ITEM 1. BUSINESS
History and Development of Business
GEX Management, Inc. was originally formed in 2004 as Group Excellence Management, LLC. d/b/a MyEasyHQ. In March of 2016, it was converted from a limited liability company into a C corporation and changed its name to GEX Management, Inc.
Carl Dorvil founded Group Excellence, LLC, a tutoring and mentoring company, from his dorm room at Southern Methodist University in 2004. Group Excellence provided tutoring and mentoring services to students with the goal of inspiring young persons to pursue high personal and academic achievement. The company quickly grew to more than six hundred employees. In 2011, Group Excellence was on Inc. 500’s annual list of the 500 fastest growing private companies in the United States.
In response to rapid growth, Mr. Dorvil developed GEX Management to facilitate the back-office functions of his company. GEX Management provided Group Excellence, LLC with human resources, IT, accounting/bookkeeping, social media, payroll, and conducted a majority of the overall operations of the company. Mr. Dorvil sold Group Excellence, LLC in 2011 but maintained ownership of GEX Management, which continued as a Professional Services Company providing back office support to the tutoring company, as well as third-party clients. In 2016 GEX Management revised its business model to provide staffing and back-office services to a wide variety of industries in order to expand the Company’s footprint, thereby building on the previous 12-year history of exceptional client service.
Over the next few years, GEX Management experienced tremendous growth in sales and customer pipeline - staffing business grew by over 1600%+ from 2016 to 2017 with the firm being named among the “fastest growing public companies in the North Texas region” by the Dallas Morning News, while also significantly expanding its client footprints across multiple staffing, business consulting and PEO opportunities.
In September 2018, the Company terminated contracts with two customers who accounted for over 83% of the Company’s net staffing revenue, resulting in significant loss of revenue to the company in Q4 2018 and continuing into 2019. The termination of these and other contracts was attributable to the increased business risk associated with Merchant Cash Advance contracts that the prior management had entered into requiring attachment of future receivables of customer receipts with the MCAs as well as a result of current management decision to move away from low/negative margin, high cost contracts which were deemed detrimental to the company’s sustained operability and profitability in the long run.
Despite these setbacks, the current management of GEX set strategic goals in 2019 to expand further into areas of higher margin and growth business categories particularly in the space of Corporate Strategy, Technology Consulting and Strategy Consulting with a mission of delivering synergistic opportunities to clients that results in significant cost rationalization, revenue streams, benefits and integrated solutions to corporate businesses. As a result of management efforts towards achieving this strategic goal, GEX Management was invited in February to be a Preferred Supplier to Insight Global (www.insightglobal.com), one of the largest Managed Service Providers (MSPs) to Fortune 100 Companies in the Enterprise Technology Consulting and Staffing solutions space. This has resulted in a significant new business development opportunity for GEX. The first technology consultant that GEX hired through this Preferred Supplier initiative was successfully placed at a large PA based financial services firm to provide Business and Quality Analysis professional services to the client, additional contract hires are expected to follow suit in 2020. In Q4 2019, GEX signed a contract with a California based, high growth, highly visible, social media video entertainment platform to provide key corporate consulting services - this contract has started to drive revenue starting Q4 2019 and is expected to significantly expand growth in future periods with a focus on providing corporate strategy, business advisory and corporate “CFO” level consulting services to clients- this model is in line with the corporate vision outlined by the management earlier in the year. Furthermore, GEX is in talks with multiple staffing and consulting companies to identify synergistic acquisition opportunities to help compensate for the lost revenue and growth momentum in Q4 2018 and 2019 due to the contract terminations of legacy businesses and regain its position as a top tier business services firm in the US while also developing a long term and sustainable business pipeline model. Management expects these and other potential organic and inorganic growth initiatives to help the firm eventually achieve strong and stable revenue growth while also help move towards profitability by targeting a higher margin, lower cost business model and relying on less expensive debt instruments to help reduce the burden across the firm’s capital structure while maximizing efficient use of operating capital during future periods.
In addition to these planned strategic growth initiatives which had started to build momentum in 2019 and expected to grow steadily in future periods, management has been focusing on materially improving its balance sheet by significantly reducing or eliminating the debt or debt like instruments related to convertible notes and asset related liens introduced in 2018 while simultaneously exploring opportunities to reduce or eliminate the high interest MCA related toxic debt instruments that resulted in significant interest expenses to the company and a burden to operating capital. As part of this balance sheet “clean-up” initiative, on February 8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which would allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for cancellation of the $1,300,000 real estate lien note secured by the building along with any and all accrued interest payable on the note as of the date of the agreement. Additionally, on March 5, 2019, one of GEX’s promissory note holders proceeded to execute its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the note holder taking possession of the Setco property resulting in the elimination of a $500,000 note and any accrued interest on the principal amount and the elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests from the Company books. Furthermore, GEX has been able to reduce the overall convertible notes burden on the balance sheet by over 40% of the principal outstanding balance through strategic conversions of these notes to common equity initiated by the convertible note issuers throughout 2019 - this focus on balance sheet is expected to sustain through 2020 and beyond as a result of these management growth initiatives and the continued support of investors and shareholders alike. Finally, management believes that the material reduction of MCA related debt like instruments will be a critical first step prior to rebuilding a robust revenue pipeline as this will require strong working capital and favorable leverage covenants to sustain operations in the long term as well as reduce liabilities related to attachment to future receivables. While management efforts to settle these instruments are aggressively underway, the inability or failure by the firm to completely address these toxic MCA instruments could result in management pursuing a restructuring program or similar initiatives to bring the balance sheet within reasonable covenant parameters to allow the firm to continue operating efficiently in the coming years without exposing future customers to significant business risks associated with these toxic instruments.
