Notes
to Condensed Consolidated Financial Statements
For
the Three Months Ended March 31, 2019 and 2018
(Unaudited)
NOTE
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of Business
GEX
Management, Inc. was originally formed in 2004 as Group Excellence Management, LLC. d/b/a MyEasyHQ. In March of 2016, it was converted
from a limited liability company into a C corporation and changed its name to GEX Management, Inc. in April of 2016. GEX Management
obtained its license to operate as a Professional Employer Organization (PEO), and established GEX Staffing, LLC, a wholly owned
subsidiary of GEX Management, in March 2017 in order to begin distinguishing its staffing and PEO operations.
Carl
Dorvil founded Group Excellence, LLC, a tutoring and mentoring company, from his dorm room at Southern Methodist University in
2004. Group Excellence provided tutoring and mentoring services to students with the goal of inspiring young persons to pursue
high personal and academic achievement. The company quickly grew to more than six hundred employees. In 2011, Group Excellence
was on Inc. 500’s annual list of the 500 fastest growing private companies in the United States.
In
response to rapid growth, Mr. Dorvil developed GEX Management to facilitate the back-office functions of his company. GEX Management
provided Group Excellence, LLC with human resources, IT, accounting/bookkeeping, social media, payroll, and conducted a majority
of the overall operations of the company. Mr. Dorvil sold Group Excellence, LLC in 2011 but maintained ownership of GEX Management,
which continued as a Professional Services Company providing back office support to the tutoring company, as well as third-party
clients. In 2016 GEX Management revised its business model to provide staffing and back-office services to a wide variety of industries
in order to expand the Company’s footprint, thereby building on the previous 12-year history of exceptional client service.
On February 23, 2018, the US Secretary of Commerce, Wilbur Ross, mentioned at the “African American Leaders in the White
House: Education, Business and Policy” that Dorvil was “the youngest African American CEO ever to take a company public
in U.S. history.”
Over
the last few years, GEX Management experienced tremendous growth in sales and customer pipeline - staffing business grew by over
1600%+ from 2016 to 2017 with the firm being named among the “fastest growing public companies in the North Texas region”
by the Dallas Morning News, while also significantly expanding its client footprints across multiple staffing, business consulting
and PEO opportunities.
In
September 2018, the Company terminated contracts with two customers who accounted for over 83% of the Company’s net staffing
revenue, resulting in significant loss of revenue to the company in Q4 2018 and Q1 2019. The termination of these and other contracts
was attributable to the increased business risk associated with Merchant Cash Advance contracts requiring attachment of future
receivables of customer receipts with the MCA institutions as well as a result of management decision to move away from low margin,
high cost contracts which were deemed detrimental to the company’s sustained operability and profitability in the long run.
Despite
these setbacks, the current management, has set strategic goals in 2019 to expand into areas of higher margin and higher growth
categories particularly in the space of IT and Management Consulting as well as identify synergistic opportunities within the
healthcare sector to deliver significant cost rationalization, benefits and integrated staffing solutions to clients and customers
alike. As a result of management efforts towards achieving this strategic goal, GEX Management was invited in February to be a
Preferred Supplier to Insight Global (
www.insightglobal.com
), one of the largest Managed Service Providers ( MSPs) to Fortune
100 Companies in the Enterprise Technology Consulting and Staffing solutions space. This has resulted in a significant new business
development opportunity for GEX that is expected to yield a strong revenue and growth pipeline starting Q2 2019, with sales expected
to pick up momentum in Q3 and Q4 2019. The first technology consultant that GEX hired through this Preferred Supplier initiative
has already been successfully placed at a large PA based financial services firm to provide Business and Quality Analysis professional
services to the client with the consultant expected to begin onsite services via GEX starting June 2019; additional contract hires
are expected to follow suit with sales expected to significantly pick up during the second half of the year as a result of GEX
sales and recruiting efforts for preferred placement opportunities across the country. Additionally, GEX executed a strategic
staffing agreement with a leading Ohio based Healthcare group to deliver staffing, HR management, payroll processing and benefit
administration services to the client’s healthcare and clinical practice centers in the mid-west region which is expected
to show results starting Q2 2019. Furthermore, GEX is in talks with multiple staffing and consulting companies to identify synergistic
acquisition opportunities to help compensate for the lost revenue and growth momentum in Q4 2018 and Q1 2019 due to the contract
terminations and regain its position as one of the fastest growing staffing businesses in the local and national markets while
also developing a long term and sustainable business pipeline model. Management expects these and other potential organic and
inorganic growth initiatives to help the firm eventually achieve strong and stable revenue growth while also help move towards
profitability by targeting a higher margin, lower cost business model and relying on less expensive debt instruments to help reduce
the burden across the firm’s capital structure while maximizing efficient use of operating capital during future periods.
In
addition to these planned strategic growth initiatives which are expected to fully materialize during the second half of 2019,
management has been focusing on materially improving its balance sheet by significantly reducing or eliminating the debt or debt
like instruments related to convertible notes and asset related liens introduced in 2018 while simultaneously exploring opportunities
to reduce or eliminate the high interest MCA related toxic debt instruments that resulted in significant interest expenses to
the company and a burden to operating capital. As part of this balance sheet “clean-up” initiative, on February 8
2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which would
allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for cancellation
of the $1,300,000 real estate lien note secured by the building along with any and all accrued interest payable on the note as
of the date of the agreement. Additionally, on March 5, 2019, one of GEX’s promissory note holders proceeded to execute
its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the note holder taking possession
of the Setco property resulting in the elimination of a $500,000 note and any accrued interest on the principal amount and the
elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests from the Company books. Furthermore,
GEX has been able to reduce the overall convertible notes burden on the balance sheet which totaled to over $1.2M by over 40%
of the principal outstanding balance to less than $750,000 as of April 2019 through strategic conversions of these notes to common
equity initiated by the convertible note issuers throughout Q1 2019, thus demonstrating a strong market interest by retail and
institutional investors in the GEX growth platform evidenced by the record high market volume of GEX trading stock in the OTC
markets - this momentum is expected to sustain through 2019 and beyond as a result of these management growth initiatives and
the continued support of investors and shareholders alike. Finally, management believes that the material reduction of MCA related
debt like instruments will be a critical first step prior to rebuilding a robust revenue pipeline as this will require strong
working capital and favorable leverage covenants to sustain operations in the long term as well as reduce liabilities related
to attachment to future receivables. The inability or failure by the firm to immediately address these toxic MCA instruments could
result in management pursuing a restructuring program or similar initiatives to bring the balance sheet within reasonable covenant
parameters to allow the firm to continue operating efficiently in the coming years without exposing future customers to significant
business risks associated with these toxic instruments.
