GEE Group Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; figures are unaudited. GEE Group provides temporary and permanent staffing and placement services, including professional and light industrial staffing. Its acquisition of SNI Companies in March 2017 materially expanded the business and affects comparability with the prior-year quarter.
Financial results and liquidity
- Revenue: $45.2 million, up 115% from $21.0 million. Professional contract services were $33.6 million, industrial contract services $5.9 million, and direct-hire placement services $5.8 million.
- Profitability: Gross profit was $15.8 million versus $5.4 million; reported combined gross margin rose to 34.9% from 25.9%. Operating income was $1.5 million versus $0.5 million. Net loss was $1.8 million, compared with net income of $51,000; loss per share was $0.18.
- Costs and interest: SG&A was $12.8 million, up from $4.5 million, primarily reflecting SNI. Amortization increased to $1.4 million from $0.4 million. Interest expense rose to $3.3 million from $0.4 million, principally due to acquisition-related and other borrowings.
- Cash flow: Operating cash use was $249,000, versus $696,000 used in the prior-year quarter. Investing cash use was $128,000; financing provided $1.1 million. Cash increased $695,000 during the quarter to $3.5 million.
- Liquidity: Working capital was approximately $630,000, down from $1.6 million at September 30, 2017. The company reported approximately $5.8 million available under its revolving facility.
- Debt and capital structure: At quarter-end, the balance sheet reported $10.0 million outstanding on the revolver, $47.3 million of term-loan principal (about $44.8 million net of discounts), and $18.7 million of subordinated debt. The term loan and revolver are secured by company assets. Series B preferred stock had an approximately $28.8 million liquidation value. Common shares outstanding were 10.0 million at quarter-end and 10.4 million as of February 14, 2018.
Changes versus the prior-year quarter
- Revenue growth was largely acquisition-driven: management attributed about $4.3 million of direct-hire growth and $19.9 million of professional contract-services growth to SNI. Direct-hire revenue excluding SNI declined, which management associated with fewer recruiters and sales professionals.
- Professional contract revenue increased 142%, while industrial contract revenue decreased 2%. Professional contract gross margin improved to 27.0% from 23.9%; industrial contract margin declined to 15.6% from 16.4%.
- The reported comparison includes SNI in the current quarter but not in the prior-year reported results; it is therefore not a like-for-like comparison.
Outlook, financing, and risks
- The company stated that it does not provide financial forecasts. Management believed cash on hand and revolver availability would be sufficient for the next 12 months; this depends partly on operating cash flow and continued access to borrowing.
- After lender amendments and waivers in 2017, the company reported compliance with the amended financial covenants at December 31, 2017, the first measurement date under the amendment. The credit agreement includes fixed-charge coverage, EBITDA, and senior-leverage tests and restrictive covenants.
- A November 2017 amendment called for commercially reasonable efforts to prepay $10 million of advances, with repayment contingent on future financing, non-operational cash flow, or excess cash flow. The amendment also imposed a $364,140 fee due by June 30, 2018 or earlier upon repayment and termination of the credit commitments. Contractual borrowing rates can rise substantially from June 2018 under specified leverage conditions.
- The company disclosed prior covenant-related waivers, although it reported compliance at quarter-end. Its significant debt, interest burden, limited working capital, and secured borrowing arrangements are key liquidity risks.
- A $1.5 million amount retained from the SNI purchase price relates to a working-capital guarantee. The company and sellers had not agreed on the working-capital calculation as of quarter-end.
- Approximately $999,000 of accrued interest payable in common stock was subsequently settled through share issuances in January 2018. The company also reported issuing shares for interest and preferred-stock conversion, creating dilution.
- Management cited efforts to reduce costs, consolidate back-office functions, and expand the sales force. The filing reported no legal proceedings and no defaults upon senior securities; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow and borrowing availability can support liquidity needs and scheduled debt service over the next 12 months.
- Current covenant headroom, borrowing-base availability, applicable interest rates, and the status or funding source for the contemplated $10 million prepayment.
- Whether SNI’s acquisition-related revenue and expected operating contribution are translating into sustainable profitability and cash flow.
- The resolution of the $1.5 million SNI working-capital guarantee and any resulting payment or adjustment.
- Potential dilution from stock-settled interest, convertible subordinated notes, preferred-stock conversion, options, and warrants.