GEE Group Inc. (General Employment Enterprises, Inc.) — FY2012 Form 10-K
Business context and reporting period: The filing covers the fiscal year ended September 30, 2012, rather than a standalone fourth quarter. GEE Group provides professional, industrial and agricultural staffing, as well as direct-hire placement. It reported 22 branch offices in 11 states. Figures below are in U.S. dollars; financial statement amounts are generally in thousands.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $52.405 million | $37.189 million |
| Operating income (loss) | ($0.807 million) | $0.556 million |
| Net income (loss) | ($1.011 million) | $0.358 million |
| Basic and diluted earnings (loss) per share | ($0.05) | $0.02 |
| Net cash from (used in) operations | $0.095 million | ($2.290 million) |
| Cash and cash equivalents at year-end | $0.364 million | $0.314 million |
| Short-term debt at year-end | $2.404 million | $1.938 million |
- Revenue increased approximately 41%. Contract staffing revenue was $45.190 million; direct-hire placement revenue was $7.215 million. Management services generated no FY2012 revenue.
- Contract staffing gross profit was approximately $6.954 million, or 15.4% of contract revenue. The filing reports segment gross margins of 4.41% for agricultural, 17.15% for industrial and 19.38% for professional contract staffing. Consolidated operating and net margins were approximately (1.5%) and (1.9%), respectively.
- SG&A rose to $14.308 million from $8.841 million. The filing cites business growth, increased stock compensation and bad-debt expense, change-of-control compensation, asset impairment and one-time costs. Stock compensation expense was $0.422 million versus $0.008 million.
- Operating cash flow improved from a $2.290 million use to $0.095 million provided. Investing activities used $0.511 million and financing activities provided $0.466 million, mainly from increased short-term borrowing.
- Year-end working capital was approximately $0.530 million and the current ratio was approximately 1.1. Shareholders’ equity was $4.105 million, or approximately 37% of assets. The filing does not provide a clear consolidated gross-margin figure across all revenue streams.
Material changes versus the prior year
- Industrial contract revenue more than doubled to $28.206 million from $12.349 million, while agricultural revenue fell to $7.852 million from $12.412 million. Professional contract revenue rose to $9.132 million from $7.160 million; direct-hire placement rose to $7.215 million from $4.430 million.
- Management attributed the agricultural decline partly to losing a large customer. The company recorded $0.274 million of goodwill and intangible-asset impairment associated with the agricultural business.
- The revenue mix shifted toward industrial contract staffing: 54% of FY2012 revenue versus 33% in FY2011. Agricultural staffing declined from 34% to 15% of revenue.
- Despite higher revenue and improved operating cash flow, the company moved from FY2011 net income to a significant FY2012 net loss. FY2011 results included a $1.276 million earn-out liability reduction, partly offset by a $1.126 million impairment charge related to the discontinued RFFG management agreement.
Outlook, risks, contingencies and unusual items
- Liquidity and financing: Management said cash from operations and availability under the receivables facility should provide sufficient cash for the next 12 months. The Wells Fargo facility had $2.404 million outstanding and $0.596 million available at September 30, 2012; borrowings are subject to lender eligibility determinations and potential repayment demands. Amendments extended the facility to December 14, 2013, but specified events could permit Wells Fargo to shorten its term. The company reported covenant compliance at year-end.
- Profitability and customer risk: The company warned that it had experienced significant losses and might not become or remain profitable. Staffing demand, customer concentration, competition, recruiting and retaining qualified workers, and customers’ ability to pay are material risks. No customer exceeded 10% of FY2012 revenue; two customers represented approximately 17.4% and 11.5% in FY2011.
- Control change and litigation: LEED HR, controlled by CEO and Chairman Michael Schroering, was reported to beneficially own approximately 74% of shares. Civil actions challenge the validity of transactions underpinning his control; the company said the outcome could affect leadership and control. The filing also discloses a $229,000 Ohio workers’ compensation lien, fully accrued, which the company is contesting.
- Listing and reporting: The company received NYSE MKT notices for delinquent annual and quarterly reports. The exchange accepted a compliance plan and granted an extension to April 17, 2013; failure to regain compliance could result in delisting. The filing states the company was not current with required reports at the time of the notices.
- Governance and audit developments: Former CEO and Chairman Salvatore Zizza, former President Herbert Imhoff Jr. and former CFO Jarett Misch departed after year-end; Andrew Norstrud became CFO in March 2013 and Schroering became CEO and Chairman in December 2012. BDO was dismissed during the FY2012 audit after a disagreement over expanded procedures and open-ended fees and timing; Friedman was engaged and audited FY2012 and FY2011 statements. The auditor issued an unqualified opinion on the financial statements, but did not express an opinion on internal-control effectiveness. Management concluded controls were effective as of September 30, 2012.
- Other items: The company maintained a full valuation allowance against deferred tax assets and disclosed that ownership changes may limit use of federal and state net operating losses under Section 382. It also reported 1.747 million options outstanding and warned that shares underlying options under the 2011 plan had not been registered with the SEC or listed with NYSE MKT. No cash dividends were declared or anticipated in the near future.
- No specific revenue or earnings guidance was provided. Management expected SG&A not to grow faster than revenue as one-time costs abated and acquisition consolidation benefits were realized; this is an expectation, not formal quantified guidance.
Important facts for investors to verify
- Current profitability, operating cash generation, receivables quality and the actual availability and renewal terms of the Wells Fargo facility.
- Whether the NYSE MKT reporting and listing deficiencies were cured by the stated deadline, and the status of any subsequent listing notices.
- Developments and potential financial or governance effects of lawsuits challenging the control transactions, and confirmation of current beneficial ownership.
- Outcome of the Ohio workers’ compensation dispute and status of the RFFG acquisition earn-out liabilities and negotiations.
- Whether the option shares were registered and listed, and the potential dilution from outstanding options.
- Section 382 limitations on use of tax-loss carryforwards, and whether subsequent operating results support realization of deferred tax assets.
- The filing contains apparent date and other drafting inconsistencies, including an auditor-report reference to “September 31”; investors should consult the filed statements and subsequent SEC filings for clarification.