GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2018. Financial statements are unaudited; amounts below are in millions of dollars unless stated otherwise. The company provides professional, industrial, and medical staffing and placement services. Its fiscal 2018 results include SNI, acquired in April 2017, for the full current periods, while the comparable 2017 periods include SNI for little or none of the period; year-over-year growth is therefore not directly comparable.
Key financial results
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Revenue | $39.9; up 85% year over year | $85.1; up 100% |
| Gross profit / margin | $13.6 / 34.2% | $29.4 / 34.6% |
| Operating income | $0.015 | $1.49 |
| Interest expense | $2.20 | $5.49 |
| Net loss / basic loss per share | $(2.88) / $(0.28) | $(4.67) / $(0.46) |
| Operating cash flow | Not separately presented for the quarter | $0.172, versus $(0.281) in 2017 |
Six-month revenue comprised $74.0 million of contract staffing and $11.1 million of direct-hire placements. Professional contract staffing and direct hire drove growth; industrial staffing revenue declined. Management reported improved contract-services margins, citing a mix shift toward placements and professional-services margin initiatives. The six-month combined gross margin rose to 34.6% from 26.1%.
Balance sheet, debt, and liquidity
- At March 31, 2018, cash was $2.94 million, total assets $135.1 million, and shareholders’ equity $22.2 million. Working capital was negative $0.96 million, compared with positive $1.59 million at September 30, 2017.
- Revolver borrowings were $9.90 million, with about $3.4 million available. The term loan had $46.83 million principal outstanding ($44.52 million net of unamortized discount). Subordinated debt totaled $18.41 million, including $16.69 million of convertible debt.
- Six-month investing cash use was $0.20 million and financing cash provided was $0.18 million. Cash increased $0.15 million over the six months. Cash interest paid was $4.55 million.
- Management said operating cash flow and revolver availability were expected to provide sufficient liquidity for the next 12 months. The company also disclosed approximately $6.91 million of required principal payments and $2.53 million of lease payments for the 12 months after March 31.
Changes, outlook, and risks
- Revenue growth primarily reflects the SNI acquisition and is not solely organic. Management also cited fewer recruiters and sales personnel, a slower post-holiday hiring recovery, and severe winter weather as pressures on the quarter. Industrial revenue fell 16% in the quarter and 9% for the six months.
- Quarterly SG&A rose 148% year over year and six-month SG&A rose 165%, mainly reflecting SNI; management said it continued back-office consolidation and cost-reduction efforts. Amortization also increased following the acquisition.
- Interest expense increased substantially, primarily due to acquisition-related borrowing and fees. It included noncash stock-paid interest; the filing reports approximately $0.40 million for the quarter and approximately $0.40 million for the six-month period.
- The company did not meet its financial loan covenants at March 31 and obtained a temporary lender waiver. Management believed conditions were improving and expected future covenant compliance, but gave no financial forecast. Credit terms include restrictive covenants and potential default and acceleration provisions; interest rates may increase depending on leverage and the applicable period.
- Management does not provide forecasts. Stated business risks include service demand, competition, recruiting and retaining qualified personnel, and potential liabilities related to contract employees. The company reported no legal proceedings. It retained a $1.5 million SNI working-capital purchase-price deposit pending agreement with the sellers on the working-capital calculation.
- A $0.4 million discrete tax benefit related to the Tax Cuts and Jobs Act affected the six-month tax provision. The company was evaluating the impact of forthcoming revenue-recognition and lease-accounting standards.
Investor facts to verify
- Review the covenant waiver, subsequent covenant status, and any related lender terms or rate increases.
- Assess recurring operating profitability and cash generation apart from SNI acquisition effects, noncash charges, and tax items.
- Confirm available borrowing capacity under the receivables-based revolver and the company’s ability to meet upcoming principal, interest, and lease obligations.
- Track resolution of the $1.5 million SNI working-capital deposit and monitor the large convertible subordinated debt balance and potential dilution.