GEE Group Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015; filed May 15, 2015. Financial amounts below are in U.S. dollars unless stated otherwise. The company provides professional contract staffing, industrial temporary staffing, and direct-hire placement services.
Financial performance
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Revenue | $9.796 million, up 2% year over year | $19.478 million, down 5% |
| Operating loss | $505,000, versus $639,000 | $650,000, versus $746,000 |
| Net loss | $45,000, versus $727,000 | $3.452 million, versus $954,000 |
| Net loss attributable to common shareholders | $82,000 | $3.489 million |
| Basic and diluted loss per share | $0.00 | $0.13 |
- Revenue mix: Quarterly contract staffing revenue was $8.314 million, up from $7.858 million; direct-hire revenue was $1.482 million, down from $1.776 million. For the six months, contract staffing revenue was $16.546 million versus $16.927 million, and direct-hire revenue was $2.932 million versus $3.514 million.
- Margins: Consolidated gross margin was 28.37% for the quarter versus 30.3%; six-month margin was 29.7% versus 29.9%. Industrial contract staffing margins improved, while professional contract staffing margins declined slightly. The filing attributes quarterly margin pressure partly to a revenue mix shift toward lower-margin industrial staffing.
- Expenses: Quarterly selling, general and administrative expense declined 8% to $3.203 million; six-month expense declined 6% to $6.277 million. Interest expense rose 43% for the quarter and 31% for the six months, primarily due to higher average borrowings.
- Cash flow: Six-month operating cash use was $1.713 million versus $152,000 a year earlier. Investing used $171,000; financing provided $2.604 million, including net proceeds of about $1.961 million from preferred stock. Cash increased to $888,000 from $168,000 at September 30, 2014.
- Liquidity and debt: Working capital was positive $424,000, compared with negative $909,000 at September 30, 2014. Short-term debt was $3.380 million; a convertible note had a $63,000 net current carrying value, and a $470,000 derivative liability was recorded. About $800,000 was available under the asset-based revolving facility at March 31.
- Capitalization: Shareholders’ equity was $3.318 million. Common shares outstanding were 30.232 million at March 31 and 30.893 million as of May 14, 2015. The filing reports a $37,000 preferred dividend for the six-month period.
Changes, outlook, and notable items
- Quarterly revenue increased modestly, but six-month revenue declined, reflecting lower direct-hire placements and professional contract staffing. Management cited fewer experienced recruiters and closures of two industrial offices whose revenue was considered unprofitable. It said it had taken steps to increase experienced recruiters and improve revenue and profitability.
- The six-month net loss included a $2.319 million expense from remeasuring the convertible note’s derivative liability and a $210,000 loss on extinguishment of debt. In the quarter, a $796,000 derivative fair-value gain substantially reduced the reported net loss. These non-operating, valuation-related items make reported earnings period-sensitive.
- In January 2015, the company sold 200,000 preferred shares for $2.0 million gross, netting about $1.96 million. The preferred shares carry an 8% annual dividend payable in kind at the company’s option and are convertible. The filing gives inconsistent conversion descriptions: initially 50 common shares per preferred share in one passage, but 10,000,000 common shares per preferred share in another; the governing terms should be checked.
- Brio converted $500,000 of note principal into 2.5 million common shares during the period. On May 5, 2015, it converted the remaining $132,500 into 662,500 shares, eliminating the remaining note principal after quarter-end. The note and conversion feature generated significant dilution and noncash accounting effects.
- On April 1, 2015, after quarter-end, GEE acquired Scribe Solutions for consideration estimated at $7.5 million, consisting of 640,000 preferred shares and warrants to purchase up to 6.35 million common shares. The preliminary purchase-price allocation estimated $7.083 million of intangible assets and $5.951 million of goodwill; these values remained subject to valuation. Management said no cash was used for the acquisition and expected no negative cash-flow effect. Pro forma six-month revenue including Scribe was $21.396 million, with a $3.063 million net loss.
- Management does not provide financial forecasts. It expected expenses to stabilize or decline modestly as acquisition integration progressed, and stated that cash flow, the preferred-stock proceeds, and borrowing availability should provide sufficient liquidity for the next 12 months. This is management’s assessment, not a guarantee.
- The $6 million revolving facility is secured by company assets and bears a floating rate that was 6.5% at March 31. The company reported compliance with its EBITDA and administrative covenants at quarter-end; an additional amendment and waiver was entered into on April 1, 2015. Future EBITDA covenant levels after September 2015 are set at the lender’s discretion based on projections.
- Risks identified include general business conditions and demand for staffing, competition, recruiting and retaining qualified personnel, and potential liability relating to contract employees and client sites. The company reported no material pending legal proceedings and no material changes in internal control during the quarter.
Most important facts for investors to verify
- Resolve the conflicting Series A preferred-stock conversion terms and assess potential dilution from preferred shares, warrants, options, and other equity instruments.
- Review the ACF facility’s borrowing base, remaining availability, covenant amendments and waivers, collateral terms, and post-September 2015 covenant requirements.
- Assess the drivers of operating cash use and whether the stated 12-month liquidity expectation remains supported by cash generation and borrowing availability.
- Separate recurring operating performance from the sizable derivative fair-value changes and debt-extinguishment charges when evaluating losses and trends.
- Track Scribe’s finalized purchase-price allocation, integration results, financing needs, and contribution to consolidated revenue and profitability.