Material
Definitive Agreements
On
December 29, 2017 GEX purchased 100% of the membership interest in AMAST Consulting, LLC (“AMAST”), which owned a
multi-use office building in Lowell, Arkansas, which had an occupancy rate of 100% at the time of the acquisition. The terms of
the Agreement to purchase AMAST include the fulfillment of the lease obligations of the current tenants, as well as the assumption
of the debt that is collateralized by the building and associated property. The consolidated financials include the assets and
debt of AMAST.
On
May 2, 2018, the Company purchased a 25% interest in Payroll Express, LLC (PE), a California limited liability company for $500,000
in cash. The Company recognized this investment under the equity method due to its ability to exercise significant influence over
the operating and financial policies of PE. Additionally, the Company had the right, but not the obligation, to purchase an additional
26% interest under similar terms. On June 11, 2018, the Company paid $250,000 in cash to the owners of Payroll Express as a deposit
towards purchasing additional shares in PE and is recorded in Other Assets on the Balance Sheet
On
August 3, 2018, the Company entered into a Membership Interest Purchase Agreement with PE, pursuant to which the Company purchased
an additional 26 % of the membership interests of PE for a purchase price of (a) $250,000, plus (b) warrants (the “Warrants”)
to purchase 2,000,000 shares of the Company’s common stock. As a result of this transaction, the Company owned a total of
51% of the membership interests of PE. The Warrants were exercisable for a period of 24 months from the date of issuance. The
Warrants provided for the purchase of shares of the Company’s Common Stock an exercise price of $1.06 per share. The Warrants
were exercisable for cash, or on a cashless basis. The number of shares of Common Stock to be deliverable upon exercise of the
Warrants were subject to adjustment for subdivision or consolidation of shares and other standard dilutive event.
On
September 28, 2018, the Company, consummated a real property purchase and sale transaction (“Setco Property Purchase Transaction”)
with Setco International Forwarding Corporation, a Texas corporation (“Setco”), pursuant to which the Company purchased
a 16.84 acre tract of land from Setco, located at 13000 S. Lyndon B. Johnson Freeway in Dallas, Texas, for an aggregate purchase
price of $11,000,000 , paid as follows:
|
●
|
$1,125,000,
by the Company’s execution and delivery of a Real Estate Lien Note made to Setco (the “September 2018 Note”);
|
|
|
|
|
●
|
$4,875,000,
by the Company’s issuance to Setco of 15,000,000 shares of the Company’s common stock (valued at $0.325 per share);
and
|
|
|
|
|
●
|
$5,000,000,
by the Company’s transfer to Setco of the Company’s 51% ownership interest in Payroll Express.
|
On
June 4, 2018, the Company entered into a discounted Promissory Note Payable with a principal balance of $500,000, and bearing
interest at a rate of 15% per annum. This note was personally guaranteed by Carl Dorvil, the Company’s former Chief Executive
Officer and principal shareholder and secured, among other things, certain liens and security interests including the Setco property
purchased on September 28, 2019. This note was due to be paid in full by August 1, 2018. The Company had been in negotiations
to restructure this loan, as it was originally intended as a bridge loan with a term of 57 days. Pursuant to these negotiations,
in August 2018, the maturity date on the note was extended to August 30, 2018. As of December 31, 2018, the Company failed to
pay the Principal Amount and, therefore, continued to be in default under the Note. Subsequently on March 5, 2019, the noteholder
proceeded to execute its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the
noteholder taking possession of the Setco property resulting in the elimination of the $500,000 Civitas note and any accrued interest
on the principal amount and the elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests
from the Company books and with the elimination of the Setco property assets from the company books.
On
February 8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which
would allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for
cancellation of the $1,300,000 real estate lien note secured by the building along with an and all accrued interest payable on
the note as of the date of the agreement and the elimination of the AMAST property related assets from the company books.
Basis
of Presentation
Our
financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”),
as well as the applicable regulations and rules of the Securities and Exchange Commission (“SEC”). This requires management
to make estimates and assumptions that affect the amounts reported in the financial statements and their accompanying notes. The
actual results could differ from those estimates.
The
accompanying interim, unaudited consolidated financial statements and related financial information should be read in conjunction
with the audited financial statements and the related notes thereto for the year ended December 31, 2017 included in the Company’s
Annual Report on Form 10-K, filed with the SEC on April 10, 2018. All adjustments necessary for a fair statement of the results
for the interim periods have been made. All adjustments are of a normal and recurring nature.
Principles
of Consolidation
The
consolidated financial statements include the accounts of GEX Management, Inc. and its wholly owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
There
have been no significant changes to our accounting policies that have a material impact on our financial statements and accompanying
notes.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents include cash in banks and short-term investments with original maturities of three months or less.
