GEE Group Inc. — Form 10-Q Summary
Business and reporting period: Unaudited results for the three months ended December 31, 2012, the first quarter of fiscal 2013, compared with the three months ended December 31, 2011. GEE Group provides direct-hire placement and contract staffing, including professional, agricultural, and light-industrial staffing services.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change / context |
|---|---|---|---|
| Net revenue | $14.643 million | $12.780 million | Up $1.863 million, or 15% |
| Operating income | $256,000 | $75,000 | Improved $181,000 |
| Interest expense | $70,000 | $52,000 | Up $18,000, primarily from higher borrowings |
| Net income | $186,000 | $23,000 | Up $163,000 |
| Basic and diluted EPS | $0.01 | $0.00 | Reported amounts rounded to cents |
| Operating cash flow | $(721,000) | $(681,000) | Cash used increased by $40,000 |
| Investing cash flow | $(87,000) | $(10,000) | Primarily equipment purchases |
| Financing cash flow | $691,000 | $422,000 | Primarily net short-term borrowing |
Margins and operating costs: Combined gross margin increased to 28.7% from 27.1%. Contract-services cost was 71.3% of contract revenue, compared with 72.9%. Segment gross margins were 34.9% for professional contract staffing (31.5% prior year), 13.2% for industrial staffing (12.5%), and 4.5% for agricultural staffing (5.7%); direct-hire placement gross margin was 100%. SG&A rose $588,000, or 18%, to $3.871 million, reflecting increased business and higher professional-service expenses. Management expected those unusually high expenses to continue through the end of the second quarter.
Revenue mix: Direct-hire placement revenue was $2.156 million, up 15%; professional contract staffing was $2.485 million, up 21%; industrial contract staffing was $8.376 million, up 33%; and agricultural staffing was $1.626 million, down 37%. The filing attributes overall growth to contract services and placements, including Hurricane Sandy cleanup work, a new office, and new customers. Agricultural revenue declined following the loss of a major customer.
Financial position and liquidity
- At December 31, 2012, cash was $247,000, total assets $11.868 million, and shareholders’ equity $4.293 million. Working capital was approximately $690,000.
- Short-term debt was $3.095 million, up from $2.404 million at September 30, 2012. Long-term liabilities were $191,000. Accounts receivable was $7.611 million.
- Operating cash use reflected the timing of receivable collections and payments of accounts payable and payroll accruals. Cash declined $117,000 during the quarter.
- The Wells Fargo receivables facility advances up to 85% of eligible receivables and bears interest at 5.75% at quarter-end. Outstanding borrowings were approximately $3.095 million, with only about $100,000 of borrowing-base availability.
- Management stated that cash flows from operations and facility availability were expected to provide sufficient liquidity for the next 12 months. The filing also notes prior significant losses and negative operating cash flows, making liquidity dependent in part on lender advances.
Material changes, outlook, and risks
- Management does not provide forecasts of future financial performance. It said SG&A was not expected to keep growing faster than revenue and should decline significantly once the company could realize acquisition-consolidation benefits.
- The Wells Fargo facility was extended to December 14, 2013, but the lender may shorten its term under specified conditions, including matters tied to a shareholder-ownership lawsuit, delivery and acceptability of audited financial statements, officer background checks, or board composition. A subsequent amendment extended certain delivery deadlines to April 30, 2013. The company reported covenant compliance and said it had received no notice that the lender intended to shorten the term.
- The company reported an approximately $870,000 expected earn-out liability related to the DMCC/RFFG asset purchase and was discussing amendments to the earn-out because the associated management agreement had ended. Approximately $382,000 had been earned through December 31, 2012, net of offsets; the company subsequently paid an additional $110,000.
- A $229,000 Ohio Bureau of Workers’ Compensation lien, believed by the company to relate to a period before an acquisition, was fully accrued and being contested. The filing also notes possible successor-liability claims related to acquired businesses, although no additional claims had been brought to the company’s attention.
- The 2012 agricultural-customer loss had led to impairment charges of approximately $101,000 for intangible assets and $173,000 for goodwill. No intangible-asset impairment was recorded in this quarter. Goodwill was $1.106 million at December 31, 2012.
- The company’s change in control during fiscal 2012 may restrict use of net operating losses under Internal Revenue Code Section 382. The filing reports no cash taxes paid in either comparative quarter.
- Future minimum lease payments were approximately $2.2 million. Management identified staffing demand, competition, recruiting and retaining qualified personnel, potential liability from contract-worker activities, and dependence on lender financing as risks.
- Management concluded disclosure controls were effective as of December 31, 2012; no material changes in internal control over financial reporting were reported for the quarter.
Most important facts for investors to verify
- Whether operating cash flow improves and receivables are collected promptly, given negative quarterly operating cash flow and only approximately $100,000 of facility availability at quarter-end.
- Continued access to the Wells Fargo facility, satisfaction of its conditions, and the effect of any changes to borrowing availability or lender terms.
- Progress and final cost of the DMCC/RFFG earn-out, including the proposed amendment and subsequent payments.
- Resolution and potential exposure from the Ohio workers’ compensation lien and any successor-liability claims.
- Whether higher revenue and improved gross margin translate into sustained profitability after elevated SG&A and interest costs, particularly after the temporary cleanup-related revenue contribution.