The accompanying notes are an integral
part of these condensed consolidated financial statements.
The accompanying notes are an integral
part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial
Statements
September 30, 2017
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Organization and Description of Business
GEX Management, Inc., a Texas corporation
(the “Company,” “GEX,” “we,” “our,” “us,” and words of similar import)
is a Professional Employer Organization (PEO) and Professional Services Company that was originally formed in 2004 as Group Excellence
Management, LLC d/b/a MyEasyHQ. The Company converted from a limited liability company to a corporation in March of 2016, and changed
its name to GEX Management, Inc. in April of 2016. GEX provides PEO services and a variety of professional services to support
the human resources and back office needs of companies in a variety of industries. Some of the main professional services we provide
include: IT support, accounting and bookkeeping, human resources, business consultation and optimization and staffing.
On January 25, 2017, GEX obtained its
license to operate as a Professional Employer Organization, and we began offering PEO services in April 2017.
The Company formed
GEX Staffing, LLC (GEX Staffing) in March 2017. The initial funding and first transactions occurred in GEX Staffing in September
2017. The consolidated financials include the accounts of GEX Staffing, LLC
. Staffing and PEO services make up a majority of
our revenue.
Basis of Presentation
The
accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America, or U.S. GAAP, and applicable rules and regulations of the Securities and Exchange Commission, or SEC, regarding
interim financial reporting. As permitted under those rules, certain footnotes or other financial information that are normally
required by GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2016 has
been derived from the audited consolidated financial statements at that date but does not include all of the information required
by GAAP for complete consolidated financial statements. These unaudited condensed consolidated financial statements have
been prepared on the same basis as the Company’s annual consolidated financial statements and, in the opinion of management,
reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for the fair statement of the Company’s
condensed consolidated financial information. The results of operations for the nine months ended September 30, 2017 are
not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other
interim period or for any other future year.
The
accompanying interim unaudited condensed 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, 2016 included
in the Company’s Form 10-K, filed with the SEC on March 28, 2017.
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.
Property and Equipment
Property and Equipment are carried at
the cost of acquisition or construction, and are 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. Gains and losses on dispositions of
equipment are in operating income. Depreciation and amortization are provided using the straight-line and accelerated methods over
the estimated useful lives of the assets as follows:
Office Furniture & Equipment
|
|
5 Years
|
Revenue Recognition
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 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 in the period amounts are due and where collectability
is reasonably assured.
Staffing 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.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(Topic 606)
in May 2014. ASU No. 2014-09 outlines a single, comprehensive revenue recognition model for revenue derived from
contracts with customers and it supersedes the most current revenue recognition guidance. This includes current 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.
ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017. Earlier adoption is permitted as of
annual reporting periods beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective
approach to adopt ASU No. 2014-09. GEX plans to adopt ASU 2014-09 effective January 1, 2018. We intend to use the modified retrospective
method. Since we intend to use the modified retrospective method, the guidance will be applied to only our most current period
presented in the financial statements. We will continue to analyze this model, but we expect our revenue recognition policies to
remain substantially unchanged as a result of adopting ASU 2014-09. Furthermore, we do not anticipate significant changes will
result in our business relating to the adoption of ASU 2014-09.
NOTE 2. OTHER CURRENT ASSETS
On March 9, 2017 GEX entered into a
Contract Purchase Agreement with another Professional Employer Organization for the purchase of three client service agreements.
Under the terms of this Agreement, GEX paid $37,500 in cash. The cost of the Contract Purchase Agreement will be amortized over
nine months, the term of the contract, starting in April 2017.
In April 2017, GEX entered into an Agreement
with Center Operating Company, L.P. (Center Operating) for the rental of a box at a local arena for marketing and promotion and
covers the eight month seasons starting in September 2017 for $87,500. The payment terms include an initial deposit of $10,000
in April 2017, and three payments of $25,833 in September 2017, December 2017 and February 2018. This Agreement will be charged
to advertising and marketing expense over the eight month season at $10,938 per month.
In May 2017, GEX entered into an Agreement
with OTC Market Group Inc. (OTC Markets) to trade the Company’s common stock on the OTCQB tier of the OTC Markets trading
system under the symbol “GXXM.” In accordance with the terms and conditions of this Agreement, GEX paid $10,000 for
a term of one year that began in June 2017. The Agreement is being amortized over the life of the Agreement starting in June 2017.
