UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549
 
FORM 10-Q

xQUARTERLY REPORT UNDER SECTION  13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30,
For the quarterly period ended December 31, 2011
OR
 
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-05707

GENERAL EMPLOYMENT ENTERPRISES, INC
(Exact name of registrant as specified in its charter)
GENERAL EMPLOYMENT ENTERPRISES, INCIllinois 
(Exact name of registrant as specified in its charter)
 
Illinois36-6097429
(State (State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
One Tower Lane, Suite 2200, Oakbrook Terrace, Illinois 60181
One Tower Lane, Suite 2200, Oakbrook Terrace, Illinois 60181
(Address of principal executive offices)(630) 954-0400(Registrant’s telephone number, including area code)

(630) 954-0400
(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 xNo 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.
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.

Large accelerated filer  o
Accelerated filer o
Non-accelerated filer    o
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes. Yes  oNo  x
 
The number of shares outstanding of the registrant’s common stock as of August 15,December 31, 2011 was 20,449,675.
 
 
 
 
 
GENERAL EMPLOYMENT ENTERRISES, INC.
Form 10-Q
For the Quarter Ended December 31, 2011
INDEX

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS3
PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements
4
Consolidated Balance Sheets at December 31, 2011 and September 30, 2011
4
Consolidated Statements of Operations for the three months ended December 31, 2011 and December 31, 2010
5
Consolidated Statements of Cash Flows for the three months ended December 31, 2011 and December 31, 2010
6
Consolidated Statements of Shareholders’ Equity for the three months ended December 31, 2011 and December 31, 2010
7
Notes to Consolidated Financial Statements
8-15
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15-20
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
20
Item 4.
Control and Procedures
20

PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings
20
Item 1A.
Risk Factors
20
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
Item 3.
Defaults Upon Senior Securities
20
Item 4.
(Removed and Reserved)
20
Item 5.
Other Information
21
Item 6.
Exhibits
21
Signatures
21
2
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.

3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
 
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
  June 30  September 30 
  2011  2010 
(In Thousands) (unaudited)    
       
ASSETS      
Current assets:      
Cash and cash equivalents $297  $945 
Accounts receivable, less allowances (June 2011- $ 112; September 2010 - $86)  4,553   1,419 
Other  200   216 
         
Total current assets  5,050   2,580 
 
Property and equipment, net
  303   383 
Goodwill  1,256   172 
Intangible assets, net  3,365   259 
         
Total assets $9,974  $3,394 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $183  $107 
Accrued compensation  1,665   769 
Short-term debt  976   — 
Other  1,090   495 
         
Total current liabilities  3,914   1,371 
         
Long-term obligations  1,924   431 
         
Shareholders’ equity:        
Preferred stock; authorized - 100 shares; issued and outstanding - none  —   — 
Common stock, no-par value; authorized - 50,000 shares; issued and outstanding – 20,449 shares in 2011 and 14,856 shares in 2010  9,698   7,287 
Accumulated deficit  (5,562)  (5,695)
         
Total shareholders’ equity  4,136   1,592 
         
Total liabilities and shareholders’ equity $9,974  $3,394 
See notes to consolidated financial statements.


2
    
  December 31  September 30 
(In Thousands) 2011  2011 
  (unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $45  $314 
Accounts receivable, less allowances (December 2011- $187; September 2011 - $137)  7,464   6,604 
Other  160   190 
         
Total current assets  7,669   7,108 
Property and equipment, net  385   409 
Goodwill  1,280   1,280 
Intangible assets, net  2,599   2,699 
         
Total assets $11,933  $11,496 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $400  $485 
Accrued compensation  2,532   2,391 
Short-term debt  2,360   1,938 
Other  1,286   1,307 
         
Total current liabilities  6,578   6,121 
         
Long-term obligations  632   681 
         
Shareholders’ equity:        
Preferred stock; authorized - 100 shares; issued and outstanding - none  —   — 
Common stock, no-par value; authorized - 50,000 shares; issued and outstanding - 21,699 shares at December 2011 and at September 2011  10,037   10,031 
Accumulated deficit  (5,314)  (5,337)
         
Total shareholders’ equity  4,723   4,694 
         
Total liabilities and shareholders’ equity $11,933  $11,496 
 
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
  Three Months  Nine Months 
  Ended June 30  Ended June 30 
(In Thousands, Except Per Share Amounts) 2011  2010  2011  2010 
             
Net revenues:            
Contract staffing services $10,239  $2,982  $21,751  $5,840 
Direct hire placement services  1,142   854   3,055   1,996 
Management services  336   —   786   — 
Net revenues  11,717   3,836   25,592   7,836 
                 
Cost of contract services  9,049   2,445   18,967   4,500 
Selling, general and administrative expenses  2,215   1,519   5,974   4,726 
Amortization of intangible assets  154   —   403   — 
                 
Income(loss) from operations  299   (128)  248   (1,390)
Other expense, net  (77)  (9)  (115 )  (36)
                 
Net Income (loss) $222  $(137) $133  $(1,426)
                 
Weighted average number of shares – basic  20,449   13,867   18,584   13,542 
Weighted average number of shares – diluted  20,750   13,867   18,884   13,542 
                 
Net Income (loss) per share - basic  .01   (.01)  .01   (.11)
Net Income (loss) per share - diluted $.01  $(.01) $.01  $(.11)
See notes to consolidated financial statements.
3
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
  Nine Months 
  Ended June 30 
(In Thousands) 2011  2010 
       
Operating activities:      
Net income (loss) $133  $(1,426)
         
Adjustments to reconcile net income (loss) to net cash used in operating activities -        
Depreciation and amortization  541   166 
Stock compensation expense  7   10 
Non-cash interest expense  66   — 
Expenses paid by principal stockholder  —   46 
Changes in assets and liabilities -        
Accounts receivable  (3,134)  (1,092)
Accounts payable  76   (273)
Accrued compensation  896   390 
Other current items, net  228   59 
Long-term obligations  (388)  (135)
         
Net cash used in operating activities  (1,575)  (2,255)
Investing activities:        
Acquisition of property and equipment  (54)  — 
Financing activities:        
Net proceeds from short-term debt  976   — 
Exercises of stock options  5   — 
Net cash provided by financing activities  981   — 
         
Decrease in cash and cash equivalents  (648)  (2,255)
Cash and cash equivalents at beginning of period  945   2,810 
         
Cash and cash equivalents at end of period $297  $555 
         
Supplemental Disclosure of Cash Flow Information:        
Interest paid $73  $36 

Supplemental Disclosure of Non-Cash Investing Activities:
In November 2010, the Company purchased certain assets of DMCC Staffing, LLC and RFFG of Cleveland, LLC and agreed to issue 5,581 shares of common stock to DMCC Staffing and RFFG of Cleveland, LLC.

