GEE Group Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended June 30, 2011, and was signed August 15, 2011. This conflicts with the request metadata identifying “2010 Q3”; the filing itself reports 2011 results. Amounts below are in thousands of dollars unless noted.
Business context and performance
GEE Group provides staffing and placement services, including professional, agricultural, and industrial contract staffing, as well as management services. Results include acquired businesses: On-Site (acquired in June 2010) and DMCC and RFFG of Cleveland (acquired effective November 1, 2010). The company operated 14 offices in eight states as of June 30, 2011.
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Net revenue | $11,717 | $3,836 | $25,592 | $7,836 |
| Operating income (loss) | $299 | $(128) | $248 | $(1,390) |
| Net income (loss) | $222 | $(137) | $133 | $(1,426) |
| Basic and diluted EPS | $0.01 | $(0.01) | $0.01 | $(0.11) |
Revenue rose 205.4% in the quarter and 226.6% for the nine-month period, principally reflecting acquired operations. For nine months, acquired businesses and related management fees contributed approximately $15,583 of revenue. Existing professional contract and placement revenue also increased.
Margins, cash flow, and liquidity
- Contract-service gross margin declined to 11.6% in the quarter from 18.0% a year earlier, and to 12.8% for nine months from 22.9%. Management cited lower-margin On-Site work, higher Ohio unemployment and sales tax rates, and higher professional contract wages. Nine-month professional-services gross margin improved to 29.8% from 28.8%.
- Nine-month operating cash flow was a use of $1,575, versus a use of $2,255 in 2010. Increased receivables associated with business growth were the main working-capital use. Investing cash flow included $54 of property and equipment purchases; financing provided $981, primarily from the Wells Fargo facility.
- Cash was $297 at June 30, down from $945 at September 30, 2010. Working capital was approximately $1,136 and the current ratio was 1.3 to 1.
- Current liabilities were $3,914, including $976 of short-term debt. Long-term obligations were $1,924; these include contingent acquisition consideration and other obligations. Wells Fargo facility borrowings were approximately $976, with borrowing-base availability of $1,277. The stated effective rate was 6.94%; the company reported covenant compliance.
Material changes and unusual items
- The November 2010 acquisition of DMCC and RFFG of Cleveland was accounted for as a business combination. Consideration included $2,400 in stock and $2,198 of estimated earn-out consideration. The earn-out liability was estimated at fair value; $266 had accrued by June 30, 2011, and no payments had been made through that date. Common shares outstanding increased from 14,856 at September 30, 2010 to 20,449 at June 30, 2011, primarily due to 5,581 shares issued for the acquisition.
- After quarter-end, the former owners’ RFFG business ceased operations on July 15, 2011 following an unresolved issue with the Ohio Bureau of Workers Compensation. Management was assessing possible effects on $1,180 of unamortized management-agreement intangible assets and $2,240 of contingent earn-out liabilities. The filing does not state the outcome of that assessment.
- The management-services agreement generated $786 of nine-month revenue, including $336 in the quarter; $523 was receivable at June 30. Fees generally approximate 6% of RFFG gross revenue. RFFG’s cessation creates uncertainty for this revenue and receivable.
- The largest customer represented 29.8% of quarterly revenue and 23.5% of nine-month revenue. The second-largest represented 11.0% and 11.7%, respectively, indicating meaningful customer concentration.
- No financial forecast was provided. Management stated that the Wells Fargo facility should be adequate for ongoing operations and working-capital needs. The company also disclosed potential limits on use of tax-loss carryforwards under Internal Revenue Code Section 382.
Investor verification priorities
- Confirm the intended reporting period: the supplied filing is for the quarter ended June 30, 2011, not 2010 Q3.
- Obtain an update on the Ohio workers-compensation issue, RFFG’s closure, collectability of the $523 management-fee receivable, and any impairment or change to earn-out estimates.
- Review cash conversion and receivables aging, particularly given operating cash outflow, reliance on receivables-backed financing, and concentrated customers.
- Verify actual earn-out payments and acquisition performance against targets, as well as the effect of the acquisition-related share issuance and any further dilution.
- Assess availability and terms of the Wells Fargo facility and the company’s ability to maintain liquidity as staffing volumes and payroll needs change.