Business Operations
GEX Management is a progressive and growing provider of business services, consulting and staffing solutions to corporations across the nation. We provide both long and short-term consulting and staffing solution services, including corporate consulting, enterprise strategy and technology consulting, enterprise project management; grey, white and blue collar staffing solutions and Human Capital Management (HCM) solution capabilities.
GEX Management is strategically purposed to provide tailored business service products and services to our clients. Our client-responsive approach is a key differentiator in the industry.
Specific services are described below:
Business Strategy
Our objective is to become a leading business management services company, and to continuously expand our client base. We seek to achieve this objective by continuing to implement our business strategy, which includes the primary elements enumerated below.
Marketing and Sales
Our comprehensive marketing efforts are fluid, adaptive, and results-driven. They comprise both traditional and non- traditional channels including print collateral, website, video, PowerPoint presentations, digital ads, social media posts and press releases. We likewise employ a small sales team. We strategically target small and mid-sized businesses that require the services we provide. Previously, a significant amount of corporate revenue has been derived through client referrals and management’s personal relationships. Our plan is to continue to leverage these important relationships while expanding our brand reach by means of integrated marketing campaigns, more timely, informative, and effectual messaging, and greater collaboration between marketing and sales in order to increase both client and sales growth.
Industry and Competitors
The Professional Staffing industry is highly fragmented, resulting in robust competition. Competition affects our success in both the market segments we currently serve, as well as the new market segments we may enter in the future. We compete with several large business service companies that provide identical services to those GEX Management provides; some offer additional services. The financial and marketing resources of some of our competitors exceed those of GEX Management. Businesses primarily select a service provider based on price point/value, innovative/flexible product offerings, and quality of customer service.
Environmental Concerns
As a professional services company, federal, state or local laws that regulate the discharge of materials into the environment do not impact us.
Other Events
The occurrence of an uncontrollable event such as the COVID-19 pandemic may negatively affect our operations. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only impact our operations, financial condition and demand for our goods and services but our overall ability to react timely to mitigate the impact of this event. In addition, at this time we cannot predict the impact of COVID-19 on our ability to obtain financing necessary for the Company to fund its working capital requirements. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
Number of Employees
As of December 31, 2019 we had 6 employees.
ITEM 1A.
ITEM 1A. RISK FACTORS
As a Smaller Reporting Company we are not required to provide the information required by this item.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Corporate Office
As of December 31, 2019, GEX’s corporate offices were located at 1701 W. Northwest Highway Grapevine, Texas 76051.
Other Property
As of December 31, 2019, GEX does not have interest in material assets involving real estate.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GEX is not subject to any pending legal proceedings, nor is the Company aware of any material threatened claims against it.
ITEM 5. DEFAULTS UPON SENIOR SECURITIES
In connection with the Merchant Cash Advances, the company has occasionally defaulted on making certain daily interest payments as a result of lack of immediate access to capital to fulfill short term payment obligations related to these MCAs. As a result of these defaults in timely payments, Confession of Judgements have been filed by some of these MCAs in the New York district courts and GEX is currently in the process of negotiating settlement terms on monies owed to these parties. As a result of the highly irregular and unregulated nature of the Merchant Cash Advance industry, current management has taken the decision to move away from these cash advance opportunities introduced by the prior finance teams and will, going forward, solely rely on more traditional and regulated sources of financing available within the investment and regulated capital markets. Additionally, current management has determined it to be necessary to cease active business discussions with MCAs and proceed with settlement discussions to reduce or eliminate the monies owed to the MCAs and related parties in a timely manner. The management is also in the process of hiring a legal team to contest some of these Confession of Judgements which the management believes were incorrectly filed by the MCAs. The potential inability of the Company to satisfy these MCA obligations or settle in a timely manner could result in a significant impact on the financial and operational health of the company which could also potentially result in the company pursuing Chapter 11 bankruptcy and /or similar legal avenues if it is not able to settle these outstanding MCA obligations in a timely manner. While the management team has already begun these settlement conversations and is hopeful of reaching a resolution in a timely manner, there can be no guarantee that such a settlement will be reached any time soon.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is included in the OTC Pink Sheets, under the symbol GXXM. The table below summarizes the high and low closing sales prices per share for our common stock for the periods indicated, as reported on OTC. These amounts have been adjusted to reflect the 4 for 3 stock split of our common stock effected on December 12, 2017. The Company began trading on June 13, 2017 and therefore has no activity prior to the Quarter ended June 30, 2017.
Shareholders
As of December 31, 2019, there were approximately 80 holders of record of our common stock. This number does not include shareholders for whom shares were held in “nominee” or “street name.”
Dividends
No Dividends were declared for the Fiscal year 2019.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to report selected financial data.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Business
GEX Management is a business services company providing client employers and their employees with a broad portfolio of related products and services. We provide both long and short-term consulting and staffing solution services, including enterprise strategy and technology consulting, enterprise project management; grey, white and blue collar staffing solutions to middle market clients, and Human Capital Management (HCM) solution capabilities.
