GEE Group Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. This is an annual report, not a standalone fourth-quarter report. GEE Group provides professional contract and direct-hire staffing, medical scribe services, and light-industrial staffing.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $83.074 million | $43.387 million |
| Operating income (loss) | $1.197 million | $(1.633) million |
| Net income (loss) | $1.173 million | $(4.662) million |
| Operating cash flow | $0.723 million | $(0.650) million |
| Investing cash flow | $(9.515) million | $(2.762) million |
| Financing cash flow | $5.388 million | $9.176 million |
- Revenue rose 91%, primarily reflecting acquisitions. Professional contract revenue was $54.249 million, industrial contract revenue $21.916 million, and direct-hire revenue $6.909 million.
- Combined gross margin was 28.4%, down from 30.3%. Professional contract margin declined (reported as 25.5% in the MD&A and 25.2% in the segment table); industrial contract margin improved to 13.1% from 12.3%.
- SG&A was $19.863 million, up from $13.789 million, largely due to acquired businesses. Interest expense rose to $1.602 million from $0.544 million.
- Net income included a $1.581 million gain from changes in contingent acquisition consideration. The filing attributes the change principally to a reduction in Access earnout consideration, partly offset by higher Paladin consideration.
- Cash was $2.528 million, down from $5.932 million. Working capital was negative $0.597 million, versus positive $5.636 million; the reported current ratio was approximately 96%.
- At year-end, short-term debt was $7.127 million. Subordinated debt totaled $6.266 million, including $1.285 million current and $4.981 million long-term. The ACF revolving facility limit was $10 million, with approximately $1.25 million available; its stated rate was 4.75%. The company reported compliance with covenants at September 30, 2016.
- Shareholders’ equity was $24.533 million. Goodwill was $18.590 million and net intangible assets were $11.094 million, substantially increased by acquisitions.
Material changes and management commentary
- Acquisitions expanded professional staffing: Access was acquired in October 2015 and Paladin in January 2016; Scribe and Agile had been acquired in fiscal 2015. The company said the deals expanded its IT staffing footprint and that it was investing in sales and recruiting capacity.
- Industrial revenue declined to $21.916 million from $26.499 million, which management attributed to losing a client with roughly $2 million in annual revenue and eliminating certain unprofitable work.
- Acquisition payments drove most investing outflows. Management stated it expected operating cash flow, equity and debt financing, and ACF availability to fund liquidity needs for the next 12 months.
- The ACF agreement was amended to increase the facility limit, lower its pricing, revise financial covenants, and extend the stated termination date to September 27, 2018. The filing’s covenant description uses “less than” for EBITDA thresholds, so the intended test is not clear from the text.
- No numerical operating guidance was provided. Management noted continued acquisition and growth plans, while acknowledging financing, integration, staffing, economic, competitive, data-security, and employment-related risks.
Risks, contingencies, and unusual items
- Liquidity is tight: negative working capital, acquisition-related debt and scheduled debt payments create refinancing and cash-generation risk. The company disclosed significant historical losses and negative operating cash flows.
- Access included a $3 million seller note, stock-price protection, and an earnout; Paladin consideration included contingent payments. These estimates depend on performance and other assumptions and may change.
- Goodwill and identifiable intangible assets are significant and rely on acquisition valuations and impairment assessments. No impairment was recorded in FY2016.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. It did not anticipate cash dividends.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. The auditor gave an unqualified opinion on the financial statements but did not audit or express an opinion on internal control effectiveness.
Important facts for investors to verify
- How much of revenue growth and earnings improvement came from acquisitions versus organic growth, and how acquired businesses perform after integration.
- Available borrowing capacity, covenant definitions and thresholds, debt service obligations, and the company’s ability to meet near-term liquidity needs.
- The sustainability of operating cash flow and margins, including the discrepancy between the two reported professional contract margin figures.
- The assumptions behind contingent consideration, goodwill and intangible valuations, and the stated debt and acquisition payment schedules.
- The precise meaning of the ACF EBITDA covenant language, which the filing describes as thresholds the company must maintain “less than.”