UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q x QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2014 OR ¨ 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) Illinois 36-6097429 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 184 Shuman Blvd., Suite 420, Naperville, IL 60563 (Address of principal executive offices) (630) 954-0400 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. 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). 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 ¨ Accelerated filer ¨ Non-accelerated filer ¨ 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 The number of shares outstanding of the registrant’s common stock as of GENERAL EMPLOYMENT Form 10-Q For the Quarter Ended CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS PART I. FINANCIAL INFORMATION Item 1. 4 5 6 7 8 Item 2. 20 Item 3. 25 Item 4. 25 PART II. OTHER INFORMATION Item 1. Item 1A. 26 Item 2. 26 Item 3. 26 Item 4. 26 Item 5. 26 Item 6. 27 Signatures 28 CAUTIONARY STATEMENT REGARDING 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 within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements often contain or are prefaced by words such as “believe”, “will” and “expect.” These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. 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, as well as those risks discussed in the Company’s annual report on Form 10-K for the year ended September 30, Financial Statements. GENERAL EMPLOYMENT ENTERPRISES, INC. (In Thousands) ASSETS Cash and cash equivalents $ 431 $ 168 Accounts receivable, less allowances (December - $425; September - $395) 5,129 4,907 Other current assets 1,049 1,650 Assets of discontinued operations, less allowances (December and September -$265) - - Total current assets 6,609 6,725 Property and equipment, net 431 453 Goodwill 1,106 1,106 Intangible assets, net 1,475 1,560 TOTAL ASSETS $ 9,621 $ 9,844 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Short-term debt $ 3,927 $ 2,711 Accounts payable 1,037 910 Accrued compensation 1,562 2,633 Convertible note payable - current portion, net of discount 221 35 Derivative liability 3,246 131 Other current liabilities 918 1,214 Total current liabilities 10,911 7,634 Convertible note payable, net of discount - 132 Other long-term liabilities - 13 Total long-term liabilities - 145 Commitments and contingencies SHAREHOLDERS' EQUITY (DEFICIENCY) Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none - - Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 25,899 shares at December 31, 2014 and September 30, 2014 - - Additional paid in capital 11,710 11,658 Accumulated deficit (13,000 ) (9,593 ) Total shareholders' equity (deficiency) (1,290 ) 2,065 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) $ 9,621 $ 9,844 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. GENERAL EMPLOYMENT ENTERPRISES, INC. (In Thousands, Except Per Share Data) NET REVENUES: Contract staffing services $ 8,232 $ 9,069 Direct hire placement services 1,450 1,738 NET REVENUES 9,682 10,807 Cost of contract services 6,668 7,612 Selling, general and administrative expenses 3,074 3,221 Amortization of intangible assets 85 81 LOSS FROM OPERATIONS (145 ) (107 ) Loss on change in derivative liability (3,115 ) - Interest expense (147 ) (120 ) LOSS BEFORE INCOME TAX PROVISION (3,407 ) (227 ) Provision for income tax - - NET LOSS $ (3,407 ) $ (227 ) BASIC & DILUTED LOSS PER SHARE (0.13 ) (0.01 ) WEIGHTED AVERAGE NUMBER OF SHARES - BASIC & DILUTED 25,899 22,799 The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. GENERAL EMPLOYMENT ENTERPRISES, INC. (In Thousands) Balance, September 30, 2013 22,799 $ 10,851 $ (8,238 ) $ 2,613 Stock compensation expense - 98 - 98 Issuance of warrants related to debt - 219 - 219 Issuance of common stock, net 3,000 470 - 470 Stock issued for services 100 20 - 20 Net loss - - (1,355 ) (1,355 ) Balance, September 30, 2014 25,899 $ 11,658 $ (9,593 ) 2,065 Stock compensation expense - 52 - 52 Net loss - - (3,407 ) (3,407 ) Balance, December 31, 2014 25,899 $ 11,710 $ (13,000 ) $ (1,290 ) The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. GENERAL EMPLOYMENT ENTERPRISES, INC. (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,407 ) $ (227 ) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 122 125 Stock compensation expense 52 2 Provision for doubtful accounts 30 44 Loss on abandonement of fixed assets - 44 Change in derivative liability 3,115 - Changes in operating assets and liabilities - Accounts receivable (252 ) 494 Accounts payable 127 (420 ) Accrued compensation (1,071 ) (344 ) Other current items, net 434 (177 ) Long-term liabilities - (45 ) Net cash used in operating activities - Continuing Operations (850 ) (504 ) Net cash used in operating activities - Discontinued Operations - (21 ) Net cash used in operating activities (850 ) (525 ) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (15 ) (51 ) Partial payment of earn-out (75 ) (75 ) Net cash used in investing activities (90 ) (126 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term debt, net 1,216 376 Payments on capital lease (13 ) (12 ) Net cash provided by financing activities 1,203 364 Net change in cash - Continuing Operations 263 (266 ) Net change in cash - Discontinued Operations - (21 ) Cash and cash equivalents at beginning of period 168 361 Cash and cash equivalents at end of period $ 431 $ 74 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 95 $ 101 Cash paid for taxes $ - $ - The accompanying notes are an integral part of the unaudited condensed consolidated financial statements. 1. Description of Business General Employment Enterprises, Inc. (the 2. Significant Accounting Policies and Estimates The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three Liquidity The Company has On November 14, 2014, the Company entered into a Securities Purchase Agreement with 18 individuals who collectively have subscribed to purchase a total of 200,000 shares of Preferred Stock from the Company for a total purchase price of $2,000,000. The purchase price is being held in escrow pending a closing of the transactions set forth in the Agreement. The net proceeds to the Company from the offering will be approximately $2,000,000, with approximately $1,000,000 to be used as working capital and the remaining $1,000,000 for marketing, acquisitions, expansion and to further the operations of the Company. The Preferred Stock was designated by the Company on December 15, 2014 through the filing of a Certificate of Designation of Series A Convertible Preferred Stock with the Illinois Secretary of State. Each share of Preferred Stock is initially convertible, at the election of the holder, into 50 shares of the Company’s Common Stock. The foregoing conversion ratio is subject to standard adjustment mechanisms, as set forth in the Designation. The Company completed this transaction on January 8, 2015. On August 7, 2014, the Company Principles of Consolidation The condensed unaudited consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All Estimates and Assumptions Management makes estimates and assumptions that can affect the amounts of assets and liabilities reported as of the date of the condensed consolidated financial statements, as well as the amounts of reported revenues and expenses during the periods presented. Those estimates and assumptions typically involve expectations about events to occur subsequent to the balance sheet date, and it is possible that actual results could ultimately differ from the estimates. If differences were to occur in a subsequent period, the Company would recognize those differences when they became known. Significant matters requiring the use of estimates and assumptions include, but may not be limited to, deferred income tax valuation allowances, accounts receivable allowances, accounting for acquisitions, accounting for derivatives and evaluation of impairment. Management believes that its estimates and assumptions are reasonable, based on information that is available at the time they are made. Revenue Recognition Direct hire placement service revenues are recognized when applicants accept offers of employment, less a provision for estimated losses due to applicants not remaining employed for the Company’s guarantee period. Contract staffing service revenues are recognized when services are rendered. Falloffs and refunds during the period are reflected in the unaudited condensed consolidated statements of operations as a reduction of placement service Cost of Contract Staffing Services The cost of contract services includes the wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments. Cash and Cash Equivalents Highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At Accounts Receivable The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. An allowance for placement fall-offs is recorded, as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company’s guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect management’s estimate of the potential losses inherent in the accounts receivable balances, based on historical loss statistics and known factors impacting its customers. The nature of the contract service business, where companies are dependent on employees for the production cycle allows for a small accounts receivable allowance. Based on management’s review of accounts receivable, an allowance for doubtful accounts of approximately
For the quarterly period ended June 30, 2014ORoGENERAL EMPLOYMENT ENTERPRISES, INC.(Exact name of registrant as specified in its charter)Illinois36-6097429
