GEE Group Inc. - Quarter Report: 2012 March (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
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x
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QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2012
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 1-05707
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GENERAL EMPLOYMENT ENTERPRISES, INC
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(Exact name of registrant as specified in its charter)
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Illinois
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36-6097429
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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One Tower Lane, Suite 2200, Oakbrook Terrace, Illinois 60181
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(Address of principal executive offices)
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(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer
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o |
Accelerated filer
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o | |
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Non-accelerated filer
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o |
Smaller reporting company
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x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the registrant’s common stock as of May 14, 2012 was 21,699,675.
GENERAL EMPLOYMENT ENTERRISES, INC.
Form 10-Q
For the Quarter Ended March 31, 2012
| CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | 3 |
PART I. FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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4
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5
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6
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7
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8-13
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Item 2.
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13-19
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Item 3.
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19
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Item 4.
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19
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PART II. OTHER INFORMATION
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Item 1.
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19
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Item 1A.
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20
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Item 2.
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20
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Item 3.
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20
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Item 4.
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20
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Item 5.
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20
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Item 6.
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20
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20
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
As a matter of policy, the Company does not provide forecasts of future financial performance. The statements made in this Form 10-Q Quarterly Report which are not historical facts are forward-looking statements. Such forward-looking statements often contain or are prefaced by words such as “will” and “expect.” As a result of a number of factors, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause the Company’s actual results to differ materially from those in the forward-looking statements include, without limitation, general business conditions, the demand for the Company’s services, competitive market pressures, the ability of the Company to attract and retain qualified personnel for regular full-time placement and contract assignments, the possibility of incurring liability for the Company’s business activities, including the activities of its contract employees and events affecting its contract employees on client premises, and the ability to attract and retain qualified corporate and branch management. The Company is under no obligation to (and expressly disclaims any such obligation to) and does not intend to update or alter its forward-looking statements whether as a result of new information, future events or otherwise.
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Item 1.
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Financial Statements.
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GENERAL EMPLOYMENT ENTERPRISES, INC.
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March 31
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September 30
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(In Thousands)
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2012
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2011
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(unaudited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 95 | $ | 314 | ||||
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Accounts receivable, less allowances (March 31, 2012- $174; September 30, 2011 - $137)
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6,484 | 6,604 | ||||||
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Other
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262 | 190 | ||||||
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Total current assets
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6,841 | 7,108 | ||||||
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Property and equipment, net
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540 | 409 | ||||||
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Goodwill
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1,280 | 1,280 | ||||||
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Intangible assets, net
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2,499 | 2,699 | ||||||
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Total assets
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$ | 11,160 | $ | 11,496 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$ | 295 | $ | 485 | ||||
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Accrued compensation
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2,690 | 2,391 | ||||||
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Short-term debt
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2,299 | 1,938 | ||||||
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Other
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1,055 | 1,307 | ||||||
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Total current liabilities
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6,339 | 6,121 | ||||||
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Long-term obligations
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573 | 681 | ||||||
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Total liabilities
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6,912 | 6,802 | ||||||
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Shareholders’ equity:
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Preferred stock; authorized - 100 shares; issued and outstanding - none
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— | — | ||||||
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Common stock, no-par value; authorized - 50,000 shares; issued and outstanding - 21,699 shares at March 2012 and at September 2011
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10,077 | 10,031 | ||||||
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Accumulated deficit
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(5,829 | (5,337 | ||||||
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Total shareholders’ equity
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4,248 | 4,694 | ||||||
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Total liabilities and shareholders’ equity
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$ | 11,160 | $ | 11,496 | ||||
See notes to consolidated financial statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
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Three Months
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Six Months | |||||||||||||||
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Ended March 31
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Ended March 31 | |||||||||||||||
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(In Thousands, Except Per Share Amounts)
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2012
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2011
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2012
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2011
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Net revenues:
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Contract services
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$ | 11,064 | $ | 6,626 | $ | 21,971 | $ | 11,512 | ||||||||
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Placement services
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1,638 | 990 | 3,511 | 1,913 | ||||||||||||
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Management services
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- | 288 | - | 450 | ||||||||||||
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Net revenues
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12,702 | 7,904 | 25,482 | 13,875 | ||||||||||||
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Cost of contract services
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9,438 | 5,803 | 18,760 | 9,918 | ||||||||||||
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Selling, general and administrative expenses
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3,624 | 2,025 | 6,907 | 3,760 | ||||||||||||
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Amortization of intangible assets
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100 | 155 | 200 | 249 | ||||||||||||
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Loss from operations
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(460 | ) | (79 | ) | (385 | ) | (52 | ) | ||||||||
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Interest expense
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55 | 25 | 107 | 38 | ||||||||||||
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Net loss and comprehensive loss
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$ | (515 | ) | $ | (104 | ) | $ | (492 | ) | $ | (90 | ) | ||||
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Average number of shares – basic and diluted
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21,699 | 20,447 | 21,699 | 17,652 | ||||||||||||
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Net loss per share - basic and diluted
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$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (.01 | ) | ||||
See notes to consolidated financial statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
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Six Months
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Ended March 31
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(In Thousands)
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2012
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2011
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Common shares outstanding:
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Number at beginning of period
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21,699 | 14,856 | ||||||
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Issuance of common stock for acquisition
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- | 5,581 | ||||||
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Issuance of common stock for options
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- | 12 | ||||||
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Number at end of period
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21,699 | 20,449 | ||||||
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Common stock:
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Balance at beginning of period
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$ | 10,031 | $ | 7,287 | ||||
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Stock compensation expense
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46 | 4 | ||||||
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Issuance of common stock for options
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- | 5 | ||||||
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Issuance of common stock for acquisition
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- | 2,400 | ||||||
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Balance at end of period
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$ | 10,077 | $ | 9,696 | ||||
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Accumulated deficit:
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Balance at beginning of period
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$ | (5,337 | ) | $ | (5,695 | ) | ||
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Net loss
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(492 | ) | (90 | ) | ||||
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Balance at end of period
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$ | (5,829 | ) | $ | (5,785 | ) | ||
See notes to consolidated financial statements.