Business Operations
GEX Management works continuously to expand its service offerings to its clients in order to assist them to achieve their respective business goals. Our unique and tailored approach, coupled with an ever-expanding array of services, has significantly differentiated the Company from competitors. GEX likewise distinguished itself in the market via accessible and exceptional client support ensuring that we will not only gain new clients but will retain those we currently have, resulting in long-term sustainability. Clients typically initiate service by means of a three-month agreement with the Company. The contract thereby automatically renews until terminated with a 30-day notice by either party.
Critical Accounting Policies
The Company’s financial statements were prepared in conformity with U.S. generally accepted accounting principles. As such, management is required to make certain estimates, judgments and assumptions that they believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expense during the periods presented.
Revenue Recognition
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.
All staffing and consulting workers are completely vetted by the company to ensure their employment terms are in adherence to all applicable state. federal and immigration laws. Additionally, GEX Management carries professional liability and fidelity/crime insurance to protect against risks involving working at third party client locations that require the workers to handle sensitive client data and equipment.
Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018
Revenues
Revenues for the year ended December 31, 2019 and 2018 were $385,872 and $9,261,910, respectively. The steep decline in sales was because the Company terminated contracts with two customers in late 2018 who accounted for over 83% of the Company’s net staffing revenue, resulting in significant loss of revenue to the company in Q4 2018 that spilled into 2019. The termination of these and other contracts was attributable to the increased business risk associated with Merchant Cash Advance contracts that the prior management had entered into requiring attachment of future receivables of customer receipts with these entities as well as a result of current management decision to move away from low/negative margin, high cost contracts which were deemed detrimental to the company’s sustained operability and profitability in the long run.
Management had identified several gaps in the proper implementation and execution of the revenue recognition policy by the previous finance team, including (1) inconsistencies in application of bill rates and margin rates as documented in customer contracts against actual customer invoices resulting in contract losses (2) lack of attention to detail in documenting invoices and mapping cost of sales accurately resulting in missed invoicing and gross sales losses (3) insufficient oversight by the prior finance executive in ensuring accurate book keeping and contract follow- ups resulting in build-up of un-paid receivables and eventual write-offs of .invoices despite strong sales pipelines.
To satisfy these deficiencies in past financial controls, the current management has put in processes in place to strengthen internal controls such as, (1) adherence to established contract markups through enforcement of systematic and auto-invoicing processes to minimize manual errors and enforcing timely invoice submission to clients (2) frequent follow ups by the executive management team to ensure invoices and receivables are tracked and closed in a timely manner, and (3) timely alerts to customers to notify on upcoming billing cycles and payment dues
Cost of Services and Gross Profit
The Company’s gross profit in 2019 was $278,116 with a Gross Margin of 72% compared to $784,074 with 8% Gross Margin in 2018. While the lower gross profit in 2019 compared to 2018 is because of the reduced staffing contract volume for the reasons mentioned earlier, the significant 64% expansion in gross margin was primarily due to signing higher margin consulting contracts in 2019 compared to 2018 and also significant cost rationalization efforts associated with customer contracts relating to our business services in 2019 compared to 2018 and prior years.
Operating Expense
Total operating expense in the years ended December 31, 2019 and 2018 were $700,090 and $5,541,966 respectively. The lower expenses reflects the significant reduction in personnel and infrastructure costs along with significant operating expense rationalization efforts associated with customer contracts relating to our business services in 2019 compared to 2018 and prior years.
Net Loss
Net loss for the years ended December 31, 2019 and 2018 was $100,200 and $5,105,429, respectively. The significant decline in losses for 2019 compared to 2018 was attributable to the higher gross margin, lower operating expenses, lower debt amortization expenses related to debt and debt like instruments, lower interest expenses, lower G&A expenses and lower staffing & service contract amortization expenses related to business development.
Liquidity and Capital Resources
The Company has identified several potential financing sources in order to raise the capital necessary to fund operations through December 31, 2020. Management believes that it has been historically difficult for minority and women owned businesses to get access to reasonably price capital at scale which creates an opportunity to invest into these companies and receive a greater than average return for our shareholders. However, the opportunity to make a significant return for our investors is so overwhelmingly compelling that management had in the past taken short term working capital loans against future receivables in order to timely fund the growth of the company. Management intends to move away from these expensive debt like obligations and rely on other traditional and non-traditional debt instruments primarily in the form of convertible notes as well as explore 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, the Company’s financial condition and results of operations may be materially adversely affected and the Company may not be able to continue operations.
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 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.
In addition, at this time we cannot predict the impact of COVID-19 on our ability to obtain financing necessary for the Company to fund its working capital requirements.
A summary of our cash flows for the twelve months ended December 31, was as follows:
Net cash in operating activities was $13,053,711 for the twelve months ended December 31, 2019 as compared to $17,699,769 cash used in operating activities for the twelve months ended December 31, 2018. The increase in cash used in operating activities was in part due to lower operating expenses in 2019 as the Company focused on restructuring the business by eliminating redundant overhead, reducing operating costs, removing low margin customer contracts, optimizing business acquisition capital and rationalizing expenses to support long term growth as well as because of gain from extinguishment of debt/debt like instruments.