(Registrant’s telephone number, including area code)o¨o¨oooo¨ No xAugust 11, 2014February 13, 2015 was 25,899,675.28,994,014.ENTERRISES,ENTERPRISES, INC.June 30,December 31, 20143 PART I. FINANCIAL INFORMATION4 2014 2014 8-1919-2627272826 28282929292930FORWARD-LOOKINGFORWARD LOOKING STATEMENTS2013,2014, and in other documents which we file with the Securities and Exchange Commission. Any forward-looking statements speak only as of the date on which they are made, and 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. June 30, September 30, 2014 2013 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 66 $ 361 Accounts receivable, less allowances (June - $317; September - $272) 6,028 6,697 Other current assets 682 416 Assets of discontinued operations 229 238 Total current assets 7,005 7,712 Property and equipment, net 476 530 Goodwill 1,106 1,106 Intangible assets, net 1,640 1,884 Other assets 32 - TOTAL ASSETS $ 10,259 $ 11,232 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 3,266 $ 3,734 Accounts payable 1,447 1,015 Accrued compensation 2,958 2,733 Other current liabilities 909 981 Liabilities from discontinued operations - 30 Total current liabilities 8,580 8,493 Long-term liabilities 39 126 Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock; no par value; authorized - 20,000 shares; issued and outstanding - none - - Common stock, no-par value; authorized - 200,000 shares; issued and outstanding - 25,899 shares at June 30, 2014 and 22,799 at September 30, 2013 11,298 10,851 Additional paid in capital - warrants 168 - Accumulated deficit (9,826 ) (8,238 ) Total shareholders' equity 1,640 2,613 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,259 $ 11,232 December 31, September 30, 2014 2014 CURRENT ASSETS: Three Months Ended June 30, Nine Months Ended June 30, 2014 2013 2014 2013 NET REVENUES: Contract staffing services $ 8,184 $ 9,128 $ 25,111 $ 29,352 Direct hire placement services 1,739 1,593 5,253 5,807 NET REVENUES 9,923 10,721 30,364 35,159 Cost of contract services 6,970 7,038 21,295 23,806 Selling, general and administrative expenses 3,416 3,614 10,115 11,565 Amortization of intangible assets 81 80 244 240 LOSS FROM OPERATIONS (544 ) (11 ) (1,290 ) (452 ) Interest expense 90 48 298 190 LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION $ (634 ) $ (59 ) $ (1,588 ) $ (642 ) Provision for income tax - - - (8 ) LOSS FROM CONTINUING OPERATIONS $ (634 ) $ (59 ) $ (1,588 ) $ (650 ) Loss from discontinued operations - (169 ) - (219 ) NET LOSS $ (634 ) $ (228 ) $ (1,588 ) $ (869 ) BASIC AND DILUTED LOSS PER SHARE From continuing operations $ (0.02 ) $ (0.00 ) $ (0.07 ) $ (0.03 ) From discontinued operations $ - $ (0.01 ) $ - $ (0.01 ) Total loss per share $ (0.02 ) $ (0.01 ) $ (0.07 ) $ (0.04 ) WEIGHTED AVERAGE NUMBER OF SHARES - BASIC AND DILUTED 25,720 21,699 23,845 21,699 Three Months Ended
December 31, 2014 2013 Common Stock Shares Amount Balance, September 30, 2012 21,699 $ 10,453 $ - $ (6,348 ) $ 4,105 Issuance of common stock 1,100 330 - - 330 Stock compensation expense - 68 - - 68 Net loss - - - (1,890 ) (1,890 ) Balance, September 30, 2013 22,799 $ 10,851 $ - $ (8,238 ) $ 2,613 Stock compensation expense - 90 - - 90 Stock compensation expense - services 100 20 - - 20 Issuance of common stock and warrants, net 3,000 337 168 - 505 Net loss - - - (1,588 ) (1,588 ) Balance, June 30, 2014 25,899 $ 11,298 $ 168 $ (9,826 ) $ 1,640 Total Common Stock Additional Paid Accumulated Shareholders'
Equity Shares In Capital Deficit (Deficiency) Nine Months Ended June 30, 2014 2013 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (1,588 ) $ (869 ) Loss from discontinued operations - (219 ) Net loss from continuing operations (1,588 ) (650 ) Adjustments to reconcile net loss from continuing operations to cash used in operating activities: Depreciation and amortization 364 365 Stock compensation expense 90 22 Provision for doubtful accounts 45 92 Stock issued for services 20 - Loss on abandonment of leasehold improvements 44 - Changes in operating assets and liabilities - Accounts receivable 624 239 Accounts payable 432 360 Accrued compensation 225 (301 ) Other current assets (266 ) (349 ) Other current liabilities 78 - Other assets (32 ) - Long-term liabilities (87 ) (82 ) Net cash used in operating activities - Continuing Operations (51 ) (304 ) Net cash used in operating activities - Discontinued Operations (21 ) (279 ) Net cash used in operating activities (72 ) (583 ) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (110 ) (177 ) Partial payment of earn-out (88 ) (150 ) Net cash used in investing activities - Continuing Operations (198 ) (327 ) Net cash used in investing activities - Discontinued Operations - (4 ) Net cash used in investing activities (198 ) (331 ) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from/repayment of short-term debt, net (468 ) 551 Payments on capital lease (62 ) - Proceeds from related party 185 - Payments to related party (185 ) Proceeds from issuance of common stock, net 505 - Net cash (used in) provided by financing activities - Continuing Operations (25 ) 551 Net change in cash - Continuing Operations (274 ) (80 ) Net change in cash - Discontinued Operations (21 ) (283 ) Cash at beginning of period - Continuing Operations 361 364 Cash at end of period $ 66 $ 1 SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 210 $ 151 Cash paid for taxes $ 24 $ 8 Three Months Ended
December 31, 2014 2013 “Company,” “we,”“Company”, “us”, “our” or “us”“we”) was incorporated in the State of Illinois in 1962 and is the successor to employment offices doing business since 1893 and provides staffing services through a network of branch offices located in major metropolitan areas throughout the United States. The Company’s professional staffing services provide information technology, engineering and accounting professionals to clients on either a regular placement basis or a temporary contract basis. The Company’s agricultural staffing services provided agricultural workers for farms and groves, until July 7, 2013, when the Company ceased operations within its Agricultural Division, terminated all the division’s employees and began the process of liquidating all assets of this division. The Company’s industrial staffing business provides weekly temporary staffing for light industrial clients in Ohio and Pennsylvania.and nine month period ended June 30,December 31, 2014 are not necessarily indicative of the results that may be expected for the year ending September 30, 2014.2015. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 20132014 as filed on January 13,December 22, 2014.In recent years, theincurredexperienced significant losses and negative cash flows from operations.operations in the past. Management has implemented a strategy which included cost reduction efforts, consolidation of certain back office activities to gain efficiencies as well as identifying strategic acquisitions, to be financed primarily through the issuance of common stock and convertible debt, to improve the overall profitability and cash flows of the Company. In 2013, the Company entered into a three year revolving credit agreement with Keltic Financial Partners II, LLP (“Keltic”)ACF Finco I LP (formerly Keltic) to provide working capital financing.Company is currently in a continuing default under the terms of their line of credit agreement (See Note 6). Keltic has the abilityallows ACF Finco I LP to terminate the lending obligations under the agreement until this continuing default is cured. As of the date of this report, Keltic continues to lendadvance the Company funds in the normal coursebased on a percentage of business under the agreement, without an increase in the rate of interest or any other changes. Management will continue to work with Keltic to obtain the proper waivers and amendments to the agreement to ensure normal operations are not interrupted, however if management is not able to reasonably negotiate terms with Keltic, the Company could be required to obtain alternative financing.eligible invoices. Management believes with anticipated improved futurecurrent cash flow from operations, the preferred offering below and the availability under the Keltic Credit Facility,ACF Finco I LP loan agreement, the Company will have sufficient liquidity for the next 12 months.After six months from closing, the conversion price will have a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company can force conversion if the Company’s common stock trades at 250% greater than the conversion price for 20 consecutive trading days.significant inter-company accounts and transactions are eliminated in consolidation.revenues. Based on management’s reviewrevenues and was $133,000 and $104,000 as of open guarantees and accounts receivables, an allowance is also recorded at the end of each period as an offset to placement service revenues. As of June 30,December 31, 2014 and September 30, 2013 a provision of approximately $131,000 and $90,000 is considered necessary, respectively.Income TaxesWe record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.Due to the private sale of shares of common stock to LEED HR during fiscal 2012 and the resulting change in control, the Company may 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.We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results.Discontinued OperationsA discontinued operation is a component of an entity that has either been disposed of, or that is classified as held for sale, which represents a separate major line of business or geographical area of operations and is part of a single coordinated plan to dispose of a separate line of business or geographical area of operations. In accordance with the rules regarding the presentation of discontinued operations, the assets, liabilities and activity of our agricultural business have been reclassified as a discontinued operation for all periods presented.June 30,December 31, 2014 and September 30, 2013,2014, there were no cash equivalents. The Company maintains deposits in financial institutions in excess of amounts guaranteed by the Federal Deposit Insurance Corporation. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.$317,000$425,000 and $272,000$395,000 is considered necessary as of June 30,December 31, 2014 and September 30, 2013,2014, respectively. The Company charges uncollectible accounts against the allowance once the invoices are deemed unlikely to be collectible. Based on management’s review of accounts receivables related to discontinued operations, an allowance of approximately $35,000 is considered necessary as of June 30, 2014.