In June 2010, the Company purchased certain assets of On-Site Services, Inc. through the issuance of 1,476 shares of common stock.

See notes to consolidated financial statements.
 
 
4

GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITYOPERATIONS (Unaudited)
  Nine Months 
  Ended June 30 
(In Thousands) 2011  2010 
       
Common shares outstanding:      
Number at beginning of period  14,856   13,380 
Issuance of common stock for acquisition  5,581   1,476 
Issuance of common stock for options  12   — 
Number at end of period  20,449   14,856 
         
Common stock:        
Balance at beginning of period $7,286  $6,743 
Stock compensation expense  7   — 
Issuance of common stock for options  5   487 
Issuance of common stock for acquisition  2,400   10 
Administrative compensation paid by principal stockholder  —   46 
         
Balance at end of period $9,698  $7,286 
         
Accumulated deficit:        
Balance at beginning of period $(5,695) $(4,139)
Net Income(loss)  133   (1,426)
         
Balance at end of period $(5,562) $(5,565)

  Three Months 
  Ended December 31 
(In Thousands, Except Per Share Data) 2011  2010 
       
Net revenues:      
Contract staffing services $10,907  $4,887 
Direct hire placement services  1,873   923 
Management services  —   162 
Net revenues  12,780   5,972 
         
Cost of contract services  9,322   4,115 
Selling, general and administrative expenses  3,283   1,735 
Amortization of intangible assets  100   94 
         
Income from operations  75   28 
Interest expense  52   13 
         
Net Income $23  $15 
         
         
Weighted average number of shares – basic  21,699   14,917 
Weighted average number of shares – diluted  21,928   14,921 
         
Net Income per share – basic and diluted $—  $— 
See notes to consolidated financial statements.
 
 
5
 
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

  Three Months 
  Ended December 31 
(In Thousands) 2011  
2010
 
       
Operating activities:      
Net income $23  $15 
Adjustments to reconcile net income to net cash used in operating activities -        
Depreciation and amortization  134   141 
Stock compensation expense  6   2 
Other non-cash items  —   9 
Changes in current assets and current  liabilities -        
Accounts receivable  (860)  (1,723)
Accounts payable  (85)  589 
Accrued compensation  141   88 
Other items, net  (40)  (87)
Net cash used in operating activities  (681)  (966)
Investing activities:        
Acquisition of property and equipment  (10)  — 
Financing activities:        
Net proceeds from short-term debt  422   264 
Net cash provided by financing activities  422   264 
         
Decrease in cash and cash equivalents  (269)  (702)
Cash and cash equivalents at beginning of period  314   945 
         
Cash and cash equivalents at end of period $45  $243 
         
Supplemental Disclosure of Cash Flow Information:        
Interest paid $37  $15 

Supplemental Disclosure of Non-Cash Investing Activities:
·In August 2011, the Company purchased certain assets of Ashley Ellis, LLC in exchange for 1,250 shares of common stock value at $331.
·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.

See notes to consolidated financial statements.
6
GENERAL EMPLOYMENT ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

  Three Months 
  Ended December 31 
(In Thousands) 2011  2010 
       
Common shares outstanding:      
Number at beginning of period  21,699   14,856 
Issuance of common stock for acquisition  —   5,581 
Number at end of period  21,699   20,437 
         
Common stock:        
Balance at beginning of period $10,031  $7,287 
Issuance of common stock for acquisitions  —   2,400 
Stock compensation expense  6   2 
         
Balance at end of period $10,037  $9,689 
         
Accumulated deficit:        
Balance at beginning of period $(5,337) $(5,695)
Net Income  23   15 
         
Balance at end of period $(5,314) $(5,680)

See notes to consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.Basis1. 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, 20102011 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP.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, 20102011 of General Employment Enterprises, Inc. (the “Company”).

2.Entry2. 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 agreed to pay Ashley Ellis an additional $200,000 within six months of closing.  The Company also agreed to issue to Ashley Ellis 1,250,000 restricted shares of the Company’s common stock.  As the sole member of Ashley Ellis, Brad A. Imhoff has an interest in the entire consideration paid by the Company to Ashley Ellis for the assets.
In connection with the transactions contemplated by the Ashley Ellis Asset Purchase Agreement, on August 31, 2011, the Company and Ashley Ellis entered into a registration rights agreement (the “Registration Rights Agreement”), pursuant to which Ashley Ellis was granted certain piggyback registration rights with respect to the Shares to be issued to Ashley Ellis under the Ashley Ellis Asset Purchase Agreement.  The Registration Rights Agreement contains certain indemnification provisions for the benefit of the Company and Ashley Ellis and other customary provisions.  The total consideration is summarized as follows:

In Thousands   
    
Stock consideration $331 
Future payout consideration  200 
Payout consideration  200 
     
Total consideration for acquisition $731 
8
The following table summarizes the approximate fair value of the assets acquired and liabilities assumed at the date of closing.

In Thousands   
    
Fixed assets $114 
Intangible assets – trade name  17 
Intangible assets – customer relationships  577 
Goodwill  23 
     
Total fair value of assets acquired $731 

The assets purchased from Ashley Ellis constitute a business and as such, the acquisition of these assets was accounted for as a business combination. The assets purchased related to the Ashley Ellis, LLC acquisition were not considered a significant acquisition.  The results of operations of Ashley Ellis, LLC are included in the Company’s statement of operations from the effective date of the acquisition, September 1, 2011.

Acquisition of DMCC Staffing, LLC and RFFG of Cleveland,LLC

Effective November 1, 2010, the Company, andthrough 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, includingprimarily 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.

The closing of the Asset Purchase Agreement was subject to certain conditions, including entry 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”) by the Company.  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”RFFG”). (Refer to Entry into Management Service Agreement footnote below for further description).

The assets purchased from RFFG of Cleveland and DMCC constitute businesses and as such the acquisition of these assets were accounted for as a business combination. Pursuant to the Asset Purchase Agreement, the Company agreed to issue $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 upon receipt of (a) stockholder approval of the transaction and of an increase to the Company’s authorized Common Stock and (b) approval of an additional listing application by the NYSE Amex Stock Exchange.  On March 24, 2011, the Company received written consents in lieu of a meeting of shareholders from the holders of 71.8%71.9% of the shares of Common Stock, (i) approving the issuance of 5,581,395 shares of the Common Stock to DMCC Staffing and RFFG of Cleveland pursuant to the Asset Purchase Agreement and the issuance of any additional shares of Common Stock to DMCC and RFFG of Cleveland as may be necessary pursuant to certain earn-out payment provisions under the Asset Purchase Agreement; and (ii) approving an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of capital stock from 20,100,000 shares to 50,100,000 shares and to increase the number of authorized shares of Common Stock from 20,000,000 shares to 50,000,000 shares.

