GEE Group Inc. (filing registrant: General Employment Enterprises, Inc.) — Form 10-K summary
Period clarification: The filing covers the fiscal year ended September 30, 2011, with comparison to fiscal 2010. This does not correspond to the “2010 Q4” period in the request metadata.
Business context and reporting period
The company provides professional placement and contract staffing, agricultural and light-industrial staffing, and management services. Its fiscal 2011 revenue expansion chiefly reflects acquisitions and new operations, including On-Site Services, DMCC/RFFG of Cleveland, and Ashley Ellis. At year-end, it operated 18 branch offices in 11 states.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $37.189 million | $11.917 million |
| Operating income (loss) | $556,000 | $(1.511) million |
| Net income (loss) | $358,000 | $(1.556) million |
| Basic and diluted earnings (loss) per share | $0.02 | $(0.11) |
| Cash used in operating activities | $2.290 million | $1.865 million |
- Revenue rose 212.1%, primarily from acquisitions and start-ups; direct-hire placement revenue increased 52.9% and professional contract revenue increased 15.2%.
- Contract-service gross margin fell to 14.1% from 21.1%, mainly because acquired agricultural and industrial operations had lower margins. Professional contract margin improved to 29.9% from 29.1%; agricultural margin was 4.6% and industrial margin 14.6%.
- Cash and cash equivalents were $314,000, down from $945,000. Net working capital was $987,000 and the current ratio was 1.2. Accounts receivable rose to $6.604 million from $1.419 million.
- Short-term borrowings were $1.938 million, versus none reported in FY 2010. The Wells Fargo receivables facility had a $3.0 million limit, $1.062 million of reported remaining availability, and a 5.75% effective rate at year-end.
- Total assets were $11.496 million; shareholders’ equity was $4.694 million. The company paid no dividends and said it did not anticipate cash dividends for the foreseeable future.
Material changes and unusual items
- Fiscal 2011 operating results included a $1.126 million impairment charge for the RFFG management-agreement intangible asset and a $1.276 million gain from reducing the associated earn-out liability. RFFG ceased operations on July 15, 2011 after an unresolved Ohio Bureau of Workers’ Compensation issue; the management agreement was effectively terminated.
- Acquisitions substantially expanded revenue and the balance sheet. The company issued approximately 6.831 million shares for acquisitions during the year; shares outstanding increased from 14.856 million to 21.699 million.
- Ashley Ellis acquisition consideration totaled $731,000, including $200,000 paid at closing, a further $200,000 due within six months, and 1.25 million restricted shares. The seller was the brother of a company director and president.
- DMCC/RFFG acquisition consideration included $2.4 million in stock and a recorded earn-out. The filing reports $416,000 of earn-out payments currently due through September 30, 2011 and $803,000 of contingent earn-out liability due within one year.
Outlook, risks, and contingencies
- The company does not provide forecasts of future financial performance. Management cited improving economic conditions and higher demand for professional staffing, but described results as dependent on national employment trends.
- Management said the Wells Fargo facility should fund increased working-capital needs, but warned that liquidity could be constrained if Wells Fargo declines to advance against receivables or acquired businesses underperform. Operating cash use was driven particularly by receivables growth.
- Customer concentration increased: the two largest customers accounted for approximately 17.4% and 11.5% of FY 2011 revenue. RFFG of Cleveland had one customer.
- The company reported approximately $8.5 million of federal and $7.0 million of state net operating loss carryforwards, but maintained a full valuation allowance. Section 382 ownership-change limits may restrict use of those losses.
- Other obligations included $2.552 million of future minimum lease payments and a $144,000 recruitment-advertising commitment. The filing reported no material legal proceedings pending at year-end.
- Management concluded disclosure controls and internal control over financial reporting were effective. Its internal-control assessment excluded acquired DMCC, RFFG of Cleveland, and Ashley Ellis operations, which represented 44.9% of consolidated assets and 20.1% of revenue; the auditor did not attest to management’s internal-control assessment.
Most important facts for investors to verify
- Whether cash conversion improved after the large receivables build and whether the receivables facility remained available on acceptable terms.
- The status and financial consequences of the Ohio workers’ compensation issue, RFFG closure, and associated earn-out estimates.
- Post-acquisition revenue, margins, and cash generation, especially in lower-margin agricultural and industrial staffing.
- Customer concentration, collectability of receivables, and the performance and payment terms of acquisition-related earn-outs.
- The dilution and related-party terms of the Ashley Ellis transaction, and the practical ability to use tax-loss carryforwards subject to Section 382.