GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2014; comparative period is the three months ended December 31, 2013. Unaudited results. The company provides professional staffing and direct-hire placement, plus light-industrial temporary staffing, primarily in Ohio.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $9.682 million | $10.807 million |
| Operating loss | $145,000 | $107,000 |
| Net loss | $3.407 million | $227,000 |
| Basic and diluted loss per share | $0.13 | $0.01 |
| Operating cash flow | $(850,000) | $(525,000) |
| Investing cash flow | $(90,000) | $(126,000) |
| Financing cash flow | $1.203 million | $364,000 |
- Revenue declined 10%. Direct-hire placement revenue fell 17% to $1.450 million; professional contract revenue fell 22% to $1.705 million; and industrial contract revenue fell 5% to $6.527 million.
- Combined gross margin rose to 31.1% from 29.5%. Industrial contract gross margin improved to 15.2% from 12.9%, and professional contract gross margin to 33.7% from 31.9%. Management cited lower Ohio workers’ compensation rates and office closures among the contributing factors.
- SG&A decreased 5% to $3.074 million. Interest expense increased 23% to $147,000.
- The $3.407 million net loss included a $3.115 million loss from remeasuring the convertible-note derivative liability, a non-cash charge. Excluding that charge, management reported shareholders’ equity of approximately $1.825 million and negative working capital of approximately $1.187 million; these are management’s adjusted figures, not reported GAAP balances.
Balance sheet, liquidity and debt
- At December 31, cash was $431,000, accounts receivable net was $5.129 million, and total assets were $9.621 million. Shareholders’ equity was a deficit of $1.290 million, compared with positive equity of $2.065 million at September 30.
- Current liabilities were $10.911 million, including $3.927 million of short-term debt and a $3.246 million derivative liability. Negative working capital was approximately $4.302 million, versus $909,000 at September 30.
- The secured ACF revolving facility has a $6 million maximum. Approximately $500,000 was available at December 31; the stated rate was 6.5%. The company reported compliance with its EBITDA covenant at quarter-end, and said defaults had been waived or covenants were being met. The lender had waived certain defaults in connection with its December 2014 amendment.
- Management believed liquidity would be sufficient for the next 12 months, relying on operating cash flow, the preferred-stock financing completed after quarter-end, and ACF availability. The company has a history of losses and negative operating cash flows.
Material developments, outlook and risks
- On January 8, 2015, the company closed a $2 million Series A convertible preferred-stock financing. The proceeds were held in escrow at December 31; each preferred share is initially convertible into 50 common shares. Management planned to use approximately half for working capital and half for marketing, acquisitions, expansion and operations.
- On February 6, 2015, Brio converted $250,000 of its note into 1.25 million common shares. The note includes a conversion-price reset subject to a $0.14 floor, and was accompanied by a warrant for up to 2,371,875 shares. The filing said the conversion would produce a gain on the derivative liability in the following quarter.
- A proposed acquisition of Scribe Solutions would exchange 640,000 preferred shares and warrants for up to 6.4 million common shares for Scribe’s stock and warrants. The transaction, based on a valuation of at least $6.4 million, remained subject to customary closing conditions and was expected before March 31, 2015.
- After quarter-end, 3,094,339 common shares were issued for warrant conversions, board services, employee option exercises and the Brio conversion; the filing says these issuances generated no cash. The share count reported as of February 13, 2015 was 28,994,014, versus 25,899,000 shares at December 31.
- Management does not provide financial forecasts. It cited lower revenue from fewer experienced recruiters in professional services and the closure of two unprofitable industrial offices; it said it had taken steps to add experienced recruiters and expected SG&A to stabilize and slightly decrease in FY2015.
- Principal risks identified include staffing demand and general business conditions, competition, recruiting and retaining qualified personnel, and potential liabilities involving contract employees. The filing reported no material legal proceedings and effective disclosure controls as of December 31.
Facts investors should verify
- Whether the company sustains liquidity given negative working capital, operating cash burn and limited ACF availability; confirm covenant compliance and any further waivers.
- The terms, dilution and use of proceeds of the January preferred financing, including conversion adjustments and resulting common-share issuance.
- The fully diluted share count and potential dilution from the Brio note and warrants, preferred shares, and proposed Scribe transaction.
- Whether the Scribe acquisition closes on the disclosed terms and how its consideration and valuation affect the balance sheet.
- Whether revenue and operating performance recover, particularly in professional staffing, and whether improved segment margins persist.