Accounts
Receivable
Accounts
receivable consists of accrued services and consulting receivables due from customers and are unsecured. The receivables are generally
due within 30 to 45 days after the date of the invoice. Accounts receivable is carried at their face amount, less an allowance
for doubtful accounts. GEX’s policy is not to charge interest on receivables after the invoice becomes past due. Write-offs
are recorded at the time when a customer receivable is deemed uncollectible. No bad debt expense was incurred for the 3 months
ended March 31, 2018. No bad debt expense was incurred for the 3 months ended March 31, 2017.
Property
and Equipment
Property
and Equipment, net is carried at the cost of purchase, acquisition or construction, and is depreciated over the estimated useful
lives of the assets. Assets acquired in a business combination are stated at estimated fair value. Costs associated with repair
and maintenance are expensed as they are incurred. Costs associated with improvements which extend the life, increase the capacity
or improve the efficiency of our property and equipment are capitalized and depreciated over the remaining life of the related
asset. Depreciation and amortization are provided using the straight-line methods over the useful lives of the assets as follows:
|
Useful
Life
|
Buildings
|
30
Years
|
Office
Furniture & Equipment
|
5
Years
|
Impairment
of Long-Lived Assets
The
Company records an impairment of long-lived assets used in operations, other than goodwill, and its equity method investments
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.
Revenue
Recognition
Effective
on January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts
with Customers (Topic 606)
. ASU No. 2014-09 outlines a single, comprehensive revenue recognition model for revenue derived
from contracts with customers and it supersedes the prior revenue recognition guidance, including prior guidance that is industry-specific.
Under ASU No. 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that
reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The Company adopted
ASU No. 2014-09 using the modified retrospective method, which applies to only the most current period presented in the financial
statements. There were no significant changes to the Company’s existing revenue recognition policies as a result of adopting
ASU 2014-09.
GEX
enters into contracts with its clients for professional services, staffing and/or PEO services. GEX’s contract stipulates
the rate and price charged to each client. GEX’s contracts for these services are generally cancellable at any time by either
party with 30-days’ written notice. GEX fulfills its performance obligations each month, and the contracts generally have
a term of one year with an automatic renewal after 12 months. The duration between invoicing and when GEX completes its contractual,
performance obligations are satisfied is not significant. For the Company’s PEO services, payment is generally due on the
date the invoice is sent to the client. For staffing and professional services payment is generally due 30 days after the invoice
is sent to the client. GEX does not have significant financing components or significant payment terms.
GEX’s
revenue is generally recognized ratably, month-to-month as co-employees or staffed employees perform their service at the client’s
worksite. Generally, GEX’s PEO clients are invoiced concurrently with each payroll of its co-employees, and clients that
utilize GEX’s staffing and back office services are billed concurrently with each payroll or on a monthly basis.
PEO
Services
Professional
Employment Organization (“PEO”) service revenues represent the fees charged to clients for administering payroll and
payroll tax transactions for our clients’ Co-Employed Employees (“CEEs”), access to our HR and benefits administration
services, consulting related to employment and benefit law compliance and general employment consulting related fees. PEO service
revenues are recognized in the period the PEO services are performed as stipulated in the Client Service Agreement (“CSA”),
where these fees are fixed or determinable, when the PEO client is invoiced and collectability is reasonably assured.
GEX
is not considered the primary obligor with respect to CEE’s payroll and payroll tax, and insurance payments and therefore,
these payments are not reflected as either revenue or expense in our statements of operations.
PEO-related
revenues also include revenues generated from insurance administration for our PEO clients. These insurance-related revenues include
insurance-related billings, as well as administrative fees that GEX collects from PEO clients and withholds from CEEs for health
benefit insurance plans provided by third-party insurance carriers. Insurance-related revenues are recognized over the period
the insurance coverage is provided and where collectability is reasonably assured.
Sta
f
fin
g
Services and Professional Services
Staffing
services revenue is derived from supplying temporary staff to clients. Temporary staff generally consists of temporary workers
working under a contract for a fixed period of time, or on a specific client project. The temporary staff includes both GEX employees
and third-parties contracted by GEX.
Temporary
staff are provided to clients through a Staffing Service Agreement (‘SSA’) involving a specified service that the
temporary staff will provide to the client. When GEX is the principal or primary obligor for the temporary staff, GEX records
the gross amount of the revenue and expense from the SSA.
GEX
is generally the primary obligor when GEX is responsible for the fulfillment of services under the SSA, even if the temporary
staff are not employees of GEX. This typically occurs when GEX contracts third-parties to fulfill all or part of the SSA with
the client, but GEX remains the holder of the credit risk associated with the SSA, and GEX has total discretion in establishing
the pricing under the SSA.
All
other Professional Services revenues are recognized in the period the services are performed as stipulated in the client’s
Outsourcing Agreement, when the client is invoiced, and collectability is reasonably assured. Revenue recognition for arrangements
with multiple deliverables constituting a single unit of accounting is recognized generally over the greater of the term of the
arrangement or the expected period of performance.
Income
Taxes
The
Company uses the liability method in the computation of income tax expense and the current and deferred income taxes payable.
A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to
be realized.
Fair
Value Measurements
ASC
Topic 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
requires certain disclosures about fair value measurements. In general, fair value of financial instruments is based upon quoted
market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed
models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s
credit worthiness, among other things, as well as unobservable parameters.
Earnings
Per Share
Earnings
per share are calculated in accordance with ASC 260 “Earnings per Share”. Basic income (loss) per share is computed
by dividing the period income (loss) available to common shareholders by the weighted average number of common shares outstanding.
Diluted earnings (loss) per share is computed by dividing the income (loss) available to common share-holders by the weighted
average number of common shares outstanding plus additional common shares that would have been outstanding if dilutive potential
common shares had been issued. For purposes of this calculation, common stock dividends, warrants and options to acquire common
stock, would be considered common stock equivalents in periods in which they have a dilutive effect and are excluded from this
calculation in periods in which these are anti-dilutive to the net loss per share..
