The accompanying notes are an integral
part of these unaudited consolidated financial statements.
The accompanying
notes are an integral part of these unaudited consolidated financial statements.
Notes to Consolidated Financial Statements
March 31, 2018
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
Organization and Description of Business
GEX Management, Inc. (“GEX”,
the “Company”, “we”, “our”, “us”) is a 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
C corporation in March of 2016, and changed its name to GEX Management, Inc. in April of 2016.
On January 25, 2017, GEX obtained its
license to operate as a Professional Employer Organization (“PEO”), 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.
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.
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. 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 Form 10-K, filed
with the SEC on April 10, 2018.
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. The Company did not write off any accounts receivable in the three months ended March
31, 2018 or 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:
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|
|
|
|
|
|
|
|
|
|
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Useful Life
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Buildings
|
|
|
|
|
|
|
30 Years
|
Office Furniture & Equipment
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|
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5 Years
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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.
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 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.
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.
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. The Company has no potentially dilutive common shares.
Earnings per share information has been
retroactively adjusted to reflect the stock split that occurred in November 2017, and the incremental value of the newly issued
shares were recorded with the offset to additional paid-in capital.
NOTE 2. OTHER CURRENT ASSETS
At March 31, 2018 and December 31, 2017
Other Current Assets were as follows:
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Mar 31, 2018
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Dec 31, 2017
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Other Current Assets:
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Prepaids
|
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$
|
57,997
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|
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$
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116,623
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|
Other Current Assets
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|
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7,288
|
|
|
|
2,709
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|
Acquired Customer Contracts
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|
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—
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37,500
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Accumulated Amortization
|
|
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—
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(68,083
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)
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Total Other Current Assets
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$
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65,285
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|
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$
|
88,749
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In 2017, the Company purchased customer contracts on March 31, 2017
and in April started amortizing those contracts along with other contracts entered into in the 2nd quarter of 2017. There was no
amortization expense recorded in the quarter ended March 31, 2017. The Company fully amortized the contracts at December 31, 2017
so recorded no amortization in the three months ended March 31, 2018.
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 March 31, 2018 and March 31, 2017, the Company had no potentially dilutive
shares.
NOTE 4.
STOCKHOLDERS’ EQUITY
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 March 31, 2018 and December
31, 2017 there were 11,797,231 and 11,797,231 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 March 31,
2018 and December 31, 2017 there were no 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 March 31, 2018 and December 31, 2017
Notes Payable were as follows:
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Mar 31, 2018
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Dec 31, 2017
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Note Payable:
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Note Payable – Real Estate Lien Note, 4.5% interest rate, $9,540.13 monthly principal and interest payments, balloon
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payment due March 22, 2022
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$
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1,296,995
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$
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1,310,920
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Note Payable:
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Note payable– Forty weekly payments of $26,654
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1,012,741
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—
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Less Discount on Note Payable
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(267,901)
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—
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Note Payable:
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Note Payable- Related Party, 6% interest rate, $500,000
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Line of Credit, due March 31, 2019
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352,100
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352,100
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Total Notes Payable
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$
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2,393,935
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$
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1,663,020
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Less: Current Portion
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(802,129
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)
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|
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(56,649
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)
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Long-Term Notes Payable
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$
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1,591,806
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$
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1,606,371
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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. This agreement is personally guaranteed by Carl Dorvil, the Company's Chief
Executive Officer and Chairman. The Company
also incurred $23,175 in origination fees related to this transaction. The
discount on this note that was amortized to interest expense was $25,649
for the quarter ended March 31, 2018. The full amount of the note is due within twelve months.
