GEE Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014; filed August 14, 2014. Financial amounts below are in thousands of dollars, except per-share data. The company provides professional contract staffing and direct-hire placement, plus light-industrial staffing. Agricultural operations were discontinued in 2013.
Financial results
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $9,923 | $10,721 | $30,364 | $35,159 |
| Operating loss | $(544) | $(11) | $(1,290) | $(452) |
| Net loss | $(634) | $(228) | $(1,588) | $(869) |
| Loss per share | $(0.02) | $(0.01) | $(0.07) | $(0.04) |
Quarterly revenue declined 7%; nine-month revenue declined 14%. Direct-hire revenue increased 9% in the quarter but fell 10% year to date. Contract staffing revenue decreased 10% in the quarter and 14% year to date. Management attributed declines to lost light-industrial customers, fewer professional consultants, operational disruption and, for the nine-month comparison, prior-year Hurricane Sandy-related work.
Combined gross margin was 29.8% in the quarter versus 34.4% a year earlier, and 29.9% for nine months versus 32.3%. Management cited mix shifts and higher workers’ compensation costs. SG&A declined 5% quarterly and 13% year to date, but did not offset the revenue and margin pressure. Interest expense rose 88% in the quarter and 57% year to date.
For the nine months, operating cash use was $72, compared with $583 in the prior year; investing cash use was $198 versus $331. Financing cash use was $25, compared with $551 provided in the prior-year period. Cash fell to $66 from $361 at September 30, 2013. At June 30, total assets were $10,259, total liabilities $8,619, and shareholders’ equity $1,640. Short-term debt was $3,266. Negative working capital was approximately $1,575, versus $781 at September 30, 2013.
Liquidity, financing and material developments
- The company was in continuing default under covenants in its secured Keltic revolving credit facility. Keltic could stop lending, increase interest, or accelerate amounts due. Keltic was still advancing funds in the ordinary course without changing terms as of the report date; approximately $1,197 of availability remained at June 30. Management was seeking waivers and amendments and warned that alternative financing might be needed if negotiations failed.
- Management said it expected sufficient liquidity for the next 12 months based on anticipated operating cash flow and facility availability, if the facility remained available. The company disclosed recent losses and negative operating cash flows.
- In March and April 2014, investors purchased equity units for $600 gross in total, comprising 3.0 million common shares and warrants for 1.5 million shares, before approximately $95 of related expenses. The agreements include price-adjustment terms and, in certain delisting circumstances, an additional 3.0 million shares to Aracle.
- After quarter-end, on August 7, the company issued Brio a convertible note with $632.5 original principal for $550 proceeds, plus a warrant for up to 2,371,875 shares. The note is payable in 13 monthly installments beginning in the sixth month and is convertible from six months after closing, initially at $0.20 per share, subject to a reset with a $0.14 floor.
- Common shares outstanding increased to 25.899 million at June 30 from 22.799 million at September 30, 2013. The quarter-end balance sheet does not include the subsequent Brio financing.
Outlook, risks and unusual items
- The company does not provide financial forecasts. Management said revenue was increasing slowly month over month, expected new consultants to begin producing within about 90 days, and was pursuing larger national clients and light-industrial expansion beyond Ohio. These are expectations, not formal guidance.
- Management was raising billing rates to address workers’ compensation and Affordable Care Act costs and warned margins could continue to decline if rate increases did not offset cost pressures. It anticipated a 25% reduction in overall workers’ compensation insurance from joining an Ohio retrospective-rating program effective July 1, 2014.
- The company reported $229 of receivables remaining from discontinued agricultural operations, which management expected to collect; failure to collect could result in an additional $229 expense.
- Unusual items included a $44 loss on abandoned Oak Brook leasehold improvements, settlement payments exceeding $400 related to prior agreements, costs and overtime associated with a failed administrative-software implementation, and continuing payments related to acquisition earn-out obligations. Future minimum lease payments were approximately $948.
- Management reported no material legal proceedings pending as of June 30. Disclosure controls and procedures were assessed as effective.
Investor verification priorities
- Confirm whether Keltic waived or amended the covenant defaults, continued lending, and maintained the stated availability; assess potential acceleration or refinancing requirements.
- Review cash conversion, working-capital needs, and the company’s ability to fund operations given $66 of cash and negative working capital.
- Track revenue trends, consultant hiring and productivity, lost customers, billing-rate changes, and whether gross margins recover.
- Assess dilution and contractual share adjustments from the investor units, warrants, and Brio convertible note, including the conversion-price reset terms.
- Monitor collection of the discontinued-operation receivable and payment of remaining acquisition, settlement, and lease obligations.