GENERAL EMPLOYMENT ENTERPRISES, INC.
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Six Months
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Ended March 31
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(In Thousands)
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2012
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2011
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Operating activities:
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Net loss
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$ | (492 | ) | $ | (90 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation and amortization
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275 | 345 | ||||||
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Stock compensation expense
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46 | 4 | ||||||
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Other non-cash items
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- | 18 | ||||||
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Changes in current assets and current liabilities -
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Accounts receivable
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120 | (2,597 | ) | |||||
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Accounts payable
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(190 | ) | 28 | |||||
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Accrued compensation
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299 | 758 | ||||||
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Other, net
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(232 | ) | (82 | ) | ||||
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Net cash used in operating activities
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(174 | ) | (1,616 | ) | ||||
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Investing activities:
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Acquisition of property and equipment
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(206 | ) | (1 | ) | ||||
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Acquisition of Ashley Ellis
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(200 | ) | - | |||||
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Net cash used in investing activities
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(406 | ) | (1 | ) | ||||
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Financing activities:
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Net proceeds from short-term debt
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361 | 1,266 | ||||||
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Exercises of stock options
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- | 5 | ||||||
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Net cash provided by financing activities
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361 | 1,271 | ||||||
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Decrease in cash and cash equivalents
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(219 | ) | (346 | ) | ||||
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Cash and cash equivalents at beginning of period
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314 | 945 | ||||||
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Cash and cash equivalents at end of period
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$ | 95 | $ | 599 | ||||
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Supplemental Disclosure of Cash Flow Information:
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Interest paid
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$ | 96 | $ | 25 | ||||
Supplemental Disclosure of Non-Cash Investing Activities:
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·
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In November 2010, the Company purchased certain assets of DMCC Staffing, LLC and RFFG of Cleveland, LLC in exchange for the issuance of 5,581 shares of common stock valued at $2,400.
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See notes to consolidated financial statements.
1. Basis of Presentation
The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and the rules of the United States Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of results for a full year. The September 30, 2011 consolidated balance sheet was derived from audited financial statements. These financial statements should be read in conjunction with the financial statements included in the annual report on Form 10-K for the year ended September 30, 2011 of General Employment Enterprises, Inc. (the “Company”).
2. Entry into Asset Purchase Agreements
Ashley Ellis, LLC
On August 31, 2011, General Employment Enterprises, Inc. (the “Company”) entered into an asset purchase agreement with Ashley Ellis LLC, an Illinois limited liability company (“Ashley Ellis”), and Brad A. Imhoff (the “Ashley Ellis Asset Purchase Agreement”), for the purchase of certain assets of Ashley Ellis, primarily customer lists, comprising Ashley Ellis’ services business. Ashley Ellis’ services business was operated from offices in Illinois, Texas and Georgia and provided services related to the recruitment and placement of technical personnel. The Ashley Ellis Asset Purchase Agreement was deemed effective on September 1, 2011.
Brad A. Imhoff is the brother of Herbert F. Imhoff, Jr., a director and President of the Company. Brad A. Imhoff and Ashley Ellis, an entity of which Brad A. Imhoff is the sole member and Chief Executive Officer, were parties to the transaction. As consideration for the assets, the Company paid Ashley Ellis $200,000 on the date of closing and paid an additional $200,000 in February 2012. The Company also issued Ashley Ellis 1,250,000 restricted shares of the Company’s common stock valued at $331,000.
Acquisition of DMCC Staffing, LLC and RFFG of Cleveland, LLC
Effective November 1, 2010, the Company, through its wholly-owned subsidiary, Triad Personnel Services, Inc. (Triad), entered into an asset purchase agreement (the “Asset Purchase Agreement”), dated as of October 29, 2010, with DMCC Staffing, LLC (“DMCC”), RFFG of Cleveland, LLC (“RFFG of Cleveland”), and Thomas J. Bean, for the purchase of certain assets of DMCC and RFFG of Cleveland, primarily customer lists, comprising DMCC’s and RFFG of Cleveland’s services business. Thomas Bean was the beneficial owner of approximately 9.9% of the Company’s outstanding shares prior to acquisition. The business is operated from offices in Ohio and provides labor and human resource solutions, including temporary staffing, human resources and payroll outsourcing services, labor and employment consulting and workforce solutions. RFFG of Cleveland has one customer.
In conjunction with the acquisition, the Company entered into a definitive management and services agreement for the management of the businesses of certain affiliates of DMCC, RFFG of Cleveland and Mr. Bean (the “Management Agreement”), as described in Note 3. On November 30, 2010, Business Management Personnel, Inc. (“BMP”), a wholly-owned subsidiary of the Company, entered into the Management Agreement, effective as of November 1, 2010, with RFFG, LLC (“RFFG”).