Property and Equipment Property and equipment are recorded at cost. Depreciation expense is calculated on a straight-line basis over estimated useful lives of five years for computer equipment and two to ten years for office equipment, furniture and fixtures. The Company capitalizes computer software purchased or developed for internal use and amortizes it over an estimated useful life of five years. The carrying value of property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that it may not be recoverable. If the carrying amount of an asset group is greater than its estimated future undiscounted cash flows, the carrying value is written down to the estimated fair value. There was no impairment of property and equipment for the Goodwill Goodwill represents the excess of cost over the fair value of the net assets acquired in Fair Value Measurement The Company follows the provisions of the accounting standard which defines fair value, establishes a framework for measuring fair value and enhances fair value measurement disclosure. Under these provisions, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is described below: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data. Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. The fair value of the Company’s current assets and current liabilities, excluding the derivative liability, approximate their carrying values due to their short term nature. The carrying value of the Company’s long-term liabilities and the derivative liability represents their fair value based on level 3 Derivative Financial Instruments The Company does not use derivative instruments to hedge exposure to cash flow, market or foreign currency risk. Terms of convertible promissory note instruments are reviewed to determine whether or not they contain embedded derivative instruments that are required under ASC 815 “Derivative and Hedging” (ASC 815) to be accounted for separately from the host contract, and recorded on the balance sheet at fair value. The fair value of derivative liabilities, if any, is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results. Freestanding warrants issued by the Company in connection with the issuance or sale of debt and equity instruments are considered to be derivative instruments and are evaluated and accounted for in accordance with the provisions of ASC 815. Pursuant to ASC 815, an evaluation of specifically identified conditions is made to determine whether fair value of warrants issued is required to be classified as Intangible Assets Customer Loss per Share Basic Advertising Expenses The majority of the Company’s advertising expense budget is used to support the Company’s business. Most of the advertisements are in print or internet media, with expenses recorded as they are incurred. Impairment of Long-lived Assets The Company records an impairment of long-lived assets used in operations, other than goodwill, when events or circumstances indicate that the asset might be impaired and the estimated undiscounted cash flows to be generated by those assets over their remaining lives are less than the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value, which is typically calculated using the discounted cash flow method. Stock-Based Compensation The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance with applicable accounting principles. Such options are valued using the Black-Scholes option pricing model. Income Taxes We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized. Due to the private sale of shares of common stock to LEED HR during fiscal 2012 and the resulting change in control, the Company may 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. We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the Reclassification Certain reclassifications have been made to the financial statements as of and for the three months ended December 31, 2013 to conform to the current year presentation. Segment Data The Company has two operating business segments a) Contract staffing services, and b) Direct hire ninethree month periods ended June 30,December 31, 2014 and 2013. For property and equipment included in current assets of discontinued operations in the accompanying balance sheet, the Company has ceased recording depreciation expense.ourthe various acquisitions. The Company assesses goodwill for impairment at least annually. The Company adopted, Intangibles – Goodwill and Other (Topic 350): Testing Goodwillgoodwill for Impairment, whichimpairment allows the Company to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the entity determines that this threshold is not met, then performing the two-step impairment test is unnecessary. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value.inputs.inputs, as further discussed in note 8. The Company’s goodwill and other intangible assets are measured at fair value on a non-recurring basis using level 3 inputsinputs.further discussed in Note 5.listsrelationships and trade names were recorded at their estimated fair value at the date of acquisition and are amortized over their estimated useful lives ranging from two to ten years using both accelerated and straight-line methods.Earnings (Loss)income (loss)loss per share is computed by dividing net income (loss)loss attributable to common stockholders by the weighted average common shares outstanding for the period. Diluted income (loss)loss per share is computed giving effect to all potentially dilutive common shares. Potentially dilutive common shares may consist of incremental shares issuable upon the exercise of stock options and warrants.warrants and the conversion of notes payable to common stock. In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus are excluded from the calculation. There were no common share equivalents for the three and nine months ended June 30, 2014.IncludedFor the three months ended December 31, 2014 and 2013, included in selling, general and administrative expenses was advertising expense totaling approximately $177,000$207,000 and $549,000, and approximately $187,000 and $548,000, for the three and nine months ended June 30, 2014 and 2013,$162,000, respectively.Compensationis recorded for the fair value ofrelated to share-based transactions, including employee stock options, issued to directorsbe measured and employees. The expense is measured asrecognized in the estimatedfinancial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.datetechnical merits of grantthe position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, oversuch differences will affect the vesting periods.placement services.placement. These operating segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. Other factors, including type of business, type of employee, length of employment and revenue recognition are considered in determining these operating segments.ReclassificationCertain reclassifications have been made to the financial statements for the three and nine months ended June 30, 2013 to conform to the current year presentation.
3. Recent Accounting Pronouncements On January 9, 2015, the FASB Other recent accounting pronouncements issued by FASB and 4. Property and Equipment Property and equipment, net consisted of the following: (In thousands) 2014 2014 Computer software 5 years $ 1,447 $ 1,447 Office equipment, furniture and fixtures and leasehold improvements 2 to 10 years 1,413 1,413 Total property and equipment, at cost 2,860 2,860 Accumulated depreciation and amortization (2,429 ) (2,407 ) Property and equipment, net $ 431 $ 453 Leasehold improvements are amortized over the term of the lease. Depreciation expense for the three 5. Goodwill and Intangible Assets Goodwill Goodwill represents the excess of cost over the fair value of the net assets acquired from various acquisitions. Goodwill is not amortized. The Company performs a goodwill impairment test annually, by reporting unit, in the fourth quarter of the fiscal year, or whenever potential impairment triggers occur. Should the two-step process be necessary, the first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value including goodwill. In applying a fair-value-based test, estimates are made of the expected future cash flows to be derived from the reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future margins, capital needs, economic trends and other factors. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. An impairment loss would be recognized to the extent the carrying value of goodwill exceeds its implied fair value. There was no impairment recorded during the three Revenue RecognitionIn May 2014,jointlyissued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU 2015-01”), which eliminates the concept of extraordinary items and the uncertainty in determining when an item is both unusual in nature and infrequent in occurrence. Presently, an event or transaction is presumed to be ordinary activity unless evidence clearly supports the transaction as unusual in nature and infrequent in occurrence. If an event or transaction is determined to be unusual and infrequent, it is deemed to be extraordinary, and is required to be segregated from the results of ordinary operations on the face of the income statement, net of tax, after income from continuing operations, along with other financial statement disclosures. ASU 2015-01 eliminates the concept of extraordinary items from the income statement presentation. Eliminating this concept removes the uncertainty in determining when a transaction is both unusual in nature and infrequent in occurrence. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU 2015-01 aligns U.S. GAAP with International Accounting Standards Board, issued a comprehensive new standard on revenue recognition from contracts with customers. The standard's core principleStandard 1, which prohibits the presentation and disclosure of extraordinary items. ASU 2015-01 is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying this new guidance to contracts within its scope, an entity will: (1) identify the contract(s) with a customer, (2) identify the performance obligation in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. Additionally, this new guidance would require significantly expanded disclosures about revenue recognition. Provisions of this new standard are effective for annual reporting periods (including interim reporting periods within those annual periods)years beginning after December 15, 2016. Early application is not2015, with early adoption permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The Company is currently evaluatingdoes not expect that the potentialadoption of ASU 2014-18 will have a material effect on itsthe Company’s consolidated financial position, results of operationsstatements.cash flows from adoption of this standardDiscontinued OperationsIn April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." The ASU amends the definition of a discontinued operation, expands disclosure requirements for transactions that meet the definition of a discontinued operation and requires entities to disclose additional information about individually significant components that are disposed of or held for sale and do not qualify as discontinued operations. The ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. The Company cannot early adopt this ASU as management reported discontinued operations last year.Other recently issued accounting pronouncementsSEC did not or are not believed by management to have a material impact on the Company’s present or future financial position, results of operations and cash flows.(In thousands) Computer software 5 years $ 1,447 $ 1,447 Office equipment, furniture and fixtures and leasehold improvements 2 to 10 years 1,635 2,325 Total property and equipment, at cost 3,082 3,772 Accumulated depreciation and amortization (2,606 ) (3,242 ) Property and equipment, net $ 476 $ 530 December 31 September 30 Useful Lives During the nine months ended June 30, 2014, as part of the lease settlement related to the Oak Brook facility, the Company wrote off the assets that were directly related to the facility. The assets related to this facility amounted to approximately $800,000 with accumulated depreciation associated with such assets in the amount of $756,000, for a loss of $44,000.During the year ended September 30, 2013, the Company sold vehicles with a value of approximately $225,000 and leased them back under a 30 month agreement at an interest rate of approximately 23%. As of June 30, 2014, approximately $72,000 is current and included in other current liabilities and approximately $31,000 is included in other long term liabilities. The terms are 30 months and the payments remaining totaled approximately $103,000 at June 30, 2014.and nine month periods ended June 30,December 31, 2014 and 2013 was approximately $38,000$37,000 and $120,000, and $42,000 and $125,000,$44,000, respectively.and nine month periods ended June 30,December 31, 2014 and 2013.