Commencing in 2011, if the aggregate EBITDA of the businesses acquired, includingplus 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.  The EBITDA Targets are $300,000, $600,000, $900,000 and $1,200,000 for each of the three-, six-, nine- and twelve-month periods, respectively, in the fiscal year ending December 31, 2011, and earn-out payments will consist of quarterly payments of $150,000, payable in three equal monthly installments, if the relevant EBITDA Targets are met.
6
Starting in the fiscal year ending December 31, 2012, the EBITDA Targets will be 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 June 30,Through December 31, 2011, RFFG of Cleveland and DMCC has accrued $266,235$556,000 of earn-out payments.payments were currently due and are included in other liabilities on the consolidated balance sheet.
9

The accounting guidance requires that contingent consideration be added to the purchase price and the resultant liability be recorded at fair value.  Given the terms of the earn-out provisions of the Asset Purchase Agreement, the Company believes that the earn-out will be paid and accordingly, has included the fair value of the projected total earn-out payments in the total consideration paid for the acquisition.  Any subsequent changes in the estimated fair value of this contingent consideration will be recorded in the Company’s statement of operations. Through June 30, 2011, there has been no change in the estimated fair value of the earn-out consideration to be paid.  

The total consideration is summarized as follows:

In Thousands   
    
Stock consideration $2,400 
Earn-out consideration  2,198 
     
Total consideration for acquisition $4,598 

The following table summarizes the approximate fair value of the assets acquired and liabilities assumed at the date of closing.

In Thousands   
    
Fixed assets $5 
Intangible assets - management agreement  1,396 
Intangible assets - customer relationships  2,113 
Goodwill  1,084 
     
Total fair value of assets acquired $4,598 

The results of operations of DMCC and RFFG of Cleveland are included in the Company’s statement of operations from the effective date of the acquisition, November 1, 2010.  The Company wrote off the intangible asset associated with the management agreement and reduced the earn-out liability by $1,276,000 in September 2011 when it was determined that RFFG ceased doing business on July 15, 2011 and therefore, future management fees would no longer would be earned.   

In connection with the application of purchase accounting, the Company recorded its identifiable intangible assets at fair value.  Fair value of the intangible assets was determined primarily through the use of a discounted cash flow analysis.  The discounted cash flow analysis projected the estimated future cash flows to be generated by the underlying assets and discounted these at a rate reflecting perceived business and financial risks.  The projected cash flow estimates used in the discounted cash flow analysis are based on management’s best estimate and actual results may differ.  The valuation of these intangible assets is based predominately on Level 3 inputs.  The levels of the fair value hierarchy are described below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets.

Level 2: Inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly, included quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 
710
 
Level 3: Inputs that are both significant to the fair value measurement and unobservable.

Acquisition of On-Site Services, Inc.

On June 1, 2010, the Company, through its wholly-owned subsidiary Triad Personnel Services, Inc., entered into an asset purchase agreement (the “On-Site Asset Purchase Agreement”) with On-Site Services, Inc. (“On-Site”) and Thomas J. Bean.  On-Site is located in Florida and provides labor and human resource solutions, including temporary staffing, human resources, labor and employment consulting and workforce solutions to the agricultural industry. Pursuant to the On-Site Asset Purchase Agreement, upon On-Site’s direction, the Company issued 1,476,015 shares of its Common Stock (no par value) to Big Red Investments Partnership, Ltd, an affiliate of On-Site (based on a stated value of $600,000 divided by the average share price of the 20 consecutive trading days prior to the second trading day prior to the closing of the On-Site Asset Purchase Agreement).  For accounting purposes, the shares of Common Stock issued were valued at approximately $487,000 based on the quoted market price on the closing date.  Under the On-Site Asset Purchase Agreement, if the aggregate EBITDA of the business acquired meets certain targets over a period of four years, the Company will be required to make earn-out payments to On-Site totaling up to $1,020,000, $600,000 of which is payable in cash and $420,000 of which is payable in cash or Common Stock, or any combination thereof, in the Company’s sole discretion. The Company has determined the fair value of the contingent consideration that could be paid under the earn-out provisions of the On-Site Asset Purchase Agreement is zero based on the estimated probability that no payment will be made under this earn-out arrangement. Therefore, at the date of the acquisition, no value has been assigned to the contingent consideration. Any subsequent changes in the estimated fair value of this contingent consideration will be recorded in the Company’s statement of operations.  As of June 30, 2011, there has been no earn-out payments accrued or changes in the estimated fair value of the potential earn-out consideration.  In addition, the Company also provided the principal, Thomas J. Bean, of On-Site a non-interest bearing advance of $300,000 on June 1, 2010, which was fully repaid by June 30, 2010.

The following table summarizes the approximate fair value of the assets acquired at the date of the closing.

In Thousands   
    
Fixed assets $2 
Intangible assets - non-compete agreement  89 
Intangible assets - customer relationships  223 
Goodwill  173 
     
Total fair value of assets acquired $487 
The results of operations of On-Site are included in the Company’s statement of operations from the date of the acquisition.
Pro Formaforma 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.

  Three Months Ended  Nine Months Ended 
  June 30  June 30 
(In thousands) 2011  2010  2011  2010 
             
Net revenues $11,717  $9,089  $26,183  $20,777 
Net Income (loss) $222  $224  $173  $(962)
                 
Basic and diluted income (loss) per share $.01  $.01  $.01  $(0.07)

8
  Three months ended 
  December 31 
(In thousands) 2011  2010 
       
Net revenues $12,780  $6,563 
Net income $23  $26 
         
Basic and diluted loss per share $0.00  $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 the Management Agreementa management service agreement (the “Management Agreement”) with RFFG.  The Management Agreement becameRFFG effective on 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, ITinformation technologies and employees.  The Management Agreement providesprovided that additional services may be added if BMP and RFFG mutually agree to the cost to be charged by BMP for such services and as long as BMP has the resources to provide such services.

In consideration of the services provided under the Management Agreement, RFFG, willLLC agreed to pay BMP monthly fees that will approximate 6% of its gross revenues on an annual basis.  Fees may be adjusted up or down by mutual agreement of the parties to accommodate seasonal trends in revenues of RFFG.  The Management Agreement may be terminated by either BMP or RFFG upon 180 days prior written notice.  The Company added employees to provide the services required under the Management Agreement.

For the nine months and quarter ended June 30, 2011, the CompanyDecember 31, 2010, approximately $162,000 of revenues were recorded approximately $786,000 and $336,000 of revenue related to this agreement, respectively.  As of June 30, 2011, BMP has $523,000 of management fee receivable.agreement.

