GEE Group Inc. — Q3 FY2017 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2017; amounts below are in U.S. dollars, generally in millions unless noted. The quarter is the company’s fiscal third quarter. GEE Group provides professional and industrial staffing and placement services. Results include SNI Companies from its April 3, 2017 acquisition, so comparisons with 2016 are affected by the acquisition.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net revenue | $46.069 vs. $21.982 in 2016, up 110% | $88.624 vs. $61.273 in 2016, up 45% |
| Gross profit | $17.054 vs. $6.274 | $28.152 vs. $17.598 |
| Gross margin | 37.02% vs. 28.54% | 31.77% vs. 28.72% |
| Operating income (loss) | $(2.446) vs. $0.522 | $(1.642) vs. $0.713 |
| Net income (loss) | $(6.020) vs. $0.528 | $(6.098) vs. $0.141 |
| Basic loss per share | $(0.61) vs. $0.06 income | $(0.64) vs. $0.02 income |
Quarterly revenue growth included approximately $24.3 million of SNI revenue since acquisition. Management attributed the increase in professional contract and direct-hire revenue primarily to SNI. Excluding SNI, direct-hire placement revenue was down; management said recruiter and sales staffing had declined and expected to hire more in the following quarter. Industrial contract revenue rose as the company worked to replace customers lost in the prior year.
Contract services cost was $29.015 million for the quarter and $60.472 million for the nine months. Management reported contract cost as a share of contract revenue declining to 63% for the quarter from 71%, and to approximately 68% for the nine months from 71%. It attributed gross-margin changes to the mix of acquired and industrial staffing businesses. The reported consolidated gross margin also reflects direct-hire placement revenue, whose associated costs are recorded in SG&A.
Quarterly SG&A increased 199% to $15.546 million, primarily due to SNI expenses. Acquisition, integration and restructuring expense was $2.206 million for the quarter and $2.306 million for the nine months. Interest expense was $2.378 million for the quarter and $3.130 million for the nine months, up substantially from 2016 following new borrowings and acquisition financing. The quarter also included a $0.994 million loss on extinguishment of debt.
Cash flow, liquidity and debt
- For the nine months, operating cash flow was negative $0.843 million, versus positive $0.667 million in 2016; investing cash flow was negative $25.335 million, primarily for acquisitions; financing cash flow was positive $26.504 million.
- Cash was $2.854 million at June 30, 2017, up from $2.528 million at September 30, 2016. Working capital was $1.565 million, compared with negative $0.597 million at fiscal year-end 2016.
- At June 30, reported balances included $8.142 million drawn on the revolver, term debt of $45.868 million net of discount, and subordinated debt of $18.976 million. These carrying amounts total approximately $73.0 million; the filing also reports $1.700 million of accrued interest.
- The April 2017 PNC/MGG credit agreement provides for a $48.750 million term loan and a revolving facility of up to $25 million, subject to a borrowing base. Both mature March 31, 2021. Interest is LIBOR plus 10% or the lender’s base rate plus 9%; reported June rates were 11.3% on the term loan and 13.25% on the revolver. Approximately $9.9 million of revolver availability remained.
- The company was not in compliance with the EBITDA covenant and other credit covenants at June 30, but received a waiver. Management expected to regain compliance before the end of the next quarter and said cash, operating cash flow and revolver availability should provide liquidity for the next 12 months.
Acquisition, outlook and risks
GEE Group acquired SNI Companies on April 3 for stated aggregate consideration of approximately $66.3 million, subject to a working-capital adjustment. Consideration included approximately $23 million cash, $12.5 million of 9.5% convertible subordinated notes, approximately $29.3 million of Series B convertible preferred stock, and a $1.5 million working-capital reserve. The purchase-price allocation was preliminary; the filing says it remained subject to change. SNI added substantial goodwill and intangible assets, while related amortization and acquisition costs weighed on earnings.
The company does not provide forecasts of future financial performance. Management described strategic acquisitions, cost reduction and back-office consolidation as part of its strategy to improve profitability and cash flow. Risks highlighted include demand for staffing services, competition, attracting and retaining qualified staff and managers, and potential liability arising from its business and contract employees. Other notable exposures include the high-cost secured borrowing, covenant compliance, the working-capital adjustment with SNI sellers, and an Access Data seller note that had not been subordinated as required by the credit agreement; a waiver for that requirement ran through August 31, 2017. The filing reports no material legal proceedings pending and no material changes in internal controls; management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the company regained compliance with its credit covenants after the June 30 waiver, and the terms and duration of the August 14, 2017 waiver filed as an exhibit.
- Actual revolver availability, borrowing-base capacity, interest costs and cash generation, given negative operating cash flow and high-cost secured debt.
- The final SNI working-capital adjustment and purchase-price allocation, including the retained $1.5 million reserve and the reported goodwill and intangible values.
- Collectability of receivables and adequacy of reserves: the allowance for doubtful accounts was approximately $1.915 million at June 30, versus $0.191 million at September 30, 2016; the period also included a $1.724 million doubtful-account provision.
- Progress in restoring recruiter and sales staffing and improving earnings after the acquisition-related expenses, amortization and interest burden.
- Potential dilution and claims on common equity from the Series B preferred stock and convertible notes; the preferred stock carries a senior liquidation preference and the notes bear 9.5% or 10% interest.