Intangible Assets As of (In Thousands) Customer Relationships $ 2,690 $ 1,221 $ 1,469 Trade Name 17 11 6 $ 2,707 $ 1,232 $ 1,475 As of September 30, (In Thousands) Customer Relationships $ 2,690 $ 1,137 $ 1,553 Trade Name 17 10 7 $ 2,707 $ 1,147 $ 1,560 Amortization expense was approximately The trade names are amortized on a straight – line basis over the estimated useful life of five years. Customer relationships are amortized based on the future undiscounted cash flows over estimated remaining useful lives of three to ten years. Over the next five years, annual amortization expense for these finite life intangible assets will be approximately $320,000 in Long-lived assets, such as purchased intangibles subject to amortization, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company regularly evaluates 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. 6. Short-term Debt On September 27, 2013, the Company (“Borrower”) entered into agreements with ACF FINCO I LP (successor-in-interest to Keltic Financial Partners II, June 30,December 31, 2014( In Thousands) Cost Customer Relationships $ 2,690 $ 1,057 $ - 1,633 Trade Name 17 10 - 7 $ 2,707 $ 1,067 $ - 1,640 Cost Accumulated Amortization Net Book
Value 2013(In Thousands) Cost Customer Relationships $ 2,690 $ 816 $ - $ 1,874 Trade Name 17 7 - 10 $ 2,707 $ 823 $ - $ 1,884 Cost Accumulated Amortization Net Book
Value $81,000$85,000 and $244,000$81,000 for the three and nine months ended June 30,December 31, 2014 respectively and was approximately $80,000 and $240,000 for the three and nine months ended June 30, 2013, respectively.2014, $320,000 in 2015, $320,000 in 2016, $320,000 in 2017, and $320,000 in 2018 and $40,000 thereafter.During the three and nine month periods ended June 30, 2014 and 2013, the Company did not record any impairment of intangible assets.LP ("Keltic"LP) (“ACF”) (“Lender”), that provide the Company with long term financing through a six million dollar ($6,000,000) secured revolving note (the "Note"“Note”). The Note has a term of three years and has no amortization prior to maturity. The interest rate for the Note is a fluctuating rate that, when annualized, is equal to the greatest of (A) the Prime Rate plus three and one quarter percent (6.5%(3.25%), (B) the LIBOR Rate plus six and one quarter percent (6.25%), and (C) six and one half percent (6.50%), with the interest paid on a monthly basis. At December 31, 2014 and 2013 the interest rate was 6.5%. Loan advances pursuant to the Note are based on the accounts receivable balance and other assets. Upon execution of the Note, approximately three million fifty thousand dollars ($3,050,000) was advanced for the full repayment of the AR Credit Facility and fees from Wells Fargo related to the early termination thereof. At the time of close, there was approximately nine hundred thousand ($900,000) of availability under the new Note in excess of amounts paid to extinguish the debt and fees with Wells Fargo. The Company incurred certain cash expense and commitment fees related to obtaining the agreement of approximately $170,000, which has been paid. The Note is secured by all of the Company'sCompany’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests. On April 21, 2014, the Company entered into the First Amendment and Waiver to the Loan and Security Agreement with KelticACF to adjust the covenants. On December 3, 2014, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with ACF to adjust the future covenants as outlined below.below and waived certain defaults. The KelticACF facility includes certain covenants which require compliance until termination of the agreement. As of the date of this report, the Company was not in compliance with all such covenants.
The Company has several administrative covenants and the following financial covenant:
The Company must maintain the following EBITDA:
(a) The Fiscal Quarterthree (3) consecutive calendar month period ending on December 31, 2013,2014, to be no less than Threea negative number exceeding negative Two Hundred SeventyFifty Thousand and 00/100 Dollars ($370,000.00)250,000);
(b) The six (6) consecutive calendar month period ending on March 31, 2014,2015, to be no less than Twoa negative number exceeding negative Five Hundred Ninety Five Thousand and 00/100 Dollars ($295,000.00)500,000);
(c) The nine (9) consecutive calendar month period ending on June 30, 2014,2015, to be no less thana negative number exceeding negative Seven Hundred TenFifty Thousand and 00/100 Dollars ($710,000.00)750,000);
(d) The Fiscal Yeartwelve (12) consecutive calendar month period ending on September 30, 2014,2015, to be no less than Eight Hundred Ninety Thousanda negative number exceeding negative One Million and 00/100 Dollars ($890,000.00)1,000,000); and
(e) For any period commencing on or after October 1, 2014,2015, no less than such amounts as are established by Lender for such period in Lender’s permitted discretion based on the annual financial projections including such period delivered by Borrower pursuant the agreement.
As of the date of this report,December 31, 2014, the Company was not in compliance with all such covenants, as a result, Keltic has the following remedies for the continued default:
7. Accrued Compensation
In connection with the completion of the sale of shares of common stock to PSQ in fiscal year 2009, the Company’s then Chairman, Chief Executive Officer and $44,000President (the “former CEO”) retired from those positions and $130,000, respectively.
8. Convertible Note
On August 7, 2014, the Company
issued a Convertible Note (the “Note”) with an original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio has the right, however not the obligation, six months after closing, to convert all or any part of the outstanding Note into the Company’s common stock at an initial conversion price of $0.20 per share. After six months from closing, the conversion price will have a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company can force conversion if the Company’s common stock trades at 250% greater than the conversion price for 20 consecutive tradingIn addition to the Note, the Company issued a Warrantwarrant to purchase up to 2,371,875 shares of the CompanyCompany’s common stock. The Warrantwarrant is exercisable at $0.25 per share, vests 6 months after the closing, and expires 5 years thereafter.
The Convertible Note contains an embedded conversion feature requiring bifurcation and liability treatment. The Company accounted for this conversion feature and the completiondetachable warrants by allocating the proceeds from issuance of the saleconvertible notes to the conversion feature and the warrants. These were based on a relative fair value and the conversion feature was valued by a third party.
To recognize the fair value of shares of common stock to PSQ in fiscal year 2009, the Company’s then Chairman, Chief Executive Officer and President (the “former CEO”) retired from those positions and his employment agreement withwarrants, the Company discounted the note and increased additional paid in capital. The fair value of the conversion feature was replaced by a new consulting agreement. On January 31, 2013, he retired from all positions withapproximately $178,000, the Company however hediscounted the note and created a derivative liability, which will continue to receive his monthly payments required under his consulting agreement. As of June 30, 2014, $75,000 remains payable under this agreementbe evaluated each quarter and is includeadjusted for any change in accrued compensation.
9. Equity
On March 31, 2014, the Company entered into a Securities Purchase Agreement (the “SPA”) with Aracle SPF I, LLC (“Aracle”) pursuant to which Aracle and or other subscribed investors had the right to acquire up to 12 units (the “Units”), for $50,000 per Unit, with each Unit consisting of 250,000 shares of common stock (the “Shares”) of the Company and 125,000 common stock purchase warrants (the “Warrants”). The Warrants are exercisable 6 months after issuance, have a term of 4 years, and have an exercise price of $0.25 per warrant share. The SPA contains standard representations, warranties, and covenants. In addition, the SPA contains a price adjustment mechanism that requires the Company, with certain exceptions, to issue additional shares of common stock to the investor in the event the Company, within 12 months of the initial closing under the SPA, issues certain equity securities at a price per share less than $0.20, provided, however, as long as the Company is listed on the NYSE MKT the total number of shares issuable under the foregoing adjustment provision may not exceed 19.9% of the Company’s outstanding shares of common stock on March 30, 2014. Further, in the event the Company is delisted from the NYSE MKT while Aracle owns at least 51% of the Shares issued to it under the SPA, the Company shall issue an additional 3,000,000 Sharesshares to Aracle, and the 12 month price adjustment period shall be extended to 36 months. The Company agreed to appoint two new members to the Company’s Board of Directors within 60 days of the initial closing, which new members are subject to the prior approval of Aracle. The Company granted Aracle piggyback registration rights with respect to the Shares and the shares of common stock underlying the Warrants. The Company appointed Mr. Jack Zwick to the Board of Directors and Chairman of the Audit Committee on May 20, 2014, whichwhose appointment was approved by Aracle. The second member has not yet been appointed.