Due to an unresolved issue with the Ohio Bureau of Workers Compensation, the former owners RFFG, haveLLC ceased operations as of July 15, 2011.2011 and, as a result, the Management is assessingService Agreement was effectively terminated.  No future revenues are expected related to this agreement.  As a result, the impactCompany recorded a loss on the $1,180,000impairment of unamortized management agreement intangible assets andin September 2011of $1,126,000, offset by income of $1,276,000 for the $2,240,000 contingentreduction of an associated earn-out liabilities in the financial statements.liability.
 
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 Company does not expectadoption of ASU 2011-04 todid not have a material effect on our consolidated financial statements, however, it may result in additional disclosures.statements.

In JuneSeptember 2011, the FASB issued ASU No. 2011-05, Comprehensive Income2011-08, Intangibles – Goodwill and Other (Topic 220)350): Presentation of Comprehensive IncomeTesting Goodwill for Impairment (ASU 2011-05)2011-08).  Under ASU 2011-05 will require companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements, eliminating2011-08, a company has the option to present componentsfirst assess qualitative factors to determine whether the existence of other comprehensive income as partevents 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 statement of changes in stockholders' equity.entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary.  ASU 2011-05 does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income.  ASU 2011-052011-08 is effective for interim and annual reporting periodsimpairment tests performed for fiscal years beginning after December 15, 2011. Because ASU 2011-05 impacts presentation only,2011; however, early adoption is permitted.  The Company early adopted this provision in fiscal 2011 and it willdid not have no effecta material impact on the Company’sour consolidated financial statements.
11

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 months ending December 31, 2011 and 2010, 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

As a result of the acquisition of certain of the assets of DMCC and RFFG of Cleveland and entry into the Management Agreement discussed above, the Company’s internal reporting was adjusted and as a result, the Company re-assessed its segment presentation. Accordingly, the Company’s segment disclosures were revised in the current year.

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The Company provides the following distinctive services: (a) direct hire placement services, (b) temporary professional services staffing in the fields of information technology, engineering, and accounting, (c )(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 statementstatements of operations.  Selling, general and administrative expenses are not separately allocated among the agricultural, professional services or industrial staffing segmentsservices within the contract staffing services sector for internal reporting purposes.

  Three Months Ended  Nine Months Ended 
  June 30  June 30 
(In Thousands) 2011  2010  2011  2010 
             
Direct Hire Placement Services            
Revenue $1,142  $854  $3,055  $1,996 
Operating loss  (92)  (138)  (352)  (1,156)
Depreciation & amortization  40   48   134   147 
Accounts receivable – net  538   316   538   316 
Total assets  1,871   2,360   1,871   2,360 
                 
Management Services                
Revenue $336  $—  $786  $— 
Operating income  223   —   586   — 
Fee receivable  523   —   523   — 
Total assets  523   —   523   — 
                 
Contract Staffing Services                
Agricultural services revenue $5,635  $1,376  $11,047  $1,376 
Industrial services revenue  2,677   —   5,602   — 
Professional services revenue  1,927   1,606   5,102   4,464 
Agricultural services gross margin  4.7%  3.9%  4.4%  3.9%
Industrial services gross margin  13.4%  —   13.7%  — 
Professional services gross margin  29.0%  30.1%  29.8%  28.8%
Operating income(loss) $168  $10  $14  $(234)
Depreciation and amortization  155   17   407   19 
Accounts receivable – agricultural services  939   960   939   960 
Accounts receivable – industrial services  1,615   —   1,615   — 
Accounts receivable – professional services  938   854   938   854 
Total assets  7,580   1,498   7,580   1,498 
                 
Consolidated                
Operating income(loss)  299   (128)  248   (1,390)
Depreciation and amortization  195   65   541   166 
Total assets $9,974  $3,858  $9,974  $3,858 
  Three Months Ended 
  December 31 
(In Thousands) 2011  2010 
       
Direct Hire Placement Services      
Revenue - net $1,873  $923 
Placement services gross margin  100%  100%
Operating loss  (203)  (152)
Depreciation & amortization  64   47 
Accounts receivable – net  1,043   477 
Intangible assets - net  555   — 
Goodwill  24   — 
Total assets  4,697   4,988 
         
Management Services        
Revenue - net $—  $162 
Operating income  —   164 
Fee receivable  137   162 
Intangible assets –net  —   1,342 
Total assets  137   1,504 
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Contract Staffing Services      
Agricultural services revenue – net $2,565  $2,377 
Industrial services revenue – net  6,284   935 
Professional services revenue – net  2,058   1,575 
Agricultural services gross margin  5.7%  3.9%
Industrial services gross margin  12.5%  17.4%
Professional services gross margin  31.5%  32.9%
Operating income $278  $16 
Depreciation and amortization  72   95 
Accounts receivable net  – agricultural services  1,411   932 
Accounts receivable net – industrial services  3,751   676 
Accounts receivable net – professional services  1,122   898 
Intangible assets - net  2,044   2,332 
Goodwill  1,256   1,256 
Total assets  7,099   2,385 
         
Consolidated        
Revenue -net  12,780   5,972 
Operating income  75   28 
Depreciation and amortization  136   141 
Total accounts receivable – net  7,464   3,143 
Intangible assets – net  2,599   3,674 
Goodwill  1,280   1,256 
Total assets $11,933  $8,877 
 
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 $547,000$205,000 and $320,000$192,000 for the nine-month periodsthree months ended June 30, 2011and 2010, respectively, and $186,000 and $177,000 for the three-month periods ended June 30,December 31, 2011 and 2010, respectively.respectively.  

7. Customer Concentration

The portion of consolidated net revenues derived from the Company’s largest customer was approximately 29.8 %7.4% for the quarter ending and 23.5% for the ninethree months ending June 30, 2011, respectively.  The largest customer had $295,655 of accounts receivables at June, 30ended December 31, 2011. The second largestThis customer accounted for 11%8.8% of the consolidated accounts receivable as of December 31, 2011.

The portion of consolidated net revenues derived from the Company’s largest customer was approximately 13.7% for the quarter ending and 11.7% for the ninethree months ending June 30, 2011, respectively.  The second largest customer had $972,047 in accounts receivables at June, 30 2011 No otherended December 31, 2010. This customer accounted for more than 10%11.3% of net revenues during the three months ending June 30, 2011.
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consolidated accounts receivable as of December 31, 2010.
 