Pursuant to the Asset Purchase Agreement, the Company issued $2,400,000 in shares of its common stock (5,581,395 shares based on the December 30, 2010 closing date) to DMCC and RFFG of Cleveland.
If the aggregate EBITDA of the businesses acquired, plus any management fees paid to the Company under the Management Agreement meets certain targets (each, an “EBITDA Target”) over a four-year period ending December 31, 2014 (the “Earnout Period”), the Company will be required to make earn-out payments to DMCC and RFFG of Cleveland, each payable in three equal installments. In the event that an EBITDA Target for a certain period is not met, the earn-out payment in respect to such period will be reduced proportionately. Starting in the calendar year ending December 31, 2012, the EBITDA Targets are adjusted annually to reflect the EBITDA for the twelve-month period ending on December 31st of the most recently completed fiscal year (each, an “Annual EBITDA Target”) and earn-out payments for the year will be adjusted to equal 50% of the relevant Annual EBITDA Target divided by four. At the end of each fiscal year during the Earnout Period, if the aggregate EBITDA for the 12-month period then ended is greater than the Annual EBITDA Target for such year, then the Company will pay to DMCC and RFFG of Cleveland the amount of such excess, 50% in cash and 50% in shares of common stock. As of March 31, 2012, the Company has accrued approximately $1 million of estimated earn-out payments, of which $585,000 is currently due and is included in other liabilities and long-term obligations on the consolidated balance sheets.
Pro forma Information
The following unaudited pro forma information represents the Company’s results of operations as if the acquisitions described above had occurred on the first day of the earliest period presented.
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Three Months Ended
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Six Months Ended
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March 31
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March 31
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(In thousands)
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2012
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2011
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2012
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2011
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Net revenues
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$ | 12,702 | $ | 8,610 | $ | 25,482 | $ | 15,900 | ||||||||
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Net loss
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$ | (565 | ) | $ | (10 | ) | $ | (542 | ) | $ | 14 | |||||
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Basic and diluted loss per share
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$ | (0.03 | ) | $ | (0.00 | ) | $ | (0.03 | ) | $ | 0.00 | |||||
3. Entry into Management Service Agreement
In conjunction with the Asset Purchase Agreement for DMCC and RFFG of Cleveland, BMP, an Ohio corporation and a wholly-owned subsidiary of the Company, entered into a management service agreement (the “Management Agreement”) with RFFG, LLC (“RFFG”), effective November 1, 2010.
Pursuant to the Management Agreement, BMP agreed to provide services to RFFG to operate its day-to-day business, including services related to accounting, sales, finance, workers’ compensation, benefits, physical locations, information technologies and employees.
In consideration of the services provided under the Management Agreement, RFFG, LLC agreed to pay BMP monthly fees that approximate 6% of its gross revenues on an annual basis. For the three and six months ended March 31, 2011, approximately $288,000 and $450,000, respectively, of revenues were recorded related to this agreement.
Due to an unresolved issue with the Ohio Bureau of Workers Compensation, RFFG, LLC ceased operations as of July 15, 2011 and, as a result, the Management Service Agreement was effectively terminated. No future revenues are expected related to this agreement. At March 31, 2012, the Company has a $137,000 Management Fee Receivable related to this agreement.
4. Recent Accounting Developments:
In May 2011, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued Accounting Standards Update (ASU) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and International Financial Reporting Standards (ASU 2011-04). ASU 2011-04 created a uniform framework for applying fair value measurement principles for companies around the world and clarified existing guidance in GAAP. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011 and shall be applied prospectively. The adoption of ASU 2011-04 did not have a material effect on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08). Under ASU 2011-08, a company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. ASU 2011-08 is effective for interim and annual impairment tests performed for fiscal years beginning after December 15, 2011; however, early adoption is permitted. The Company early adopted this provision in fiscal 2011 and it did not have a material impact on our consolidated financial statements.
Pursuant to FASB ASC Topic 220, “Comprehensive Income” (“ASC Topic 220”), the Company is required to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of its condensed consolidated balance sheets. For the three and six months ending March 31, 2012 and 2011, comprehensive income consisted of net income only, and there were no items of other comprehensive income for any of the periods presented.
5. Segment Data
The Company’s segments consist of the following: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, and accounting, (c) temporary staffing in the agricultural industry, (d) temporary light industrial staffing and (e) management services. Intersegment net service revenues are not significant. Revenues generated from the temporary professional services staffing, temporary staffing in the agricultural industry and light industrial staffing are classified as contract staffing services revenues in the statements of operations. Selling, general and administrative expenses are not separately allocated among agricultural, professional services or industrial staffing services within the contract staffing services sector for internal reporting purposes.