Concurrently with entering into the SPA, the Company and Aracle conducted an initial closing thereunder, in which Aracle purchased 9.5 Units for $475,000. The Company incurred certain expenses related to the SPA of approximately $88,000, which were paid from the proceeds.
On April 16, 2014, the Company, Aracle and a second institutional investor (both companies referred to as “Investors”), entered into certain Securities Purchase Agreements (“SPA”) pursuant to which the Investors purchased 2.5 Units for $125,000. The Company incurred certain expenses related to the SPA of approximately $7,250, which were paid from the proceeds of this closing.
On January 28,November 14, 2014, the BoardCompany entered into a Securities Purchase Agreement with 18 individuals who collectively have subscribed to purchase a total of Directors200,000 shares of Preferred Stock from the Company for a total purchase price of $2,000,000. The purchase price is being held in escrow pending a closing of the transactions set forth in the Agreement. The net proceeds to the Company approvedfrom the issuance of 1,395,500 stock options, of which 895,500 are exercisable at $0.25 per share, valued atoffering will be approximately $151,000 and will vest over a period of three years; 300,000 stock options are exercisable at $0.20 per share, valued at $52,000 and will vest over a period of three years and; the remaining 200,000 stock options are exercisable at $0.20 per share, valued at $34,000 and will vest over a period of two years. Of the options issued, 50,500 vested immediately, 200,000 options will vest over a period of two years$2,000,000, with approximately $1,000,000 to be used as working capital and the remaining 1,145,000 will vest over three years.
Stock Options
The Company has recognized compensation expense in the amount of $44,000 and $90,000$52,000 during the quarter and nine months ended June 30,December 31, 2014, respectively, related to the issuance of the stock options. The Black-Scholes option pricing model was used to value the options based upon an expected stock price volatility of 97%, a 10 year expected life of the option and an a risk free interest rate of 2.75% and 2.71%, respectively. There is approximately $444,000$371,000 of unvested stock compensation that will be recorded over the remaining life of vesting of approximately 2.652 years.
10. Commitments and Contingencies and Commitments
On April 22, 2013, the Company finalized an Amendment to the Asset Purchase Agreement by and among DMCC Staffing, LLC, an Ohio limited liability company, RFFG of Cleveland, LLC an Ohio limited liability company (each a “Seller” and together, “Sellers”), the Company, and Triad Personnel Services, Inc., an Illinois corporation and wholly owned subsidiary of the Company (“Buyer”).
The Company agreed to pay Sellers additional cash consideration of between $550,000 and $650,000 depending on the length of payments and 1,100,000 shares of common stock, in full satisfaction of all amounts owed to Seller, related to the Asset Purchase Agreement. The Company issued 1,100,000 shares of common stock on July 2, 2013, which was valued at approximately $330,000. The Company elected to pay the cash amount due over two years. To date, the Company paid $350,000$275,000 of the cash consideration noted above. The Company has approximately $263,000 recorded$160,000, which is included in other current liabilities on the condensed consolidated balance sheet at June 30, 2014.December 31, 2014, for the liability. There was approximately $16,000$14,000 and $62,000$20,000 of interest recorded for the three and nine month periods ended JuneDecember 31, 2014 and 2013, respectively.
During 2013, the Company sold vehicles with a value of approximately $225,000 and leased them back under a 30 2014.
Lease
The Company leases space for all of its branch offices, which are located either in downtown or suburban business centers, and for its corporate headquarters. Branch offices are generally leased over periods from three to five years. The corporate office lease expires in 2015.2018. The leases generally provide for payment of basic rent plus a share of building real estate taxes, maintenance costs and utilities.
Rent expense was approximately $236,000$205,000 and $715,000 and $257,000 and $812,000$237,000 for the three and nine month periods ended June 30,December 31, 2014 and June 30, 2013, respectively. As of June 30,December 31, 2014, future minimum lease payments due under non-cancelable lease agreements having initial terms in excess of one year, including certain closed offices, totaled approximately $948,000,$904,000, as follows: fiscal 2014 - $170,000, fiscal 2015 - $398,000,$301,000, fiscal 2016 - $232,000,$323,000, fiscal 2017 - $123,000$164,000, fiscal 2018 - $89,000 and thereafter - $25,000.
11. Segment Data
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, and (c) temporary light industrial staffing. Intersegment net service revenues are not significant. Revenues generated from the temporary professional services staffing and light industrial staffing are classified as contract staffing services revenues in the statements of operations. Selling, general and administrative expenses are not separately allocated among agricultural, professional services or industrial staffing services within the contract staffing services sector for internal reporting purposes.
Three Months Ended | Nine Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In Thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Direct Hire Placement Services | ||||||||||||||||
Revenue – net | $ | 1,739 | $ | 1,593 | $ | 5,253 | $ | 5,807 | ||||||||
Placement services gross margin | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Operating loss | (479 | ) | (628 | ) | (1,209 | ) | (1,623 | ) | ||||||||
Depreciation & amortization | 55 | 56 | 164 | 168 | ||||||||||||
Accounts receivable – net | 910 | 665 | 910 | 665 | ||||||||||||
Intangible assets – net | 257 | 376 | 257 | 376 | ||||||||||||
Goodwill | 24 | 24 | 24 | 24 | ||||||||||||
Total assets | 4,052 | 1,797 | 4,052 | 1,797 | ||||||||||||
Contract Staffing Services | ||||||||||||||||
Industrial services revenue – net | $ | 6,208 | $ | 6,899 | $ | 19,295 | $ | 22,331 | ||||||||
Professional services revenue – net | 1,976 | 2,229 | 5,816 | 7,021 | ||||||||||||
Industrial services gross margin | 9.90 | % | 12.3 | % | 10.40 | % | 12.0 | % | ||||||||
Professional services gross margin | 29.60 | % | 33.3 | % | 31.00 | % | 33.6 | % | ||||||||
Operating income (loss) | $ | 65 | $ | 597 | $ | (81 | ) | $ | 1,171 | |||||||
Depreciation and amortization | 71 | 66 | 200 | 197 | ||||||||||||
Accounts receivable net – industrial services | 4,227 | 4,089 | 4,227 | 4,089 | ||||||||||||
Accounts receivable net – professional services | 891 | 1,079 | 891 | 1,079 | ||||||||||||
Intangible assets – net | 1,383 | 1,588 | 1,383 | 1,588 | ||||||||||||
Goodwill | 1,083 | 1,083 | 1,083 | 1,083 | ||||||||||||
Total assets | 5,978 | 8,510 | 5,978 | 8,510 | ||||||||||||
Consolidated | ||||||||||||||||
Revenue –net | $ | 9,923 | $ | 10,721 | $ | 30,364 | $ | 35,159 | ||||||||
Operating loss | (544 | ) | (11 | ) | (1,290 | ) | (452 | ) | ||||||||
Depreciation and amortization | 126 | 122 | 364 | 365 | ||||||||||||
Total accounts receivable – net | 6,028 | 5,833 | 6,028 | 5,833 | ||||||||||||
Intangible assets – net | 1,640 | 1,964 | 1,640 | 1,964 | ||||||||||||
Goodwill | 1,106 | 1,106 | 1,106 | 1,106 | ||||||||||||
Assets from continuing operations | 10,030 | 10,307 | 10,030 | 10,307 | ||||||||||||
Assets from discontinued operations | 229 | 1,092 | 229 | 1,092 | ||||||||||||
Total assets | $ | 10,259 | $ | 11,399 | $ | 10,259 | $ | 11,399 |
Unallocated corporate expenses primarily include, corporate legal expenses, consulting expenses, corporate payroll, audit fees, corporate rent and facility costs, board fees and interest expense.