8. Other Expense, Net

The components of other expense, net are as follows:
  
Three Months Ended June 30
  
Nine Months Ended June 30
 
(In thousands) 2011  2010  2011  2010 
             
Interest expense $(77) $(9) $(115) $(28)
Interest income  —   —   —   3 
Loss on investments  —   —   —   (11)
                 
Other expense, net $(77) $(9) $(115) $(36)
The loss on investments includes realized and unrealized holding gains and losses on trading securities.
9. Income Taxes

There was no provision for income taxes recorded for the periodsthree months ended June 30,December 31, 2011 and 2010 as a result of cumulative net operating losses of the companyCompany which it expects will be used to offset current tax liabilities.  There were no credits for income taxes for the periods ended June, 30 2010 as a result of the pretax losses during the periods, because there was not sufficient assurance that a future tax benefit would be realized.
 
10.
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9. Property and Equipment

Property and equipment, net consisted of the following:
 June 30  September 30  December 31  September 30 
(In thousands) 2011  2010  2011  2011 
            
Computer software $1,447  $1,447  $1,447  $1,447 
Office equipment, furniture and fixtures  1,925   1,886   2,076   2,066 
                
Total property and equipment, at cost  3,372   3,333   3,523   3,513 
Accumulated depreciation and amortization  (3,069)  (2,950)  (3,138)  (3,104)
                
Property and equipment, net $303  $383  $385  $409 
 
11.10. Intangible Assets – finite life

As of JuneDecember 31, 2011
(In Thousands) Cost  
Accumulated
Amortization and
Impairment
  
Net
Book Value
 
          
Non-Compete $89  $28  $61 
Customer Relationships  2,913   391   2,522 
Management Agreement  1,396   1,396   — 
Trade Name  17   1   16 
             
  $4,415  $1,816  $2,599 

As of September 30, 2011
(In thousands) Cost  
Accumulated
Amortization
  
Net Book
Value
 
(In Thousands) Cost  
Accumulated
 Amortization and
Impairment
  
Net
Book Value
 
                  
Non-Compete Agreement $89  $19  $70 
Non-Compete $89  $24  $65 
Customer Relationships  2,336   221   2,115   2,913   296   2,617 
Management Agreement  1,396   216   1,180   1,396   1,396   — 
Trade Name  17   —   17 
                        
 $3,821  $456  $3,365  $4,415  $1,716  $2,699 

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Finite life intangible assets are comprised of a non-compete agreement, the Management Agreementmanagement agreement, trade name and customer relationships.  The non-compete agreement isand trade name are amortized on a straight – line basis over itsthe estimated lifeuseful lives of 5 years.  The customer relationships are amortized based on the estimated future undiscounted cash flows over tenestimated remaining useful lives of three to 10 years.  The Management Agreement ismanagement agreement intangible was being amortized over fourthe five year term of the agreement.  Over the next five years, based on the estimated future undiscounted cash flows.  The futureannual amortization expense for these finite life intangibles is as follows:  $194,000 for 2011, $615,000intangible assets will be $394,000 in fiscal 2012, $615,000$376,000 in fiscal 2013, $616,000$359,000 in fiscal 2014, $222,000$340,000 in fiscal 2015 and $1,103,000$1,230,000 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.

12.
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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.
11. Commitments

As of June 30,December 31, 2011, the Company had contractual obligations to purchase approximately $288,000$560,000 of recruitment advertising through December 31, 2011.
 
13.12. Line of Credit

Through December 2010, theThe Company had a loan and security agreement with Crestmark Bank for financing of its accounts receivable.  Under the terms, the Company could borrow up to 85% of its eligible accounts receivable not to exceed $3,500,000. The loanwhich was secured by accounts receivable and other property of the Company.  Interest was charged at the rate of 1% above the prime rate.terminated in December 2010.  Interest expense under this agreement was $4,500 for the nine months ending June 30, 2011.  There was no interest expense for the three months ended June 30,2011.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 nine months ended June 30, 2011.  There were no fees charged for the three months ended June 30, 2011.  The term of the agreement was for three years or earlier upon demand by Crestmark, and was to be renewed automatically for consecutive two year terms unless terminated by either party.December 31, 2010.

In December 2010, the Company terminated its agreement with Crestmark Bank and entered into a two yeartwo-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 6.94%5.83 % as of June 30,December 31, 2011).  Under 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 and carries the receivables and any outstanding borrowings on its consolidated balance sheet.

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 of On-Site, RFFG of Cleveland, and DMCC.assets.

The outstanding borrowings under this agreement, which are classified as short-term debt on the consolidated balance sheets were $2,360,000 and $1,938,000 as of December 31, 2011 and September 30, 2011, respectively.  As of June 30,December 31, 2011, the borrowing base availability under this agreement was $1,277,000 and the outstanding borrowings approximated $976,000.$337,000.  Total interest expense related to the line of credit for the quarter and ninethree months ending June 30,ended December 31, 2011 approximated $35,000 and $73,000, respectively.$44,000.

The loan and security agreement with Wells Fargo Bank includes certain covenants which require compliance until termination of the agreement.  As of June 30,December 31, 2011, the Company was in compliance with all such covenants.

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Item 2.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
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 provides contract andthe following distinctive services: (a) professional placement staffing services for business and industry, primarily specializing in the placement of information technology, engineering, and accounting professionals.  Withprofessionals for direct hire and contract staffing, (b) temporary staffing services in the agricultural industry, (c) temporary staffing services in light industrial staffing, and (d) management services.

Businesses in the agricultural industry, light industrial staffing and management services 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 certain of the assets of On-Site Services, Inc. (“On-Site”) in June 2010, the Company also began to provide contract staffing services for the agricultural industry. This business is located in Florida and provides labor and human resource solutions, including temporary staffing, to the agricultural industry.  On November 1, 2010, the Company and its wholly-owned subsidiary, Triad Personnel Services, Inc. an Illinois corporation, entered into an asset purchase agreement, dated as of October 29, 2010, with DMCC Staffing, LLC, an Ohio limited liability company (“DMCC”), RFFG of Cleveland, LLC an Ohio limited liability company (“RFFG of Cleveland”), and Thomas J. Bean (the “Asset Purchase Agreement”), forDMCC Staffing, LLC in November 2011 allowed entry into the purchase of certain assets of DMCClight industrial market and RFFG of Cleveland, including customer lists, comprising DMCCmanagement services.  Lastly, Ashley Ellis, LLC was acquired in August 2011 and RFFG of Cleveland’scomplemented the professional staffing segment.
The Company’s professional staffing services business.  This business is operated from officeshighly dependent on national employment trends in Ohiogeneral and provides laboron the demand for professional staff in particular.  As an indicator of employment conditions, the national unemployment rate was 8.5% in December 2011 and human resource solutions, including temporary staffing, human resources9.4% in December 2010.  Our revenues are highly contingent on the unemployment rate and payroll outsourcing services, laborwe are optimistic that employment levels continue to decline as we enter a Presidential election year.
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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 employment consulting and workforce solutions. The business of RFFG of Cleveland acquired by the Company has one customer.