On June 20, 2017, GEX entered into an
Advisory Agreement with NMS Capital Advisor, LLC (NMS). NMS is a full service Investment Bank that will provide financial advisory
services to GEX. Under the terms and conditions of the Advisory Agreement, GEX paid $24,750 through the issuance of 2,500 shares
of the Company’s common stock. The term of the Advisory Agreement is for one year starting on June 20, 2017, and it is being
amortized over that period.
At September 30, 2017 and December 31,
2016 Other Current Assets were as follows:
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|
Sept 30, 2017
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|
Dec 31, 2016
|
Other Current Assets:
|
|
|
|
|
|
|
|
|
Contract Purchase
|
|
$
|
12,500
|
|
|
$
|
—
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|
Center Operating
|
|
|
76,562
|
|
|
|
—
|
|
OTC Markets
|
|
|
6,667
|
|
|
|
—
|
|
NMS Contract
|
|
|
17,531
|
|
|
|
|
|
Other Current Assets
|
|
|
—
|
|
|
|
959
|
|
Total Other Current Assets
|
|
$
|
113,260
|
|
|
$
|
959
|
|
NOTE 3. EARNINGS PER SHARE
Earnings per share are calculated in
accordance with ASC 260 “
Earnings per Share.
” The weighted average number of common shares outstanding
during each period is used to compute basic earnings (loss) per share. Diluted earnings per share are computed using
the weighted average number of shares and potentially dilutive common shares outstanding. Potentially dilutive common shares are
additional common shares assumed to be exercised. As of September 30, 2017 the Company had no agreements for the issuance of dilutive
shares.
NOTE 4. STOCKHOLDERS’ EQUITY
Transactions
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 issued 33,334 for services
at $1.50 per share for a total of $50,000 during the first quarter of 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 30,000 shares of the Company's common stock, at a cost basis of $1.50 per share.
The two consultants were issued 15,000 shares each of the total 30,000 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 115,248 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.
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 14,252 shares
of its common stock, for a total of $120,000.
On June 20, 2017, GEX entered into an
Advisory Agreement with NMS Capital Advisor, LLC (NMS). 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 2,500 shares of the Company’s common stock.
On July 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 9,501 shares
of its common stock, for a total of $80,000.
On September 20, 2017, GEX entered into
Stock Purchase Agreements (SPA) with two advisory board members. Under the terms and conditions of the SPA’s, GEX issued
4,923 shares of its common stock, for a total of $32,000.
General
The Company is authorized to issue 200,000,000
common shares at a par value of $0.001 per share. These shares have full voting rights. At September 30, 2017 and December
31, 2016 there were 8,638,832 and 8,241,015 common shares outstanding, respectively.
The Company is authorized to issue 20,000,000
preferred shares at a par value of $0.001 per share. These shares have full voting rights. At September 30, 2017 and
December 31, 2016 there were 0 preferred shares outstanding. The preferred stock ranks senior to the common stock of the Company
in each case with respect to dividend distributions and distributions of assets upon the liquidation, dissolution or winding up
of the Company whether voluntary or involuntary.
NOTE 5. NOTES PAYABLE
At September 30, 2017 and December 31,
2016 Notes Payable were as follows:
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|
Sept 30, 2017
|
|
Dec 31, 2016
|
Non-Current Note Payable
(1)
:
|
|
|
|
|
|
|
|
|
Note Payable –6% interest rate, $1,000,000
|
|
|
|
|
|
|
|
|
Line of Credit, cancelled June 7, 2017 upon conversion of the $317,187
|
|
|
|
|
|
|
|
|
and accrued interest of $28,588 to common stock
|
|
|
—
|
|
|
|
317,187
|
|
Non-Current Note Payable:
|
|
|
|
|
|
|
|
|
Note Payable- Related Party, 6% interest rate, $500,000
|
|
|
|
|
|
|
|
|
Line of Credit, due March 31, 2019
|
|
|
96,000
|
|
|
|
46,000
|
|
Total Notes Payable
|
|
$
|
96,000
|
|
|
$
|
363,187
|
|
(1)
On December 31, 2016 the Note Payable and accrued interest was recorded as owed to a related party, the Company’s CEO, Carl
Dorvil. On April 11, 2017 Mr. Dorvil sold the Line of Credit Promissory Note to an unrelated third-party.