Net cash used in financing activities of $13,079,689 for the twelve months ended December 31, 2019 was primarily from significant reduction in debt /debt like instruments in the balance sheet on account of conversion of convertible debt into common stock and the related increase of common stock in 2019 compared to 2018.
Net cash used in investing activities for the twelve months ended December 31, 2019 was $0.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
On August 21, 2019, the Board of Directors of GEX Management, Inc (the “Company”) approved the engagement of Slack and Company, LLC (“Slack & Co.”) as the Company’s new independent registered public accounting firm for the year ending December 31, 2018.
On January 15, 2020, the Board of Directors of GEX Management, Inc (the “Company”) approved the re-engagement of Slack and Company, LLC (“Slack & Co.”) as the Company’s independent registered public accounting firm for the year ending December 31, 2019.
The Company’s financial statements as of December 31, 2017 have been audited by Pinnacle Accountancy Group of Utah (a d/b/a of Heaton & Company, PLLC, “Heaton & Co”) independent registered public accountants.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
During the year ended December 31, 2018, and the subsequent interim period through September 30, 2019, there were no (1) disagreements (as defined in Item 304(a)(1)(iv) of Regulation S-K and related instructions) with Slack & Co on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Slack & Co, would have caused Slack & Co to make reference to the subject matter of the disagreement in their reports, or (2) reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K). The audit reports of Slack & Co on the Company’s consolidated financial statements for the year ended December 31, 2018, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.
The Company has provided Slack & Co. with a copy of the disclosures it is making in this Current Report on Form 10-K prior to its filing with the Securities and Exchange Commission (“SEC”)
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
In accordance with Exchange Act Rules 13a-15 and 15a-15, we carried out an evaluation, under the supervision and with the participation of management, including our Interim Chief Executive Officer and Interim Chief Investment Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Interim Chief Executive Officer and Interim Chief Investment Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As part of its review into the company’s past operational and financial controls, current management identified a pattern of inconsistent application of established practices by the prior finance executive team related to managing and executing contractual obligations and related book keeping practices. Lack of easily accessible expense records and failure to match certain contract terms to invoices have resulted in higher costs and missed profit opportunities despite the company recording strong sales during these periods. Additionally, lack of certain documentation related to terms and invoices have introduced challenges to performing accurate and timely audit and review of financial books of records by both current management and the newly introduced independent audit firm.
Despite these past challenges, management has taking extraordinary steps to mitigate this risk by (1) reviewing the book of records for the entire 2019 fiscal year and ensuring journal entries are accurately documented for all past transactions and bank statement records are matched with book entries and corrected as needed to reflect accurate records (2) perform comprehensive review of invoices and receivables and write-off long standing receivables as bad expense if required based on detailed analysis (3) transition towards automatic bank feeds to the book of records and away from the past practice of manual book entries of bank deposits or withdrawals which are subject to human errors and prone to transactions risks. Management is confident that these changes would help mitigate the potential risks related to internal controls going forward.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with the evaluation we conducted of the effectiveness of our internal control over financial reporting as of December 31, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations
Control systems, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems’ objectives are being met. Further, the design of any control systems must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors or mistakes. Control systems can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table lists the names and ages of the executive officers and directors a of the Company as of December 31, 2019.
Name
Age
Position
Held Since
Srikumar Vanamali
Executive Director, Interim
October
W. Northwest Highway
CEO, Interim CFO
Grapevine, Texas 76051
Shaheed Bailey
Director, Interim
October
W. Northwest Highway
CIO
Grapevine, Texas 76051
Srikumar Vanamali:
Srikumar Vanamali, 38, is an experienced post-MBA executive with 15 years of top-tier, diverse experience in strategy and technology consulting, investment banking and professional business services. Mr. Vanamali has been leading the Company’s Corporate Strategy functions since June 2018. Prior to that, from January 2017 through May 2018, he worked as an investment banker at NMS Capital, a L.A.-based investment banking firm focusing on capital markets and M&A. Before joining NMS Capital, he was a Management Consultant for Sharp Decisions Inc, a business services company through which he provided consulting services to Toyota Financial Services from November 2014 through December 2016. Prior to this, he was a Consultant and Technology Lead at Infosys, a global consulting firm, from November 2003 through June 2012. Mr. Vanamali earned a Bachelor’s in Engineering, Computer Science from the University of Madras, in Chennai, Tamil Nadu, India, in 2003, and an MBA from UCLA Anderson School of Management, in Los Angeles, California, in 2014.
In October 2018, Mr. Vanamali became the Executive Director and Interim Chief Executive Officer and Director for GEX Management, Inc., and currently serves in these roles.
Shaheed Bailey:
Shaheed Bailey, 33, had been serving as Managing Partner and Chief Executive Officer of Veterans Capital Inc., a consulting firm that helps middle market companies raise equity/debt capital and locate strategic and value strategic acquisitions, and provides consulting for cost cutting, tax savings and growth strategies since October 2012. Prior to that, from June 2010 through September 2012, he served as a Sales Consultant/Partner for Sales Consultants of Morris County, a company that provided strategic consulting services. Before joining Sales Consultants of Morris County, he was a Private Banker with Wells Fargo Bank from July 2008 through April 2010. In October 2018, Mr. Bailey became the Interim Chief Investment Officer and Director for GEX Management, Inc., and currently serves in these roles.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers and directors, and persons who beneficially own more than ten percent of our common stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
We believe that as of the date of this report they were all current in their 16(a) reports.