The closingcash flows of the Asset Purchase Agreement was subject to certain conditions, including entry into a definitive managementCompany.  We believe our current segments complement one another and services agreementposition us for the management by the Company of the businesses of certain affiliates of DMCC, RFFG of Cleveland and Mr. Bean (the “Management Agreement”).  On November 30, 2010, Business Management Personnel, Inc. (“BMP”), an Ohio corporation and an wholly-owned subsidiary of the Company, entered into the Management Agreement, effective as of November 1, 2010, with RFFG, LLC (“RFFG”).

Due to an unresolved issue with the Ohio Bureau of Workers Compensation, the former owners RFFG have ceased operations as of July 15, 2011.  Management is assessing the impact of the $1,180,000 of unamortized intangible assets and the $2,240,000 contingent earn-out liabilities in the financial statement.future growth.

As of June 30,December 31, 2011, the Company operated fourteeneighteen branch offices located in eighteleven states.
 
Results of Operations – NineThree Months Ended June 30,December 31, 2011 Compared to the NineThree Months Ended June 30,December 31, 2010
Results of Operations

Net Revenuesrevenues
Consolidated net revenues are comprised of the following:
Consolidated net revenues are comprised of the following: 
 Nine Months Ended June 30  
Three Months
Ended December 31,
      
(In thousands) 2011  2010  2011  2010 $ change  % change 
Placement Services $3,055  $1,996  $1,873  $923  $950   102.9%
Management Services  786   —   —   162   (162)  (100%)
Professional Contract Services  5,102   4,464   2,058   1,575   483   30.7 
Agricultural Contract Services  11,047   1,376   2,565   2,377   188   7.9 
Industrial Contract Services  5,602   —   6,284   935   5,349   572 
Consolidated Net Revenues $25,592  $7,836  $12,780  $5,972  $6,808   114.0%

Consolidated net revenues increased by approximately $17,756,000 (226.6%)$6,808,000 or 114.0% from the same period last year primarily due to the acquisition of certain assets of On-Site ($9,671,000), RFFG of Cleveland ($2,984,000),and DMCC ($2,142,000) and fees earned underin November 2010.  The Industrial Contract Services segment has seen tremendous growth over the Management Agreement ($786,000), which in total contributed approximately $15,583,000 in revenue for the period. Professional contract and placement services increased by approximately $638,000 (14.3%) and $1,059,000 (53.1%) from the same period last year with the addition of these entities as well as the start up of BMCH Inc. and BMCHPA, Inc. in May 2011 and July 2011, respectively.  The increaseincremental revenue growth due BMCH Inc. and BMCHPA, Inc was $4,891,000 in placementsthe three months ended December 31, 2011.  These increases are coupled with strong demand for Placement Services and professional contract services wasProfessional Contract Services.  Increases in each area were partially offset with a $162,000 decrease in Management Services revenue due to the improvementtermination of the agreement with RFFG Inc. in the economy and the job market.July 2011.

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Cost of Servicescontract 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 ninethree months ended June 30,December 31, 2011 increased $5,207,000 or 126.6% primarily due to revenue growth.  Cost of services expressed as a percentage of net revenue increased from 68.9% for the three months ended December 31, 2010 to 72.9% for the three months ended December 31, 2011 primary due to revenue mix.  The current quarter has significantly more Industrial service revenue which carries a lower gross profit percentage.  See chart below for summary of Gross Profit % by approximately $14,467,000 (321.5%)segment:

 Three Months Ended Three Months Ended
Gross Profit Margin %
December 31, 2011
 
 December 31, 2010
Direct hire placement services100% 100%
Management servicesn/a 100%
Agricultural contract services5.7% 3.9%
Industrial contract services12.5% 17.2%
Professional contract services31.5% 32.9%
Combined Gross Profit Margin %27.1% 31.1%
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For the three months ended December 31, 2011, we saw an improvement in Agricultural Services to 5.7% due to aggressive pricing while we saw a decrease in Professional Services to 31.5% due to a more competitive market place.  Industrial Services saw a decrease in margin rate due to the acquisitionincremental revenue of certain assets of On-Site ($10,556,000), RFFG of Cleveland ($2,571,000), and DMCC ($1,851,000)BMCH Inc. which totaled approximately $14,978,000 in cost of services for the period.  Due to an improvement in the economy and a higher demand for professional staff, the gross profit margin on the professional contract services business increased from 28.8% in the nine months ended June 30, 2010 to 29.8% in the nine months ended June 30, 2011. For the nine months ended June 30, 2011, the gross profit margin of the On-Site business was 4.4%, the gross profit margin of the RFFG of Cleveland business was 13.8%, and the gross profit margin of the DMCC business was 13.6%.  The decrease in the consolidated contract service gross profit margin from 22.9% for the nine months ended June 30, 2010 to 12.8% for the nine months ended June 30, 2011 is primarily due to thehad lower margins earned on On-Site services.margins.

Selling, Generalgeneral and Administrative Expensesadministrative 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.

The Company’s largest selling, general and administrative expense is for compensation in the operating divisions.  Most of the Company’s employment consultants are paid on a commission basis and receive advances against future commissions.  Advances are expensed when paid.  When commissions are earned, prior advances are applied against them and the consultant is paid the net amount.  At that time, the Company recognizes the full amount as commission expense, and advance expense is reduced by the amount recovered.  Thus, the Company’s advance expense represents the net amount of advances paid, less amounts applied against commissions.

Selling, general and administrative expenses for the ninethree months ended June 30,December 31, 2011 increased by approximately $1,248,000 (26.4%)$1,548,000 or 89.2% compared to the same period last year.  Compensation in the operating divisions increased by approximately $1,057,000 (52.4%) from the same period last year reflecting higher commissions on  the increased volume of placement business.  Administrative compensation and branch occupancy costs were relatively consistent with the same period last year.  Recruitment advertising increased by approximately $106,000 (39.3%)primarily due to higher utilizationrevenue growth.  Expressed as a % of job board posting services.  Professional feesrevenue, selling, general and administrative expenses decreased by approximately $180,000 (32.9%) over the same period last year duefrom 29.1% to fewer fees related to both the GT Systems and other acquisitions and the Park Ave bank inquiry.25.7 % as we leverage our growth.

Amortization of intangible assets
Amortization expense of approximately $403,000$100,000 and $16,000$94,000 recorded for the ninethree months ended June 30,December 31, 2011and 2010 includesrepresents the amortization associated with the identifiable intangibles recorded for the Company’s acquisitions of certain assets of On-Site,Onsite, RFFG of Cleveland, DMCC and DMCC.Ashley Ellis.