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Three Months Ended
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Six Months Ended
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March 31
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March 31
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(In Thousands)
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2012
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2011
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2012
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2011
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Direct Hire Placement Services
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Revenue - net
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$ | 1,638 | $ | 990 | $ | 3,511 | $ | 1,913 | ||||||||
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Placement services gross margin
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100 | % | 100 | % | 100 | % | 100 | % | ||||||||
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Operating loss
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(601 | ) | (108 | ) | (803 | ) | (260 | ) | ||||||||
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Depreciation & amortization
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61 | 49 | 125 | 96 | ||||||||||||
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Accounts receivable – net
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795 | 599 | 795 | 599 | ||||||||||||
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Intangible assets - net
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525 | - | 525 | - | ||||||||||||
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Goodwill
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24 | - | 24 | - | ||||||||||||
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Total assets
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3,817 | 4,997 | 3,817 | 4,997 | ||||||||||||
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Management Services
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Revenue - net
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$ | - | $ | 288 | $ | - | $ | 450 | ||||||||
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Operating income
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- | 201 | - | 363 | ||||||||||||
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Fee receivable
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137 | 371 | 137 | 371 | ||||||||||||
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Contract Staffing Services
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Agricultural services revenue – net
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$ | 1,787 | $ | 3,035 | $ | 4,352 | $ | 5,412 | ||||||||
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Industrial services revenue – net
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7,254 | 1,991 | 13,538 | 2,925 | ||||||||||||
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Professional services revenue – net
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2,023 | 1,600 | 4,081 | 3,175 | ||||||||||||
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Agricultural services gross margin
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3.1 | % | 4.4 | % | 4.6 | % | 4.2 | % | ||||||||
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Industrial services gross margin
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13.2 | % | 13.0 | % | 12.9 | % | 14.4 | % | ||||||||
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Professional services gross margin
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30.4 | % | 26.9 | % | 31.1 | % | 29.9 | % | ||||||||
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Operating income (loss)
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$ | 141 | $ | (172 | ) | $ | 418 | $ | (155 | ) | ||||||
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Depreciation and amortization
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80 | 164 | 150 | 249 | ||||||||||||
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Accounts receivable net – agricultural services
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525 | 868 | 525 | 868 | ||||||||||||
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Accounts receivable net – industrial services
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4,073 | 1,221 | 4,073 | 1,221 | ||||||||||||
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Accounts receivable net – professional services
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954 | 897 | 954 | 897 | ||||||||||||
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Intangible assets - net
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1,974 | 3,519 | 1,974 | 3,519 | ||||||||||||
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Goodwill
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1,256 | 1,256 | 1,256 | 1,256 | ||||||||||||
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Total assets
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7,206 | 7,206 | ||||||||||||||
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Consolidated
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Revenue -net
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$ | 12,702 | $ | 7,904 | $ | 25,482 | $ | 11,512 | ||||||||
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Operating income (loss)
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(460 | ) | (79 | ) | (335 | ) | (90 | ) | ||||||||
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Depreciation and amortization
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141 | 204 | 275 | 345 | ||||||||||||
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Total accounts receivable – net
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6,484 | 4,017 | 6,484 | 4,017 | ||||||||||||
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Intangible assets – net
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2,499 | 3,519 | 2,499 | 3,519 | ||||||||||||
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Goodwill
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1,280 | 1,256 | 1,280 | 1,256 | ||||||||||||
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Total assets
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$ | 11,160 | $ | 9,889 | $ | 11,160 | $ | 9,889 | ||||||||
6. Placement Service Revenues
The provision for falloffs and refunds, reflected in the consolidated statement of operations as a reduction of placement service revenue, was $159,000 and $170,000 for the three months ended March 31, 2012 and 2011, respectively, and $364,000 and $362,000 for the six months ended March 31, 2012 and 2011, respectively.
7. Customer Concentration
The portion of consolidated net revenues derived from the Company’s largest customer was 10.4% for the three months ended March 31, 2012. The Accounts Receivable balance for this customer was $872,000 at March 31, 2012. No other customer accounted for more than 10% of net revenues during the quarter ended March 31, 2012. For the six months ended March 31, 2012, no one customer accounted for more than 10% of net revenue.
The portion of consolidated net revenues derived from the Company’s largest customer was 21.4% for the three months ended March 31, 2011. The second largest customer accounted for 15.2% for the quarter ending March 31, 2011. No other customer accounted more than 10% of net revenues during the quarter ended March 31, 2011. For the six months ended March 31, 2011, the company’s largest customer was 18.1% of net revenue with the second largest accounting for 12.2%. No other customer accounted for more than 10% of net revenues during the six months ended March 31, 2011.
8. Property and Equipment
Property and equipment, net consisted of the following:
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March 31
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September 30
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||||||
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(In thousands)
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2012
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2011
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||||||
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Computer software
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$ | 1,447 | $ | 1,447 | ||||
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Office equipment, furniture and fixtures
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2,270 | 2,066 | ||||||
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Total property and equipment, at cost
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3,717 | 3,513 | ||||||
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Accumulated depreciation and amortization
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(3,177 | ) | (3,104 | ) | ||||
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Property and equipment, net
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$ | 540 | $ | 409 | ||||
9. Intangible Assets – finite life
As of March 31, 2012
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(In Thousands)
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Cost
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Accumulated
Amortization and
Impairment
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Net
Book Value
|
|||||||||
|
Non-Compete
|
$ | 89 | $ | 33 | $ | 56 | ||||||
|
Customer Relationships
|
2,913 | 485 | 2,428 | |||||||||
|
Management Agreement
|
1,396 | 1,396 | - | |||||||||
|
Trade Name
|
17 | 2 | 15 | |||||||||
| $ | 4,415 | 1,916 | 2,499 | |||||||||
As of September 30, 2011
|
(In Thousands)
|
Cost
|
Accumulated
Amortization and
Impairment
|
Net
Book Value
|
|||||||||
|
Non-Compete
|
$ | 89 | $ | 24 | $ | 65 | ||||||
|
Customer Relationships
|
2,913 | 296 | 2,617 | |||||||||
|
Management Agreement
|
1,396 | 1,396 | — | |||||||||
|
Trade Name
|
17 | — | 17 | |||||||||
|
|
||||||||||||
| $ | 4,415 | $ | 1,716 | $ | 2,699 | |||||||
Finite life intangible assets are comprised of a non-compete agreement, management agreement, trade name and customer relationships. The non-compete agreement and trade name are amortized on a straight – line basis over the estimated useful lives of 5 years. The customer relationships are amortized based on the future undiscounted cash flows over estimated remaining useful lives of three to 10 years. The management agreement intangible was previously being amortized over the five year term of the agreement. Amortization expense for these finite life intangible assets will be $193,000 for the remainder of fiscal 2012, $376,000 in fiscal 2013, $359,000 in fiscal 2014, $340,000 in fiscal 2015, $321,000 in fiscal 2016 and $910,000 thereafter.
Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates, regularly, whether events and circumstances have occurred that indicate possible impairment and relies on a number of factors, including operating results, business plans, economic projections, and anticipated future cash flows. The Company uses an estimate of the future undiscounted net cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable.
The Company recorded an impairment charge of $1,126,000 in September 2011 for the remaining unamortized amount of the Management Services Agreement intangible asset. The impairment charge represents the difference between the fair value and the carrying value of the intangible asset. No future cash flows associated with the Management Services Agreement are expected as the management agreement was effectively terminated as a result of the managed entity, RFFG, LLC, ceasing operations in July 2011.
10. Commitments
As of March 31, 2012, the Company had contractual obligations to purchase approximately $380,000 of recruitment advertising through December 31, 2012.
11. Line of Credit
The Company had a loan and security agreement with Crestmark Bank for financing of its accounts receivable which was terminated in December 2010. Interest expense under this agreement was $4,500 for the three months ended December 31, 2010. In addition, the agreement required a maintenance fee of $3,500 per month and an annual loan fee of 1% of the maximum borrowing amount under the agreement. The Company incurred $29,000 of fees related to this agreement during the three months ended December 31, 2010.
In December 2010, the Company entered into a two-year, $3,000,000 account purchase agreement (“AR Credit Facility”) with Wells Fargo Bank N.A. (“Wells Fargo”). The AR Credit Facility provides for borrowings, on a revolving basis, of up to 85% of the Company’s eligible accounts receivable less than 90 days old and bears interest at a rate equal to the three month LIBOR plus 5.25% (effective rate was 5.75% as of March 31, 2012).
In February 2012 the AR Credit Facility with Wells Fargo Bank N.A. was amended whereby the facility maximum increased to $4,500,000 from $3,000,000.
The Company believes that the borrowing availability provided by the Wells Fargo agreement will be adequate to fund the increase in working capital needs resulting from the prior year acquisitions of certain assets.
The outstanding borrowings under this agreement, which are classified as short-term debt on the consolidated balance sheets were $2,299,000 and $1,938,000 as of March 31, 2012 and September 30, 2011, respectively. As of March 31, 2012, the borrowing base availability under this agreement was $639,000. Total interest expense related to the line of credit for the three months ended March 31, 2012 and 2011 was $50,000 and $18,000 respectively, and $88,000 and $19,000 for the six months ended March 31, 2012 and 2011, respectively.
The loan and security agreement with Wells Fargo Bank includes certain covenants which require compliance until termination of the agreement. As of March 31, 2012, the Company was in compliance with all such covenants.
Overview
General Employment Enterprises, Inc. (the “Company”) was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893. The Company’s segments consist of the following: (a) professional placement services specializing in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing, (b) temporary staffing services in the agricultural industry and (c) temporary staffing services in light industrial staffing.
The agricultural industry, light industrial staffing and management services segments are the direct result of acquisitions over the last two fiscal years. Onsite Services Inc. was acquired June 2010 which allowed us entry to the agricultural industry while the acquisition of RFFG of Cleveland, LLC and DMCC Staffing, LLC in November 2011 allowed entry into the light industrial market and management services. Lastly, Ashley Ellis, LLC was acquired in August 2011 and complemented the professional staffing segment.
The Company’s professional staffing services business is highly dependent on national employment trends in general and on the demand for professional staff in particular. As an indicator of employment conditions, the national unemployment rate was 8.2% in March 2012 and 8.9% in March 2011.
Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stock, to improve the overall profitability and cash flows of the Company. We believe our current segments complement one another and position us for future growth.
As of March 31, 2012, the Company operated eighteen branch offices located in eleven states.
Results of Operations – Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011
Results of Operations
Net revenues
|
Consolidated net revenues comprised of the following:
|
||||||||||||||||
|
Three Months Ended March 31,
|
||||||||||||||||
|
% change
|
||||||||||||||||
|
(In thousands)
|
2012
|
2011
|
$ change
|
|||||||||||||
|
Placement Services
|
$ | 1,638 | $ | 990 | $ | 648 | 65.5 | % | ||||||||
|
Management Services
|
- | 288 | (288 | ) | (100.0 | ) | ||||||||||
|
Professional Contract Services
|
2,023 | 1,600 | 423 | 26.4 | ||||||||||||
|
Agricultural Contract Services
|
1,787 | 3,035 | (1,248 | ) | (41.1 | ) | ||||||||||
|
Industrial Contract Services
|
7,254 | 1,991 | 5,263 | 264.5 | ||||||||||||
|
Consolidated Net Revenues
|
$ | 12,702 | $ | 7,904 | $ | 4,798 | 60.7 | % | ||||||||
Consolidated net revenues increased $4,798,000 or 60.7% from the same period last year primarily due to the acquisition of certain assets of Ashley Ellis, LLC in September 2011 and Industrial Contract start ups of BMCH Inc. and BMCHPA, Inc. in May 2011 and July 2011, respectively. The Ashley Ellis acquisition resulted in incremental Placement Services and Professional Contract Services revenue of $393,000 and $366,000 respectively. These increases were partially offset by decreases in Management Services revenue resulting from the termination of the management agreement with RFFG Inc. in July 2011 and by the loss of a major customer in the Agricultural Contract Services segment in January 2012.
