GEE Group Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended March 31, 2016. Financial amounts below are in thousands of dollars, except per-share data. The company provides contract staffing and direct-hire placement services; results include several acquired staffing businesses.
Financial performance
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Revenue | $21,666, up 121% year over year | $39,291, up 102% |
| Operating income | $260, versus an operating loss of $505 | $191, versus an operating loss of $650 |
| Net income (loss) | $7, versus a loss of $45 | Loss of $387, versus a loss of $3,452 |
| Operating cash flow | Not separately presented for the quarter | $683 provided, versus $1,713 used |
- Six-month revenue comprised contract staffing of $35,606 and direct-hire placement of $3,685. Professional contract revenue rose substantially with acquisitions; industrial contract revenue fell 16% to $10,874.
- Combined gross margin declined to 27.86% for the quarter from 28.37%, and to 28.8% for the six months from 29.7%. Management attributed pressure in contract staffing margins partly to Paladin’s lower margins; professional contract margin was 23.9% for the six months versus 32.0%.
- Cash was $2,916 at March 31, down from $5,932 at September 30, 2015. Working capital was negative $3,241, versus positive $5,636 at September 30.
- Debt included $6,989 of short-term debt and $6,430 of subordinated debt, for approximately $13,419 total carrying value. The ACF revolving facility limit was increased to $10,000; reported availability was approximately $850. The company reported compliance with its EBITDA and other ACF covenants at March 31.
- Total assets were $45,288, including goodwill of $18,193 and net intangible assets of $11,667; shareholders’ equity was $22,028.
Changes, transactions and unusual items
- Revenue growth was driven primarily by acquisitions of Scribe, Agile, Access Data and Paladin. Management cited the loss of an industrial client with approximately $2 million in annual revenue, and the elimination of some unprofitable business, as reasons for lower industrial staffing revenue.
- Acquisition-related investing cash outflow was $9,217 for the six months. Acquisition and integration costs were $568, and intangible-asset amortization increased to $772 from $166.
- The six-month net loss improved versus 2015, when results included a $2,319 derivative-liability charge. The Brio convertible note had been fully converted in the prior year; no derivative-liability change was recorded in the current period.
- Contingent consideration associated with Access and Paladin affected results. Management reduced its estimated Access earnout, while a stock-price guarantee adjustment partly offset that benefit; the filing reports a net $156 benefit for the period. After quarter-end, 122,581 shares were issued to Access sellers under the guarantee.
- Access acquisition consideration included a $3,000 seller note and potential earnout of up to $2,000. Paladin’s consideration includes contingent payments tied to performance; the filing recorded a $375 contingent liability and no liability for certain other potential payments, citing estimated negative working capital.
- Weighted-average basic shares were 9,256 for the quarter versus 2,855 a year earlier. The company had 9,378,892 common shares outstanding on May 13, 2016. The filing gives share figures after the October 2015 1-for-10 reverse split.
Outlook, liquidity and risks
- The company does not provide forecasts. Management said it expected current operating cash flow, financing and availability under the ACF facility to provide sufficient liquidity for the next 12 months, despite the negative working capital position and history of losses and negative operating cash flows.
- Management said it was investing in sales growth and recruiting and seeking to add experienced sales agents and recruiters. It also expects acquisition-related expenses while pursuing its growth strategy.
- The ACF facility is secured by company assets and includes EBITDA covenants. Future covenant levels after September 2016 are to be set by the lender based on projections. Subordinated notes carry substantial interest obligations, and acquisition-related seller notes include scheduled payments and balloon maturities.
- Disclosed business risks include demand for staffing services, competitive pressures, attracting and retaining qualified personnel and management, and potential liability arising from business activities and contract employees. Acquisition integration, earnout estimates, receivables collection and goodwill or intangible-asset impairment are also relevant uncertainties.
- No material legal proceedings were reported. Management concluded disclosure controls were effective as of March 31, 2016; no material changes to internal control were reported.
Important facts for investors to verify
- Whether operating cash generation and borrowing availability can support near-term obligations, given negative working capital and only about $850 of reported revolver availability.
- Debt service and maturity requirements, including the ACF facility terms, seller-note balloon payments and the 10% cash-interest subordinated note due in 2018.
- How much reported revenue growth and profitability reflect acquired businesses versus organic performance, and whether lower industrial revenue and contract-staffing margins persist.
- The final working-capital adjustments, earnouts and stock-price guarantees for Access and Paladin, including post-quarter share issuances and potential cash or equity dilution.
- Whether acquisition-related goodwill and intangible assets remain recoverable, and whether integration costs and amortization continue to weigh on earnings.