Good morning, and welcome to the GEE Group Fiscal 2023 Third Quarter Ended June 30, 2023 Earnings and Update Webcast Conference Call. I'm Derek Dewan, the Chairman and Chief Executive Officer of GEE Group, and we will be hosting today's call. Joining me as a co-presenter is Kim Thorpe, our Senior Vice President and Chief Financial Officer. Thank you all for joining us today. It is our pleasure to share with you GEE Group's results for the 2023 fiscal third quarter ended June 30, 2023. And provide you with our outlook for the remainder of the 2023 fiscal year and the foreseeable future. Some comments Kim and I will make today may be considered forward-looking, including predictions, estimates, expectations and other statements about our future performance. These represent our current judgments of what the future holds and are subject to risks and uncertainties that actual results may differ materially from our forward-looking statements. These risks and uncertainties are described below under the caption forward-looking statements safe harbor and in Monday's earnings press release and in our most recent 10-Q, 10-K and other SEC filings under the captions Cautionary Statement regarding forward-looking statements and forward-looking statements, safe harbor. We assume no obligation to update statements made on today's call. During this presentation, we also will talk about some non-GAAP financial measures. Reconciliations and explanations of the non-GAAP financial measures we will address today are included in the earnings press release. Our presentation of financial amounts, and related items including growth rates, based upon rounded amounts, for purposes of this call and all amounts, percentages and related items presented are approximations, accordingly. For your convenience, our prepared remarks for today's call are available in the Investor Center on our website, www.geegroup.com. We once again achieved very good results in the fiscal 2023…

Thank you, Derek. And good morning. Our consolidated revenues for the 3 and 9 months ended June 30, 2023, were $38.2 million and $118.2 million which were lower overall in comparison with comparable fiscal 2022 period. The lower fiscal 2023 revenues were mainly attributable to 2022's record high performance and direct hire placement revenues. Despite this and the headwinds we've faced so far in fiscal 2023, there are some notable positive results, including substantive growth in our professional contract services businesses led by our IT brands. Our financial performance so far in fiscal 2023 also is on par and better in several respects than that of other publicly traded staffing companies and we remain reasonably optimistic about performance for the remainder of the fiscal year. Professional and industrial contract staffing services for fiscal 2023’s third quarter were $33 million, which is near level with the comparable fiscal 2022’s third quarter contract staffing revenue services. Professional contract staffing or professional contract services revenue, our largest contract services segment represents 90% of all of our contract services revenue and 78% of our consolidated revenue and increased $800,000 or 3% quarter-over-quarter. The bright spots in these comparisons were that our professional finance, accounting and office and IT contract services revenues both grew in the quarter with IT revenues achieving 9% growth year-to-date. IT contract services has now grown to 59% of all of our professional services contract revenue and IT direct hire and contract services revenue combined represented 49% of consolidated revenue, nearly 50%. Direct higher placement revenue for the fiscal 2023 third quarter was $5.2 million compared with the fiscal 2022 third quarter of $8 million. As Derek and I mentioned earlier, fiscal 2022 was a record high year for direct-hire placement services. And in fact, our June 2022 quarter set the…

Thank you, Kim. The fiscal 2023 third quarter marked our eighth consecutive quarter of strong operating performance since deleveraging the company, having consistently achieved higher margins and free cash flow for the last 8 quarters we continue to build a positive track record as well as a positive momentum for the future. At June 30, 2023, the company had no debt and over $20.7 million in cash with $12.4 million in availability under our bank ABL credit facility. GEE Group's prospects today for future profitable growth continue to expand and improve despite macroeconomic headwinds and unforeseen events [Technical Difficulty]

Derek, I'll take it over from here. I think we lost you. What Derek was saying is despite macroeconomic headwinds and unforeseen events, we will continue to work hard for the benefit of our shareholders and expect to deliver solid results for fiscal 2023 and beyond. And significantly increase shareholder value. Before we pause to take your questions, I want to again say for Derek and I, a special thanks to our wonderful people, for their professionalism, hard work and dedication. As we said, without them, we could not have accomplished all the good things we shared with you today. Now Derek and I would be happy to answer your questions. Please just ask one question and rejoin the queue with follow-ups as needed. If there's time, we'll come back to you for additional questions. And I'm going to give Derek just a minute to see if he can come back on the line before I begin answering questions.

