Notes to Condensed Consolidated Financial Statements
For the Six Months Ended June 30, 2018 and 2017
(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 2016, and changed its name to GEX Management, Inc. in April
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
(“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. The Company incurred $92,102 of bad debt expense for
each of the three and six months ended June 30, 2018. No bad debt
expense was incurred for the three or six months ended June 30,
2017.
Equity Method Investments
The
Company has accounted for its investment in Payroll Express, LLC
(“PE”),
a Santa
Clara, CA based professional services firm that provides a wide
array of back office and managed services related to medical
staffing needs for its healthcare clients that includes clinical
practices and Ambulatory Surgery Centers (ASCs), as an equity
method investment due to its ability to assert significant
influence over PE’s operational and financial policies. This
investment was initially accounted for at cost. The Company
recognizes its proportionate share of PE’s earnings (after
the effect of basis differences) as an increase in its Investment
in PE and as Income from Investment in PE.
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.
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. As of June 30, 2018, the Company had 80,000
potentially dilutive shares pursuant to convertible debt and 90,000
potentially dilutive warrant shares outstanding. At December 31,
2017, the Company has no potentially dilutive common
shares.
Earnings
per share information for the three and six months ended June 30,
2017 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, 2017 or
operations or cash flows for the periods ended June 30,
2017.
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 June 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 and six months
ended June 30, 2018 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 of
$4,270,590
at
June 30, 2018, 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 June
30, 2018 and December 31, 2017, Other Current Assets were as
follows:
|
|
|
Other Current
Assets:
|
|
|
Prepaids
|
$
53,565
|
$
116,623
|
Other Current
Assets
|
12,029
|
2,709
|
Acquired Customer
Contracts
|
-
|
37,500
|
Accumulated
Amortization
|
-
|
(68,083
)
|
Total Other Current
Assets
|
$
65,594
|
$
88,749
|
In
2017, the Company purchased customer contracts on March 31, 2017
and started amortizing those contracts in April 2017 along with
other contracts entered into in the 2nd quarter of 2017. The
Company fully amortized the contracts at December 31, 2017 so it
recorded no amortization in the three or six months ended June 30,
2018.
NOTE 3. 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. In April 2018, the Company issued shares of
125,000 of common stock at $3.49 per share to a non-officer
employee. The Company recognized compensation expense of $436,250
recorded in General and Administrative Expenses on the Consolidated
Statement of Operations for the three and six months ended June 30
2018. At June 30, 2018 and December 31, 2017, there were 11,922,231
and 11,797,231 common shares outstanding, respectively. Also, in
April 2018, the Company agreed to issue 19,456 shares of common
stock for $48,640. The related shares were not issued as of June
30, 2018 and the amount due was recorded in Accrued Expenses on the
Consolidated Balance Sheet.
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 June 30, 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.
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. Upon issuance,
the fair value of these warrants totaled $78,751.
The
following table outlines the activity relative to these warrants
for the 6 months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
at December 31, 2017
|
-
|
$
-
|
Granted
|
90,000
|
2.96
|
Exercised
|
-
|
-
|
Forfeited
or expired
|
-
|
-
|
Outstanding,
at end of period
|
90,000
|
2.96
|
Exercisable,
at June 30, 2018
|
90,000
|
$
266,400
|
Weighted
average fair value of
|
|
|
warrants
granted during
|
|
|
the
period
|
|
$
86,360
|
The
following table summarizes the warrants outstanding as of June 30,
2018:
|
|
Weighted - Average
|
|
|
|
Remaining Contractual
|
|
|
|
Life of Warrants
|
|
|
|
Outstanding
|
|
$
4.00
|
50,000
|
4.84
years
|
50,000
|
$
1.66
|
40,000
|
1.52
years
|
40,000
|
|
90,000
|
|
90,000
|
During
the three months ended June 30, 2017, GEX entered into a Conversion
Agreement with two consultants that had a $45,000 balance with the
Company and issued a total of 30,000 shares of the Company’s
common stock at a cost basis of $1.50 per share in order to settle
this outstanding balance.
During
the three months ended June 30, 2017, the Company issued 115,248
shares of its common stock to its Chief Executive Officer under a
Debt Conversion Agreement, for the extinguishment of $345,745 in
debt and accrued interest owed by GEX under the Line of Credit as
of the Debt Conversion date.
During
the three months ended June 30, 2017, the Company also issued a
total of 14,252 and 2,500 shares of the Company’s common
stock to a third-party investor and a third-party advisor,
respectively.