Board of Directors
Our Board of Directors currently consists of two members. Our Board of Directors has affirmatively determined that there are currently no independent directors serving on our board.
Committees of the Board of Directors
Audit Committee
We do not have a standing audit committee of the Board of Directors. Management has determined not to establish an audit committee at present because of our limited resources and limited operating activities do not warrant the formation of an audit committee or the expense of doing so. We do not have a financial expert serving on the Board of Directors or employed as an officer based on management’s belief that the cost of obtaining the services of a person who meets the criteria for a financial expert under Item 401(e) of Regulation S is beyond its limited financial resources and the financial skills of such an expert are simply not required or necessary for us to maintain effective internal controls and procedures for financial reporting in light of the limited scope and simplicity of accounting issues raised in its financial statements at this stage of its development.
Governance, Compensation and Nominating Committee
We do not have a standing governance, compensation and nominating committee of the Board of Directors. Management has determined not to establish governance, compensation and nominating committee at present because of our limited resources and limited operations do not warrant such a committee or the expense of doing so.
Code of Ethics
The Company has adopted the following code of ethics for officers, directors and employees:
-
Show respect towards others in the workplace
-
Conduct all business activities in a fair and ethical manner
- Work dutifully and responsibly for the Company’s shareholders and stakeholders
Limitation of Liability of Directors
Pursuant to the Texas Business Organizations Code, our Amended and Restated Articles of Incorporation exclude personal liability for our Directors for monetary damages based upon any violation of their fiduciary duties as Directors, except as to liability for any breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or any transaction from which a Director receives an improper personal benefit. This exclusion of liability does not limit any right which a Director may have to be indemnified and does not affect any Director’s liability under federal or applicable state securities laws.
Legal Proceedings
During the past ten years, none of our current directors, executive officers or persons nominated to become directors or executive officers:
(1) A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;
(2) Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);
(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;
(4) Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (f)(3)(i) of this section, or to be associated with persons engaged in any such activity;
(5) Such person was found by a court of competent jurisdiction in a civil action or by the Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;
(6) Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
(7) Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:
(i) Any Federal or State securities or commodities law or regulation; or
(ii) Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or
(iii) Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
(8) Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Material Changes to the Procedures by which Security Holders May Recommend Nominees
There have been no material changes to the procedures by which security holders may recommend nominees to the registrants Board of Directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
The following summary compensation table sets forth all compensation awarded to, earned by, or paid to the named executive officers paid by us during the fiscal years ended December 31, 2019 in all capacities for the accounts of our executives, including the Interim Chief Executive Officer (“Interim CEO”) and Interim Chief Operating Officer (“Interim COO”):
The following officers received the following compensation for the years ended December 31, 2018. These officers have employment contracts with the Company.
Employment Agreements
We have employment agreements in place with each of the above referenced officers of the Company.
Compensation of Directors
Directors do not receive any compensation for their services as directors. The Board of Directors has the authority to establish the compensation of directors. No amounts have been paid to, or accrued to, directors in such capacity.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
The following table lists the number of shares of Common Stock of our Company and, with respect to our officers, directors and principal stockholder, shares of our Super Voting Preferred Stock, as of May 14, 2020 that are beneficially owned by (i) each person or entity known to our Company to be the beneficial owner of more than 5% of the outstanding Common Stock; (ii) each officer and director of our Company; and (iii) all officers and directors as a group. Information relating to beneficial ownership of Common Stock and Super Voting Preferred Stock by our principal stockholders and management is based upon information furnished by each person using “beneficial ownership” concepts under the rules of the Securities and Exchange Commission. Under these rules, a person is deemed to be a beneficial owner of a security if that person has or shares voting power, which includes the power to vote or direct the voting of the security, or investment power, which includes the power to vote or direct the voting of the security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership within sixty (60) days. Under the rules of the SEC, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he/she may not have any pecuniary beneficial interest. Except as noted below, each person has sole voting and investment power. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the shares. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of our common stock held by them.
(1) Based upon 5,903,508,139 shares of Common Stock and 800,000 Super Voting Preferred Stock issued and outstanding as of May 14, 2020. Mr. Vanamali’s voting stock represents 25.5% or 1,505,394,575 shares of voting capital stock. Mr. Vanamali is the Interim CEO and Executive Director of the Company.
(2) Based upon 5,903,508,139 shares of Common Stock and 800,000 Super Voting Preferred Stock issued and outstanding as of May 14, 2020. Mr. Baily’s voting stock is 25.5% or 1,505,394,575 shares of voting capital stock. Mr. Bailey is the Interim Chief Investment Officer and a Director of the Company.
(3) Includes shares of Common Stock and Super Voting Preferred Stock owned by our officers and directors as a group (2 persons).
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE
The Company does not have any related party transactions at this time.
The Company does not have any independent directors serving on the Board of Directors.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees incurred for professional services rendered by our auditors, for the audit of our annual financial statements and review of the financial statements included in our Form S-1, Form 10-K and Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the year ended December 31, 2019 and 2018 was $40,000 and $30,000 respectively.
Audit Related Fees
None.
Tax Fees
None.
