Notes
to Condensed Consolidated Financial Statements
For the Nine Months Ended September 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.
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 .
|
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 the nine months ended September 30, 2018. No bad debt expense was incurred for the nine months ended September 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.
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. As of September 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 nine months ended September 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 September 30, 2018.
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 and nine months ended September 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 $9,402,000 at September 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
September 30, 2018 and December 31, 2017, Other Current Assets were as follows:
|
|
September 30, 2018
|
|
|
December
31, 2017
|
|
Other Current Assets:
|
|
|
|
|
|
|
Prepaids
|
|
$
|
1,229,014
|
|
|
$
|
116,623
|
|
Other Current Assets
|
|
|
167,376
|
|
|
|
2,709
|
|
Acquired Customer Contracts
|
|
|
-
|
|
|
|
37,500
|
|
Accumulated Amortization
|
|
|
-
|
|
|
|
(68,083
|
)
|
Total Other Current Assets
|
|
$
|
1,396,390
|
|
|
$
|
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 nine months ended September 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 $450,650 recorded in General and Administrative Expenses on the Consolidated Statement of Operations
for the nine months ended September 30, 2018. At September 30, 2018 and December 31, 2017, there were 27,829,570 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 September 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 September 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.
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.
During
the three months ended September 30, 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.
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. Upon
issuance, the fair value of these warrants totaled $78,751.
The following table outlines the activity
relative to these warrants for the 9 months ended September 30, 2018:
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Warrant Shares
|
|
|
Exercise Price
|
|
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 September 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 September 30, 2018:
Exercise
Prices
|
|
|
Number
of Warrants
Outstanding
|
|
|
Weighted
- Average Remaining Contractual Life of Warrants
Outstanding
|
|
Number
of Warrants
Exercisable
|
|
$
|
4.00
|
|
|
|
50,000
|
|
|
4.84
years
|
|
|
50,000
|
|
$
|
1.66
|
|
|
|
40,000
|
|
|
1.52 years
|
|
|
40,000
|
|
|
|
|
|
|
90,000
|
|
|
|
|
|
90,000
|
|
NOTE
4. NOTES PAYABLE
At
September 30, 2018 and December 31, 2017, Notes Payable were as follows:
|
|
September
30, 2018
|
|
|
Dec
31, 2017
|
|
Note
Payable: Real Estate Lien
|
|
|
|
|
|
|
|
|
Interest
at 4.5%; $9,540 monthly principal & interest;
|
|
|
|
|
|
|
|
|
Balloon
payment due March 22, 2022
|
|
$
|
1,210,220
|
|
|
$
|
1,310,920
|
|
|
|
|
|
|
|
|
|
|
Discounted
Notes Payable:
|
|
|
|
|
|
|
|
|
Weekly
payments totaling $26,654
|
|
|
|
|
|
|
|
|
Daily
payments totaling $91,108
|
|
|
|
|
|
|
|
|
Debt
matures by March 21,2019
|
|
|
3,440,825
|
|
|
|
-
|
|
Less
Discounts on Notes Payable
|
|
|
(2,581,219
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Discounted
Note Payable:
|
|
|
|
|
|
|
|
|
Principal
and interest
|
|
|
500,000
|
|
|
|
-
|
|
Interest
at 15%
|
|
|
|
|
|
|
|
|
Less
Discount on Notes Payable
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes Payable:
|
|
|
|
|
|
|
|
|
Principal
and interest
|
|
|
854,363
|
|
|
|
-
|
|
Interest
at 10%
|
|
|
|
|
|
|
|
|
Less
Discount on Notes Payable
|
|
|
(273,251
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Discounted
Note Payable - Related Party:
|
|
|
|
|
|
|
|
|
Weekly
payments of $44,995
|
|
|
|
|
|
|
|
|
Debt
matures on November 9, 2018
|
|
|
464,397
|
|
|
|
-
|
|
Less
Discount on Notes Payable
|
|
|
(291,850
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note
Payable - Related Party:
|
|
|
|
|
|
|
|
|
Line
of Credit; Due April 1, 2020
|
|
|
1,428,314
|
|
|
|
352,100
|
|
Interest
at 6%
|
|
|
|
|
|
|
|
|
Total
Notes Payable
|
|
|
6,320,211
|
|
|
|
1,663,020
|
|
Less
Current Portion
|
|
|
(3,205,385
|
)
|
|
|
(56,649
|
)
|
Long-term
Notes Payable
|
|
$
|
3,114,826
|
|
|
$
|
1,606,371
|
|
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. 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, 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. During the three months ended September 30, 2018, CBSG has purchased
future receivables for a total of 1,332,983 in relation to the factoring agreement.