Okay. In the interest of time, we have one question in the queue. Which is, can you explain the structure of the business are the professional contract services and direct hire segments run separately? Or do they share staffing and/or customers? Thank you. That's a good question. The businesses, the products or the services, if you will, are very different. All of our brands with a couple of exceptions, light industrial being one and scrub our medical have both direct hire services and professional contract businesses. The customers can overlap, but they're not necessarily the same customers. I'm not sure of the proportion with which they ever left, but I would guess that in most cases, they are separate, but that's a guess. But thank you for the question. I have another question in relation to 2019 and 2022, what are you guys expecting for the Q4 '23 and full year of 2024. I'm going to presume that the question is, how do we think we're ultimately coming out on a trend from pre-COVID to post-COVID? 2022, again, was a very record year. I think there was some significant catch-up in 2022 as we continue in 2021 to kind of slowly come out of the pandemic, there were variants of COVID and things like that. And there were also new paradigms in the workplace that were being assimilated. And so in 2022, I believe there was some catch-up, and there was a lot more direct hire business in that year. And I wish Derek we're here to share the points. But

I'm here. I lost the connection for a second, but.

Okay. Derek, I'm looking at a question, and I was just answering the question in relation to 2019 and 2022. What you guys expecting for Q4 '23 and 2024. And I was giving some color to that. I think a lot of it will depend on how we weather through the uncertainties that are still out there, I mean inflation, although it is there are different points of view as to how much under control it's becoming and when. And there are different points of view about a recession or a potential recession. So all this will have a bearing on it. But I continue to think that will perform very well relative to our industry peers. Derek, do you want to add to that?

Yes. I'll add something. The outlook for the macroeconomic environment is it's choppy in 2023. We're seeing some ups and downs. Clearly, permanent hires reached a peak in 2022, but we see strength in 2023 relative to the non 2022 years, as you suggested. The outlook for the summer of 2024 is anticipated to be strong versus any recessionary trends that we're in now. I would say that it's a bit choppy on permanent hires now. Our contract business is doing quite well and holding up. Our pricing power is pretty good and our profitability will continue to be good. Cash flow is great. And I think that you should expect good things going forward as we do. The next question, Kim, was pretty much covering pricing. And I will -- you want to talk about that because you were in

Yes. I'm glad. We recognize actually about a year ago that -- well, more than a year ago, that inflation was occurring, and we began to see increases in wages not only in our core staff that operate the business, but also in our temporary staff. In the case of our temporary staff, there is some built-in hedging in the way we price to begin with in the structure because we start with the rate per hour for our temporary contractors or workers and then we had a spread to that. Be that as of May, we began in earnest over a year ago, directing our businesses to go to our clients and seek price increases. And fast-forwarding from there, I would tell you over the last 12 months or so, we've achieved low to high in some case, single-digit rate increases. And then with respect to our industrial business, in some cases, we've gotten even higher double-digit rate increases. So and going forward, you probably will see more robust attention to rates while we watch inflation and while we remain mindful of it.

Okay. The next question is a question about the scope of review for strategic alternatives that the Board of Directors decided to take a look at. The concept there is to get an investment bank or other consultant to just take a look at all the different alternatives in corporate structure, acquisitions, buybacks and so forth to see if we're maximizing utilization of all the tools we have to enhance shareholder value. So it's a good healthy check. We'll call it like a physical checkup, and we expect to get some good benefit out of that. The next item is, can you expand on the strategic review? Again, we'll let you know more after that happens. Shares trading over $1.50 before the COVID with over $108 million in debt that you paid off over two years, can you provide a breakdown of the professional contract services revenue, IT, F&A and other, how that evolved over the past two years? Kim, why don't you address the -- both the capital structure and the different verticals and how they look right now.

