GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2015; unaudited results compared with the three months ended December 31, 2014. The company provides professional, industrial, and medical-scribe staffing and placement services.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $17.625 million | $9.682 million |
| Gross profit and margin | $5.288 million; 30.0% | $3.014 million; 31.1% |
| Operating loss | $69,000 | $145,000 |
| Net loss | $394,000 | $3.407 million |
| Operating cash flow | $125,000 | Use of $850,000 |
- Contract staffing revenue was $15.999 million, including $9.999 million professional services and $6.000 million industrial services. Direct-hire revenue was $1.626 million.
- Cash was $4.610 million at December 31, down from $5.932 million at September 30, 2015. Working capital was negative $26,000, versus positive $5.636 million at September 30.
- Current assets were $14.232 million and current liabilities $14.258 million. Net accounts receivable was $8.829 million.
- Debt comprised $4.245 million of revolving debt and $6.525 million of subordinated debt, net of discount, including $1.490 million classified as current. The revolving facility had approximately $1.2 million available at quarter-end. The company reported compliance with its covenants.
- Total assets were $41.334 million, including $15.906 million goodwill and $10.474 million net intangible assets. Shareholders’ equity was $21.791 million.
Changes versus the prior period
- Revenue increased 82%, primarily reflecting the acquisitions of Scribe, Agile, and Access, whose combined reported quarterly revenue contributions were approximately $8.516 million. Industrial contract revenue fell 8%, partly because of the loss of a client with approximately $2 million in annual revenue.
- Combined gross margin declined from 31.1% to 30.0%. Industrial and professional contract margins fell to 11.7% and 29.6%, respectively, from 15.2% and 33.7%.
- Operating loss narrowed, while net loss improved substantially mainly because the prior-year quarter included a $3.115 million loss from a change in derivative liability. Interest expense rose to $325,000 from $147,000.
- SG&A increased 50% to $4.508 million, reflecting acquired businesses and higher acquisition, integration, and restructuring expense ($446,000 versus $30,000). Intangible amortization rose to $337,000 from $85,000.
- Investing cash outflow was $6.849 million, principally for the Access acquisition; financing provided $5.402 million. The quarter’s operating cash flow was positive, with management attributing the change in part to higher accounts payable.
Acquisitions, outlook, and risks
- Access was acquired in October 2015 for a stated purchase price of $13 million, subject to working-capital adjustments and up to $2 million of earnout. Consideration included $7 million cash, a $3 million seller note, and $2 million of company shares. The filing records acquisition-related contingent consideration and working-capital liabilities.
- On January 1, 2016, after quarter-end, the company acquired Palladin Consulting. Consideration includes cash and potential contingent notes and earnouts; the filing describes performance conditions and potential stock payments.
- On January 1, 2016, the ACF revolving-credit maximum was increased from $6 million to $10 million, with covenant amendments. The ACF facility is secured by company assets. The JAX Legacy subordinated note carries 10% cash interest plus 4% interest paid in advance in shares; the Access seller note bears 5.5% interest and has balloon payments.
- Management does not provide financial forecasts. It stated that operating cash flow, equity offerings, issued debt, and availability under the ACF facility were expected to provide sufficient liquidity for the next 12 months. The company had experienced significant losses and negative operating cash flows in prior years.
- Key risks include staffing-service demand and competition, attracting and retaining qualified recruiters and contract workers, customer losses, acquisition integration and performance, debt service and covenant requirements, and potential liabilities related to contract employees. Goodwill and acquired intangibles are subject to impairment risk. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Whether acquired businesses sustain revenue and improve margins, particularly as reported growth is heavily acquisition-driven.
- Cash conversion and working-capital trends, given near-zero negative working capital and substantial acquisition-related cash use.
- Debt availability, covenant compliance, repayment schedules, and the effect of the higher-cost subordinated financing.
- Final Access working-capital adjustments, share-price protection, and earnout obligations, as well as Palladin’s contingent consideration.
- Whether goodwill and acquired intangible-asset values remain supportable as acquisitions are integrated.