Earnings
per share information for the three months ended March 31, 2019 has been retroactively adjusted to reflect the stock split that
occurred in December 2017.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year presentation. Such reclassifications have had no effect
on the financial position as of December 31, 2018 or operations or cash flows for the periods ended March 31, 2019.
Going
Concern
To
date, the Company has funded its operations primarily through public and private offerings of common stock, our line of credit,
short- term discounted and convertible notes payable. The Company has identified several potential financing sources in order
to raise the capital necessary to fund operations through September 30, 2019.
In
addition to the aforementioned current sources of capital that will provide additional short-term liquidity, the Company is currently
exploring various other alternatives including debt and equity financing vehicles, strategic partnerships, government programs
that may be available to the Company, as well as trying to generate additional sales and increase margins. However, at this time
the Company has no commitments to obtain any additional funds, and there can be no assurance such funds will be available on acceptable
terms or at all. If the Company is unable to obtain additional funding and improve its operations, the Company’s financial
condition and results of operations may be materially adversely affected and the Company may not be able to continue operations,
which raises substantial doubt about its ability to continue as a going concern. Additionally, even if the Company raises sufficient
capital through additional equity or debt financing, strategic alternatives or otherwise, there can be no assurances that the
revenue or capital infusion will be sufficient to enable it to develop its business to a level where it will be profitable or
generate positive cash flow. If the Company raises additional funds through the issuance of equity or convertible debt securities,
the percentage ownership of our stockholders could be significantly diluted, and these newly issued securities may have rights,
preferences or privileges senior to those of existing stockholders. If the Company incurs additional debt, a substantial portion
of its operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds
available for business activities. The terms of any debt securities issued could also impose significant restrictions on the Company’s
operations. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating
performance, and may adversely impact our ability to raise additional funds. Similarly, if the Company’s common stock is
delisted from the public exchange markets, it may limit its ability to raise additional funds.
The
consolidated financial statements for the three months ended March 31, 2019 were prepared on the basis of a going concern which
contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly,
they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The ability
of the Company to meet its total liabilities as of March 31, 2019, and to continue as a going concern is dependent upon the availability
of future funding, continued growth in billings and sales contracts, and the Company’s ability to profitably meet its after-sale
service commitments with its existing customers. The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
NOTE
2. OTHER CURRENT ASSETS
At
March 31, 2019 and December 31, 2018, Other Current Assets were $2,029,440 and $88,749 respectively. Current
Assets primarily comprised of Debt Fees and Debt Discounts related to MCAs and Derivative Assets.
At March 31, 2019 and December 31,
2018, Other Assets were $7,171,107 and $4,471 respectively. Other Assets primarily comprised of long term Consulting Contracts
that had been capitalized on the Balance Sheet and Amortized over their lives over a period of 3-5 years depending on the length
of the specific contract.
NOTE
3. STOCKHOLDERS’ EQUITY
General
The
Company filed Form S-1 with the Securities & Exchange Commission and it was declared effective on November 14,
2016 under which the Company sold 188,059 shares for $282,089 in the first quarter under this registration statement. The
Company effected a 4 for 3 stock split in December 2017. All transaction have been adjusted to reflect this split.
The
Company issued 47,781 shares for services for a total of $74,750 during 2017.
On
May 15, 2017, GEX entered into a Conversion Agreement with two consultants that had a $45,000 balance with the Company. In accordance
with the terms and conditions of the Conversion Agreement, GEX issued a total of 40,000 shares of the Company’s common stock,
at a cost basis of $1.125 per share. The two consultants were issued 20,000 shares each of the total 40,000 shares issued by the
Company.
On
June 7, 2017, GEX entered into a Debt Conversion Agreement with the Company that purchased the Line of Credit Promissory Note
from the Company’s Chief Executive Officer. Under the terms and conditions of the Debt Conversion Agreement GEX issued
153,664 shares of its common stock, for the extinguishment of $345,745 in debt and accrued interest owed by GEX under the Line
of Credit as of the date of the Debt Conversion Agreement. The shares were valued at $1.125 per share. GEX recorded a gain on
extinguishment of debt in the amount of $172,872.
On
June 20, 2017, GEX entered into a Stock Purchase Agreement (“SPA”) with a third-party investor. Under the terms and
conditions of the SPA, GEX issued 19,003 shares of its common stock, for a total of $120,000.
On
June 20, 2017, GEX entered into an Advisory Agreement with a third-party advisory firm. Under the terms and conditions of
the Advisory Agreement, GEX paid a non-refundable retainer in the amount of $24,750 through the issuance of 3,334 shares of the
Company’s common stock.
On
July 20, 2017, GEX entered into a Stock Purchase Agreement with a third-party investor. Under the terms and conditions of the
SPA, GEX issued 12,668 shares of its common stock restricted pursuant to Rule 144 of the Securities Act of 1933 for a total of
$80,000.
On
September 20, 2017, GEX entered into Stock Purchase Agreements with two advisory board members. Under the terms and conditions
of the SPA’s, GEX issued 6,564 shares of its common stock, for a total of $32,000.
On
October 18, 2017, GEX entered into a Stock Purchase Agreements with one advisory board member. Under the terms and conditions
of the SPA, GEX issued 2,667 shares of its common stock restricted pursuant to Rule 144 of the Securities Act of 1933, as amended,
for a total of $13,000.
On
October 31, 2017 GEX entered into a Lease Agreement for office space in Fayetteville, Arkansas for 1,067 shares of its common
stock, restricted pursuant to Rule 144 of the Securities Act of 1933, as amended.
