GEE Group Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the three months ended December 31, 2016. Unaudited financial amounts are in thousands of dollars unless otherwise noted. GEE Group provides professional, industrial, and medical-scribe staffing and placement services.
Financial performance and liquidity
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net revenue | $21,006 | $17,625 |
| Gross profit | $5,443 | $5,288 |
| Gross margin | 25.9% | 30.0% |
| Operating income (loss) | $477 | $(69) |
| Interest expense | $360 | $325 |
| Net income (loss) | $51 | $(394) |
| Operating cash flow | $(696) | $125 |
Revenue increased 19% year over year. Contract staffing generated $19,856, while direct-hire placement generated $1,150. Cost of contract services was $15,563; it represented 74% of contract revenue, compared with about 70% in the prior-year quarter. Diluted earnings per share were $0.01, versus a loss of $0.04.
At December 31, cash was $2,193, current assets were $16,362, and current liabilities were $16,442; working capital was negative $80, improved from negative $597 at September 30, 2016. Cash declined $335 during the quarter. Accounts receivable rose to $12,577 from $11,569.
Reported short-term debt was $8,649. Subordinated debt was $6,231 in total, including a $1,421 short-term portion and $4,810 long-term portion. The ACF revolving facility had a $10 million limit, with approximately $1,351 available at quarter-end; the reported rate was 4.75%. The company reported compliance with its financial and administrative covenants.
Material changes versus the prior-year quarter
- Professional contract revenue increased $3,876, while direct-hire revenue declined $476 and industrial contract revenue was approximately flat. Management attributed about $4,429 of professional contract revenue to the Paladin acquisition; it said lower professional contract revenue otherwise offset some of that increase.
- Consolidated gross margin fell to 25.9% from 30.0%. Management cited Paladin’s lower-margin business as a factor; professional contract gross margin fell to 23.9% from 29.6%, while industrial contract gross margin improved to 16.4% from 11.7%.
- Operating results improved to income from a loss, with lower acquisition, integration, and restructuring charges ($23 versus $446) and slightly lower SG&A. Interest expense increased $35.
- Operating cash flow moved from a $125 inflow to a $696 outflow, principally reflecting higher receivables and lower accounts payable and accrued compensation. Investing cash outflow was $67, versus $6,849 in the prior-year quarter, which included acquisition payments.
Outlook, risks, and unusual items
- The company does not provide forecasts. Management said it was stabilizing and expanding its sales strategy and investing in revenue growth, and did not expect the decline in permanent placement revenue to continue.
- Management stated it believed cash from operations, equity offerings, debt, and ACF availability would provide sufficient liquidity for the next 12 months. However, the company noted prior significant losses and negative operating cash flows.
- On January 20, 2017, after quarter-end, the company restructured Paladin earnout payments: $250 cash was paid and a $1,000 subordinated note was issued, bearing 5.5% interest for three years. At the company’s option, principal and interest may be paid in cash, shares, or a combination. The lender consented to the arrangement.
- Risks identified include staffing-service demand and competition, retaining qualified staff and management, and potential liability connected with business activities and contract employees. Borrowing availability and compliance with lender covenants are also important to liquidity.
- No material legal proceedings were reported as pending at December 31, 2016. Management concluded disclosure controls were effective; no material change in internal control was reported.
Important facts for investors to verify
- How much of revenue growth came from acquisitions versus underlying business trends, particularly in professional staffing.
- Whether gross-margin pressure persists and whether management’s expected stabilization in direct-hire placement revenue materializes.
- Whether receivables convert to cash and operating cash flow improves, given the quarter’s cash use and increased accounts receivable.
- Current ACF borrowing availability, covenant definitions and thresholds, and the company’s ongoing compliance.
- The accounting and payment implications of the Paladin earnout restructuring, including potential share settlement and dilution.
- The amount and timing of contingent consideration and subordinated-debt obligations; the filing reports $750 of contingent consideration at quarter-end but does not clearly explain the change from $1,750 at September 30, 2016.