NOTE 4. NOTES PAYABLE
At June
30, 2018 and December 31, 2017, Notes Payable were as
follows:
|
|
|
Note
Payable: Real Estate Lien
|
|
|
Interest
at 4.5%; $9,540 monthly principal & interest;
|
|
|
Balloon
payment due March 22, 2022
|
$
1,278,272
|
$
1,310,920
|
|
|
|
Discounted
Notes Payable:
|
|
|
Weekly
payments totalling $26,654
|
|
|
Daily
payments totalling $18,245
|
|
|
Debt
matures by December 21,2018
|
1,851,930
|
-
|
Less
Discounts on Notes Payable
|
(462,346
)
|
-
|
|
|
|
Discounted
Note Payable:
|
|
|
Principal
and interest due August 1, 2018
|
500,000
|
-
|
Interest
at 15%
|
|
|
Less
Discount on Notes Payable
|
(51,537
)
|
-
|
|
|
|
Convertible
Notes Payable:
|
|
|
Principal
and interest due May 3, 2019
|
200,000
|
-
|
Interest
at 10%
|
|
|
Less
Discount on Notes Payable
|
(47,974
)
|
-
|
|
|
|
Discounted
Note Payable - Related Party:
|
|
|
Weekly
payments of $44,995
|
|
|
Debt
matures on November 9, 2018
|
864,355
|
-
|
Less
Discount on Notes Payable
|
(302,221
)
|
-
|
|
|
|
Note
Payable - Related Party:
|
|
|
Line
of Credit up to $500,000; Due April 1, 2020
|
218,600
|
352,100
|
Interest
at 6%
|
|
|
Total
Notes Payable
|
4,049,079
|
1,663,020
|
Less
Current Portion
|
(2,605,365
)
|
(56,649
)
|
Long-term
Notes Payable
|
$
1,443,714
|
$
1,606,371
|
In
March 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 and
amortization of origination fees that were amortized to interest
expense was $190,603 for the three and six months ended June 30,
2018. The full amount of the note is due within twelve months of
inception.
During
the three months ended June 30, 2018, the Company entered into six
discounted Notes Payable Agreements to sell its future accounts
receivable and revenues to provide liquidity for working capital
and 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. 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. 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. The Company incurred a total of $143,500 related to
origination fees on these notes. The full amount of the notes is
due within twelve months. The Company recognized interest expense
related to these notes totaling $ 416,239 for the three and six
months ended June 30, 2018. On June 28, 2018, the Company paid
$164,890 to pay off the April 25 note.
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, the Company's Chief Executive Officer and Chairman and
by Chelsea Christopherson, the Company's President and Chief
Operating Officer. 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. The Company recognized
$12,000 of interest expense related to the Notes for the three and
six months ended June 30, 2018. The conversion options are
considered to be derivative liabilities with a fair value of zero
at inception. On June 30, 2018, the fair value of the derivative
liabilities was $20,455, and the Company recognized a loss of the
same amount during the three months ended June 30,
2018.
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, the Company's Chief Executive Officer. 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. The Company recognized $47,335 of interest expense,
including the amortization of debt issuance costs and the discount
related to the Notes for the three and six months ended June 30,
2018. This note was due to be paid in full by August 1, 2018. The
Company has 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. In consideration of
this extension, the Company has agreed to change the exercise price
on the outstanding warrants to $0.01 per share and issued and
additional 40,000 warrant shares at an exercise price of $0.01 per
share.
The
Real Estate Lien Note had a balance of $1,278,272. The following is
a schedule of the minimum principal payments required under the
loan as of June 30, 2018:
Year
Ended
|
|
Remainder of
2018
|
$
28,001
|
2019
|
59,252
|
2020
|
61,973
|
2021
|
64,821
|
2022
|
67,798
|
2023 and
beyond
|
996,427
|
Total
|
$
1,278,272
|
Total
interest expense was $687,084 and $4,919 for the three months ended
June 30, 2018 and 2017, respectively. For the six months ended June
30, 2018 and 2017, total interest expense was $732,638 and $10,292,
respectively.
NOTE 5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT
RISK
As of
June 30, 2018, one customer accounted for 25% while four other
customers accounted for 26% of the Company’s outstanding
accounts receivable balance. As of December 31, 2017, three
customers made up 86% of the Company’s outstanding accounts
receivable balance, and 25% were related party receivables as of
June December 31, 2017. The Company had no related party
receivables at June 30, 2018.
For the
three months ended June 30, 2018 and June 30, 2017, one customer
accounted for 24.73% and two customers accounted for 95.18% of the
Company’s net revenue, respectively of which 0% and 45.3%
were related party revenues for the three months ended and June 30,
2018 and 2017, respectively.
