) and $694 for the three-month periods ended March 31, 2024 and 2023, respectively. This decrease is consistent with the decrease in revenues, especially in direct hire placements, as discussed above.

Interest Expense

Interest expense was $67 and $73 for the three-month periods ended March 31, 2024 and 2023, respectively, and is mainly attributable to unused availability and administrative fees on the Company’s Facility.

Interest Income

Interest income earned was $179 and $95 for the three-month periods ended March 31, 2024 and 2023, respectively. Interest income is earned on cash balances held in the Company’s two brokerage accounts.

Provision for Income Taxes

The Company recognized income tax (benefit) expense of $(915) and $58 for the three-month periods ended March 31, 2024 and 2023, respectively. Our effective tax rate for the three-month period ended March 31, 2024 is higher than the statutory tax rate primarily due to the effect of federal tax credits and state and local taxes. Our effective tax rate for the three-month period ended March 31, 2023 are lower than the statutory tax rate primarily due to the effect of the change in valuation allowance on the net DTA position as the company maintained a full valuation allowance during that period..

Net Income (Loss)

The Company’s net income (loss) was $(1,008) and $658 for the three-month periods ended March 31, 2024 and 2023, respectively. The decrease of $1,666 is primarily the result of the decrease in revenues for the three months ended March 31, 2024 compared with the three months ended March 31, 2023, as explained in the preceding paragraphs.

20

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

Six Months Ended March 31, 2024 Compared to the Six Months Ended March 31, 2023

Net Revenues

Consolidated net revenues are comprised of the following:

Contract staffing services contributed $53,171 or approximately 91% of consolidated revenue and direct hire placement services contributed $5,510, or approximately 9%, of consolidated revenue for the six months ended March 31, 2024. This compares to contract staffing services revenue of $69,377, or approximately 87%, of consolidated revenue and direct hire placement revenue of $10,630, or approximately 13%, of consolidated revenue for the six months ended March 31, 2023.

Economic weakness and uncertainties, including persistent inflation and the possibility of recession, continued to negatively impact the Company’s results through the six months ended March 31, 2024. Professional contract staffing services revenues decreased $14,317, or 23%, as compared to the six months ended March 31, 2023. Industrial staffing services decreased by $1,889, or 28%, mainly due to decreases in orders from clients and competition for orders and temporary labor to fill orders, accordingly.

Direct hire placement revenue for the six months ended March 31, 2024 decreased by $5,120, or approximately 48%, over the six months ended March 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 the first quarter of fiscal 2023, following record highs in fiscal 2022, driven by post-COVID employment recovery trends at that time, and is down for the six months ended March 31, 2024 due to challenging economic conditions.

Similar contract and direct hire services performance challenges as those experienced by the Company since 2022 are also being experienced in the broader U.S. staffing industry.

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 six months ended March 31, 2024 decreased by approximately 23% to $40,178 compared to $52,400 for the six months ended March 31, 2023. The $12,222 overall decrease in cost of contract services is consistent with the decrease in revenues as discussed above.

21

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

Gross profit percentage by service:

(a) 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 (recorded at 100% gross margin) for the six-month periods ended March 31, 2024 and 2023 were approximately 31.5% and 34.5%, respectively.

In the professional contract services segment, the gross margin (excluding direct hire placement services) was approximately 25.3% for six-month period ended March 31, 2024 compared to approximately 25.4% for the six-month period ended March 31, 2023. The slight decrease in professional contract staffing services gross margin is due, in part, to increases in contractor pay and other employment costs associated with the recent rise in inflation resulting in some spread compression.

The Company’s industrial contract services gross margin for the six-month period ended March 31, 2024 was approximately 15.6% versus approximately 15.9% for the six-month period ended March 31, 2023. The decrease is driven by competition in the labor market served by the Company’s Industrial segment, as discussed above, requiring the Company offer more competitive rates and contractor pay to win business.

Selling, General and Administrative Expenses

Selling, general and administrative expenses 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.

