GEE Group Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2017. Financial statements are unaudited; amounts below are in thousands of dollars except per-share data.
Business context
GEE Group provides professional and industrial staffing, contract staffing, and direct-hire placement services. Its reportable segments are Industrial Staffing Services and Professional Staffing Services. The period’s results include the effects of prior acquisitions, including Paladin.
Financial results and liquidity
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Revenue | $21,549 | $42,555 |
| Gross profit | $5,655 | $11,098 |
| Gross margin | 26.2% | 26.1% |
| Operating income | $327 | $804 |
| Net income (loss) | $(129) | $(78) |
| Basic loss per share | $(0.01) | $(0.01) |
For the six months, operating cash flow was $(281), investing cash flow $(536), and financing cash flow $(149). Cash declined by $966 to $1,562. Working capital was $1,390 at March 31, versus a deficit of $597 at September 30, 2016.
At March 31, cash was $1,562 and current assets were $16,153 against current liabilities of $14,763. Short-term debt was $7,142; subordinated debt was $6,220 in total, including $1,357 classified as current and $4,863 long-term. The filing reported no availability on the existing ACF credit line while refinancing was underway. Total assets were $45,660 and shareholders’ equity was $25,840.
Changes versus the prior comparable periods
- Quarterly revenue decreased $117, or 0.5%. Industrial contract revenue rose 26%, while professional contract revenue fell 5% and direct-hire revenue fell 29%.
- Six-month revenue increased $3,264, or 8%, with professional contract revenue up 13% and industrial contract revenue up 11%; direct-hire revenue declined 29%.
- Gross margin declined from 27.9% to 26.2% for the quarter and from 28.8% to 26.1% for the six months. Management attributed pressure partly to lower-margin Paladin and industrial contract work.
- Operating income improved to $327 for the quarter from $260, and to $804 for the six months from $191. However, the quarter shifted from $7 net income to a $129 net loss; the six-month net loss narrowed from $387 to $78.
- Six-month SG&A declined 4% to $9,306, and acquisition, integration and restructuring expenses declined to $100 from $568.
Outlook, transactions, and risks
- The company does not provide forecasts. Management said it expected to increase hiring in the following quarter, was investing in revenue growth, and believed liquidity would be sufficient for the next 12 months, taking account of cash flows, equity, debt, and the new credit facility.
- On April 3, 2017, after quarter-end, GEE closed its acquisition of SNI Holdco for stated aggregate consideration of $66.4 million. Consideration included $25.1 million cash, $12.5 million of 9.5% convertible subordinated notes, and approximately 5.926 million Series B convertible preferred shares valued at $28.8 million. The transaction materially changed the company’s scale, financing, and potential dilution after the reporting date.
- Also on April 3, GEE entered a new facility with maximum capacity of $73.75 million: a $48.75 million term loan and a revolving facility of up to $25 million, subject to a borrowing base. It borrowed approximately $56.2 million at closing to refinance debt, pay transaction costs, and fund the acquisition. The facility matures March 31, 2021, carries interest at LIBOR plus 10% or the lender’s base rate plus 9%, and includes financial covenants and restrictions. Management stated that availability under the facility was expected to support working capital needs.
- The SNI notes and Series B preferred stock are convertible, subject to conversion limits and required stockholder approval for certain issuances. The preferred shares have a $4.86 liquidation preference and are convertible initially one-for-one; the notes carry 9.5% interest and have a $5.83 conversion price. These securities could significantly dilute common shareholders.
- On April 3, the existing $4.185 million JAX subordinated note was amended into a 10% convertible note due October 2021, convertible at $5.83 per share.
- Risks cited include demand and competitive conditions, recruiting and retaining qualified personnel, potential liability arising from contract employees, and management retention. The company also noted possible limits on use of tax-loss carryforwards under Section 382. Management cautioned that actual results may differ materially from forward-looking statements.
- The company reported no material legal proceedings pending at March 31, no defaults upon senior securities, and effective disclosure controls. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Post-close SNI acquisition results, purchase accounting, integration progress, and whether expected operational benefits materialize.
- Current borrowing-base availability, interest expense, covenant headroom, and the ability to service the new secured debt through its maturity.
- Required stockholder approval, conversion terms, and potential dilution from the SNI preferred shares and convertible notes, as well as the JAX convertible note.
- Whether working-capital pressure persists: receivables increased $1,530 during the six months and operating cash flow was negative despite reported revenue growth.
- Near-term subordinated-debt payments and the October 2017 balloon payment on the Access Data note; the filing stated that payments on that loan were current.