Business Context and Reporting Period
Company: General Employment Enterprises, Inc. (GEE Group Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: The Company operates in a single segment providing professional staffing services, specializing in information technology, engineering, and accounting professionals. Services include contract staffing (temporary assignments) and placement services (permanent hires). As of September 30, 2009, the Company operated ten branch offices across eight states.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Revenues | $10,394,000 | $15,235,000 |
| Loss from Operations | $(4,178,000) | $(1,843,000) |
| Net Loss | $(4,228,000) | $(1,806,000) |
| Net Loss Per Share (Basic/Diluted) | $(0.58) | $(0.35) |
| Cash and Cash Equivalents (End of Period) | $2,810,000 | $4,165,000 |
| Net Cash Used by Operating Activities | $(2,695,000) | $(1,550,000) |
| Shareholders' Equity | $2,604,000 | $5,076,000 |
| Current Ratio | 2.8 to 1 | Filing text does not provide a clear value |
| Contract Service Gross Margin | 30.4% | 32.6% |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated net revenues decreased 32% ($4.84 million) due to a 15% drop in billable contract hours and a 51% drop in placements, driven by the national economic downturn and rising unemployment (9.8% in Sept 2009 vs. 6.2% in Sept 2008).
- Expense Structure: Selling, general, and administrative (SG&A) expenses decreased 15% ($1.84 million). However, this included a $1.07 million non-cash provision for additional compensation to the former CEO and a $330,000 provision for closing branch offices.
- Capital Structure: The Company issued 7.7 million shares to PSQ, LLC for $1.925 million (net proceeds $1.384 million) and issued 500,000 shares to the former CEO as part of a consulting agreement. Total shares outstanding increased from 5.165 million to 13.38 million.
- Operational Restructuring: The Company consolidated ten branch offices, closing six of them, and reduced sales, recruiting, and administrative staff by 58% compared to the beginning of the fiscal year.
Outlook, Risks, and Unusual Items
- Liquidity and Financing: Management believes existing cash balances are adequate for the next twelve months. In November 2009, the Company secured a $3.5 million line of credit from Crestmark Bank, secured by accounts receivable.
- Unusual Item - CD Non-Performance: In November 2009, the Company discovered a bank failed to return proceeds from a $2.3 million certificate of deposit (CD) maturing in October 2009. The Company assigned the CD to a third party in December 2009 and was reimbursed in full. This event led to a resignation of the former CEO and a determination of a material weakness in internal controls.
- Acquisitions: The Company is in negotiations to purchase On-Site Services, Inc. (approx. $10M revenue) and entered a memorandum agreement in December 2009 to purchase GT Systems, Inc., subject to securing $9 million in financing.
- Tax Risks: The Company has significant net operating loss carryforwards ($7.4M federal, $6.8M state) but maintains a full valuation allowance. The ownership change involving PSQ may limit the use of these losses under Section 382 of the Internal Revenue Code.
- Guidance: The Company does not provide forecasts of future financial performance.
Investor Verification Checklist
- Internal Controls: Verify the remediation of the material weakness regarding the unauthorized CD purchase and the non-performance of the bank.
- Section 382 Limitations: Confirm the impact of the ownership change on the usability of the $14.2 million in net operating loss carryforwards.
- Acquisition Financing: Monitor the status of the $9 million accounts receivable financing line required for the GT Systems, Inc. acquisition.
- Customer Concentration: Note that the two largest customers accounted for 21% of revenues in 2009, up from 11% in 2008.
- Debt Covenants: Review the financial covenants associated with the new Crestmark Bank line of credit.