Three Months Ended | ||||||||
December 31, | ||||||||
(In Thousands) | 2014 | 2013 | ||||||
Direct Hire Placement Services | ||||||||
Revenue | $ | 1,450 | $ | 1,738 | ||||
Placement services gross margin | 100 | % | 100 | % | ||||
Operating (loss) income | (33 | ) | 305 | |||||
Depreciation & amortization | 56 | 59 | ||||||
Accounts receivable – net | 609 | 679 | ||||||
Intangible assets | 198 | 317 | ||||||
Goodwill | 24 | 24 | ||||||
Total assets | 2,436 | 4,367 |
Contract Staffing Services | ||||||||
Industrial services revenue | 6,527 | 6,893 | ||||||
Professional services revenue | 1,705 | 2,176 | ||||||
Industrial services gross margin | 15.17 | % | 12.90 | % | ||||
Professional services gross margin | 33.67 | % | 31.90 | % | ||||
Operating income | $ | 512 | $ | 206 | ||||
Depreciation and amortization | 66 | 66 | ||||||
Accounts receivable net – industrial services | 3,757 | 4,624 | ||||||
Accounts receivable net – professional services | 763 | 856 | ||||||
Intangible assets | 1,277 | 1,486 | ||||||
Goodwill | 1,082 | 1,082 | ||||||
Total assets | 7,185 | 5,617 | ||||||
Unallocated Expenses | ||||||||
Corporate administrative expenses | 399 | 366 | ||||||
Corporate facility expenses | 51 | 109 | ||||||
Board related expenses | 27 | 23 | ||||||
Interest expense | 147 | 120 | ||||||
Total unallocated expenses | 624 | 618 | ||||||
Consolidated | ||||||||
Total revenue | 9,682 | 10,807 | ||||||
Operating loss | (145 | ) | (107 | ) | ||||
Depreciation and amortization | 122 | 125 | ||||||
Total accounts receivable – net | 5,129 | 6,159 | ||||||
Intangible assets | 1,475 | 1,803 | ||||||
Goodwill | 1,106 | 1,106 | ||||||
Assets from continuing operations | 9,621 | 9,984 | ||||||
Assets from discontinued operations | 0 | 234 | ||||||
Total assets | $ | 9,621 | $ | 10,218 |
12. Discontinued Operations
Subsequent to year end, a total of July 7, 2013,3,094,339 shares of common stock were issued, however no cash was received for these issuances.
1,224,149 shares of common stock were issued related to several cashless warrant conversions.
356,521 shares of common stock were issued to the Company’s Board of Directors determined thatfor services. The Company was relieved of approximately $71,000 in board fees accrued at December 31, 2014. The Company will record the best coursefair value of action relatedthe shares at date of issuance as compensation expense, net of any amount already accrued at December 31, 2014.
263,669 shares of common stock were issued to employees of the Company who exercised their stock options on a cashless basis.
Brio converted $250,000 of its outstanding loan into 1,250,000 shares of the Company’s common stock. Based on the closing stock price of $0.85 per common share, the 1,250,000 shares will convert into approximately $1,062,500 of equity and the Company will recognize a gain on the conversion on the derivative liability of approximately $236,000 during the quarter ended March 31, 2015.
On December 11, 2014, General Employment Enterprises, Inc. (the “Company”) entered into a Stock Exchange Agreement (the “SCRIBE Agreement”) with Brittany M. Dewan as Trustee of the Derek E. Dewan Irrevocable Living Trust II dated the 27th of July, 2010, Brittany M. Dewan, individually, Allison Dewan, individually, Mary Menze, individually, and Alex Stuckey, individually (collectively, the “Scribe Shareholders”). Pursuant to the Agricultural Division wasterms of the SCRIBE Agreement the Company will acquire 100% of the outstanding stock of Scribe Solutions Inc., (“Scribe”) from the Scribe Shareholders for 640,000 shares of Series A Preferred Stock (the “Preferred Stock”) of the Company. In addition, the Company will exchange warrants to terminate operationspurchase up to 6,400,000 shares of the Company’s common stock, for $0.20 per share, with a term of 5 years (the “Warrants”), for Scribe warrants held by two individuals. The issuances of Preferred Stock and to liquidateWarrants by the Division’s assets and to focus the businessCompany shall be effected in reliance on the light industrialexemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, (the “Securities Act”), and professional divisions. On July 7, 2013, all staffing was discontinuedRule 506 of Regulation D promulgated thereunder. The transactions set forth in the SCRIBE Agreement are based on a valuation of Scribe of not less than $6,400,000.
The transaction has been unanimously approved by the written consent of the Board of Directors of the Company (the “Board”) and the entire operationsholders of a majority of the Agricultural Division were discontinued as of August 1, 2013. All employees have been terminated and an expense of approximately $100,000 was recognized as of June 30, 2013.
Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||
(In Thousands) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Discontinued Operations | ||||||||||||||||
Agricultural services revenue – net | $ | - | $ | 2,840 | $ | - | $ | 6,596 | ||||||||
Agricultural services gross margin | 0 | % | 3.0 | % | 0 | % | 3.4 | % | ||||||||
Agricultural services net loss | - | (169 | ) | - | (219 | ) | ||||||||||
Accounts receivable net – Agricultural services | $ | 229 | $ | 1,078 | $ | 229 | $ | 1,078 | ||||||||
Fixed assets – Agricultural services | - | 14 | - | 14 | ||||||||||||
Total assets – Agricultural services | $ | 229 | $ | 1,092 | $ | 229 | $ | 1,092 | ||||||||
Total liabilities – Agricultural services | $ | - | $ | 415 | $ | - | $ | 415 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
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 the following distinctive services: (a) professional placement services specializing in the placement of information technology, engineering, and accounting professionals for direct hire and contract staffing, and (b) temporary staffing services in light industrial staffing.
The Company provides staffing services through a network of branch offices located in major metropolitan areas throughout the United States. The Company’s professional staffing services provide information technology, engineering and accounting professionals to clients on either a regular placement basis or a temporary contract basis. The Company’s industrial staffing business provides weekly temporary staffing for light industrial clients in Ohio and Pennsylvania.
Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, financed primarily through the issuance of common stock and convertible debt, to improve the overall profitability and cash flows of the Company. We believe our current segments complement one another and position us for future growth.
Results of Operations – Three Months Ended June 30,December 31, 2014 Compared to the Three Months Ended June 30,December 31, 2013
Results of Operations
Net Revenues
Consolidated net revenues are comprised of the following:
Three Months Ended June 30, | ||||||||||||||||
(In thousands) | 2014 | 2013 | $ change | % change | ||||||||||||
Placement Services | $ | 1,739 | $ | 1,593 | $ | 146 | 9 | % | ||||||||
Professional Contract Services | 1,976 | 2,229 | (253 | ) | (11 | ) | ||||||||||
Industrial Contract Services | 6,208 | 6,899 | (691 | ) | (10 | ) | ||||||||||
Consolidated Net Revenues | $ | 9,923 | $ | 10,721 | $ | (798 | ) | (7 | )% |
Three Months Ended December 31, | $ | % | ||||||||||||||
(In thousands) | 2014 | 2013 | change | change | ||||||||||||
Placement Services | $ | 1,450 | $ | 1,738 | $ | (288 | ) | (17 | )% | |||||||
Professional Contract Services | 1,705 | 2,176 | (471 | ) | (22 | ) | ||||||||||
Industrial Contract Services | 6,527 | 6,893 | (366 | ) | (5 | ) | ||||||||||
Consolidated Net Revenues | $ | 9,682 | $ | 10,807 | $ | (1,125 | ) | (10 | )% |
Consolidated net revenues decreased approximately $798,000$1,125,000 or 7%10% compared with the same period last year. The Company closed two offices in the industrial contract services division, however this was done as the revenue was determined to be unprofitable and these changes increased the overall profitability of the division. Overall the professional services division had less experienced recruiters working during the period ended December 31, 2014 compared to the prior year, which resulted in the overall decrease in revenue was primarily due torevenue. Management has taken significant action during the elimination of certain customers in Light Industrial, a lower number of professional service consultants and the rebuildingcourse of the middle management of the Company, which was required after prior management had caused significant disruptions to normal operations. Management has changed certain compensation plans and begun a new campaignyear to increase the number of consultants. Management does not expect immediate increases, however does expect to have these new consultants producing within 90 daysexperienced recruiters and has implemented a new National strategy for larger clients, whichimprove the Company has never had in the past. In addition, management is aggressively looking at opportunities for Light Industrial to expand outsideprofitability of Ohio. Our month over month revenue continues to increase slowly as we implement our new growth strategies.