The Company’s SG&A for the six-month period ended March 31, 2024 decreased by $3,901 as compared to the six-month period ended March 31, 2023. SG&A for the six-month period ended March 31, 2024, as a percentage of revenues, were approximately 35.1% compared to approximately 30.6% for the six-month period ended March 31, 2023. The increase in SG&A expenses as a percentage of revenues during the six-month period ended March 31, 2024, was primarily attributable to the declines in revenues in relation to the level of fixed SG&A expenses, including fixed personnel-related expenses, occupancy costs, job boards and applicant tracking systems, and to the presence of certain non-cash and/or non-operational and other expenses described below.

22

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

SG&A includes certain non-cash costs and 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 $1,001 and $110 for the six-month periods ended March 31, 2024 and 2023, respectively, and include mainly expenses associated with legal proceedings, former closed and consolidated locations, advisory fees, and personnel costs associated with eliminated positions.

Amortization and Depreciation Expense

Amortization expense was $1,439 for both six-month periods ended March 31, 2024 and 2023. Depreciation expense was $161 and $199 for the six months ended March 31, 2024, and 2023, respectively.

Income (Loss) from Operations

Income (loss) from operations was $(3,709) and $1,456 for the six-month periods ended March 31, 2024 and 2023, respectively. This decrease is consistent with the decrease in revenues, especially in direct hire placements, as discussed above.

Interest Expense

Interest expense was $138 and $146 for the six-month periods ended March 31, 2024 and 2023, respectively, and is mainly attributable to unused availability and administrative fees on the Company’s Facility.

Interest Income

Interest income earned was $369 and $133 for the six-month periods ended March 31, 2024 and 2023, respectively. Interest income is earned on cash balances held in the Company’s two brokerage accounts.

Provision for Income Taxes

The Company recognized income tax (benefit) expense of $(915) and $131 for the six-month periods ended March 31, 2024 and 2023, respectively. Our effective tax rate for the six-month period ended March 31, 2024 is higher than the statutory tax rate primarily due to the effect of federal tax credits and state and local taxes. Our effective tax rate for the six-month period ended March 31, 2023 are lower than the statutory tax rate primarily due to the effect of the change in valuation allowance on the net DTA position as the company maintained a full valuation allowance during that period..

Net Income (Loss)

The Company’s net income (loss) was $(2,563) and $1,312 for the six-month periods ended March 31, 2024 and 2023, respectively. The decrease of $3,875 is primarily the result of the decrease in revenues for the six months ended March 31, 2024 compared with the six months ended March 31, 2023, as explained in the preceding paragraphs.

23

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:

As of March 31, 2024, the Company had $21,200 of cash, which was a decrease of $1,271 from $22,471 as of September 30, 2023. As of March 31, 2024, the Company had working capital of $27,439 compared to $30,290 of working capital as of September 30, 2023. The decrease in working capital is mainly attributable to the use of cash to purchase treasury stock and the effects of lower business volume on other components of working capital during the six-months ended March 31, 2024. Cash flows provided by operating activities during the six-months ended March 31, 2023 included the second and final installment payment of deferred payroll taxes under the CARES Act from fiscal 2020 of $1,847.

The primary uses of cash for investing activities were for the acquisition of property and equipment, principally information technology equipment, during the six-month periods ended March 31, 2024 and 2023. Investing activities represent capital expenditures and did not include any major capital expenditures or capital improvements during either of the six-month periods ended March 31, 2024 and 2023.

The cash flows used in financing activities were for purchases of treasury stock during the six-months ended March 31, 2024, and payments made on finance leases during the six-month periods ended March 31, 2024 and 2023.

The Company had $8,165 in availability for borrowings under its Facility as of March 31, 2024. There were no outstanding borrowings on the Facility as of March 31, 2024, or September 30, 2023, 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 six-months ended March 31, 2024, 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 6,128 shares in aggregate (accounting for approximately 5.4% of our issued and outstanding common shares immediately prior to the program).

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 March 31, 2024, are approximately $1,561.

There are no minimum debt service principal payments due during the twelve-month period commencing after the close of business on March 31, 2024.

24

Table of Contents

(Amounts in thousands except per share data, unless otherwise stated)

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 March 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.

Disclosure Controls and Procedures

As of March 31, 2024, the Company’s management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("the Exchange Act"). Based on that evaluation, the Company's principal executive officer and its principal financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2024.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company's six-month period ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

25

Table of Contents

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (“2023 Form 10-K”) filed with the SEC on December 18, 2023. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. of Part I of our 2023 Form 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.