Yes. All right. Thanks. The reason the shares are trading where they are down as opposed to $1.50 is that before COVID, we had 18 million shares outstanding. And the follow-on offering that we completed to raise the funds to pay off or the remainder of the $108 million debt that you referred to, we sold 95 -- almost 96 million shares. So that accounts for the dilution between the $1.50 and the 50-some-odd cents and trading range that it's been in recently in addition to the other market forces that are out there at work on the entire staffing industry. As far as the breakdown of professional contract services revenue, IT, F&A and other, as I mentioned in the script, IT is 59% of professional F&A is probably the second largest. And those two together account for about 85% to 90% the other portions being medical, engineering and some other professional specialties, smaller specialties. How these evolved over the past two to three years, very simply, IT is overtaking. It's spot and accelerating and becoming a bigger portion of all our professional services revenue and it's mostly because of its growth. In fact, during the COVID pandemic, one of our IT brands actually grew which was a total surprise, but it turned out that because of all the -- not layoffs, if you will, but all the office locations closing during the pandemic and sending people to work from home, it actually generated more business for our IT, so at least one of our IT brands. The other ones tended to lose some revenues during the pandemic but IT is a coveted vertical and professional staffing. It tends to fetch the highest multiples in valuation terms, and it tends to be not as sensitive to changes in economic conditions because IT is becoming so much -- just in a nutshell, has begun so much of a factor in our total infrastructure. So anyway, Derek, do you want to add anything to that or?

No. I think you did great. Thank you. The next question is relating to your client industry verticals. And we have -- we're fortunate that we have diversity in our clientele. Four of the big segments of our clientele's industry group would fit into telecom, tech, manufacturing and financial services. And within those entities, we staff everything from finance professionals, controllers, account -- other accountants, analysts and so forth. We have a banking specialty group doing permanent hires. We also have a big presence in the tech departments for placing IT workers across all the verticals. So we're very diverse, and we're not concentrated heavily too much on one particular industry segment, and that helps a lot when you have ups and downs within a segment. So we feel fortunate in that regard and our client penetration rate is pretty good. And we continue to get more business from existing clients as well as new clients. So we're very fortunate in that regard. Okay. The next question, can you elaborate on the agreement with Red Oak? Red Oak is our largest shareholder and representing our largest shareholder is David Sandberg, who joined our Board. We put that information out publicly. Mr. Sandberg is very experienced and will add value to the organization and being our largest shareholder it's a great representation for the shareholder base. The agreement is public. So feel free to read that. There was an 8-K filed with it. Next question, would a sale or private going private transaction take place? That's a great question on the table. So the answer to that is there's always people that propose alternative structures M&A, and I've been involved in that over a period of time, we have acquired 5 companies, and we can continue that path. Our capital allocation…

25% is that I believe.

That's correct. You can look at 10b-18 for reference on that. So in any event, we are buying the maximum at this time, and we'll continue to do so as our free cash flow continues to be very good and we have a lot of cash. So we put the 10b5-1 in so that we wouldn't be limited with blackout periods pretty much or if we have material nonpublic information, it would preclude us from buying back shares. One of the things that the prior question was your stock price was higher, you did an equity offering you paid off debt. The buyback makes a whole lot of sense in mitigating the dilution from issuing a lot of the shares. Kim, do you want to elaborate on that?

Yes. I'm sorry, say repeat the question again?

Just on mitigating the dilution with the buyback. We issued a lot of shares

Yes, we did. We issued almost 96 million shares in April of 2021. We bought back so far 1.5 million shares. We have a long way to go. We are allowed in certain cases, to acquire blocks, but there are special rules around that as well. But we -- over time, we've now positioned the company so that we're generating cash. We're able to maintain significant cash and continue to support the buyback program. And as time goes on, again, and I'm going to level set the price, let's say, where we are now, if we were to stay there, which we don't expect to do or don't want to do. But if we did, eventually, we'll buy back enough stock so that the price per share has to go up because of -- or because of the accretive nature of stock repurchases. So we actually are -- with the approval of the $20 million program, and of course, the Board at the end of December this year can reinstitute it or re-up it or whatever, which we would do under these circumstances almost certainly creates a process where in addition to earnings, we will increase shareholder value by reducing the number of outstanding shares.

Thanks, Kim. Another question that we had are tuck-in acquisitions basically on the horizon. Tuck-in acquisitions make a lot of sense. They're easy to integrate and can add immediate value to our company in terms of revenue, EBITDA and also brings talent to the organization that we can use to help serve existing clients as well as the clients that come in with the acquisition. So yes, tuck-in acquisitions make sense for us. We anticipate that we will do those. And they're not in lieu of the capability of buying back stock, they're in addition to. Fortunately, we have enough cash and cash flow to do both. The next question that we have is, your net operating loss carryforwards. Kim, do you want to comment on that? What are the operating…?