On
December 29, 2017 GEX entered into a SPA with a shareholder. Under the terms of the SPA, GEX issued 75,000 shares of its common
stock for a total of $300,000.
On
December 29, 2017 the Company acquired a 12,223 square foot, multi-use office building in Lowell, Arkansas through the purchase
of 100% of the member interest in AMAST Consulting, LLC for 200,000 shares of the Company’s common stock and assumption
of the outstanding mortgage.
During
the twelve months ended December 31, 2018, the Company issued the following unregistered securities. The issuance of securities
in connection with these transactions was exempt from registration under Section 4(a)(2) and/or Rule 506 of Regulation D as promulgated
by the Securities and Exchange Commission (the “SEC”) under of the Securities Act of 1933, as amended (the Securities
Act”), as transactions by an issuer not involving a public offering.
On
July 9, 2018, the Company issued 58,500 shares of common stock at no cost basis for consulting services. On July 19, 2018, the
Company issued 206,500 shares of common stock at no cost basis for consulting services. On July 25, 2018, the Company issued 12,668
shares of common stock at no cost basis for consulting services. On July 30, 2018, the Company issued 100,000 shares of common
stock at no cost basis for consulting services. On August 2, 2018, the Company issued 207,339 shares of common stock at no cost
basis in connection with issuance of a convertible note payable as a commitment fee. On August 7, 2018, the Company issued 50,000
shares of common stock at no cost basis for consulting services. On August 27, 2018, the Company issued 15,000 shares of common
stock at no cost basis for consulting services. On September 10, 2018, the Company issued 220,000 shares of common stock at no
cost basis for consulting services. On September 14, 2018, the Company issued 50,000 shares of common stock at no cost basis for
consulting services. On September 25, 2018, the Company issued 1,436 shares of common stock at no cost basis for consulting services.
On September 26, 2018, the Company issued 15,000,000 shares of common stock at no cost basis related to a real property purchase
acquisition transaction. On January 16, 2019, the Company issued 60,000 shares of common stock related to a convertible note
conversion. On January 21, 2019, the Company issued 538,095 shares of common stock related to a convertible note conversion. On
January 29, 2019, the Company issued 120,000 shares of common stock related to a convertible note conversion. On February 13,
2019, the Company issued 1,000,000 shares of common stock related to a convertible note conversion. On February 13, 2019, the
Company issued 400,000 shares of common stock related to a convertible note conversion. On February 14, 2019, the Company issued
400,000 shares of common stock related to a convertible note conversion. On February 19, 2019, the Company issued 670,000 shares
of common stock related to a convertible note conversion. On February 20, 2019, the Company issued 1,000,000 shares of common
stock related to a convertible note conversion. On February 20, 2019, the Company issued 1,000,000 shares of common stock related
to a convertible note conversion. On February 21, 2019, the Company issued 847,458 shares of common stock related to a convertible
note conversion. On February 22, 2019, the Company issued 677,966 shares of common stock related to a convertible note conversion.
On February 22, 2019, the Company issued 1,129,944 shares of common stock related to a convertible note conversion. On February
22, 2019, the Company issued 300,000 shares of common stock related to a convertible note conversion. On February 25, 2019, the
Company issued 2,300,000 shares of common stock related to a convertible note conversion. On February 25, 2019, the Company issued
2,000,000 shares of common stock related to a convertible note conversion. On February 26, 2019, the Company issued 1,140,000
shares of common stock related to a convertible note conversion. On February 26, 2019, the Company issued 1,250,000 shares of
common stock related to a convertible note conversion. On February 27, 2019, the Company issued 2,535,211 shares of common stock
related to a convertible note conversion. On February 28, 2019, the Company issued 3,400,000 shares of common stock related to
a convertible note conversion. On February 28, 2019, the Company issued 2,900,000 shares of common stock related to a convertible
note conversion. In March 2019, the Company issued a total of 253,428,115 shares of common stock related to a convertible note
conversion.
As
of December 31, 2018, the Company was authorized to issue 200,000,000 common shares at a par value of $0.001 per share. In April
2018, the Company issued shares of 125,000 of common stock at $3.49 per share to a non-officer employee. As of December 31, 2018,
the Company was authorized to issue 20,000,000 preferred shares at a par value of $0.001 per share. At December 31, 2018 and December
31, 2017 there were no preferred shares outstanding.
Effective
February 19, 2019, the Board of Directors of the Company approved the authorization of eight hundred thousand (800,000) shares
of Series A1 Voting Preferred Stock (the “Series A1 Preferred Stock”) and approved the issuance to Srikumar Vanamali,
the Corporation’s Interim CEO and Executive Director, of four hundred thousand (400,000) shares of this Series A1 Preferred
Stock and approved the issuance to Shaheed Bailey, the Corporation’s Interim Chief Investment Officer and Director, of four
hundred thousand (400,000) shares of this Series A1 Preferred Stock. As a result of the issuance of the Series A1 Preferred Stock
Shares to Mr. Srikumar Vanamali and Mr Shaheed Bailey, Mr. Srikumar Vanamali and Mr. Shaheed Bailey obtained voting rights over
the Company’s outstanding voting stock on February 19, 2019, which provide them combined the right to vote up to 51% of
the total voting shares able to vote on any and all shareholder matters. As a result, Mr. Srikumar Vanamali and Mr. Shaheed Bailey
will exercise majority control in determining the outcome of all corporate transactions or other matters, including the election
of Directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause
a change in control. In the event Mr. Srikumar Vanamali and Mr. Shaheed Bailey are no longer acting as Officers and Directors
of the Board of Directors of the Corporation, the shares of Series A1 Preferred Stock shall automatically, without any action
on the part of any party, or the Corporation, be deemed cancelled in their entirety. In relation to this, Form 3 was filed in
SEC for both Srikumar Vanamali and Shaheed Bailey
related
to the 10% Beneficial ownership on account of the majority voting
control through the preferred shares.
