GEE Group Inc. (General Employment Enterprises, Inc.) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2014. Financial statement amounts are in thousands of dollars, except per-share data and where noted.
Business context
The company provides professional staffing and direct-hire placement, along with light-industrial contract staffing, primarily in Ohio and Pennsylvania. Its agricultural staffing division was discontinued in 2013; remaining related assets are being liquidated.
Financial results and liquidity
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Net revenue | $9.634 million, down 16% year over year | $20.441 million, down 17% |
| Operating loss | $639,000, versus $736,000 loss | $746,000, versus $465,000 loss |
| Net loss | $727,000, versus $826,000 loss | $954,000, versus $641,000 loss |
| Loss per share | $0.03 | $0.04 |
| Interest expense | $88,000, versus $46,000 | $208,000, versus $117,000 |
For the six-month period, operating cash flow was negative $152,000, investing cash flow was negative $157,000, and financing cash flow was positive $442,000. Cash increased to $494,000 from $361,000 at September 30, 2013; financing included $431,000 of stock-sale proceeds. At March 31, current assets were $7.311 million and current liabilities $8.399 million, producing negative working capital of approximately $1.088 million. Shareholders’ equity was $2.142 million.
Short-term debt was $3.601 million under a secured revolving facility with a $6 million commitment; disclosed availability was approximately $792,000. The agreement carries a floating interest rate with a stated minimum of 6.5%. The company was out of compliance with covenants, and the lender could terminate lending, increase interest, or demand repayment. The filing also notes that officers had provided a $185,000 short-term loan outstanding at quarter-end; it was repaid afterward.
Contract staffing cost was about 70% of contract revenue, compared with 69% a year earlier. Industrial contract gross margin was 10.0% for the quarter (11.4% prior year); professional contract margin was 31.6% (31.9%). Direct-hire placement gross margin was 100%, with related costs recorded in selling, general and administrative expense.
Material changes versus prior comparable periods
- Quarterly revenue declined across placement, professional contract, and industrial contract services. Management cited the loss of certain light-industrial customers, fewer professional consultants, and organizational disruption. Six-month comparisons also reflect unusually strong prior-year demand related to Hurricane Sandy.
- Quarterly SG&A declined 17% to $3.478 million, which the company attributed to lower sales and cost reductions. Six-month SG&A likewise declined 17% to $6.699 million.
- Despite lower quarterly net loss, the six-month net loss increased year over year, and interest expense rose substantially.
- Cash from operations remained negative, although the outflow narrowed compared with the prior-year six months. Negative working capital increased from approximately $781,000 at September 30, 2013.
Outlook, risks, contingencies, and unusual items
- The company says it does not provide forecasts. Management reported slowly improving month-over-month revenue and intended to increase its consultant count by more than 40% over three months, with new consultants expected to become productive within 90 days. It also described a national strategy targeting larger clients and plans to explore light-industrial expansion beyond Ohio.
- Management expected overall gross margin to decline because workers’ compensation and Affordable Care Act costs were increasing and billing-rate increases might not fully offset them. It expected expenses to stabilize and potentially decrease slightly as acquisition consolidation benefits accrue.
- Management believed liquidity would be adequate for the next 12 months based on future operating cash flow and Keltic facility availability, but this depends on continued lender support and improving cash generation. The company was negotiating covenant waivers and amendments; alternative financing might be needed if negotiations failed.
- On March 31, the company completed an initial $475,000 sale of units to Aracle. Each unit included 250,000 common shares and warrants for 125,000 shares at $0.25 per share. A subsequent April 16 sale raised a further $125,000. The agreements include potential price-adjustment shares, a delisting-related issuance of 3 million shares under specified conditions, and investor approval rights over two director appointments. Further financing was under discussion but not assured.
- The company recorded a $44,000 loss on abandoned leasehold improvements following an Oak Brook facility settlement. A settlement executed April 2 required a $125,000 termination fee, paid by May 2. Remaining minimum lease payments were approximately $1.118 million.
- Approximately $263,000 remained recorded for acquisition-related cash consideration. The company also held $229,000 of receivables from the discontinued agricultural business; management expected collection, but failure to collect could result in an additional expense of up to that amount.
- Options granted during the quarter had an aggregate stated value of approximately $515,000; approximately $483,000 of unvested compensation remained to be recognized. The company reported no material pending legal proceedings and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Keltic waived or amended the covenant defaults, continued lending, and maintained the disclosed borrowing availability; confirm whether debt remains callable or classified as short-term.
- Whether operating cash flow and working capital improved, and whether the company obtained additional financing beyond the disclosed April unit sale.
- Whether revenue growth, consultant recruitment and productivity, and expansion initiatives materialized, while monitoring staffing margins and workers’ compensation and health-care costs.
- Whether the agricultural receivables were collected and acquisition-related payments and lease obligations were settled as described.
- The actual and potential dilution from the Aracle units, warrants, price-adjustment provisions, delisting provision, and outstanding stock options.