Cost of Contract Services Cost of services includes wages and the related payroll taxes and employee benefits of the Company’s employees while they work on contract assignments. Cost of contract services for the three month period ended Gross Profit percentage by segment: Gross Profit Margin % Direct hire placement services 100 % 100 % Industrial contract services 15.2 % 12.9 % Professional contract services 33.7 % 31.9 % Combined Gross Profit Margin % (1) 31.1 % 29.5 % _______________ (1) Includes gross profit from direct hire placements, which all associated costs are recorded as selling, general and administrative expenses. Selling, General and Administrative Expenses Selling, general and administrative expenses include the following categories: · Compensation in the operating divisions, which includes commissions earned by the Company’s employment consultants and branch managers on permanent and temporary placements. It also includes salaries, wages, unrecovered advances against commissions, payroll taxes and employee benefits associated with the management and operation of the Company’s staffing offices. · Administrative compensation, which includes salaries, wages, payroll taxes and employee benefits associated with general management and the operation of the finance, legal, human resources and information technology functions. · Occupancy costs, which includes office rent, depreciation and amortization, and other office operating expenses. · Recruitment advertising, which includes the cost of identifying job applicants. · Other selling, general and administrative expenses, which includes travel, bad debt expense, fees for outside professional services and other corporate-level expenses such as business insurance and taxes.June 30,December 31, 2014 decreased by approximately 1%12% to approximately $6,970,000$6,668,000 compared with the prior period of approximately $7,038,000.$7,612,000. Cost of contract services, as a percentage of contract revenue, for the three month period ended June 30,December 31, 2014 increaseddecreased approximately 4%1% to 70%69% compared with the prior period of approximately 66%70%. The change in the gross margin is related to several factors, including the significant decrease in placement services revenue. The overall decrease in costs of contract services was the result of the decrease in Placement Services revenue, which hascontract revenue. In addition, there was a higher margin, and an increase tosignificant decrease in our Ohio workers compensation expense. The Company is in the process of increasing our billing rates in 2014 to account for the increases in workers compensation andstate of Ohio, as the Affordable Care Act costs, however management believes that the overall gross margin will continue to decrease if the Company is not successful in increasing billing rates and maintain the same profit marginsrate was decreased by approximately 25% as it has in the past. Effectiveof July 1, 2014, the Company’s Ohio based subsidiary will join the Ohio Bureau of Worker's Compensation retro group retrospective rating program, which the Company anticipates will result in a 25% decrease in the Company’s overall workers compensation insurance. Three Months Ended Three Months Ended June 30, 2014 June 30, 2013 Direct hire placement services 100 % 100 % Industrial contract services 9.9 % 12.3 % Professional contract services 29.6 % 33.3 % Combined Gross Profit Margin % (1) 29.8 % 34.4 % Three Months Ended
December 31,
2014 Three Months Ended
December 31,
2013 (1)··Recruitment advertising, which includes the cost of identifying job applicants.·
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. 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 three months ended June 30,December 31, 2014 decreased by approximately $198,000$147,000 or 5% compared to the same period last year. The decrease was primarily related to the decrease in sales and management’s efforts to reduce costs and eliminate unnecessary expenses. Overall expenses are expected to stabilize during the fiscal year 20142015 and slightly decrease as the Company is able to capitalize on the consolidation of the prior acquisitions. During the three months ended June 30, 2014, the Company incurred an increased amount of overtime and expense related to a failed implementation of administrative software. Such costs were associated with restoring all payroll related systems to the original software. In addition, the Company has implemented new industry specific software in 40% of its field offices and anticipates a full implementation by fiscal end of year.
Interest Expense
Interest expense for the three months ended June 30,December 31, 2014, increased $42,000,$27,000, or 88%23% compared with the same period last year primarily as a result of higher borrowings anda change in lender, the interest expense related to the extendedfor acquisition payments of our earn out liability associated with our acquisition of RFFG in 2010.
Taxes
There were no benefitscredits for income taxes as a result of the pretax losses incurred during the periods because there was not sufficient assurance that future tax benefits would be realized.
Nine Months Ended June 30, | ||||||||||||||||
(In thousands) | 2014 | 2013 | $ change | % change | ||||||||||||
Placement Services | $ | 5,253 | $ | 5,807 | $ | (554 | ) | (10 | )% | |||||||
Professional Contract Services | 5,816 | 7,021 | (1,205 | ) | (17 | ) | ||||||||||
Industrial Contract Services | 19,295 | 22,331 | (3,036 | ) | (14 | ) | ||||||||||
Consolidated Net Revenues | $ | 30,364 | $ | 35,159 | $ | (4,795 | ) | (14 | )% |
Nine Months Ended | Nine Months Ended | |||||||
Gross Profit Margin % | June 30, 2014 | June 30, 2013 | ||||||
Direct hire placement services | 100 | % | 100 | % | ||||
Industrial contract services | 10.4 | % | 12 | % | ||||
Professional contract services | 31.0 | % | 33.6 | % | ||||
Combined Gross Profit Margin % (1) | 29.9 | % | 32.3 | % |
Liquidity and Capital Resources
The following table sets forth certain consolidated statements of cash flows data (in thousands):
For the Nine Months Ended June 30, 2014 | For the Nine Months Ended June 30, 2013 | |||||||
Cash flows used in operating activities | $ | (72 | ) | $ | (583 | ) | ||
Cash flows used in investing activities | $ | (198 | ) | $ | (331 | ) | ||
Cash flows provided by financing activities | $ | (25 | ) | $ | 551 |
For the three months ended December 31, 2014 | For the three months ended December 31, 2013 | |||||||
Cash flows used in operating activities | $ | (850 | ) | $ | (525 | ) | ||
Cash flows used in investing activities | $ | (90 | ) | $ | (126 | ) | ||
Cash flows provided by financing activities | $ | 1,203 | $ | 364 |
As of June 30,December 31, 2014, the Company had cash and cash equivalents of approximately $66,000,$431,000, which was a decreasean increase of approximately $295,000$263,000 from approximately $361,000$168,000 at September 30, 2013.2014. Negative net working capital at June 30,December 31, 2014 was approximately $1,575,000,$4,302,000, as compared to negative net working capital of approximately $781,000$909,000 for September 30, 2013.2014. Shareholders’ equity as of June 30,deficiency at December 31, 2014 was approximately $1,640,000$1,290,000. This is a result of the change in fair value of derivative liability of approximately $3,115,000, which representedis a non-cash item. Excluding this, the Company’s negative working capital would be approximately 16% of total assets.
Net cash used in operating activities for the ninethree months ended June 30,December 31, 2014 and 2013 was ($72,000)850,000) and ($583,000)525,000), respectively. The fluctuation is due to timing of ourthe decrease in revenue and resulting decrease in accounts receivable, collections and payments of accounts payable and payroll accruals. In addition, during the nine months ended June 30, 2014 the Company’swhich were off-set by significant decreases in overall operating cash flow was affected by settlement payments in excess of $400,000 related to prior agreements that were not part of the Company's Current business plan.
Net cash used in investing activities for the ninethree months ended June 30,December 31, 2014 and 2013 was ($198,000)90,000) and ($331,000)126,000) respectively. The decrease was dueThese uses related primarily to a higher amountacquisition payments and purchasing of property and equipment acquired in the prior year offset by a decrease in earn-out payments in fiscal 2014.
Net cash flow provided by (used in) financing activities for the ninethree months ended June 30,December 31, 2014 was ($25,000)$1,203,000 compared to $551,000$364,000 in the ninethree months ended June 30,December 31, 2013. Fluctuations in financing activities are attributable to the level of borrowings, and a sale of common stock of $505,000 in 2014.
All of the Company’s office facilities are leased. As of June 30,December 31, 2014, future minimum lease payments under non-cancelable lease commitments having initial terms in excess of one year, including closed offices, totaled approximately $948,000.
On April 22, 2013, the Company finalized an Amendment to the Asset Purchase Agreement by and among DMCC Staffing, LLC, an Ohio limited liability company, RFFG of Cleveland, LLC an Ohio limited liability company (each a “Seller” and together, “Sellers”), the Company, and Triad Personnel Services, Inc., an Illinois corporation and wholly owned subsidiary of the Company (“Buyer”).
The Company agreed to pay the Sellers additional cash consideration of between $550,000 and $650,000 depending on the length of paymentspayment terms and 1,100,000 shares of common stock, in full satisfaction of all amounts owed to Seller, related to the Asset Purchase Agreement. The Company issued 1,100,000 shares of common stock on July 2, 2013, which was valued at approximately $330,000. The Company elected to payDuring the cash amount due over two years. To date,year ended September 30, 2013, the Company paid $350,000$200,000 of the cash consideration noted above. The Company has approximately $263,000 recorded in other current liabilities on the condensed consolidated balance sheetaccrued $350,000 at JuneSeptember 30, 2014. There was approximately $62,000 of interest recorded2013, for the nine month period ended June 30, 2014.