Other ExpenseInterest expense
OtherInterest expense net for the ninethree months ended June 30,December 31, 2011 increased by approximately $79,000,$39,000, or 219.4%300% from the same period last year primarily dueas a result of higher borrowings.  Borrowings have increased as we continue to additional interest expense incurred related togrow the Wells Fargo loan agreement.  Interest expense was approximately $115,000 for the nine months ended June 30, 2011.business.

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Other
There was no provision for income taxes recorded for the periodsthree months ended June 30,December 31, 2011 and 2010 as a result of cumulative net operating losses of the Company which it expects will be used to offset current tax liability.  There were no credits for income taxes for the periods ended June 30, 2010 as a result of the pretax losses during the periods, because there was no sufficient assurance that a future tax benefit would be realized. As of September 30, 20102011 there were approximately $8,900,000$8,500,000 of losses available to reduce federal taxable income in future years through 2030, and there were approximately $7,000,000 of losses available to reduce state taxable income in future years, expiring from 20112012 through 2030.  ItDue to common stock transactions in the current and prior years, it is likely that the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.  The Company is currently evaluating the effects of any such limitation.
 
Results of Operations – Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Net Revenues
Consolidated net revenues are comprised of the following: 
  Three Months Ended June 30 
(In thousands) 2011  2010 
Placement Services $1,142  $854 
Management Services  336   — 
Professional Contract Services  1,927   1,606 
Agricultural Contract Services  5,635   1,376 
Industrial Contract Services  2,677   — 
Consolidated Net Revenues $11,717  $3,836 

Consolidated net revenues for the three months ended June 30, 2011 increased by approximately $7,881,000 (205.4%) from the prior year.  Contract service revenues increased by approximately $7,257,000 (243.4%) primarily due to approximately $4,259,000 of revenue from the On-Site business acquisition, $2,677,000 of revenue from the RFFG of Cleveland, and DMCC acquisition and the start up of new subsidiary in Ohio. Placement service revenues increased by approximately $288,000 (33.7%) due to an increase in the number of placements.

Cost of Contract Services
The cost of contract services for the three months ended June 30, 2011 increased by approximately $6,604,000 (270.1%) as a result of an increase in the volume of contract business due to the acquisition of certain assets of On-Site, RFFG of Cleveland and DMCC.  The gross profit margin on contract business was 11.6% for the three months ended June 30, 2011 compared to 18.0% for the three months ended June 30, 2010. The decrease in the gross profit margin was due to increases in the State of Ohio unemployment, and sales tax rates, and an increase in professional contract wages. In addition,  On-Site was acquired in June 30, 2010 and the lower gross profit margin impacted the entire quarter in 2011 (4.7% for the three months ended June 30, 2011).

Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended June 30, 2011 increased by approximately $696,000 (45.8%). Compensation in the operating divisions increased by approximately $400,000 from the same period last year, reflecting higher commission from the increased volume of permanent placement business.  Administrative compensation increased by approximately $36,000 because of the increase in staff from the acquisitions.  Occupancy costs increased by approximately 89.4% as compared to last year because of the increase in the number of  branch offices.  All other selling, general and administrative expenses together increased 35.6% due to the addition of RFFG of Cleveland, DMCC and Business Management Personnel.

Amortization
Amortization expense of approximately $154,000 and $16,000 recorded for the three months ended June 30, 2011 and 2010, respectively, includes the amortization associated with the identifiable intangibles recorded for the Company’s acquisitions of certain assets of On-Site, RFFG of Cleveland, and DMCC.

 
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Other
Other expense, net for the three months ended June 30, 2011 increased by approximately $68,000, or 755.6%, from the same period last year due to the interest expense incurred on the Wells Fargo loan agreement this year and the interest on the earn-out this year.

There was no provision for income taxes recorded for the periods ended June 30, 2011 as a result of cumulative net operating losses of the Company which will be used to offset current tax liability.  There were no credits for income taxes for the periods ended June 30, 2010 as a result of the pretax losses during the periods, because there was no sufficient assurance that a future tax benefit would be realized. As of September 30, 2010 there were approximately $8,900,000 of losses available to reduce federal taxable income in future years through 2030, and there were approximately $7,000,000 of losses available to reduce state taxable income in future years, expiring from 2011 through 2030. It is likely that the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.  The Company is currently evaluating the effects of any such limitation.
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):

  
For the three
months ended
December 31, 2011
  
For the three
months ended
December 31, 2010
 
Cash flows used in operating activities $(681) $(966)
Cash flows used in investing activities  (10)  — 
Cash flows provided by financing activities  422   264 

As of June 30,December 31, 2011, the Company had cash and cash equivalents of approximately $297,000,$45,000, which was a decrease of approximately $648,000$269,000 from September 30, 2010.2011.  Net working capital (current assets less current liabilities) at June 30,December 31, 2011 was approximately $1,136,000,$1,091,000, which was a decreasean increase of approximately $73,000$104,000 from September 30, 2010,2011 and the current assets divided by current liabilities – current ratio - was 1.31.2 to 1.
During   Net cash used in operating activities for the ninethree months ended June 30,December 31, 2011 netand the three months ended December 31, 2010 was ($681,000) and ($966,000), respectively.  The fluctuation is due to timing of our accounts receivable collections and payments of accounts payable and payroll accruals.

Net cash used by operatingin investing activities was approximately $1,575,000.  The net income for the periodthree months ended December 31, 2011 was ($10,000) and zero for the three months ended December 31, 2010.  The increase was the direct result of $133,000, adjusteda vehicle purchase to support our Agricultural segment.

Net cash flow provided by financing activities for depreciation and other non-cash charges,the three months ended December 31, 2011 was approximately $674,000, while working capital items used was approximately $2,249,000, primarily related$422,000 compared to $264,000 in the three months ended December 31, 2010.  Fluctuations in financing activities are attributable to the increase in accounts receivables due to the growth in the Company’s business in 2011.  Financing activities provided an additional $981,000, primarily from borrowings under the Company’s credit facility with Wells Fargo.  The large increase in the contract business, approximately $7,257,000, and the corresponding increase in payroll for the nine months ended June 30, 2011 has resulted in a significant amountlevel of additional borrowings under the credit facility.borrowings.

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, 2010.2011.  There have been no significant changes from the amounts presented in the Form 10-K, except10-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 estimated $2,198,000purchase of earn-out consideration recordedcertain 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. The assets purchased related to Ashley Ellis, LLC acquisition was not considered a significant acquisition and as such the acquisition of these assets will be accounted for as a long-term obligation in conjunction withbusiness combination.
As consideration for the Asset Purchase Agreement.assets, the Company paid Ashley Ellis $200,000 on the date of closing and agreed to pay Ashley Ellis an additional $200,000 within six months of closing.  The Company also agreed to issue to Ashley Ellis 1,250,000 shares of the Company’s common stock.

