Business Context and Reporting Period
Company: General Employment Enterprises, Inc. (GEE Group Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009 (Nine months ended June 30, 2009)
Business Overview: The Company provides contract and placement staffing services, specializing in information technology, engineering, and accounting professionals. Operations are highly dependent on national employment trends, which deteriorated significantly during the reporting period with the national unemployment rate rising to 9.5%.
Key Financial Metrics
| Metric | Nine Months Ended June 30, 2009 | Nine Months Ended June 30, 2008 |
|---|---|---|
| Net Revenues | $7,879,000 | $11,475,000 |
| Net Loss | $(4,159,000) | $(1,332,000) |
| Loss Per Share (Basic/Diluted) | $(0.81) | $(0.26) |
| Cash and Cash Equivalents (End of Period) | $3,081,000 | $4,267,000 |
| Net Cash Used in Operating Activities | $(2,468,000) | $(1,454,000) |
| Total Assets | $5,312,000 | $7,002,000 |
| Shareholders' Equity | $2,711,000 | $5,076,000 |
| Current Ratio | 2.4 to 1 | N/A |
Margins: Gross profit margin on contract business was 30.2% for the nine-month period, a decrease of 2.4 percentage points from the prior year due to competitive pricing pressures.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net revenues decreased 31% ($3.6 million) compared to the prior year. Contract services revenue fell 22%, while placement services revenue dropped 41% due to a 48% reduction in placements.
- Increased Losses: Operating loss widened to $4.1 million from $1.4 million in the prior year period. Net loss increased to $4.2 million from $1.3 million.
- Expense Structure: Selling, general, and administrative (SG&A) expenses decreased slightly by 2% overall. However, this masked a 72% increase in administrative compensation driven by a $1.125 million provision for a new consulting agreement with the former CEO, offset by a 27% decrease in operating division compensation.
- Capital Structure: The Company issued 7.7 million shares of common stock to PSQ, LLC, raising net proceeds of $1.432 million. This transaction resulted in a change of control.
- Restructuring: The Company consolidated ten branch offices and closed six, recording a $376,000 provision for closing costs. Staff levels were reduced by 55% compared to the start of the fiscal year.
Outlook, Risks, and Management Commentary
Management Commentary: Management attributes the financial decline to the U.S. economic downturn and reduced demand for staffing services. The Company has implemented a restructuring plan to reduce SG&A expenses substantially in the fourth quarter. The primary objective is to return to a breakeven level of cash flow as soon as possible.
Going Concern: The financial statements are prepared on a going concern basis. Management notes that the Company's ability to continue as a going concern is dependent on its ability to reduce costs and increase sales to operate profitably. No adjustments have been made to reflect potential future effects of an inability to continue as a going concern.
Risks and Contingencies:
- Economic Sensitivity: Business is highly dependent on national employment trends and demand for professional staff.
- Liquidity: Negative operating cash flow of $2.5 million for the nine-month period requires ongoing cost management.
- Contractual Obligations: As of June 30, 2009, the Company had purchase commitments of approximately $410,000 for recruitment advertising through December 31, 2009.
Guidance: The Company does not provide forecasts of future financial performance.
Key Facts for Investor Verification
- Change of Control: Verify the implications of the sale of 7.7 million shares to PSQ, LLC, which resulted in a change of control and the resignation of the former CEO.
- One-Time Charges: Confirm the impact of the $1.125 million consulting agreement provision and $376,000 office closing costs on the reported net loss.
- Liquidity Position: Assess the sustainability of the $3.1 million cash balance given the negative operating cash flow of $2.5 million for the nine-month period.
- Revenue Recovery: Monitor the 48% decline in placements and 16% decline in billable contract hours to gauge the effectiveness of the restructuring efforts.
- Stock Issuance: Review the dilution impact of the 7.7 million new shares issued, increasing total outstanding shares from 5.2 million to 13.4 million.