On June 7, 2017 GEX entered into a Debt
Conversion Agreement and issued 115,248 shares of its common stock in exchange for the extinguishment of the debt in the amount
of $317,187 and accrued interest of $28,558 totaling $345,745.
The Company
sold 429,074 shares at $1.50 per share for a total of $643,611 under its offering for shares registered on Form S-1. The closing
of this offering was disclosed on its Form 8-K filed with the SEC on March 29, 2017. This established the $1.50 value of the Company’s
common stock prior to trading on an over-the-counter market. Trading commenced on June 13, 2017 subsequent to the June 7
th
Agreement. Therefore, the Company recorded a gain on the extinguishment of debt in the amount of $172,872.
NOTE 6. ACCOUNTS RECEIVABLE AND CONCENTRATION
OF CREDIT RISK
As of September 30, 2017 and December
31, 2016 one customer made up 80% and four customers made up 92% of the Company’s outstanding accounts receivable balance,
respectively of which 0% and 19% were related party receivables as of September 30, 2017 and year ended December 31, 2016, respectively.
For the nine months ended September
30, 2017 and September 30, 2016 three customers accounted for 90% and four customers accounted for 87% of the Company’s net
revenue, respectively of which 0% and 71% were related party revenues for the nine months ended September 30, 2017 and 2016, respectively.
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 Agreements
On March 1, 2015 the Company entered
into a Loan Agreement with its CEO, Carl Dorvil. Mr. Dorvil agreed to loan the Company up to $1,000,000 at a rate of 6%. This loan
has a balance of $0 and $317,187 at September 30, 2017 and December 31, 2016, respectively (see Note 6).
On March 1, 2015 the Company entered
into a Loan Agreement with P413. P413 agreed to loan the Company up to $500,000 at a rate of 6%. GEX’s CEO, Carl Dorvil,
is a majority member interest owner in P413. This loan has a balance of $96,000 and $46,000 at September 30, 2017 and December
31, 2016, respectively.
Professional Service Agreements
On March 1, 2015 the Company entered
into an Outsourcing Agreement with P413 Management, LLC (“P413”) to provide back office services to P413. GEX’s
CEO, Carl Dorvil, is a majority member interest owner in P413. The Company reported revenues under this Agreement of $0 and $38,513
for the nine months ended September 30, 2017 and 2016, 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.
GEX’s CEO, Carl Dorvil, is a majority member interest owner in Vicar. The Company reported revenues under this Agreement
of $74,000 and $68,492 for the nine months ended September 30, 2017 and 2016, respectively.
On August 1, 2014 the Company entered
into an Outsourcing Agreement with Renaissance Global Marketing, LLC (“Renaissance”) to provide back office services
to Renaissance. GEX’s CEO, Carl Dorvil was formally a minority member interest owner in Renaissance. The Company reported
revenues under this Agreement when Renaissance was a related party of $0 and $155,380 for the nine months ended September 30, 2017
and 2016. The Company ceased being a related party in 2016.
The Company entered into a Consulting
Agreement with Capital Financial Consultants, Inc. for $30,000 and $22,500 for the year ended December 31, 2016. A GEX officer’s
family member owns Capital Financial Consultants, Inc. As of September 30, 2017 and 2016 the balance payable under the two agreements
to CFC was $0 and $45,000, respectively.
Revenues
For the nine months ended September
30, 2017 and 2016 the Company had revenues from related parties of $74,000 and $262,385, respectively.
For the nine months ended September
30, 2017 and 2016 the Company performed back office services for Diversity In Promotions in the amount of $0 and $6,000, respectively.
NOTE 8. SUBSEQUENT EVENTS
On October 18, 2017, GEX entered into
Stock Purchase Agreements (SPA) with one advisory board member. Under the terms and conditions of the SPA, GEX issued 2,000 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 800 shares of its common stock, restricted pursuant to Rule 144
of the Securities Act of 1933, as amended.