Warrants
In
May 2018, the Company issued 50,000 warrant shares related to the issuance of convertible notes payable. These warrants have a
five- year term with a conversion price of $4.00 per common share. In June 2018, the Company issued 40,000 warrant shares related
to the issuance of a note payable. These warrants have a two-year term with a conversion price of $1.66 per common share. In June
2018, the Company issued 40,000 warrant shares related to the issuance of a note payable. These warrants have a two-year term
with a conversion price of $1.66 per common share.. In Aug 2018, the Company issued 25,000 warrant shares related to the issuance
of a note payable. These warrants have a two-year term with a conversion price of $4 per common share. In Aug 2018, the Company
issued 10,000 warrant shares related to the issuance of a note payable. These warrants have a two-year term with a conversion
price of $4 per common share. In Aug 2018, the Company issued 2,000,000 warrant shares related to the transaction for Payroll
Express. These warrants have a two-year term with a conversion price of $1.04 per common share.
The
following table outlines the activity relative to these warrants for the 3 months ended March 31, 2019:
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Warrant Shares
|
|
|
Exercise Price
|
|
Outstanding, at December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
2,125,000
|
|
|
|
1.19
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding, at end of period
|
|
|
2,125,000
|
|
|
|
1.19
|
|
Exercisable, at March 31, 2019
|
|
|
2,125,000
|
|
|
$
|
1.19
|
|
The
following table summarizes the warrants outstanding as of March 31, 2019:
Exercise
Prices
|
|
|
Number of Warrants
Outstanding
|
|
|
Weighted - Average Remaining Contractual Life of Warrants
Outstanding
|
|
Number of Warrants
Exercisable
|
|
$
|
4.00
|
|
|
|
85,000
|
|
|
4.84 years
|
|
|
85,000
|
|
$
|
1.66
|
|
|
|
40,000
|
|
|
1.52 years
|
|
|
40,000
|
|
|
1.06
|
|
|
|
2,000,000
|
|
|
1,92 years
|
|
|
2,000,000
|
|
|
|
|
|
|
2,125,000
|
|
|
|
|
|
2,125,000
|
|
NOTE
4. NOTES PAYABLE
On
March 6, 2018, the Company entered into an Agreement to sell $1,066,050 of the Company’s future receipts for $772,500 to
provide liquidity for the Company’s expansion opportunities. On April 18, 2018, the Company entered into an Agreement to
sell $490,000 of the Company’s future accounts receivable for $350,000. On April 25, 2018, the Company entered into an Agreement
to sell $299,800 of the Company’s future accounts receivable for $200,000. On April 25, 2018, the Company entered into an
Agreement to sell $374,750 of the Company’s future accounts receivable for $250,000. On May 31, 2018, the Company sold $583,600
of its future accounts receivable for $400,000. On June 14, 2018, the Company entered into an Agreement to sell $299,800 of the
Company’s future receivables for $200,000. On June 27, 2018, the Company sold $909,350 of its future accounts receivable
for $650,000. On July 9, 2018, the Company entered into a discounted Note Payable agreement to sell its future accounts receivable
of $246,500 for $170,000. On July 10, 2018, the Company entered into a discounted note payable agreement to sell $437,700 of its
future accounts receivable for $300,000. On July 23, 2018, the Company entered into a discounted Note Payable agreement to sell
its future accounts receivable of $246,500 for $170,000. On July 31, 2018, the Company entered into a discounted Note Payable
agreement to sell its future accounts receivable of $539,640 for $360,000. On August 14, 2018, the Company entered into a discounted
Note Payable agreement to sell its future accounts receivable of $149,900 for $100,000. On August 17, 2018, the Company entered
into a discounted Note Payable agreement to sell its future accounts receivable of $149,900 for $100,000. On August 24, 2018,
the Company entered into a discounted Note Payable agreement to sell its future accounts receivable of $224,850 for $150,000.
On
August 29, 2018, the Company entered into a factoring agreement with Complete Business Solutions (“CBSG”) wherein
CBSG will work as a strategic partner with the Company to provide liquidity for working capital and the Company’s expansion
opportunities (organic and inorganic) on an ongoing basis. As a result of this, the company obtained weekly disbursement related
to sale of future receivables for $300,205 on Aug 29, 2018, $300,205 on Sep 5, 2018, $270,793 on Sep 12, 2018, $257,765 on Sep
19, 2018, $204,015 on Sep 26, 2018, $165,087 on Oct 3, 2018, $152,075 on Oct 10, 2018, $152,075 on Oct 17, 2018, $152,075 on Oct
24, 2018, $152,075 on Oct 31, 2018, $282,000 on Nov 2, 2018, $186,245 on Nov 7, 2018, $195,780 on Nov 14, 2018, $187,495 on Nov
28, 2018, $173,586 on Dec 5, 2018, $167,075 on Dec 12, 2018, $167,075 on Dec 19, 2018 and $167,075 on Dec 26, 2018.
On
April 26, 2018, the Company entered into two Securities Purchase Agreements, pursuant to which the Company issued Convertible
Promissory Notes (“the Notes”) with principal amounts totaling up to $1,000,000, bearing interest at 10% per annum.
The total amounts of the Notes that can be funded (consideration that can be loaned to the Company) is up to $887,500, after discounts
of $112,500 prorated over the term of the Notes. Amounts borrowed by the Company mature in twelve months after the date of funding
and can be prepaid up to six months after issuance subject to prepayment penalties and approval by the Note holders. Any amounts
outstanding on the Notes can be converted into Common Stock at a conversion price of $2.50 per share for the first six months
and at a discount of up to 50% thereafter to the then current market value of the Company’s stock commencing six months
after issuance. Conversion is at the sole discretion of the holders of the Notes. In May 2018, the Company borrowed $200,000 under
the Notes, and received $175,000 after giving effect to discounts of 10% for each note and origination fees. The Notes are personally
guaranteed by Carl Dorvil and by Chelsea Christopherson, who are currently beneficiary shareholders with the Company and previously
held the positions of CEO and COO respectively. The Company incurred a total of $5,000 related to origination fees on the Notes.