All Other Fees
None.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits
31.1
Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Company’s Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
XBRL
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on May 14, 2020.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned hereunto duly authorized.
GEX MANAGEMENT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
GEX Management, Inc.
We have audited the accompanying consolidated balance sheets of GEX Management, Inc. (the “Company”) as of December 31, 2019, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the one year period ended December 31, 2019 and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year in the one-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Slack and Company, LLC
We have served as the Company’s auditor since August 21, 2019
May 14, 2020
GEX Management, Inc.
Consolidated Balance Sheets
December 31, 2019 and 2018
See accompanying notes to the consolidated financial statements.
GEX Management, Inc.
Consolidated Statements of Operations Years Ended
December 31, 2019 and 2018
See accompanying notes to the consolidated financial statements.
GEX Management, Inc.
Consolidated Statement of Changes in Shareholders’ Equity (Deficit)
Years Ended December 31, 2019 and 2018
See accompanying notes to the consolidated financial statements.
GEX Management, Inc.
Consolidated Statements of Cash Flow
Years Ended December 31, 2019 and 2018
See accompanying notes to the consolidated financial statements.
GEX Management, Inc.
Notes to the Consolidated Financial Statements
December 31, 2019
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 business 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. 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.
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.
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.
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 was personally guaranteed by Carl Dorvil, the Company’s former Chief Executive Officer and principal shareholder and secured, among other things, certain liens and security interests including the Setco property purchased on September 28, 2018. This note was due to be paid in full by August 1, 2018. The Company had 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. As of December 31, 2018, the Company failed to pay the Principal Amount and, therefore, continued to be in default under the Note.
Subsequently on March 5, 2019, the noteholder proceeded to execute its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the noteholder taking possession of the Setco property resulting in the elimination of the $500,000 Civitas note and any accrued interest on the principal amount and the elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests from the Company books and with the elimination of the Setco property assets from the company books.
On February 8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which would allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for cancellation of the $1,300,000 real estate lien note secured by the building along with an and all accrued interest payable on the note as of the date of the agreement and the elimination of the AMAST property related assets from the company books.
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
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.
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, 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. 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 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.
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.
Earnings per share information for the twelve months ended December 31, 2019 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, 2019 or operations or cash flows for the periods ended December 31 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 December 31, 2020.
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 twelve months ended December 31, 2019 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 $5,326,398 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.
In addition, at this time we cannot predict the impact of COVID-19 on our ability to obtain financing necessary for the Company to fund its working capital requirements. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
NOTE 2. OTHER CURRENT ASSETS
At December 31, 2019 and December 31, 2018, Other Current Assets were as follows:
NOTE 3. STOCKHOLDERS’ EQUITY
General
The Company filed Form S-1 with the Securities & Exchange Commission and it was declared effective on November 14, 2016 under which the Company sold 188,059 shares for $282,089 in the first quarter under this registration statement. The Company effected a 4 for 3 stock split in December 2017. All transaction have been adjusted to reflect this split.
The Company issued 47,781 shares for services for a total of $74,750 during 2017.
On May 15, 2017, GEX entered into a Conversion Agreement with two consultants that had a $45,000 balance with the Company. In accordance with the terms and conditions of the Conversion Agreement, GEX issued a total of 40,000 shares of the Company’s common stock, at a cost basis of $1.125 per share. The two consultants were issued 20,000 shares each of the total 40,000 shares issued by the Company.
On June 7, 2017, GEX entered into a Debt Conversion Agreement with the Company that purchased the Line of Credit Promissory Note from the Company’s Chief Executive Officer. Under the terms and conditions of the Debt Conversion Agreement GEX issued 153,664 shares of its common stock, for the extinguishment of $345,745 in debt and accrued interest owed by GEX under the Line of Credit as of the date of the Debt Conversion Agreement. The shares were valued at $1.125 per share. GEX recorded a gain on extinguishment of debt in the amount of $172,872.
On June 20, 2017, GEX entered into a Stock Purchase Agreement (“SPA”) with a third-party investor. Under the terms and conditions of the SPA, GEX issued 19,003 shares of its common stock, for a total of $120,000.
On June 20, 2017, GEX entered into an Advisory Agreement with a third-party advisory firm. Under the terms and conditions of the Advisory Agreement, GEX paid a non-refundable retainer in the amount of $24,750 through the issuance of 3,334 shares of the Company’s common stock.
On July 20, 2017, GEX entered into a Stock Purchase Agreement with a third-party investor. Under the terms and conditions of the SPA, GEX issued 12,668 shares of its common stock restricted pursuant to Rule 144 of the Securities Act of 1933 for a total of $80,000.
On September 20, 2017, GEX entered into Stock Purchase Agreements with two advisory board members. Under the terms and conditions of the SPA’s, GEX issued 6,564 shares of its common stock, for a total of $32,000.
On October 18, 2017, GEX entered into a Stock Purchase Agreements with one advisory board member. Under the terms and conditions of the SPA, GEX issued 2,667 shares of its common stock restricted pursuant to Rule 144 of the Securities Act of 1933, as amended, for a total of $13,000.
On October 31, 2017 GEX entered into a Lease Agreement for office space in Fayetteville, Arkansas for 1,067 shares of its common stock, restricted pursuant to Rule 144 of the Securities Act of 1933, as amended.
