GEX MANAGEMENT, INC. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

[    ]  TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

Commission File Number 333-213470

GEX MANAGEMENT, INC.

(Exact name of registrant as specified in its charter)

12001 N. Central Expressway, Suite 825

Dallas, Texas 75243

(Address of principal executive offices)

(877) 210-4396

(Issuer's telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

As of May 14, 2018 there were 11,797,231 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

PART I

ITEM 1. FINANCIAL STATEMENTS

GEX Management, Inc.

Consolidated Balance Sheets

ASSETS

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

GEX Management, Inc.

Consolidated Statements of Operations

Three Months Ended March 31, 2018 and 2017

(Unaudited)

⁽¹⁾ Gross billings of $3,988,002 and $0 less payroll and payroll tax cost related to PEO clients of $1,098,898 and $0 for the three months ended 2018 and 2017, respectively.

 The accompanying notes are an integral part of these unaudited consolidated financial statements.

GEX Management, Inc.

Consolidated Statements of Cash Flow

(Unaudited)

 The accompanying notes are an integral part of these unaudited consolidated financial statements.

GEX Management, Inc.

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:

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:

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:

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:

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:

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:

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:

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.

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations 

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and the related notes included elsewhere in this report and in our Form 10-K for the year ended December 31, 2017.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “strategy,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are not guarantees of future performance, but are based on management’s expectations as of the date of this report and assumptions that are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements. All information provided in this report is as of the date of this report and the Company undertakes no duty to update this information except as required by law.

General

GEX Management, Inc., a Texas corporation (the “Company,” “GEX,” “we,” “our,” “us,” and words of similar import) is Professional Employer Organization (PEO), Staffing and Professional Services Company that provides services and general business consulting to companies for a variety of their “back office” needs. We generate substantially all of our revenue from the staffing and other professional services we offer. These professional services, in addition to staffing, include: IT support, accounting and bookkeeping, human resources and business consultation and optimization.

Results of Operations

The three months ended March 31, 2018 compared to the three months ended March 31, 2017

Revenue

Our revenue for the three months ended March 31, 2018 was $3,578,575 compared to $170,640 for the three months ended March 31, 2017 due primarily to an increase in customer contracts relating to its PEO and staffing services. On January 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) 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. Furthermore, we do not anticipate significant changes will result in our business relating to the adoption of ASU 2014-09.

Cost of Revenues

Cost of revenue increased to $3,817,972 for the three months ended March 31, 2018 from $298,650 for the three months ended March 31, 2017. This was primarily due to two reasons. Firstly, an increase in contracted staff due to an increase in customer contracts for staffing services, and secondly, the Company continues to build up its personnel dedicated to servicing the Company’s PEO and staffing clients.

Operating Expense

Total operating expenses for the three months ended March 31, 2018 were $309,432 compared to the operating cost for the three months ended March 31, 2017 of $182,259. This increase is primarily due to the additional, corporate personnel hired to facilitate the general growth of the Company.

Other Income (Expense)

Other income (expense) for the three months ended March 31, 2018 consisted of interest expense of $45,554, rental income of $37,910 and other income of $654, compared to other expense for the three months ended March 31, 2017 of $5,373 consisting totally of interest expense. Rental income increased due to the acquisition of the building in Lowell, Arkansas.

Liquidity and Capital Resources

The Company has sufficient liquidity to operate at current levels for the next twelve months.

Cash increased by $61,741 to $471,837 as of March 31, 2018 as compared to $410,096 at December 31, 2017. The increase was due to $772,500 in proceeds received from a discounted Note Payable in the form of the sale of future receipts, which was partially offset by the use of cash in operating activities. A summary of our cash flows for the three months ended March 31, was as follows:

Net cash used in operating activities was $669,174 for the three months ended March 31, 2018 as compared to $247,499 cash used in operating activities for the three months ended March 31, 2017. The increase in cash used in operating activities was in part due to higher net losses in 2018 as the Company invested in corporate office personnel and the related benefits to support growth. Additionally, working capital requirements increased primarily as a result of the growth of the Company’s business.

Net cash provided by financing activities of $730,915 for the three months ended March 31, 2018 came from the net proceeds from a discounted note payable agreement for the purchase and sale of the Company’s future receipts, which was partially offset by payments on other debt. Net cash provided by financing activities of $282,088 for the three months ended March 31, 2017 came from the sale of common stock related to a public offering pursuant to an effective registration statement.

Subsequent to March 31, 2018, the Company received $909,000 in net proceeds from financing arrangements including discounted notes payable from the sales of future revenues and accounts receivable, and the issuance of convertible notes payable. These short-term financing arrangements were made in order to support the future growth plans of the Company, and to provide liquidity for operating activities. Management expects to refinance any of the remaining balances not paid in full by maturity.

Item 6. Exhibits

A list of exhibits filed with this report is listed in the Index following the signature page, and they are incorporated into this Item 6 by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

GEX MANAGEMENT, INC. 

By: /s/ Carl Dorvil

Carl Dorvil, Chief Executive Officer

Date:  May 15, 2018

By: /s/ Dario Saintus

Dario Saintus, Interim Chief Financial Officer

Date:  May 15,2018