Business Context and Reporting Period
Company: General Employment Enterprises, Inc. (GEE Group Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company provides contract and placement staffing services, specializing in IT, engineering, and accounting professionals. Recent strategic growth includes acquisitions in the agricultural (On-Site Services) and industrial staffing sectors (DMCC Staffing and RFFG of Cleveland). As of March 31, 2011, the Company operated 14 offices across eight states.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Six Months Ended Mar 31, 2011 |
|---|---|---|
| Net Revenues | $7,904,000 | $13,875,000 |
| Net Loss | $(104,000) | $(90,000) |
| Loss Per Share (Basic/Diluted) | $(0.01) | $(0.01) |
| Cash and Cash Equivalents | $599,000 | $599,000 (Ending Balance) |
| Net Cash Used in Operating Activities | N/A | $(1,616,000) |
| Short-Term Debt | $1,266,000 | $1,266,000 |
| Long-Term Obligations | $2,035,000 | $2,035,000 |
| Current Ratio | 1.2 to 1 | 1.2 to 1 |
Revenue Composition (Six Months 2011): Contract Services ($11.5M), Placement Services ($1.9M), and Management Services ($0.45M).
Gross Margins (Six Months 2011): Professional Services (29.9%), Industrial Services (14.4%), Agricultural Services (4.2%).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 289.7% for the quarter and 246.8% for the six-month period compared to the prior year. This surge is primarily attributed to the acquisitions of On-Site Services, DMCC Staffing, and RFFG of Cleveland, which contributed approximately $8.8 million in revenue for the six-month period.
- Profitability: While the Company reported a net loss of $104,000 for the quarter, this represents a significant improvement from the $700,000 loss in the same period last year. The six-month net loss improved to $90,000 from $1.289 million.
- Margin Compression: Consolidated contract service gross profit margins decreased from 27.3% (prior year) to 13.9% (current six months). This decline is driven by the inclusion of lower-margin agricultural services (4.2%) and increased wage costs in professional contracts.
- Balance Sheet Expansion: Total assets grew from $3.4 million to $9.9 million, driven by the recognition of goodwill ($1.26M) and intangible assets ($3.52M) from recent acquisitions. Total liabilities increased to $5.98 million, including new short-term debt of $1.27 million.
Outlook, Risks, and Contingencies
- Acquisition Earn-Outs: The Company has contingent earn-out obligations for the DMCC and RFFG acquisitions totaling up to $2.2 million in fair value, payable over four years based on EBITDA targets. No earn-out payments have been made as of March 31, 2011, but management expects targets to be met.
- Liquidity and Debt: The Company terminated its credit facility with Crestmark Bank in December 2010 and entered a $3 million Account Purchase Agreement with Wells Fargo. As of March 31, 2011, outstanding borrowings were $1.27 million with $336,000 in remaining availability. The Company relies on this facility to fund working capital needs associated with acquisitions.
- Customer Concentration: The largest customer accounted for 21.4% of quarterly revenues and 18.1% of six-month revenues. The second-largest customer accounted for 15.2% and 12.2%, respectively.
- Management Commentary: Management attributes revenue growth to acquisitions and an improving job market. However, they note competitive pricing pressures and increased costs (wages, taxes) impacting margins. The Company does not provide specific financial forecasts.
- Legal/Contingencies: No material legal proceedings were reported. The Company has a remaining liability of $357,000 related to a consulting agreement with a former CEO.
Investor Verification Checklist
- Acquisition Integration: Verify the actual EBITDA performance of the acquired entities (On-Site, DMCC, RFFG) against the earn-out targets to assess future cash outflows.
- Margin Sustainability: Analyze the long-term viability of the low-margin agricultural segment (4.2%) and its impact on overall profitability.
- Debt Covenants: Confirm continued compliance with the Wells Fargo AR Credit Facility covenants, particularly regarding eligible receivables and repayment terms.
- Customer Retention: Monitor the stability of the top two customers, who collectively represent over 35% of revenue.
- Cash Flow: Review the ability to generate positive operating cash flow given the significant cash burn ($1.6M used in six months) driven by working capital increases.