On December 29, 2017 GEX entered into a SPA with a shareholder. Under the terms of the SPA, GEX issued 75,000 shares of its common stock for a total of $300,000.
On December 29, 2017 the Company acquired a 12,223 square foot, multi-use office building in Lowell, Arkansas through the purchase of 100% of the member interest in AMAST Consulting, LLC for 200,000 shares of the Company’s common stock and assumption of the outstanding mortgage.
During the twelve months ended December 31, 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. On January 16, 2019, the Company issued 60,000 shares of common stock related to a convertible note conversion. On January 21, 2019, the Company issued 538,095 shares of common stock related to a convertible note conversion. On January 29, 2019, the Company issued 120,000 shares of common stock related to a convertible note conversion. On February 13, 2019, the Company issued 1,000,000 shares of common stock related to a convertible note conversion. On February 13, 2019, the Company issued 400,000 shares of common stock related to a convertible note conversion. On February 14, 2019, the Company issued 400,000 shares of common stock related to a convertible note conversion. On February 19, 2019, the Company issued 670,000 shares of common stock related to a convertible note conversion. On February 20, 2019, the Company issued 1,000,000 shares of common stock related to a convertible note conversion. On February 20, 2019, the Company issued 1,000,000 shares of common stock related to a convertible note conversion. On February 21, 2019, the Company issued 847,458 shares of common stock related to a convertible note conversion. On February 22, 2019, the Company issued 677,966 shares of common stock related to a convertible note conversion. On February 22, 2019, the Company issued 1,129,944 shares of common stock related to a convertible note conversion. On February 22, 2019, the Company issued 300,000 shares of common stock related to a convertible note conversion. On February 25, 2019, the Company issued 2,300,000 shares of common stock related to a convertible note conversion. On February 25, 2019, the Company issued 2,000,000 shares of common stock related to a convertible note conversion. On February 26, 2019, the Company issued 1,140,000 shares of common stock related to a convertible note conversion. On February 26, 2019, the Company issued 1,250,000 shares of common stock related to a convertible note conversion. On February 27, 2019, the Company issued 2,535,211 shares of common stock related to a convertible note conversion. On February 28, 2019, the Company issued 3,400,000 shares of common stock related to a convertible note conversion. On February 28, 2019, the Company issued 2,900,000 shares of common stock related to a convertible note conversion. As of March 2019, the Company issued a total of 253,428,115 shares of common stock related to a convertible note conversion. In April 2019, the Company issued a total of 131,889,069 shares of common stock related to several convertible note conversions. In May 2019, the Company issued a total of 1,060,050,879 shares of common stock related to several convertible note conversions. In June 2019, the Company issued a total of 1,611,151,427 shares of common stock related to warrants and convertible note conversions. In July 2019, the Company issued a total of 1,852,682,044 shares of common stock related to warrants and convertible note conversions. In June 2019, the Company issued a total of 1,611,151,427 shares of common stock related to warrants and convertible note conversions. In August 2019, the Company issued a total of 913,654,084 shares of common stock related to warrants and convertible note conversions. For the three months ending September 30 2019, the Company issued a total of 2,766,336,128 shares of common stock related to convertible notes and warrants.
As of December 31, 2018, the Company was authorized to issue 200,000,000 common shares at a par value of $0.001 per share. In April 2018, the Company issued shares of 125,000 of common stock at $3.49 per share to a non-officer employee. As of December 31, 2018, the Company was authorized to issue 20,000,000 preferred shares at a par value of $0.001 per share. At December 31, 2018 and December 31, 2017 there were no preferred shares outstanding.
Effective February 19, 2019, the Board of Directors of the Company approved the authorization of eight hundred thousand (800,000) shares of Series A1 Voting Preferred Stock (the “Series A1 Preferred Stock”) and approved the issuance to Srikumar Vanamali, the Corporation’s Interim CEO and Executive Director, of four hundred thousand (400,000) shares of this Series A1 Preferred Stock and approved the issuance to Shaheed Bailey, the Corporation’s Interim Chief Investment Officer and Director, of four hundred thousand (400,000) shares of this Series A1 Preferred Stock. As a result of the issuance of the Series A1 Preferred Stock Shares to Mr. Srikumar Vanamali and Mr Shaheed Bailey, Mr. Srikumar Vanamali and Mr. Shaheed Bailey obtained voting rights over the Company’s outstanding voting stock on February 19, 2019, which provide them combined the right to vote up to 51% of the total voting shares able to vote on any and all shareholder matters. As a result, Mr. Srikumar Vanamali and Mr. Shaheed Bailey will exercise majority control in determining the outcome of all corporate transactions or other matters, including the election of Directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. In the event Mr. Srikumar Vanamali and Mr. Shaheed Bailey are no longer acting as Officers and Directors of the Board of Directors of the Corporation, the shares of Series A1 Preferred Stock shall automatically, without any action on the part of any party, or the Corporation, be deemed cancelled in their entirety. In relation to this, Form 3 was filed in SEC for both Srikumar Vanamali and Shaheed Bailey related to the 10% Beneficial ownership on account of the majority voting control through the preferred shares.
NOTE 4. NOTES PAYABLE
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 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. 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.
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.
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 8, 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 8, 2019.
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.
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.