For the
six months ended June 30, 2018 and June 30, 2017, one customer
accounted for 37.37% and two customers accounted for 95.18% of the
Company’s net revenue, respectively of which 0% and 45.3%
were related party revenues for the three months ended and June 30,
2018 and 2017, respectively.
NOTE 6. PROPERTY AND EQUIPMENT
The
Company had the following property and equipment as of June 30,
2018 and December 31, 2017:
|
|
|
Land
|
$
333,778
|
$
333,778
|
Buildings
|
2,125,642
|
2,125,642
|
|
5,844
|
5,844
|
Total Fixed
Assets
|
2,465,264
|
2,465,264
|
Accumulated
Depreciation
|
(36,195
)
|
(1,887
)
|
Property and
Equipment, net
|
$
2,429,069
|
$
2,463,377
|
Depreciation
expense was $14,654 and $14,508 for the three months ended June 30,
2018 and 2017, respectively. Depreciation expense for the six
months ended June 30, 2018 and 2017, was $34,307 and $14,652,
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 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 $218,600 and
$352,100 at June 30, 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 and six months ended
June 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. GEX’s CEO, Carl Dorvil, is a
majority member interest owner in Vicar. The Company reported no
revenues under this Agreement for the three or six months ended
June 30, 2018. The Company reported no revenues for the three
months ended June 30, 2017 and $1,116 in revenues for the six
months ended June 30, 2017, respectively.
Revenues
For the
three months ended June 30, 2018 and 2017, the Company had no
revenues from related parties, and $44,000, respectively. For the
six months ended June 30, 2018 and 2017, the Company had no
revenues from related parties and $64,000,
respectively.
NOTE 8: COMMITMENTS AND CONTINGENCIES
The
following are the minimum obligations under the lease related to
the Company’s Corporate office as of June 30,
2018:
|
|
Remainder of
2018
|
$
32,120
|
2019
|
60,225
|
Total
|
$
92,345
|
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 June 30, 2018 is as follows:
|
|
Remainder of
2018
|
$
73,452
|
2019
|
128,157
|
2020
|
37,616
|
Total
|
$
239,225
|
The
Company recognized rental income of $36,228 and $74,138 for the
three and six months ended June 30, 2018, respectively. The Company
recognized and no rental income for the three and six months ended
June 30, 2017.
NOTE 9. ACQUISITIONS
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 has 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. The purchase transaction was
not finalized as of June 30, 2018. During the three months ended
June 30, 2018, the Company recognized $35,197 in income from its
investment in PE. Some additional disclosures related to Payroll
Express are as follows:
Selected Balance Sheet Data:
|
|
Current
Assets
|
$
910,738
|
Long-term
Assets
|
$
9,346
|
Current
Liabilities
|
$
783,126
|
Long-term
Liabilities
|
$
16,576
|
Selected Income Statement Data for the three and six months ended
June 30, 2018:
|
Three and Six
Months Ended June 30, 2018
|
Gross
Profit
|
$
133,544
|
Net Income before
Income Taxes
|
$
53,145
|
NOTE 10. SUBSEQUENT EVENTS
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 with Payroll Express 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 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 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. The note is
convertible at $2.50 per share. In connection with this note
payable, the Company issued 25,000 warrant shares for its common
stock, exercisable at $4.00 per share. These warrants have a five
year life.
On July
30, 2018, the Company entered into a binding letter of intent with
Endeavor Plus, Inc., a corporation in the healthcare business
(“Endeavor”), pursuant to which it is anticipated that
the shareholders of Endeavor will exchange 100% of the issued and
outstanding shares of capital stock of Endeavor for an aggregate of
13,000,000 restricted shares of the Company’s common stock,
$0.001 par value per share (the “Share Exchange”). As a
result of the Share Exchange, Endeavor would become a wholly owned
subsidiary of the Company. The parties intend for the Share
Exchange to qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code of 1986, as amended.
The Company and Endeavor expect to enter into a definitive
agreement for the Share Exchange (“Share Exchange
Agreement”) by September 30, 2018, and to consummate the
Share Exchange on or before December 31, 2018.
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 now owns a total of 51% of the membership interests of PE.
The Warrants are exercisable for a period of 24 months from the
date of issuance. The Warrants provide for the purchase of shares
of the Company's Common Stock an exercise price of $1.06 per share.
The Warrants are exercisable for cash, or on a cashless basis. The
number of shares of Common Stock to be deliverable upon exercise of
the Warrants is subject to adjustment for subdivision or
consolidation of shares and other standard dilutive
event.