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. The conversion options are considered to be derivative liabilities with a fair value of zero at inception. On September
30, 2018, the fair value of the derivative liabilities was $27,524.
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. The note is convertible at $2.50 per share.
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. The note is convertible at $2.50 per share.
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.
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. The note is convertible at $2.50 per share.
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. 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 nine months ended September 30, 2018. 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 currently underway
to extend the tenure.
The
Real Estate Lien Note related to the Arkansas building property had a balance of $1,210,220. The following is a schedule of the
minimum principal payments required under the loan as of September 30, 2018:
Year Ended
|
|
Amount
|
|
Remainder of 2018
|
|
$
|
15,061
|
|
2019
|
|
|
61,697
|
|
2020
|
|
|
64,813
|
|
2021
|
|
|
67,791
|
|
2022
|
|
|
70,906
|
|
2023 and beyond
|
|
|
929,681
|
|
Total
|
|
$
|
1,210,220
|
|
NOTE
5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
As
of September 30, 2018, one customer accounted for 15% while two 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 December 31, 2017. The Company had no related party receivables
at September 30, 2018.
In
September, the Company terminated contract with 2 customers who accounted for 83% of the Company’s net staffing revenue
for the three months ended September 30, 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
The
Company had the following property and equipment as of September 30, 2018 and December 31, 2017:
|
|
Sep 30, 2018
|
|
|
Dec
31, 2017
|
|
Land
|
|
$
|
11,333,778
|
|
|
$
|
333,778
|
|
Buildings
|
|
|
2,125,642
|
|
|
|
2,125,642
|
|
Office Equipment
|
|
|
5,844
|
|
|
|
5,844
|
|
Total Fixed Assets
|
|
|
13,465,264
|
|
|
|
2,465,264
|
|
Accumulated Depreciation
|
|
|
(41,682
|
)
|
|
|
(1,887
|
)
|
Property and Equipment, net
|
|
$
|
13,423,582
|
|
|
$
|
2,463,377
|
|
Depreciation
expense was $5,487 and $14,508 for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense for
the nine months ended September 30, 2018 and 2017, was $39,795 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
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 $1,218,600 and $352,100 at September 30, 2018 and December 31, 2017, respectively. On May 2, 2018, this line of credit
was extended to April 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 or nine months ended
September 30, 2018. The Company reported no revenues for the three months ended September 30, 2017 and $1,116 in revenues for
the nine months ended September 30, 2017, respectively.
Revenues
For
the three months ended September 30, 2018 and 2017, the Company had no revenues from related parties, and $10,000, respectively.
For the nine months ended September 30, 2018 and 2017, the Company had no revenues from related parties and $74,000, respectively.
NOTE
8: COMMITMENTS AND CONTINGENCIES
The
following are the minimum obligations under the lease related to the Company’s Corporate office as of September 30, 2018:
Year
ended
|
|
Amount
|
|
Remainder
of 2018
|
|
$
|
11,738
|
|
2019
|
|
|
60,225
|
|
Total
|
|
$
|
71,963
|
|
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 September 30, 2018 is as follows:
Year
Ended
|
|
Amount
|
|
Remainder
of 2018
|
|
$
|
36,228
|
|
2019
|
|
|
128,157
|
|
2020
|
|
|
37,616
|
|
Total
|
|
$
|
202,001
|
|
The
Company recognized rental income of $36,475 and $110,613 for the three and nine months ended September 30, 2018, respectively.
The Company recognized and no rental income for the three and nine months ended September 30, 2017.
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. Pursuant to the September 2018 Note, 10 days after the Company fails to make any payment
due under the September 2018 Note, if such payment has still not been made, a late fee of 5% will be assessed.
NOTE
10. SUBSEQUENT EVENTS
On
October 15, 2018, Carl Dorvil resigned as Chief Executive Officer of the Company. In connection with his resignation, Mr. Dorvil
relinquished his role as “Principal Executive Officer” of the Company for SEC reporting purposes. Mr. Dorvil also
resigned as the Company’s Chairman of the Board of Directors as of such date. Mr. Dorvil’s resignation was for personal
reasons and was not the result of a disagreement with the Company on any matter relating to the Company’s operations, policies,
or practices. In connection with Mr. Dorvil’s resignation, his Employment Agreement with the Company, dated June 26, 2017,
was deemed to be terminated.
In
connection with his resignation, on October 15, 2018, the Company entered into a Separation Letter and General Release Agreement
with Mr. Dorvil (the “Dorvil Separation Agreement”), pursuant to which the Company agreed to pay Mr. Dorvil severance
pay of three (3) months’ salary, in the aggregate amount of $37,500 (less standard withholding and applicable deductions),
in consideration for his general release of the Company and certain related parties from any claims he may have against them.