Let me come back to get you the actual number. It's disclosed in the last 10-K, and I can guesstimate it from there, but I think it's about $18 million -- and I don't have a figure at hand, but I'll find it and report in just a second.

Okay. Great. Another question is, are your shares trading at 4x the EBITDA run rate right now, net of the cash? Yes. I think that's the 4x run rate. I mean, it represents the undervalue that we're at, consider that normalized EBITDA. We've reached some high numbers in the past in the $12 million to $14 million range. So I think you're right on track with your calculation of where we're at today. And what it shows is there's tremendous upside. And we anticipate that upside occurring as things get better economically and also with actions that we're taking internally on pricing, cost reduction, cost control, new business development and so forth and also bringing in strategic acquisitions. Buybacks don't increase EBITDA, but they do increase earnings per share so -- and they tightened the share count as well. So the combination of all of the different programs will add value to us going forward and increase shareholder -- how many shares could you buy back a day? We got that.

Yes. Derek, on the NOLs, we had $17.7 million on a federal tax basis at the end of last year. So if you just kind of mark that off against -- and this is very rough, against this year's year-to-date pretax income, it leaves you around $12 million or $13 million or something. But again, there are other adjustments to that. So I don't have an exact figure, but they're still significant. Hello? Derek, are you there? Okay. I'm going to keep going. There is a comment. Congratulations on net income. It seems there's a $6.7 million gain on taxes. Please elaborate. We talked about this in the call. And long story short, there is a -- we've been required since inception to carry 100% allowance against the deferred tax asset the deferred tax asset exists in part because of our NOLs and some other timing differences, including notably the fact that we amortize intangibles and goodwill for tax purposes in some cases that we don't for book. Having said all that, the key to being able to recognize your deferred tax assets is being able to demonstrate more positive than negative evidence to overcome the more likely than not test the biggest key aspect of that is being able to demonstrate consistent profitability in the standard rule of thumb as 12 consecutive quarters of consistent profitability, which we've now achieved through June of 2023. That, in turn, allowed us to reverse a lion's share that most of the asset, the remainder of the asset, by the way, a small portion, about 10% of this will reverse in the fourth quarter because it becomes part of the overall calculation. How much cash are you guys targeting to use for buybacks on a quarterly basis given the stock remains depressed? Our…

Yes, I'm here. I've been here. You're doing a great job.

All right.

If you read the cooperation agreement closely, one of the things in the governance arena for public companies is to make sure you have board members that are independent and that you don't have too much concentration of a director in particular, and that there's objectivity on the board from a governance standpoint. So one of the recommendations that Red Oak has made was to separate previously to separate the CEO and Chairman's position. An alternative to that, was to appoint a Lead Independent Director. And if you see the agreement -- the cooperation agreement, a Lead Independent Director has been appointed. It's also in the press release, and it's Tom Vetrano outside Director and has been on the Board since 2020. And we felt that was a good governance move. And it also satisfied Red Oak as well. And again, suggestions made by any shareholder will be looked at and, if appropriate, action will be taking. We felt good about that decision, and we also feel good about the cooperation agreement that was entered into. And we're back to business, all working together towards a common goal of getting our share price up. And I like the question about a $2 price target. That's pretty good. I set my sights even higher personally, but we have to take it a step at a time. So can this company be valued appropriately at a $2 price target? Of course. We have to deliver certain results. We need to have some good macroeconomic conditions and some momentum as well. All of which will happen. I've been through several cycles myself, both with this company and a predecessor company and was able to deliver very, very good shareholder value. So I thank you all for the comments and also the observations in device. One other question, and then we'll call it a day about -- let's see, nominal upside since the stock is so what is the target price, 1.2 or 1.4 or 2? The target price, at least by the analyst community is $2 at this point. So we have to take each step at a time. It wasn't too long ago that we were over $1 per share and the size of $1.80 pre-equity offering. So all these are stepping stones towards getting to a pretty high number. And rest assured, we won't be satisfied until we get to much higher targeted share prices, increasing our market cap and delivering value for all the shareholders. So we're very optimistic. We appreciate your investment. We appreciate you being part of our team, to shareholders or interested parties we look forward to good things going forward, and I thank you. And that will conclude the call for today.