GEE Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2013; comparisons are to the same periods in 2012. Unless otherwise noted, amounts are in thousands of dollars. The filing is for the fiscal year ending September 30, 2013.
Business context
GEE Group provides professional staffing and placement services, including information technology, engineering, accounting and light industrial staffing. The company decided in July 2013 to discontinue and liquidate its agricultural staffing division, and is focusing on its professional and light industrial businesses. Agricultural results are presented as discontinued operations.
Key financial results
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Revenue from continuing operations | $10,721 | $11,363 | $35,159 | $32,492 |
| Operating income (loss) | $(11) | $129 | $(452) | $(218) |
| Net income (loss), including discontinued operations | $(228) | $80 | $(869) | $(413) |
| Basic loss per share | $(0.01) | $0.00 | $(0.04) | $(0.02) |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $(583) | $200 |
Quarterly revenue declined 6%; nine-month revenue increased 8%. For the quarter, placement revenue fell 10%, professional contract revenue fell 9%, and industrial contract revenue fell 4%. Nine-month growth reflected contract staffing activity associated with Hurricane Sandy cleanup, a new office and new customers.
Combined gross margin was 34.4% for the quarter versus 32.2% a year earlier, and 32.3% for the nine months versus 31.3%. Industrial contract margin weakened (12.3% versus 14.7% for the quarter; 12.0% versus 13.5% for nine months), while professional contract margin was 33.3% and 33.6%, respectively. A $500 workers’ compensation rebate contributed to lower contract-service costs and supported margins.
Balance sheet and liquidity
- At June 30, 2013, cash was $1, accounts receivable was $5,833, total assets were $11,399, and shareholders’ equity was $3,258.
- Short-term debt was $2,955; long-term liabilities were $171. Current liabilities of $7,970 exceeded current assets of $7,769, resulting in approximately $201 of negative working capital.
- The Wells Fargo receivables facility carried a 5.75% effective rate. Borrowings were $2,955, with approximately $150 of availability. The lender may determine receivable eligibility and advances and may demand repayment under the agreement.
- Management stated that operating cash flow and facility availability should provide sufficient liquidity for the next 12 months. The company reported compliance with facility covenants as of the filing date.
- Operating cash use for the nine months was $583, compared with $200 provided in the prior-year period. Investing cash use was $331 in the cash flow statement, while MD&A reports $323; the filing does not clearly reconcile this difference. Financing provided $551. Cash declined from $364 at September 30, 2012 to $1 at June 30, 2013.
Material changes, outlook and risks
- Management attributed the quarterly revenue decline partly to insufficient focus on new sales earlier in the year and said it had made changes it believed addressed the issue, including terminating the professional contract division’s COO effective June 15.
- SG&A rose 5% in the quarter and 15% for the nine months, including higher professional fees and one-time costs related to employee terminations and a San Mateo lease. Management expected unusually high expenses to decline in the fourth quarter and with acquisition integration, but provided no financial forecast.
- The agricultural division generated revenue of $2,840 and a net loss of $169 in the quarter; for nine months it generated revenue of $6,596 and a net loss of $219. The company recognized an approximately $100 one-time expense as of June 30 in connection with the discontinuation. It expected to collect agricultural receivables over approximately 90 days.
- Under an amended acquisition agreement, the company agreed to additional cash consideration of $550 to $650 and issued 1,100,000 shares on July 2, 2013, valued at approximately $330. Approximately $700 of short-term liabilities was accrued at June 30. The filing also describes potential successor-liability claims related to acquired businesses; it reported no additional claims known other than an Ohio Bureau of Workers’ Compensation matter, but said further claims could be material.
- Future minimum lease payments were approximately $1,925. A subsequent San Mateo office termination required an approximately $25 payment and was expected to eliminate about $80 of additional lease payments.
- Key risks include recurring losses and negative operating cash flow, limited borrowing availability and lender discretion under the receivables facility, staffing demand and competition, attracting and retaining qualified workers and management, and potential liability associated with contract employees and acquired businesses. Management also noted that the 2012 change in control may limit use of tax-loss carryforwards under Section 382.
- The filing states that the company does not provide forecasts. No material legal proceedings were reported as of August 13, 2013. Disclosure controls were concluded to be effective as of June 30, 2013.
Important facts for investors to verify
- Whether the company can maintain adequate liquidity given only $1 of reported cash, negative working capital, $150 of stated facility availability and lender discretion over advances.
- Whether operating cash flow improves and management’s stated 12-month liquidity expectation is supported by subsequent results.
- Whether the acquired businesses meet expectations and how the $550–$650 cash obligation, accrued acquisition liabilities and 1,100,000-share issuance affect liquidity and dilution. Common shares outstanding were 22,799,675 on August 13, 2013.
- Whether the agricultural wind-down, including asset liquidation, employee-related costs and potential claims, results in further losses or cash needs.
- Whether quarterly sales and margins recover, and whether the workers’ compensation rebate and other unusual items make reported margin improvement sustainable.
- The cash-flow investing figure discrepancy ($331 in the statement versus $323 in MD&A) and the ultimate amount and timing of acquisition-related payments.