Additionally, the Company issued 50,000 warrant shares for debt issuance costs at an exercise price of $4.00 per share. The warrants
are exercisable for five years and had a fair market value of $31,852 on the date of issuance. The Notes bear interest at 10%
per annum.
On
April 26, 2018, the Company entered into a convertible note payable for $146,681 bearing interest at 10% per annum. All principal
and interest is due on April 26, 2019.
On
April 26, 2018, the Company entered into a convertible note payable for $146,681 bearing interest at 10% per annum. All principal
and interest is due on April 26, 2019.
On
August 1, 2018, the Company entered into a convertible note payable for $226,000 bearing interest at 12% per annum. All principal
and interest is due on January 27, 2019. The note is convertible at the lesser of $2.50 per share or 65% of the market price on
the date of conversion. In connection with this note payable, on August 9, 2018, the Company issued 207,339 shares for its common
stock as a commitment fee.
On August 8, 2018, the Company entered
into a convertible note payable for $85,000 bearing interest at 10% per annum. All principal and interest is due on August 8,
2019.
On
August 14, 2018, the Company entered into a convertible note payable for $250 ,000 bearing interest at 10% per annum. All principal
and interest is due on May 6, 2019.
On
August 24, 2018, the Company entered into a convertible note payable for $85,000 bearing interest at 10% per annum. All principal
and interest is due on August 24, 2019.
On January 18 2019, the Company entered
into a convertible note payable for $226,000 bearing interest at 12% per annum. All principal and interest is due on July 18,
2019. In connection with this note payable , the Company issued 538,095 shares for its common stock as a commitment fee.
On February 15, 2019, the Company entered
into a convertible note payable for $43,000 bearing interest at 10% per annum. All principal and interest is due on February 15,
2020.
On
June 4, 2018, the Company entered into a discounted Promissory Note Payable with a principal balance of $500,000 and bearing interest
at a rate of 15% per annum. This note is personally guaranteed by Carl Dorvil, beneficiary shareholder and former CEO of the Company.
In connection with this note, the Company issued 40,000 warrant shares for its common stock. The exercise price for the warrants
is $1.66 per common share and the warrants expire in 24 months from date of issuance. This note was due to be paid in full by
August 1, 2018. The Company is currently in negotiations to restructure this loan, as it was originally intended as a bridge loan
with a term of 57 days. Pursuant to these negotiations, in August 2018, the maturity date on the note was extended to August 30,
2018 with negotiations underway to extend the tenure.
The
Real Estate Lien Note related to the Arkansas building property had a balance of $1,195,159 as of December 31, 2018. On February
8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which would
allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for cancellation
of the remaining balance of real estate lien note secured by the building along with an and all accrued interest payable on the
note as of the date of the agreement.
NOTE
5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
As
of March 31, 2019, the company had no outstanding accounts receivable balance with its customers. As of December 31, 2018, the
company had no outstanding accounts receivable balance with its customers.
In
September 2018, the Company terminated contract with 2 customers who accounted for 83% of the Company’s net staffing revenue
for the twelve months ended December 31, 2018. While the Company is having ongoing discussions with the customers to renegotiate
the contracts on more favorable terms compared to the previous service agreement, there is no guarantee that these contracts will
be signed in the future.
NOTE
6. PROPERTY AND EQUIPMENT
As
a result of the foreclosure actions related to the AMAST and Setco properties, the Company did not own material fixed assets as
of March 31, 2019 compared to December 31, 2018:
|
|
Mar 31, 2019
|
|
|
Dec 31, 2018
|
|
Land
|
|
$
|
-
|
|
|
$
|
11,333,778
|
|
Buildings
|
|
|
-
|
|
|
|
2,125,642
|
|
NOTE
7. RELATED PARTY TRANSACTIONS
Policy
on Related Party Transactions
The
Company has a formal, written policy that includes procedures intended to ensure compliance with the related party provisions
in common practice for public companies. For purposes of the policy, a “related party transaction” is a transaction
in which the Company participates and in which a related party (including all of GEX’s directors and executive officers)
has a direct or indirect material interest. Any transaction exceeding the 1% threshold, and any transaction involving consulting,
financial advisory, legal or accounting services that could impair a director’s independence, must be approved by the Board
of Directors. Any related party transaction in which an executive officer or a Director has a personal interest, must be approved
by the Board of Directors, following appropriate disclosure of all material aspects of the transaction.
Related
Party Transactions
Debt
A
g
reements
On
March 1, 2015 the Company entered into a Line of Credit Agreement with P413 at an interest rate of 6%. This line of credit has
a balance of $1,168,933 and $352,100 at December 31, 2018 and December 31, 2017, respectively. On May 2, 2018, this line of credit
was extended to April 1, 2020. On September 1, 2018, the line of credit was extended to September 1, 2020.
Professional
Service A
g
reements
On
March 1, 2015 the Company entered into an Outsourcing Agreement with P413 Management, LLC (“P413”) to provide back
office services to P413. The Company reported no revenues under this Agreement for the three and nine months ended September 30,
2018 and 2017, respectively.
On
September 1, 2015 the Company entered into an Outsourcing Agreement with Vicar Capital Advisors, LLC (“Vicar”) to
provide back office services to Vicar. The Company reported no revenues under this Agreement for the three months ended March
31, 2019.
Revenues
For
the three months ended March 31, 2019 and 2018, the Company had no revenues from related parties.