Cost of contract services
The cost of services includes wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments. The cost of contract services for the three months ended March 31, 2012 increased $3,635,000 or 62.6% primarily due to revenue growth. Cost of contract services expressed as a percentage of net contract services revenue decreased to 85.3% for the three months ended March 31, 2012 from 87.6% for the three months ended March 31, 2011. See chart below for summary by segment:
| Three Months Ended | Three Months Ended | |||||||
|
Cost of contract services as % of net contract services revenue
|
March 31, 2012
|
March 31, 2011
|
||||||
|
Direct hire placement services
|
0 | % | 0 | % | ||||
|
Management services
|
n/a | 0 | % | |||||
|
Agricultural contract services
|
96.9 | % | 95.6 | % | ||||
|
Industrial contract services
|
86.8 | % | 87.0 | % | ||||
|
Professional contract services
|
69.6 | % | 73.1 | % | ||||
|
Total
|
85.3 | % | 87.6 | % | ||||
Costs as a percentage of net revenue have increased in the Agricultural segment as we had to aggressively price business to offset lost revenue. Industrial contract costs as percentage of net revenue have decreased primarily due to growth in higher margin business while Professional contract service costs as a percentage of net revenue have decreased as a result of management initiatives implemented to drive profitable growth in this segment.
Selling, general and administrative expenses
Selling, general and administrative expenses include the following categories:
|
|
·
|
Compensation in the operating divisions, which includes commissions earned by the Company’s employment consultants and branch managers on permanent and temporary placements. It also includes salaries, wages, unrecovered advances against commissions, payroll taxes and employee benefits associated with the management and operation of the Company’s staffing offices.
|
|
|
·
|
Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions.
|
|
|
·
|
Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses.
|
|
|
·
|
Recruitment advertising, which includes the cost of identifying job applicants.
|
|
|
·
|
Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.
|
Selling, general and administrative expenses for the three ended March 31, 2012 increased $1,599,000 or 79.0% compared to the same period last year. Increase can be attributed to a larger organization as the Company operated more branch offices with the acquisition of Ashley Ellis as well with the start up of BMCH Inc. and BMCHPA, Inc. Additionally, total compensation for our operating divisions has increased significantly more than the increases in net revenue primarily due to a compensation policy change in the Professional Services segment. In order to attract, retain and motivate the operating teams in a competitive marketplace, commission structures as well as base compensation were changed which resulted in a move away from advances and toward base salaries. While revenue growth is strong, the Company has not yet leveraged total compensation expense in this segment with this change.
Amortization of intangible assets
Amortization expense of $100,000 and $155,000 was recorded for the three months ended March 31, 2012 and 2011, respectively. Amount represents the amortization associated with the identifiable intangibles recorded for the Company’s acquisitions of certain assets of Onsite, RFFG of Cleveland, DMCC and Ashley Ellis. The reduction is primarily due to a decrease in the amortization of the management agreement intangible asset as a result of the $1,126,000 impairment charge recorded in September 2011 upon the termination of the related management services agreement with RFFG, Inc.
Interest expense
Interest expense for the three months ended March 31, 2012 was $55,000 as compared to $25,000 for the three months ended March 31, 2011. The increase is the result of higher borrowings due to growth of business through acquisitions.
Other
There was no provision for income taxes recorded for the three months ended March 31, 2012 and March 31, 2011 as a result of current and historical net operating losses which offset any current tax liability.
Results of Operations – Six Months Ended March 31, 2012 Compared to the Six Months Ended March 31, 2011
Results of Operations
Net revenues
|
Consolidated net revenues comprised of the following:
|
||||||||||||||||
|
Six Months Ended March 31,
|
||||||||||||||||
|
(In thousands)
|
2012
|
2011
|
$ change
|
% change
|
||||||||||||
|
Placement Services
|
$ | 3,511 | $ | 1,913 | $ | 1,598 | 83.5 | % | ||||||||
|
Management Services
|
- | 450 | (450 | ) | (100.0 | ) | ||||||||||
|
Professional Contract Services
|
4,081 | 3,175 | 906 | 28.5 | ||||||||||||
|
Agricultural Contract Services
|
4,352 | 5,412 | (1,060 | ) | 20.0 | |||||||||||
|
Industrial Contract Services
|
13,538 | 2,925 | 10,613 | 362.8 | ||||||||||||
|
Consolidated Net Revenues
|
$ | 25,482 | $ | 13,875 | $ | 11,607 | 83.7 | % | ||||||||
Consolidated net revenues increased $11,607,000 or 83.7% from the same period last year primarily due to the acquisition of certain assets of Ashley Ellis, LLC in September 2011 and Industrial Contract start ups of BMCH Inc. and BMCHPA, Inc. in May 2011 and July 2011, respectively. The Ashley Ellis acquisition resulted in incremental Placement Services and Professional Contract Services revenue of $992,000 and $683,000, respectively. These increases were partially offset by decreases in Management Services revenue resulting from the termination of the management agreement with RFFG Inc. in July 2011 and by the loss of a major customer in the Agricultural Contract Services segment in January 2012.
