GEE Group Inc. — Form 10-Q Summary
Business context and period: The quarter ended December 31, 2011, the first quarter of fiscal 2012. GEE Group provides direct-hire placement and contract staffing in professional, agricultural, and industrial markets. Comparatives are for the three months ended December 31, 2010. Financial statement amounts below are in thousands of dollars unless noted.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2011 | Prior-year quarter |
|---|---|---|
| Net revenue | $12,780 | $5,972 |
| Operating income | $75 | $28 |
| Interest expense | $52 | $13 |
| Net income | $23 | $15 |
| Cash from operating activities | $(681) | $(966) |
| Cash from investing activities | $(10) | $0 |
| Cash from financing activities | $422 | $264 |
- Revenue rose 114.0%, primarily reflecting the DMCC and RFFG of Cleveland acquisition and growth in industrial staffing. Industrial contract revenue was $6,284, up from $935; management attributed $4,891 of current-quarter industrial revenue growth to BMCH and BMCHPA.
- Direct-hire revenue increased 102.9% to $1,873; professional contract revenue rose 30.7% to $2,058; agricultural contract revenue rose 7.9% to $2,565. Management-services revenue fell to zero from $162 after the RFFG agreement ended.
- Combined gross margin declined to 27.1% from 31.1%, mainly due to a greater share of lower-margin industrial staffing. SG&A increased 89.2% to $3,283, but fell as a share of revenue to 25.7% from 29.1%. Cost of contract services was $9,322, or 72.9% of revenue.
- Cash was $45 at quarter-end, down $269 from September 30, 2011. Working capital was approximately $1,091 and the current ratio was 1.2. Operating cash use was attributed largely to the timing of receivable collections and payments.
- Short-term debt was $2,360, up from $1,938 at September 30; long-term obligations were $632. The Wells Fargo receivables facility had $337 of remaining availability and a 5.83% effective rate. The company reported compliance with its covenants.
Material changes, outlook, and risks
- The Ashley Ellis asset acquisition, effective September 1, 2011, added technical recruiting operations. Consideration totaled $731, including $200 paid at closing, a further $200 due within six months, and 1.25 million restricted shares valued at $331. The seller was the brother of the company’s president, a related-party connection disclosed in the filing.
- The DMCC and RFFG-related earn-out liability included $556 currently due at December 31, 2011. The filing says total acquisition consideration included estimated earn-out consideration of $2,198. RFFG ceased operations in July 2011 following an unresolved Ohio workers’ compensation issue; the management agreement ended and no related future revenue was expected. In September 2011, the company recorded a $1,126 intangible-asset impairment and a $1,276 reduction in the related earn-out liability.
- The company does not provide financial forecasts. Management said it was optimistic about employment trends and believed the business segments positioned it for growth; this is not formal guidance. Management believed the receivables facility would fund working-capital needs, but warned that reduced lender advances or weaker acquired-business performance could constrain liquidity.
- Key risks identified include economic and demand conditions, competition, attracting and retaining qualified personnel, and potential liability arising from contract employees and client-site events. The company reported approximately $8,500 of federal and $7,000 of state net operating loss carryforwards, but said Section 382 may limit their use and maintained a full valuation allowance.
- No income-tax provision was recorded. Net income per share is shown as a dash in the statements; the filing text does not provide a clear exact per-share amount. The quarter’s interim results are not necessarily indicative of full-year results.
- The filing reported no legal proceedings, no off-balance-sheet arrangements, effective disclosure controls, and no material changes in internal control during the quarter.
Important facts for investors to verify
- Share-count discrepancy: the cover reports 20,449,675 shares outstanding at December 31, 2011, while the balance sheet reports 21,699 thousand issued and outstanding shares at both December 31 and September 30. Confirm the correct outstanding share count and the status of the Ashley Ellis shares.
- Near-term liquidity: verify collections, borrowing-base eligibility, the $337 remaining facility availability, and ability to meet payroll and other current obligations given only $45 of cash.
- Earn-out exposure: confirm payment timing and amounts for the $556 currently due and the assumptions underlying the estimated contingent consideration.
- Recruitment-advertising commitment: the notes cite approximately $560 of contractual purchases “through December 31, 2011”; verify whether this commitment was fulfilled or remains outstanding.
- Acquisition and segment economics: monitor industrial staffing margins, acquired-business performance, and the effects of RFFG’s closure and the related-party Ashley Ellis transaction.