GEE Group Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017; this is an annual filing, not a report limited to Q4. The company provides professional, industrial and medical-related staffing and placement services. It completed its acquisition of SNI Companies on April 3, 2017, substantially expanding its professional staffing business.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $134.978 million | $83.074 million |
| Gross profit / combined gross margin | $44.975 million / 33.3% | $23.629 million / 28.4% |
| Operating income (loss) | $(1.401) million | $1.197 million |
| Net income (loss) | $(2.372) million | $1.173 million |
| Diluted earnings (loss) per share | $(0.25) | $0.12 |
| Cash provided by operations | $0.222 million | $0.723 million |
| Cash at year-end | $2.785 million | $2.528 million |
- Revenue rose 62%, with SNI contributing approximately $40.083 million of professional contract revenue and $9.627 million of direct-hire revenue after acquisition. Industrial contract revenue increased to $24.851 million from $21.916 million; professional contract revenue rose to $95.396 million from $54.249 million; direct-hire revenue rose to $14.731 million from $6.909 million.
- Gross margin improvement reflected higher direct-hire mix and improved margins in both industrial and professional contract staffing. SG&A increased to $39.498 million from $19.863 million, primarily due to SNI. Acquisition, integration and restructuring charges rose to $2.925 million from $0.702 million.
- Interest expense increased to $5.995 million from $1.602 million, and the company recorded a $0.994 million loss on extinguishment of debt. A $6.018 million income-tax benefit reduced the pretax loss of $8.390 million; the filing identifies the benefit as substantially noncash.
- Investing activities used $25.606 million, principally for acquisitions; financing activities provided $25.641 million. The company reported working capital of $1.588 million versus negative $0.597 million a year earlier, and a current ratio of approximately 106%.
- At September 30, 2017, the balance sheet reported $7.904 million drawn on the revolver, $45.451 million of term loans net of discount (including the current portion), and $18.910 million of subordinated debt. Total assets were $141.815 million; shareholders’ equity was $24.063 million. Series B preferred stock was classified as mezzanine equity, with a stated liquidation value of approximately $28.8 million.
Material changes and transaction financing
- The SNI acquisition increased the company’s scale and footprint. The company recorded $58.003 million of goodwill from SNI; year-end goodwill totaled $76.593 million and net intangible assets totaled $35.049 million. The purchase-price allocation was not final at year-end.
- The company entered a secured credit agreement with PNC and MGG in March 2017, providing for a $48.750 million term loan and revolving credit of up to $25 million, subject to a borrowing base. The term loan matures March 31, 2021; the credit facility is secured by company assets. The reported rate was approximately 13% at September 30, 2017.
- SNI consideration included $12.5 million of 9.5% convertible subordinated notes and approximately 5.926 million Series B convertible preferred shares, in addition to cash consideration. The preferred shares are convertible one-for-one at an initial $4.86 conversion price and have a $4.86-per-share liquidation preference. The notes mature in October 2021 and are convertible at $5.83 per share.
- After year-end, October and November 2017 credit amendments changed repayment terms and financial covenants. The November amendment called for commercially reasonable efforts to prepay $10 million of advances, contingent on specified financing or cash-flow sources, and imposed a $364,140 amendment fee. No financial covenant test applied at September 30 under the amendment; management expected compliance at the first subsequent test date.
Outlook, risks and other notable items
- No specific revenue or earnings guidance is provided. Management said available cash and revolver capacity were expected to fund working-capital requirements for the next 12 months.
- Management cited cost reduction, back-office consolidation, and expanding the national sales force as priorities. The company operated 47 branch offices in 16 states and had approximately 475 regular employees; contract staffing levels varied from about 2,515 to 4,245.
- Key risks include recurring losses and historically negative operating cash flow, substantial debt and high interest costs, tight liquidity, covenant compliance and refinancing needs, acquisition integration and execution, staffing-market competition, and the ability to recruit and retain qualified workers. The company also disclosed potential limits on use of tax-loss carryforwards under Section 382; it had not completed an ownership-change study.
- Future minimum lease payments were approximately $7.079 million. The company reported no material legal proceedings and no dividends paid or anticipated in the near future.
- The auditor gave an unmodified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective, but excluded SNI from its internal-control assessment because it was acquired during the year; the auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Available borrowing capacity and cash forecasts, debt service requirements, the amended covenant thresholds, compliance at subsequent testing dates, and the conditional $10 million prepayment commitment.
- The SNI transaction’s final purchase-price allocation and working-capital adjustment. The filing presents differing cash-consideration figures in its transaction discussion; the final amounts should be confirmed in the merger documents and subsequent filings.
- Whether acquired goodwill and intangibles can be supported by operating results, and whether integration produces the anticipated revenue, margin and cost benefits.
- The sustainability and cash implications of the $6.018 million tax benefit, realization of tax attributes, and any Section 382 ownership-change limitations.
- Subsequent share issuances, conversions of preferred stock and convertible notes, and potential dilution from outstanding options and warrants.