The severance payment is payable within 14 days from the date of Mr. Dorvil’s execution of the Dorvil Separation Agreement.
The Company also agreed to reimburse Mr. Dorvil for all unreimbursed travel and business expenses to which Mr. Dorvil is entitled.
The Dorvil Separation Agreement also contains standard provisions related to confidentiality and non-disparagement.
On
October 15, 2018, Dario Saintus resigned as Interim Chief Financial Officer of the Company. In connection with his resignation,
Mr. Saintus relinquished his role as “Principal Accounting Officer” of the Company for SEC reporting purposes. Mr.
Saintus also resigned as member of the Company’s Board as of such date. Mr. Saintus’s resignation was for personal
reasons and was not the result of a disagreement with the Company on any matter relating to the Company’s operations, policies,
or practices. In connection with Mr. Saintus’s resignation, his Employment Agreement with the Company, dated May 4, 2018,
was deemed to be terminated.
In
connection with his resignation, on October 15, 2018, the Company entered into a Separation Letter and General Release Agreement
with Mr. Saintus (the “Saintus Separation Agreement”), pursuant to which the Company agreed to pay Mr. Saintus severance
pay of three (3) months’ salary, in the aggregate amount of $9,000 (less standard withholding and applicable deductions),
in consideration for his general release of the Company and certain related parties from any claims he may have against them.
The severance payment is payable within 14 days from the date of Mr. Saintus’s execution of the Saintus Separation Agreement.
The Company also agreed to reimburse Mr. Saintus for all unreimbursed travel and business expenses to which Mr. Saintus is entitled.
The Saintus Separation Agreement also contains standard provisions related to confidentiality and non-disparagement.
On
October 15, 2018, Chelsea Christopherson resigned as President and Chief Operating Officer of the Company. Ms. Christopherson
also resigned as member of the Company’s Board as of such date. Ms. Christopherson’s resignation was for personal
reasons and was not the result of a disagreement with the Company on any matter relating to the Company’s operations, policies,
or practices. In connection with Ms. Christopherson’s resignation, her Employment Agreement with the Company, dated June
26, 2017, was deemed to be terminated.
In
connection with her resignation, on October 15, 2018, the Company entered into a Separation Letter and General Release Agreement
with Ms. Christopherson (the “Christopherson Separation Agreement”), pursuant to which the Company agreed to pay Ms.
Christopherson severance pay of three (3) months’ salary, in the aggregate amount of approximately $25,000 (less standard
withholding and applicable deductions), in consideration for her general release of the Company and certain related parties from
any claims she may have against them. The severance payment is payable within 14 days from the date of Ms. Christopherson’s
execution of the Christopherson Separation Agreement. The Company also agreed to reimburse Ms. Christopherson for all unreimbursed
travel and business expenses to which Ms. Christopherson is entitled. The Christopherson Separation Agreement also contains standard
provisions related to confidentiality and non-disparagement.
On
October 15, 2018, Srikumar Vanamali was appointed as a member of the Board, to fill one of the vacancies created by the resignations
described above. In addition, upon effectiveness of the resignations described above, Mr. Vanamali was appointed as the Company’s
Executive Director, Interim Chief Executive Officer, President, Interim Chief Financial Officer, Secretary and Treasurer, to serve
in such offices at the pleasure of the Board, and until his successor has been appointed by the Board. In connection with his
appointment as Interim Chief Executive Officer and Interim Chief Financial Officer of the Company, Mr. Vanamali was designated
as the Company’s “Principal Executive Officer” and “Principal Financial and Accounting Officer,”
respectively, for SEC reporting purposes,
In
connection with his appointment as Executive Director and Interim Chief Executive Officer of the Company, the Company (a) agreed
to pay Mr. Vanamali an annual base salary of $100,000, and (b) issued Mr. Vanamali 300,000 non-statutory stock options (the “Vanamali
Stock Options”), exercisable at $1.00 per share, all of which stock options vested upon the date of grant.
On
October 15, 2018, Shaheed Bailey was appointed as a member of the Board, to fill one of the vacancies created by the resignations
described above. In addition, upon effectiveness of the resignations described above, Mr. Bailey was appointed as the Company’s
Interim Chief Investment Officer, to serve in such offices at the pleasure of the Board, and until his successor has been appointed
by the Board.
In
connection with his appointment as Interim Chief Investment Officer of the Company, the Company agreed to issue Mr. Bailey 300,000
non-statutory stock options, exercisable at $1.00 per share, all of which stock options vested upon the date of grant.