NOTE
8: COMMITMENTS AND CONTINGENCIES
The
following are the minimum obligations under the lease related to the Company’s Corporate office as of March 31, 2019:
Year ended
|
|
Amount
|
|
Remainder of 2019
|
|
$
|
60,225
|
|
|
|
|
|
|
Total
|
|
$
|
60,225
|
|
NOTE
9. ACQUISITIONS AND DIVESTITURES
On
May 2, 2018, the Company purchased a 25% interest in Payroll Express, LLC (PE), a California limited liability company for $500,000
in cash. The Company recognized this investment under the equity method due to its ability to exercise significant influence over
the operating and financial policies of PE. Additionally, the Company had the right, but not the obligation, to purchase an additional
26% interest under similar terms. On June 11, 2018, the Company paid $250,000 in cash to the owners of Payroll Express as a deposit
towards purchasing additional shares in PE and is recorded in Other Assets on the Balance Sheet.
On
August 3, 2018, the Company entered into a Membership Interest Purchase Agreement with PE, pursuant to which the Company purchased
an additional 26% of the membership interests of PE for a purchase price of (a) $250,000, plus (b) warrants (the “Warrants”)
to purchase 2,000,000 shares of the Company’s common stock. As a result of this transaction, the Company owned a total of
51% of the membership interests of PE. The Warrants were exercisable for a period of 24 months from the date of issuance. The
Warrants provided for the purchase of shares of the Company’s Common Stock an exercise price of $1.06 per share. The Warrants
were exercisable for cash, or on a cashless basis. The number of shares of Common Stock to be deliverable upon exercise of the
Warrants were subject to adjustment for subdivision or consolidation of shares and other standard dilutive event.
On
September 28, 2018, the Company, consummated a real property purchase and sale transaction (“Setco Property Purchase Transaction”)
with Setco International Forwarding Corporation, a Texas corporation (“Setco”), pursuant to which the Company purchased
a 16.84 acre tract of land from Setco, located at 13000 S. Lyndon B. Johnson Freeway in Dallas, Texas, for an aggregate purchase
price of $11,000,000, paid as follows:
|
●
|
$1,125,000,
by the Company’s execution and delivery of a Real Estate Lien Note made to Setco (the “September 2018 Note”);
|
|
|
|
|
●
|
$4,875,000,
by the Company’s issuance to Setco of 15,000,000 shares of the Company’s common stock (valued at $0.325 per share);
and
|
|
|
|
|
●
|
$5,000,000,
by the Company’s transfer to Setco of the Company’s 51% ownership interest in Payroll Express.
|
In
connection with the Setco Property Purchase Transaction consummated on September 28, 2018, the Company had previously deposited
with Setco an earnest money escrow payment of $25,000 (“Escrow Deposit”). At the closing of the Property Purchase
Transaction, (a) the Company paid real estate taxes due for the Property of approximately $784, and (b) approximately $7,559 of
fees were applied to the Escrow Deposit. As a result, Setco owes the Company approximately $18,225. The September 2018 Note had
a principal balance of $1,125,000, and a stated maturity date of October 5, 2018. The Principal Amount of the September 2018 Note
bears interest at a rate of 18% per annum (in this case, the “Interest”), which is also payable on the Maturity Date.
The Company failed to pay Setco the Principal Amount and accrued and unpaid Interest due under the September 2018 Note on the
stated Maturity Date and, therefore, is in default under the September 2018 Note. The Company’s obligations to repay amounts
due under the September 2018 Note are secured by the Property, and the Company has executed and delivered the September 2018 Deed
of Trust, with Setco as the beneficiary.
On
June 4, 2018, the Company entered into a discounted Promissory Note Payable with a principal balance of $500,000, and bearing
interest at a rate of 15% per annum. This note was personally guaranteed by Carl Dorvil, the Company’s former Chief Executive
Officer and principal shareholder and secured, among other things, certain liens and security interests including the Setco property
purchased on September 28, 2019. This note was due to be paid in full by August 1, 2018. The Company had been in negotiations
to restructure this loan, as it was originally intended as a bridge loan with a term of 57 days. Pursuant to these negotiations,
in August 2018, the maturity date on the note was extended to August 30, 2018. As of December 31, 2018, the Company failed to
pay the Principal Amount and, therefore, continued to be in default under the Note. Subsequently on March 5, 2019, the noteholder
proceeded to execute its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the
noteholder taking possession of the Setco property resulting in the elimination of the $500,000 Civitas note and any accrued interest
on the principal amount and the elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests
from the Company books and with the elimination of the Setco property assets from the company books.
While
the Company had intended to take advantage of the collateral provided by the Setco real estate to obtain loan against property
for working capital purposes as well as reduce high interest loan obligations related to Merchant Cash Advances, the prior management
was unable to secure required financing because of (1) challenges associated with identifying an investor who was ready to match
the valuation of $11,000,000 provided by the valuation company introduced by Setco for evaluating the property (2) feedback from
multiple lending sources related to the lack of readily available access to the property which would further depress the value
of the property against the established valuation by the valuation company, and (3) lack of sophisticated investors ready to invest
in the land at the valuation provided by the valuation company that would have provided the Company sufficient funds to immediately
take care of its short and long term debt obligations. As a result of this assessment and given failure to gain traction on the
intended but missed capital opportunity on account of potentially misleading information by a service provider, management is
currently reviewing with counsel available options to review and, if required, possibly seek damages from targeted parties to
compensate the firm for the damages incurred related to pursuing transaction options related to this potentially incorrect valuation.
On
February 8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which
would allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for
cancellation of the $1,300,000 real estate lien note secured by the building along with an and all accrued interest payable on
the note as of the date of the agreement and the elimination of the AMAST property related assets from the company books.