Cost of contract services
The cost of services includes wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments. The cost of contract services for the six months ended March 31, 2012 increased $8,842,000 or 89.2% primarily due to revenue growth. Cost of contract services expressed as a percentage of net contract services revenue decreased to 85.4% for the six months ended March 31, 2012 from 86.2% for the six months ended March 31, 2011. See chart below for summary by segment:
| Six Months Ended | Six Months Ended | |||||||
|
Cost of contract services as % of net contract services revenue
|
March 31, 2012
|
March 31, 2011
|
||||||
|
Direct hire placement services
|
0 | % | 0 | % | ||||
|
Management services
|
n/a | 0 | % | |||||
|
Agricultural contract services
|
95.4 | % | 95.8 | % | ||||
|
Industrial contract services
|
87.1 | % | 85.6 | % | ||||
|
Professional contract services
|
68.9 | % | 70.1 | % | ||||
|
Total
|
85.4 | % | 86.2 | % | ||||
Costs as a percentage of net revenue have remained constant in the Agricultural segment. Industrial contract costs as percentage of net revenue increased primarily to significant revenue growth in lower margin business while Professional contract service costs as a percentage of net revenue has decreased as the result of more profitable business with the Ashley Ellis acquisition coupled with management initiatives implemented to drive growth in this segment.
Selling, general and administrative expenses
Selling, general and administrative expenses include the following categories:
|
|
·
|
Compensation in the operating divisions, which includes commissions earned by the Company’s employment consultants and branch managers on permanent and temporary placements. It also includes salaries, wages, unrecovered advances against commissions, payroll taxes and employee benefits associated with the management and operation of the Company’s staffing offices.
|
|
|
·
|
Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions.
|
|
|
·
|
Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses.
|
|
|
·
|
Recruitment advertising, which includes the cost of identifying job applicants.
|
|
|
·
|
Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.
|
Selling, general and administrative expenses for the six months ended March 31, 2012 increased $3,147,000 or 83.7% compared to the same period last year. The increase can be attributed to a larger organization as the Company operated more branch offices with the acquisition of Ashley Ellis as well with the start up of BMCH Inc. and BMCHPA, Inc. Additionally, the previously discussed compensation change in the Professional Services segment also contributed to the increase.
Amortization of intangible assets
Amortization expense of $200,000 and $249,000 recorded for the six months ended March 31, 2012 and 2011 represents the amortization associated with the identifiable intangibles recorded for the Company’s acquisitions of certain assets of Onsite, RFFG of Cleveland, DMCC and Ashley Ellis. The reduction is primarily due to a decrease in the amortization of the management agreement intangible assets as a result of the $1,126,000 impairment charge recorded in September 2011 upon the termination of the related management services agreement with RFFG, Inc.
Interest expense
Interest expense for the six months ended March 31, 2012 was $107,000 compared to $38,000 for the six months ended March 31, 2011 primarily as a result of higher borrowings. Borrowings have increased as we continue to grow the business through acquisitions.
Other
There was no provision for income taxes recorded for the six months ended March 31, 2012 and 2011 as a result of current and historical net operating losses of the Company which offset any current tax liability.
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):
|
Six
months ended March 31, 2012
|
Six
months ended March 31, 2011
|
|||||||
|
Cash flows used in operating activities
|
$ | (174 | ) | $ | (1,616 | ) | ||
|
Cash flows used in investing activities
|
(406 | ) | (1 | ) | ||||
|
Cash flows provided by financing activities
|
361 | 1,271 | ||||||
As of March 31, 2012, the Company had cash and cash equivalents of approximately $95,000, which was a decrease of $219,000 from September 30, 2011. Net working capital (current assets less current liabilities) at March 31, 2012 was $502,000, which was a decrease of $485,000 from September 30, 2011. Current assets divided by current liabilities – current ratio - was 1.1 to 1. Net cash used in operating activities for the six months ended March 31, 2012 and the six months ended March 31, 2011 was ($174,000) and ($1,616,000), respectively. The improvement is primarily due to the timing of Accounts Receivable billings and collections as a result of the DMCC and RFFG acquisitions in the prior year offset by a larger operating loss and the change in payroll accruals.
Net cash used in investing activities for the six months ended March 31, 2012 was ($406,000) and ($1,000) for six months ended March 31, 2011. The change was the direct result of a $200,000 payment made to Ashley Ellis, LLC as required by the purchase agreement as well as vehicle purchases to support the Light Industrial segment.
Net cash flow provided by financing activities for the six months ended March 31, 2012 was $361,000 compared to $1,271 in the six months ended March 31, 2011. Fluctuations in financing activities are attributable to the level of borrowings on the AR Credit Facility with Wells Fargo.
Information about future minimum lease payments, purchase commitments and long-term obligations is presented in the notes to consolidated financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011. There have been no significant changes from the amounts presented in the Form 10-K.
On August 31, 2011, the Company entered into an asset purchase agreement with Ashley Ellis LLC, an Illinois limited liability company, and Brad A. Imhoff, for the purchase of certain assets of Ashley Ellis, including customer lists, comprising Ashley Ellis’ services business. Ashley Ellis’ services business was operated from offices in Illinois, Texas and Georgia and provided services related to the recruitment and placement of technical personnel. The asset purchase agreement was deemed effective on September 1, 2011. Brad A. Imhoff is the brother of Herbert F. Imhoff, Jr., a director and President of the Company.