On September 27, 2013, the Company (“Borrower”) entered into agreements with ACF FINCO I LP (successor-in-interest to Keltic Financial Partners II, LP ("Keltic"LP), a limited partnership formed under the laws of the State of Delaware (“ACF”) (“Lender”) that provide the Company with long term financing through a six million dollar ($6,000,000) secured revolving note (the "Note"“Note”). The Note has a term of three years and has no amortization prior to maturity. The interest rate for the Note is a fluctuating rate that, when annualized, is equal to the greatest of (A) the Prime Rate plus three and one quarter percent (6.55%(3.25%), (B) the LIBOR Rate plus six and one quarter percent (6.25%), and (C) six and one half percent (6.50%), with the interest paid on a monthly basis. Loan advances pursuant to the Note are based on the accounts receivable balance and other assets. Upon execution of the Note, approximately three million fifty thousand dollars ($3,050,000) was advanced for the full repayment of the AR Credit Facility and fees from Wells Fargo related to the early termination thereof. At the time of close, there was approximately nine hundred thousand ($900,000) of availability under the new Note in excess of amounts paid to extinguish the debt and fees with Wells Fargo. The Company incurred certain cash expense and commitment fees related to obtaining the agreement of approximately $170,000, which has been paid. The Note is secured by all of the Company'sCompany’s property and assets, whether real or personal, tangible or intangible, and whether now owned or hereafter acquired, or in which it now has or at any time in the future may acquire any right, title or interests. On April 21, 2014, the Company entered into the First Amendment and Waiver to the Loan and Security Agreement with KelticACF to adjust the covenants. On December 3, 2014, the Company entered into a Second Amendment and Waiver to the Loan and Security Agreement with ACF to adjust the future covenants as outlined below.below and waived certain defaults. The KelticACF facility includes certain covenants which require compliance until termination of the agreement. As of the date of this report, the Company was not in compliance with all such covenants.
The Company has several administrative covenants and the following financial covenant:
The Company must maintain the following EBITDA:
(a) The Fiscal Quarterthree (3) consecutive calendar month period ending on December 31, 2013,2014, to be less than Threea negative number exceeding negative Two Hundred SeventyFifty Thousand and 00/100 Dollars ($370,000.00)250,000);
(b) The six (6) consecutive calendar month period ending on March 31, 2014,2015, to be less than Twoa negative number exceeding negative Five Hundred Ninety Five Thousand and 00/100 Dollars ($295,000.00)500,000);
(c) The nine (9) consecutive calendar month period ending on June 30, 2014,2015, to be less thana negative number exceeding negative Seven Hundred TenFifty Thousand and 00/100 Dollars ($710,000.00)750,000);
(d) The Fiscal Yeartwelve (12) consecutive calendar month period ending on September 30, 2014,2015, to be less than Eight Hundred Ninety Thousanda negative number exceeding negative One Million and 00/100 Dollars ($890,000.00)1,000,000); and
(e) For any period commencing on or after October 1, 2014,2015, no less than such amounts as are established by Lender for such period in Lender’s permitted discretion based on the annual financial projections including such period delivered by Borrower pursuant the agreement.
As of the date of this report,December 31, 2014, the Company was notin compliance with the EBITDA covenant and is in compliance with all such covenants, as a result, Keltic has the following remedies for the continued default:
On March 31, 2014, the Company entered into a Securities Purchase Agreement (the “SPA”) with Aracle SPF I, LLC (“Aracle”) pursuant to which Aracle has the right to acquire up to 12 units (the “Units”), for $50,000 per Unit, with each Unit consisting of 250,000 shares of common stock (the “Shares”) of the Company and 125,000 common stock purchase warrants (the “Warrants”).warrants. The Warrantswarrants are exercisable 6 months after issuance, have a term of 4 years, and have an exercise price of $0.25 per warrant share. The SPA contains standard representations, warranties, and covenants. In addition, the SPA contains a price adjustment mechanism that requires the Company, with certain exceptions, to issue additional shares of common stock to the investor in the event the Company, within 12 months of the initial closing under the SPA, issues certain equity securities at a price per share less than $0.20, provided, however, as long as the Company is listed on the NYSE MKT the total number of shares issuable under the foregoing adjustment provision may not exceed 19.9% of the Company’s outstanding shares of common stock on March 30, 2014. Further, in the event the Company is delisted from the NYSE MKT while Aracle owns at least 51% of the Sharesshares issued to it under the SPA, the Company shall issue an additional 3,000,000 Sharesshares to Aracle, and the 12 month price adjustment period shall be extended to 36 months. The Company agreed to appoint two new members to the Company’s Board of Directors within 60 days of the initial closing, which new members are subject to the prior approval of Aracle. The Company granted Aracle piggyback registration rights with respect to the Sharesshares and the shares of common stock underlying the Warrants.
Concurrent with entering intothe execution of the SPA, the Company and Aracle conducted an initial closing thereunder, in which Aracle purchased 9.5 Units for $475,000. The Company incurred certain expenses related to the SPA and the initial closing thereunder of approximately $88,000, which were paid from the proceeds.
On April 16, 2014, the Company, Aracle and a second institutional investor (both companies referred to as “Investors”), have entered into certain Securities Purchase Agreements (“SPA”) pursuant to which the Investorsinvestors purchased 2.5 Units for $125,000.
The Company incurred certain expenses related to the SPASPA’s and the closings thereunder of approximately $7,250,$130,000, which were paid from the proceeds for net proceeds of this closing.
On August 7, 2014, the Company
issued a Convertible Note (the “Note”) with an original principal balance of $632,500 to Brio Capital Master Fund LTD (“Brio”), for a purchase price of $550,000. The Note matures on February 6, 2016, and is payable in thirteen monthly installments of $48,654, commencing in the sixth month post-closing. Brio has the right, however not the obligation, six months after closing, to convert all or any part of the outstanding Note into the Company’s common stock at an initial conversion price of $0.20 per share. After six months from closing, the conversion price will have a one-time reset to the lower of $0.20 or 90% of the average of the 3 lowest closing prices for the previous 10 trading days, subject to a floor of $0.14 per share. The Company can force conversion if the Company’s common stock trades at 250% greater than the conversion price for 20 consecutive trading days.In addition to the Note, the Company issued a Warrantwarrant to purchase up to 2,371,875 shares of the CompanyCompany’s common stock. The Warrantwarrant is exercisable at $0.25 per share, vests 6 months after the closing, and expires 5 years thereafter.
On November 14, 2014, the Company entered into a Securities Purchase Agreement with 18 individuals who collectively subscribed to purchase a total of 200,000 shares of Preferred Stock from the Company for a total purchase price of $2,000,000. The Company believes thatcompleted this transaction on January 8, 2015. The net proceeds to the borrowing availability underCompany from the Keltic facility will be adequate to fund ouroffering were approximately $2,000,000, with approximately $1,000,000 being used as working capital needs. and the remaining $1,000,000 for marketing, acquisitions, expansion and to further the operations of the Company. The Preferred Stock was designated by the Company on December 15, 2014 through the filing of a Certificate of Designation of Series A Convertible Preferred Stock with the Illinois Secretary of State. Each share of Preferred Stock is initially convertible, at the election of the holder, into 50 shares of the Company’s Common Stock. The foregoing conversion ratio is subject to standard adjustment mechanisms, as set forth in the Designation.
On February 6, Brio converted $250,000 of the outstanding loan into 1,250,000 shares of the Company’s common stock. Based on the closing stock price of $0.85 per common share, the 1,250,000 shares will convert into approximately $1,062,500 of equity and the Company will recognize a gain on the conversion on the derivative liability of approximately $236,000 during the second quarter ended March 31, 2015.
In recent years, the Company has incurred significant losses and negative cash flows from operations. Management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions, to be financed primarily through the issuance of common stock, to improve the overall profitability and cash flows of the Company. Management believes with futurecurrent cash flow from operations, the preferred offering and the availability under the KelticACF facility, if not called, the Company will have sufficient liquidity for the next 12 months.
Off-Balance Sheet Arrangements
As of June 30,December 31, 2014, there were no transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party, under which the Company (a) had any direct or contingent obligation under a guarantee contract, derivative instrument or variable interest in the unconsolidated entity, or (b) had a retained or contingent interest in assets transferred to the unconsolidated entity.
Not applicable.
Disclosure Controls and Procedures
As of June 30,December 31, 2014, 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, 2014.
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 thirdfirst quarter ended June 30,December 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
As of June 30,December 31, 2014, there were no material legal proceedings pending against the Company.
Not required.
Not Applicable
None.
Item 6. | Exhibits |
The following exhibits are filed as a part of Part I of this report:
No. | Description of Exhibit | |
3(i) | Certificate of Designation of Series A Convertible | |
10.1 | Securities Purchase Agreement dated November 14, 2014, incorporated by | |
10.2 | Stock Exchange Agreement dated December 11, 2014, incorporated by reference to Appendix B to the Preliminary Information Statement filed on January 2, 2015. | |
10.3 | Second Amendment and Waiver to the Loan and Security Agreement with ACF FINCO I LP, dated December 3, 2014. | |
31.01 | Certifications of the principal 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 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. | |
101.INS ** | Instance Document | |
101.SCH ** | XBRL Taxonomy Extension Schema Document | |
101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document |
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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 17, 2015 | By: | /s/ Andrew J. Norstrud | |
Andrew J. Norstrud | |||
Chief Executive Officer | |||
(Principal Executive Officer) | |||
/s/ Andrew J. | |||
Andrew J. Norstrud | |||
Chief Financial Officer (Principal Financial and Accounting Officer) |