GEE Group Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless noted. Amounts are in thousands of dollars, except per-share data. The company provides professional direct-hire and contract staffing and light-industrial staffing. Its agricultural division was discontinued in 2013.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net revenue | $10,807 | $13,017 |
| Operating income (loss) | $(107) | $272 |
| Income (loss) from continuing operations | $(227) | $202 |
| Net income (loss) | $(227) | $186 |
| Basic and diluted loss per share | $(0.01) | Income per share $0.01 |
| Cash used in operating activities | $(525) | $(721) |
| Cash used in investing activities | $(126) | $(87) |
| Cash provided by financing activities | $364 | $691 |
- Combined gross margin was 29.5%, down from 31.8%. Contract staffing cost was 70% of contract revenue, versus approximately 68% a year earlier.
- At December 31, cash was $74; total assets were $10,218 and shareholders’ equity was $2,388. Working capital was negative $945, compared with negative $781 at September 30, 2013.
- Short-term debt was $4,110, up from $3,734 at September 30. The Keltic revolving facility is secured by company assets and has a $6 million commitment. Reported availability was about $38 at December 31; management reported approximately $500 of availability as of January 30, 2014.
Changes from the prior comparable period
- Revenue fell $2,210, or 17%. Management attributed much of the comparison to elevated prior-year demand associated with Hurricane Sandy recovery work.
- Direct-hire revenue declined 19% to $1,738; professional contract revenue declined 12% to $2,176; industrial contract revenue declined 18% to $6,893.
- SG&A decreased 15% to $3,221, primarily due to lower sales and cost-reduction efforts. Despite lower expenses, the company moved from operating income to an operating loss.
- Interest expense increased $50 to $120, reflecting higher borrowings and interest associated with extended earn-out payments. The agricultural division reported no revenue or loss in the quarter, compared with $1,626 revenue and a $16 loss in the prior-year quarter.
Outlook, risks and unusual items
- The company says it does not provide financial forecasts. Management believes future operating cash flow and Keltic availability will meet liquidity needs for the next 12 months, but this depends on financing remaining available.
- The filing reports continuing noncompliance with Keltic covenants and ongoing negotiations for waivers or amendments. Keltic continued lending without changing terms as of the report date, but may terminate lending, raise rates, or demand repayment. Failure to reach acceptable terms could require alternative financing, if available.
- Keltic’s EBITDA covenant requires at least $370 for the quarter ended December 31, 2013, with higher thresholds for subsequent periods. The filing does not clearly identify which covenant(s) were breached or provide the calculated covenant EBITDA.
- Management expects gross margin pressure as workers’ compensation and Affordable Care Act costs rise; it is seeking to increase billing rates but expects it may not preserve prior margins. No quantitative earnings or revenue guidance is provided.
- The company expects to collect $234 of receivables from discontinued agricultural operations during 2014; failure to collect could result in additional expense of that amount.
- Other commitments include approximately $295 of current liabilities for acquisition-related cash consideration, $1,875 of future minimum lease payments, and a $125 accrued termination fee for the former Oak Brook headquarters. The filing also describes a vehicle sale-leaseback with an approximately 23% rate and $153 of remaining payments.
- Subsequent events: in January 2014 the board approved about 1.4 million options with exercise prices of $0.20–$0.25; the company also entered a consulting agreement providing for 100,000 shares earned over six months. No material legal proceedings were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Keltic grants covenant waivers or amendments, the precise default status, and current borrowing availability and repayment terms.
- Whether operating cash flow improves enough to address negative working capital and very low cash balances.
- Whether revenue stabilizes and management can offset staffing-cost inflation without further margin deterioration.
- Collection of the $234 discontinued-operation receivable and payment timing for acquisition, lease, and other obligations.
- The effect of subsequent option and share grants on dilution and the company’s capital needs.