Business context and reporting period
GEE Group Inc. filed this Form 10-K for the fiscal year ended September 30, 2015. The company provides industrial and professional contract staffing and direct-hire placement services. Fiscal 2015 included the acquisitions of Scribe Solutions (April) and Agile Resources (July); Access Data was acquired after year-end, on October 4, 2015. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $43.387 million | $39.811 million |
| Operating loss | $1.633 million | $0.641 million |
| Net loss | $4.662 million | $1.355 million |
| Loss per share, basic and diluted | $1.14 | $0.56 |
| Cash from continuing operations | Used: $0.650 million | Provided: $0.308 million |
| Cash used in investing | $2.762 million | $0.371 million |
| Cash from/(used in) financing | Provided: $9.176 million | Used: $0.108 million |
Revenue rose 9%. Industrial contract revenue was $26.499 million (up from $25.031 million); professional contract revenue was $10.223 million (up from $7.692 million); direct-hire revenue was $6.665 million (down from $7.088 million). Acquisitions contributed approximately $2.087 million of Scribe revenue and $1.277 million of Agile professional contract revenue, plus $0.273 million of Agile direct-hire revenue.
Combined gross margin declined to 30.3% from 33.6%. Industrial contract margin fell to 12.3% from 15.6%; professional contract margin was 31.5% versus 31.1%. The filing attributes contract-margin changes to the prior-year Ohio workers’ compensation rebate, changes in workers’ compensation rates, and a greater contribution from professional services. Operating loss widened, with higher amortization and acquisition/integration costs also weighing on results. A $2.251 million derivative fair-value loss and $0.234 million debt-extinguishment loss contributed to the larger net loss. No income tax benefit was recorded in 2015 because realization of future tax benefits was not considered sufficiently assured.
At September 30, 2015, cash was $5.932 million, working capital was $5.636 million (versus negative $0.909 million in 2014), and the current ratio was approximately 1.77. Total assets were $26.874 million and shareholders’ equity $19.237 million. Short-term debt was $2.850 million; the secured ACF revolving facility had a $6 million limit, with approximately $1.390 million available. The company reported compliance with its EBITDA and other covenants at year-end, or receipt of applicable waivers. Operating cash flow was negative despite the year’s financing inflows, including equity offerings.
Material changes, outlook and risks
- Management’s strategy was to reduce costs and pursue acquisitions to improve profitability and cash flow. Management said it believed available cash, operating cash flow, equity proceeds, debt and ACF availability would fund liquidity needs for the next 12 months; this is an expectation, not assurance of profitability.
- In April 2015, GEE acquired Scribe for 640,000 Series A preferred shares and warrants; the transaction was valued at approximately $7.7 million. In July, it acquired Agile for an estimated accounting value of approximately $3.5 million, including cash, 120,192 common shares and contingent consideration. Acquisition accounting and purchase-price allocations were estimates.
- After year-end, the company issued a $4.185 million subordinated note bearing 10% cash interest, with an additional 4% interest component paid in advance in shares. It also acquired Access Data. The filing’s descriptions of Access Data consideration vary: the narrative cites approximately $15 million, while subsequent-event details describe $13 million plus working-capital adjustments and up to $2 million earnout, with cash, shares and a $3 million seller note. Verify final consideration and funding terms.
- After year-end, a 1-for-10 reverse stock split took effect and authorized common shares increased to 200 million. The filing reports 8.833 million common shares outstanding at fiscal year-end and 9.256 million as of December 29, 2015.
- Key risks include recurring operating losses and negative operating cash flow, dependence on external financing and lender covenants, acquisition integration and valuation risks, intense competition, recruiting and retaining qualified staff, employment-related claims, data security and privacy, and potentially volatile, illiquid common-stock trading. The filing states no customer exceeded 10% of revenue and no material legal proceedings were pending at year-end.
- The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of September 30, 2015; the auditor was not engaged to express an opinion on internal controls.
Important facts for investors to verify
- Whether the company can sustain liquidity and meet ACF borrowing-base and future EBITDA covenants given continuing losses and negative operating cash flow.
- Final Access Data purchase price, working-capital adjustment, earnout, seller-note schedule, and the terms and cash cost of the post-year-end subordinated financing.
- Whether Scribe and Agile meet the expected revenue, margin and integration objectives, and the final fair-value allocations and related amortization.
- The full impact of equity issuance, preferred-stock conversions, warrants, options and the reverse split on diluted ownership and future share count.
- The filing contains differing descriptions of certain amounts and periods, including Access Data consideration and a 2014 operating-cash-flow figure; reconcile these against the audited statements and subsequent filings.