GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016; comparative periods ended June 30, 2015. Financial statements are unaudited and amounts below are in millions unless stated otherwise. The company changed its name to GEE Group Inc. effective July 18, 2016.
Business context and financial performance
GEE Group provides contract staffing and direct-hire placement in professional and industrial markets. Results include acquired businesses Scribe, Agile, Access Data and Paladin. Accordingly, year-over-year revenue growth largely reflects acquisitions rather than solely organic growth.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue | $21.982 vs. $11.450; up 92% | $61.273 vs. $30.928; up 98% |
| Operating income (loss) | $0.522 vs. $0.207 | $0.713 vs. $(0.443) |
| Net income (loss) | $0.528 vs. $0.118 | $0.141 vs. $(3.334) |
| Basic earnings (loss) per share | $0.06 vs. $(0.02) | $0.02 vs. $(1.25) |
| Operating cash flow | Not separately presented | $0.667 vs. $(1.510) |
For the quarter, net income attributable to common shareholders was $0.528 million, compared with a $0.052 million loss in the prior-year quarter, which included a $0.170 million preferred-stock dividend. The nine-month common-shareholder result was income of $0.141 million versus a $3.541 million loss.
Margins, liquidity and debt
- Combined gross margin was 28.54% in the quarter, down from 31.85%; for nine months it was 28.72%, down from 30.52%. Management attributed the pressure chiefly to lower-margin Paladin business. Professional contract staffing margins were 26.10% in the quarter and 25.99% year to date, versus 34.28% and 32.93%, respectively, in 2015.
- Cash was $3.558 million at June 30, down from $5.932 million at September 30, 2015. Working capital was negative $1.495 million, compared with positive $5.636 million at fiscal year-end.
- Operating cash flow improved to $0.667 million. Investing used $9.455 million, primarily for Access and Paladin acquisitions; financing provided $6.414 million, including subordinated borrowing.
- Short-term debt was $8.012 million. Subordinated debt, net of discount, totaled $6.348 million, including $1.353 million current and $4.995 million long term. The subordinated notes include JAX Legacy debt bearing 10% cash interest and an Access seller note bearing 5.5% interest.
- The ACF revolving facility was increased to $10 million; approximately $0.894 million was available at June 30. It is secured by company assets, and the company reported covenant compliance. The facility was due to expire in September 2016; management expected to renew or replace it on similar or better terms.
Changes, outlook and notable items
- Professional contract revenue rose sharply with acquisitions; industrial contract revenue fell 22% in the quarter and 18% year to date. Management cited the loss of a client with about $2 million in annual revenue and the exit from certain unprofitable business. Direct-hire revenue fell 14% in the quarter but increased 10% year to date.
- Acquisition-related intangible amortization and interest expense increased substantially. Nine-month interest expense was $1.152 million versus $0.406 million.
- Changes in contingent acquisition consideration benefited nine-month results by a net $0.581 million: a $1.000 million reduction in estimated Access earn-out liability was partly offset by a $0.375 million increase for Paladin and a $0.044 million Access share-guarantee adjustment. The quarter included a net $0.425 million benefit, including an $0.800 million Access gain offset by the Paladin charge.
- Access consideration includes seller-note payments and potential earn-outs; Paladin also has contingent consideration tied to performance. These obligations, together with working-capital pressure and the revolving facility’s near-term expiration, are relevant liquidity considerations.
- Management stated it does not provide financial forecasts, but believed available operating cash flow, financing and the ACF facility would support liquidity for the next 12 months. It continued to pursue cost reductions, sales-force investment and strategic acquisitions. Risks include demand and competitive pressures, recruiting and retaining qualified personnel, and potential liabilities related to staffing activities.
- No material legal proceedings were reported. Management concluded disclosure controls were effective, with no material changes to internal control over financial reporting during the quarter. After quarter-end, CEO Derek Dewan entered a five-year employment agreement with a $300,000 starting annual salary and eligibility for a performance-based bonus.
Important facts for investors to verify
- How much of revenue growth and reported profitability is sustainable and attributable to organic operations rather than acquired businesses and contingent-consideration revaluations.
- The renewal or replacement, terms and availability of the ACF credit facility, and ongoing compliance with its financial covenants.
- Cash requirements and payment timing for seller notes, earn-outs, acquisition liabilities and other current obligations, particularly given negative working capital.
- Whether gross margins recover, especially in professional contract staffing, and whether management can offset the lost industrial client and improve organic sales.
- The final purchase accounting, contingent consideration and performance outcomes for Access and Paladin, along with the recoverability of acquisition-related goodwill and intangible assets.