Business context and reporting period
GEE Group Inc. provides direct-hire placement and temporary staffing in professional, agricultural, and light-industrial markets, and previously provided management services. The filing covers the quarter ended June 30, 2012, the company’s fiscal 2012 third quarter, with nine-month results compared with the periods ended June 30, 2011. This differs from the request metadata’s “2011 Q3” label.
Revenue growth reflected the Ashley Ellis acquisition and the ramp-up of two industrial staffing businesses. GEE operated 19 branch offices in 11 states.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue, 2012 | $13.860 million | $39.342 million |
| Net revenue, 2011 | $11.717 million | $25.592 million |
| Operating income (loss), 2012 | $128,000 | ($257,000) |
| Operating income, 2011 | $299,000 | $248,000 |
| Net income (loss), 2012 | $79,000 | ($413,000) |
| Net income, 2011 | $222,000 | $133,000 |
- Quarterly revenue rose 18.3%; nine-month revenue increased 53.7%. Nine-month diluted loss per share was $0.02, compared with diluted earnings per share of $0.01 in 2011.
- For the quarter, contract-service costs were 83.4% of related revenue versus 88.4% a year earlier; for nine months, 84.7% versus 87.2%. Agricultural staffing remained low-margin: its disclosed gross margin was 4.3% for the quarter and 4.5% for nine months. Professional-services margins improved, while agricultural revenue fell after the loss of a major customer.
- Nine-month cash from operations was $200,000, versus cash used of $1.575 million in 2011. Investing used $445,000 and financing provided $531,000. Cash increased by $286,000 to $600,000.
- At June 30, current assets were $7.622 million and current liabilities $6.904 million, leaving working capital of $718,000. Short-term borrowings were $2.519 million; the Wells Fargo receivables facility had $304,000 of borrowing availability. Long-term obligations were $530,000. The company reported compliance with facility covenants.
- Total assets were $11.841 million and shareholders’ equity was $4.407 million. Interest expense was $49,000 for the quarter and $156,000 for nine months. No income-tax provision was recorded, attributed to tax-loss carryforwards and historical losses.
Material changes and management commentary
- Quarterly placement revenue increased 54.6% and industrial contract revenue 167.5%; agricultural contract revenue declined 55.7%. For nine months, placement revenue grew 72.7% and industrial revenue grew substantially, while agricultural revenue fell 38.0% and management-services revenue ended.
- Management attributed higher selling, general and administrative expenses—up 59.8% for the quarter and 74.9% for nine months—to acquired and newly started operations, additional branches, and compensation-policy changes. It said professional-services growth had not yet fully offset the increased compensation costs.
- The company does not provide financial forecasts. Management believed the receivables facility would support operations and working-capital needs, but warned that reduced lender advances or underperformance by acquired businesses could create liquidity constraints.
Risks, contingencies and unusual items
- A major agricultural customer was lost in January 2012. The filing identifies this as a potential goodwill-impairment indicator; further deterioration could lead to a non-cash impairment charge.
- A $229,000 Ohio workers’ compensation lien relates, in the company’s view, to premiums incurred before the RFFG of Cleveland acquisition. The company is contesting the claim. RFFG ceased operations in July 2011 amid an unresolved Ohio workers’ compensation issue, ending related management-service revenue; $137,000 remained receivable at June 30, 2012.
- Estimated acquisition earn-out liabilities were approximately $1.0 million, of which $565,000 was earned and currently due. The earn-out relates to the DMCC and RFFG of Cleveland acquisition and may be payable partly in cash and partly in shares.
- The Ashley Ellis acquisition involved the president’s brother. Consideration included $400,000 cash and 1.25 million restricted shares valued at $331,000. The filing also describes the earlier DMCC/RFFG transaction with a seller who had been a significant shareholder.
- Placement falloff and refund provisions were $355,000 for the quarter and $719,000 for nine months, higher than the comparable 2011 amounts of $186,000 and $547,000.
- The company had approximately $260,000 of recruitment-advertising purchase commitments through December 31, 2012, and $341,000 remained payable under a former CEO consulting agreement expiring June 30, 2014.
Important facts for investors to verify
- Confirm the reporting period: the filing is for June 30, 2012, not 2011 Q3.
- Reconcile nine-month industrial revenue: the MD&A gives $20.698 million, while the segment table gives $20.968 million; $20.698 million is consistent with the consolidated revenue total.
- Assess the agricultural customer loss, segment profitability, and whether acquisition-related and compensation costs are translating into sustainable operating earnings.
- Monitor receivables-facility availability, lender advance eligibility, cash conversion, and the timing and funding of the $565,000 due earn-out.
- Track the Ohio lien dispute and any resulting liability, and assess the remaining receivable from the defunct RFFG management-services arrangement.