As consideration for the assets, the Company paid Ashley Ellis $200,000 on the date of closing and paid Ashley Ellis an additional $200,000 in February 2012. The Company also issued 1,250,000 shares of the Company’s common stock to Ashley Ellis.
In November 2010, the Company purchased certain assets of RFFG of Cleveland, LLC and DMCC Staffing, LLC (“DMCC”) and entered into a management agreement with RFFG, LLC (the previous parent company of RFFG of Cleveland and DMCC Staffing, LLC) to provide services to RFFG to operate its day-to-day business, including services related to accounting, sales, finance, workers compensation, benefits, physical locations, IT, and employees. Thomas J. Bean, a 10% shareholder of the Company (prior to consideration of common shares issued in this transaction), is the owner of RFFG.
In consideration of the services provided under the management agreement, RFFG agreed to pay the Company approximately 6% of its gross revenues. The Company added employees to provide the services required under the management agreement. In July 2011, the management agreement was effectively terminated as a result of RFFG ceasing operations. There are no future revenues expected under this agreement. In consideration for the assets acquired and the rights under the management contract, the Company paid $2,400,000 through the issuance of its common stock. In addition, the purchase agreement requires the Company to make additional payments of up to a total of $2,400,000 over the four year period ending December 31, 2014 if certain performance targets are achieved. As of March 31, 2012, the Company has accrued approximately $1,000,000 of estimated payments, of which $585,000 is currently due.
In connection with the completion of the sale of shares of common stock to PSQ in fiscal 2009, the Company’s Chairman, Chief Executive Officer and President (the “former CEO”) resigned from those positions and his employment agreement with the Company was replaced by a new consulting agreement. Under the consulting agreement, the Company became obligated to pay an annual consulting fee of $180,000 over a five-year period and to issue 500,000 shares of common stock to the former CEO for no additional consideration, and the Company recorded a liability for the net present value of the future fee payments in the amount of $790,000. As of March 31, 2012, $381,000 remains payable under this agreement and is included in accrued compensation and long-term obligations on the Company’s balance sheet. The agreement expires on June 30, 2014.
In December 2010, the Company entered into a two-year, $3,000,000 account purchase agreement (“AR Credit Facility”) with Wells Fargo Bank N.A. (“Wells Fargo”). The AR Credit Facility provides for borrowings on a revolving basis of up to 85% of the Company’s eligible accounts receivable less than 90 days old and bears interest at a rate equal to the three month LIBOR (minimum of .5%) plus 5.25% for a total interest rate of 5.75%. Upon the terms and subject to the conditions in the agreement, Wells Fargo may determine which receivables are eligible receivables, may determine the amount it will advance on any such receivables, and may require the Company to repay advances made on receivables and thereby repay amounts outstanding under the AR Credit Facility. Wells Fargo also has the right to require the Company to repurchase receivables that remain outstanding 90 days past their invoice date. The Company continues to be responsible for the servicing and administration of the receivables purchased. The Company will carry the receivables and any outstanding borrowings on its consolidated balance sheet. The outstanding borrowings at March 31, 2012 are $2,299,000 and the remaining borrowing availability is $639,000.
In February 2012 the AR Credit Facility with Wells Fargo Bank N.A. was amended whereby the facility maximum increased to $4,500,000 from $3,000,000.
The Company believes that the borrowing availability under its AR Credit Facility will be adequate to fund continuing operations and the increase in working capital due to growth in the business. In the event Wells Fargo elects not to advance us funds on our accounts receivable balance or the performance of the acquired entities do not meet our expectations, we could experience liquidity constraints.
Off-Balance Sheet Arrangements
As of March 31, 2012, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.
Not applicable.
|
Item 4.
|
Disclosure Controls and Procedures
As of March 31, 2012, the Company’s management evaluated, with the participation of its principal executive officer and its principal financial officer, the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act”). Based on that evaluation, the Company’s principal executive officer and its principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2012 to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting or in any other factors that could significantly affect these controls, during the Company’s second quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
|
Item 1.
|
In March 2012 the Company became aware of a lien on the business by the Ohio Bureau of Workers Compensation for $229,000. The Company believes this claim represents unpaid workers compensation premium for a period prior to the acquisition of RFFG of Cleveland in November 2010. The Company is currently defending its position on this matter.
|
Item 1A.
|
Not required.
None.
|
Item 3.
|
None.
|
Item 4.
|
|
Item 5.
|
None.
|
Item 6.
|
|
The following exhibits are filed as a part of Part I of this report:
|
||
|
No.
|
Description of Exhibit
|
|
|
Certifications of the principal chief executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
|
||
|
Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
|
||
|
Certifications of the principal chief executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code.
|
||
|
Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act and Section 1350 of Title 18 of the United States Code.
|
||
|
101.INS
|
Instance Document
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
GENERAL EMPLOYMENT ENTERPRISES, INC.
|
|
| (Registrant) | |
|
Date : May 14, 2012
|
By: /s/ Salvatore J. Zizza
|
|
Salvatore J. Zizza
|
|
|
Chairman of the Board and Chief Executive Officer
|
|
|
By: /s/ Jarett A. Misch
|
|
|
Jarett A. Misch
|
|
|
Chief Financial Officer and Treasurer
|
20