On January 18 2019, the Company entered into a convertible note payable for $226,000 bearing interest at 12% per annum. All principal and interest is due on July 18, 2019. In connection with this note payable, the Company issued 538,095 shares for its common stock as a commitment fee.
On February 15, 2019, the Company entered into a convertible note payable for $43,000 bearing interest at 10% per annum. All principal and interest is due on February 15, 2020.
On April 16, 2019, the Company entered into a convertible note payable for $38,000 bearing interest at 10% per annum. All principal and interest is due on April 6, 2020.
NOTE 5. ACCOUNTS RECEIVABLE AND CONCENTRATION OF CREDIT RISK
As of December 31, 2019, the company had $7,467 outstanding accounts receivable balance with its customers. As of December 31, 2018, the company had $18,265 outstanding accounts receivable balance with its customers.
NOTE 6. PROPERTY AND EQUIPMENT
The Company had the following property and equipment as of December 31, 2019 and December 31, 2018:
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
The Company did not have any related party transactions during this reporting period.
NOTE 8: COMMITMENTS AND CONTINGENCIES
The following are the minimum obligations under the lease related to the Company’s offices as of December 31, 2019:
NOTE 9. ACQUISITIONS AND DIVESTITURES
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.
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.
While the Company intended to take advantage of the collateral provided by the Setco real estate to obtain loan against property for working capital purposes as well as reduce high interest loan obligations related to Merchant Cash Advances, the prior management was unable to secure required financing because of (1) challenges associated with identifying an investor who was ready to match the valuation of $11,000,000 provided by the valuation company introduced by Setco for evaluating the property (2) feedback from multiple lending sources related to the lack of readily available access to the property which would further depress the value of the property against the established valuation by the valuation company, and (3) lack of sophisticated investors ready to invest in the land at the valuation provided by the valuation company that would have provided the Company sufficient funds to immediately take care of its short and long term debt obligations. As a result of this assessment and given failure to gain traction on the intended but missed capital opportunity on account of potentially misleading information by a service provider, management is currently reviewing with counsel available options to review and, if required, possibly seek damages from targeted parties to compensate the firm for the damages incurred related to pursuing transaction options related to this potentially incorrect valuation.
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 was personally guaranteed by Carl Dorvil, the Company’s former Chief Executive Officer and principal shareholder and secured, among other things, certain liens and security interests including the Setco property purchased on September 28, 2019. This note was due to be paid in full by August 1, 2018. The Company had 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. As of December 31, 2018, the Company failed to pay the Principal Amount and, therefore, continued to be in default under the Note.
Subsequently on March 5, 2019, the noteholder proceeded to execute its rights to enforce the liens on the Setco property through a foreclosure process which resulted in the noteholder taking possession of the Setco property resulting in the elimination of the $500,000 Civitas note and any accrued interest on the principal amount and the elimination of $1,125,000 Setco real estate lien note made to Setco along with any accrued interests from the Company books and with the elimination of the Setco property assets from the company books.
On February 8 2019, GEXM and the G&C Family LLC executed a “Deed in Lieu of Foreclosure” agreement the terms of which would allow GEXM to release ownership of the Arkansas building under AMAST LLC to the G&C Family Group, LLC in return for cancellation of the $1,300,000 real estate lien note secured by the building along with an and all accrued interest payable on the note as of the date of the agreement and the elimination of the AMAST property related assets from the company books.
NOTE 10. SUBSEQUENT EVENTS
On March 4, 2020 the Securities and Exchange Commission (the “SEC”) issued an Order under Section 36 (Release No. 34-88318) of the Securities Exchange Act of 1934 (“Exchange Act”) granting exemptions from specified provisions of the Exchange Act and certain rules thereunder (the “Order”). The Order provides that a registrant (as defined in Exchange Act Rule 12b-2) subject to the reporting requirements of Exchange Act Section 13(a) or 15(d), and any person required to make any filings with respect to such a registrant, is exempt from any requirement to file or furnish materials with the Commission under Exchange Act Sections 13(a), 13(f), 13(g), 14(a), 14(c), 14(f), 15(d) and Regulations 13A, Regulation 13D-G (except for those provisions mandating the filing of Schedule 13D or amendments to Schedule 13D), 14A, 14C and 15D, and Exchange Act Rules 13f-1, and 14f-1, as applicable, where certain conditions are satisfied.
GEX Management, Inc. (the “Company”) furnished detailed on its Current Report on Form 8-K filed on March 30, 2020 to indicate its reliance on the Order in connection with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “Report”) due to the circumstances related to COVID-19. In particular, COVID-19 has caused severe disruptions in transportation and limited access to the Company’s facilities resulting in limited support from its staff and professional advisors. The Company has also closed its corporate offices and has requested all employees to work remotely until further notice. Employees affected include certain of its key personnel responsible for assisting the Company in the preparation of its financial statements. In view of these circumstances, the Company has been unable to timely provide its auditors and accountants with financial records to provide consent, and therefore allow the Company to file a timely and accurate Annual Report on Form 10-K for its year ended December 31, 2019 by the prescribed date without undue hardship and expense to the Company. This has, in turn, delayed the Company’s ability to complete its audit and prepare the Report.
Subsequently, the Company has relied on this exemption to file the Report no later than May 14, 2020 (which is 45 days from the Report’s original filing deadline of March 30, 2020).