The Real Estate Lien Note had a balance
of $1,296,995. The following is a schedule of the minimum principal payments required under the loan as of March 31, 2018:
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Year Ended
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Amount
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Remainder of 2018
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|
|
$
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42,724
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|
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2019
|
|
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|
59,252
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|
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2020
|
|
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61,973
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2021
|
|
|
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64,821
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|
2022
|
|
|
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67,798
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2023 and beyond
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|
|
|
1,000,427
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Total
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|
|
$
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1,296,995
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NOTE 6. ACCOUNTS RECEIVABLE AND CONCENTRATION OF
CREDIT RISK
As of March 31, 2018 and December 31,
2017 one customer made up 21% and three customers made up 86% of the Company’s outstanding accounts receivable balance, respectively
of which 11% and 25% were related party receivables as of March 31, 2018 and December 31, 2017, respectively.
For the three months ended March 31,
2018 and March 31, 2017 two customers accounted for 73% and three customers accounted for 92% of the Company’s net revenue,
respectively of which 0% and 12% were related party revenues for the three months ended March 31, 2018 and 2017, respectively.
NOTE 7. PROPERTY AND EQUIPMENT
The Company had the following property
and equipment as of March 31, 2018 and December 31, 2017:
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March 31, 2018
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Dec 31, 2017
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Land
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$
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333,778
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$
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333,778
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Buildings
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2,125,642
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2,125,642
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Office Equipment
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5,844
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|
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5,844
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Total Fixed Assets
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2,465,264
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2,465,264
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Accumulated Depreciation
|
|
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(19,042
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)
|
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(1,887
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)
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Property and Equipment, net
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|
$
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2,446,222
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|
|
$
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2,463,377
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Depreciation expense for the three months ended March 31, 2018 and
2017 was $17,155 and $144, respectively.
NOTE 8. 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 Line of Credit 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 line of credit has a balance of
$352,100 and $352,100 at March 31, 2018 and December 31, 2017, respectively. On May 2, 2018, this line of credit was extended
to April 1, 2020.
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 no revenues under this Agreement for the three
months ended March 31, 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.
GEX’s CEO, Carl Dorvil, is a majority member interest owner in Vicar. The Company reported no revenues under this Agreement
,and $16,000 for the three months ended March 31, 2018 and 2017, respectively.
Revenues
For the three months ended March 31,
2018 and 2017 the Company had no revenues from related parties, and $16,000, respectively.
NOTE 9. COMMITMENTS AND CONTINGENCIES
The following are the minimum obligations
under the lease related to the Company’s Corporate office as of March 31, 2018:
|
Year ended
|
|
|
|
Amount
|
|
|
Remainder of 2018
|
|
|
$
|
48,180
|
|
|
2019
|
|
|
|
60,225
|
|
|
Total
|
|
|
$
|
108,405
|
|
The Company owns a multi-use office
building in Lowell, Arkansas which is leased to various tenants. The minimum rental income to be collected as of March 31, 2018
is as follows:
Year Ended
|
|
Amount
|
|
Remainder of 2018
|
|
|
$
|
109,680
|
|
|
2019
|
|
|
|
128,157
|
|
|
2020
|
|
|
|
37,616
|
|
|
Total
|
|
|
$
|
275,453
|
|
The Company recognized rental income
of $37,910 and no rental income for the three months ended March 31, 2018 and 2017, respectively.
NOTE 10. SUBSEQUENT EVENTS
In April 2018, the Company entered
into three discounted Notes Payable agreements to sell its future accounts receivable and revenues to provide liquidity
for the Company's expansion opportunities. On April 18, 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. These Agreements are personally guaranteed by Carl Dorvil,
the Company's Chief Executive Officer and Chairman and by Chelsea Christopherson, the Company's President and Chief
Operating Officer.
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 discount to the then current market value of the Company’s stock commencing six months after issuance
at the sole discretion of the holders of the Notes. In April and May 2018, the Company borrowed $200,000 under the Notes, and received
$177,500 after giving effect to discounts of 10% and 12.5% for each note.
On May 2, 2018, the Company purchased
a 25% interest in Payroll Express, LLC, a California limited liability company for $500,000 in cash. Additionally, the Company
has the right, but not the obligation,to purchase an additional 25% interest under similar terms.