In November 2010, the Company purchased certain assets of RFFG of Cleveland, LLC and DMCC Staffing, LLC (“DMCC”) and entered into the Management Agreementa management agreement with RFFG, LLC (the previous parent company of RFFG of Cleveland and DMCC)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. The assets purchased related to RFFG of Cleveland, LLC and DMCC Staffing, LLC constitute businesses and as such the acquisition of these assets will be accounted for as a business combination.

In consideration of the services provided under the Management Agreement,management agreement, RFFG will pay the Company approximately 6% of its gross revenues.  Gross revenues of RFFG are expected to approximate $18,000,000 on an annual basis, resulting in an expected management fee of approximately $1,000,000 per year. The Company has added employees to provide the services required under the Management Agreement.  Management fees earnedmanagement 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 nine months endedassets 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 next four years if certain performance targets are achieved.  Through December 31, 2011, payments of $556,000 are currently due.
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In June 30, 2011 were $786,000, resulting from gross revenues2010, the Company acquired certain assets of RFFGOn-Site Services, Inc. through the issuance of approximately $13,000,000.

1,476,015 shares of its common stock.  Additionally, the former owner of On-Site services, Inc is entitled to earn-out payments over the next four years totaling up to $1,020,000; $600,000 of which is payable in cash and $420,000 of which is payable in either cash or common stock or any combination thereof, in the Company’s sole discretion, upon the attainment of certain aggregate performance targets.  The Company has determined that the fair value of the contingent consideration that could be paid under this earn-out agreement is zero based on the estimated probability of any payment being made. The assets purchased related to RFFG of Cleveland and DMCCOn-Site Staffing, LLC constitute businesses and as such the acquisition of these assets werewill be accounted for as a business combination.  Pursuant to the Asset Purchase Agreement, the Company agreed to issue $2,400,000 in shares of its Common Stock to DMCC and RFFG of Cleveland upon receipt of (a) stockholder approval of the transaction and of an increase to the Company’s authorized Common Stock and (b) approval of an additional listing application by the NYSE Amex Stock Exchange. On March 24, 2011, the Company received written consents in lieu of a meeting of shareholders from the holders of 71.8% of the shares of Common Stock, (i) approving the issuance of 5,581,395 shares of the Common Stock to DMCC Staffing and RFFG of Cleveland pursuant to the Asset Purchase Agreement and the issuance of any additional shares of Common Stock to DMCC and RFFG of Cleveland as may be necessary pursuant to certain earn-out payment provisions under the Asset Purchase Agreement; and (ii) approving an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of capital stock from 20,100,000 shares to 50,100,000 shares and to increase the number of authorized shares of Common Stock from 20,000,000 shares to 50,000,000 shares.

16
Commencing in 2011, if the aggregate EBITDA of the business acquired, including 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 of such period will be reduced proportionately.  The EBITDA Targets will be $300,000, $600,000, $900,000 and $1,200,000 for each of the three-, six-, nine- and twelve-month periods, respectively, in the year ending December 31, 2011, and earn-out payments will consist of quarterly payments of $150,000, payable in three equal monthly installments, if the relevant EBITDA Targets are met. The Company has not made any earnout payments through June 30, 2011 and still expects the cumulative targets to be met.  Starting in the  year ending December 31, 2012, the EBITDA Targets will be 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.combination

In connection with the completion of the sale of shares of Common Stockcommon stock to PSQinPSQ in fiscal 2009, the Company’s then 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 June 30,December 31, 2011, $499,000$420,000 remains payable under this agreement and is included in accrued expensescompensation and long-term obligations on the Company’s balance sheet.

In December 2010, the Company terminated its agreement with Crestmark Bank and entered into a two yeartwo-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%.  UnderUpon 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 December 31, 2011 are $2,360,000 and the remaining borrowing availability is $337,000.

As of September 30, 2011, there were approximately $8,500,000 of losses available to reduce federal taxable income in future years through 2030, and there were approximately $7,000,000 of losses available to reduce state taxable income in future years, expiring from 2011 through 2029.  Due to the sale of shares of common stock to PSQ during fiscal 2009 and the change in ownership of PSQ in November 2010, the Company will be limited by Section 382 of the Internal Revenue Code as to the amount of net operating losses that may be used in future years.  The Company is currently evaluating the effects of any such limitation.  Future realization of the tax benefits of net operating loss carryforwards ultimately depends on the existence of sufficient taxable income within the carryforward period.  Based on the weight of available evidence, the Company determined that it is more likely than not that all of the deferred tax assets will not be realized.  Accordingly, the Company maintained a full valuation allowance as of December 31, 2011 and September 30, 2011.

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 needs resulting fromdue to growth in the acquisitionsbusiness.  In the event Wells Fargo elects not to advance us funds on our accounts receivable balance or the performance of certain assets of On-Site, RFFG of Cleveland, and DMCC.the acquired entities do not meet our expectations, we could experience liquidity constraints.
 
19

Off-Balance Sheet Arrangements
 
As of June 30,December 31, 2011, 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.
17

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.
Item 3.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

Not applicable.
 
Item 4.
Item 4.
Controls and Procedures.

Disclosure Controls and Procedures

As of June 30,December 31, 2011, 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 June 30,December 31, 2011 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 secondfirst quarter ended June 30,December 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

18
PART II – OTHER INFORMATION

Item 1.
Item 1.
Legal Proceedings

None.

Item 1A.
Item 1A.
Risk Factors

Not required.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. 
Defaults Upon Senior Securities

None.

Item 3.  Defaults Upon Senior Securities
Item 4. 
(Removed and Reserved).

None.

Item 4.  (Removed and Reserved).
 
Item 5.  Other Information

20
None.

Item 6. Exhibits.

The following exhibits are filed as a part of Part I of this report:Item 5. 
Other Information

None.

Item 6.
Exhibits.
The following exhibits are filed as a part of Part I of this report:

No.Description of Exhibit
  
31.01
Certifications of the principal chief executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
  
31.02
Certifications of the principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.
  
32.01
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.
  
32.02
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..Code.
101.INSXBRL Instance Document
  
101.SCHXBRL Taxonomy Extension Schema Document
  
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
  
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
 
101.LABXBRL Taxonomy Extension Label Linkbase Document
  
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Definition Linkbase Document
 
19
SIGNATURES
 
SIGNATURES
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 :  February 14, 2012By: /s/ Salvatore J. Zizza
Salvatore J. Zizza
Chairman of the Board and Chief Executive Officer
  
 
Date : August 15, 2011
By: /s/James R. Harlan
/s/ Jarett A. Misch
 James R. HarlanJarett A. Misch
 
Chief Financial Officer and Treasurer (Principal financial
and accounting officer and duly authorized officer)

 
 2021