Exhibit 99.2
GLOBAL HR RESEARCH, LLC
Balance Sheets
| | | | | | | | |
| | | June 30,
2015
(Unaudited) | | | December 31,
2014 | |
| ASSETS | |
Current Assets: | | | | | | | | |
Cash | | $ | — | | | $ | 311,197 | |
Accounts receivable | | | 872,443 | | | | 493,381 | |
Loans to members | | | 429,159 | | | | 325,173 | |
Prepaid expenses and other current assets | | | — | | | | 8,698 | |
| | | | | | | | |
Total current assets | | | 1,301,602 | | | | 1,138,449 | |
| | | | | | | | |
Property and Equipment, net of Accumulated Depreciation | | | 153,235 | | | | 167,948 | |
Other Assets: | | | | | | | | |
Platform development in progress | | | 1,362,097 | | | | 1,295,896 | |
Goodwill | | | 163,817 | | | | 163,817 | |
Security deposits | | | 34,178 | | | | 34,178 | |
Investments in affiliates | | | 9,191 | | | | 4,641 | |
| | | | | | | | |
Total other assets | | | 1,569,283 | | | | 1,498,532 | |
| | | | | | | | |
Total assets | | $ | 3,024,120 | | | $ | 2,804,929 | |
| | | | | | | | |
| LIABILITIES AND MEMBERS’ DEFICIT | |
Current Liabilities: | | | | | | | | |
Bank overdraft | | $ | 239,749 | | | $ | — | |
Accounts payable | | | 2,121,405 | | | | 1,870,723 | |
Accrued expenses | | | 72,846 | | | | 60,560 | |
Line of credit | | | 350,000 | | | | 300,000 | |
Notes payable | | | 568,249 | | | | 648,536 | |
Loans from affiliates | | | — | | | | 15,173 | |
| | | | | | | | |
Total current liabilities | | | 3,352,249 | | | | 2,894,992 | |
| | | | | | | | |
Long-term liability: | | | | | | | | |
Deferred rent | | | 291,688 | | | | 294,471 | |
| | | | | | | | |
Total liabilities | | | 3,643,937 | | | | 3,189,463 | |
| | | | | | | | |
Members’ Deficit | | | (619,817 | ) | | | (384,534 | ) |
| | | | | | | | |
Total liabilities and members’ deficit | | $ | 3,024,120 | | | $ | 2,804,929 | |
| | | | | | | | |
See accompanying notes to the financial statements.
F-1
GLOBAL HR RESEARCH, LLC
Statements of Operations (Unaudited)
For the six months ended June 30,
| | | | | | | | |
| | | 2015 | | | 2014 | |
Revenues | | $ | 5,838,919 | | | $ | 4,769,575 | |
Costs of Revenues | | | 4,381,994 | | | | 3,637,659 | |
| | | | | | | | |
Gross Profit | | | 1,456,925 | | | | 1,131,916 | |
| | | | | | | | |
Operating Expenses: | | | | | | | | |
Salaries and related expenses | | | 574,483 | | | | 447,023 | |
Commissions | | | 63,833 | | | | — | |
Selling and marketing | | | 340,324 | | | | 274,005 | |
General and administrative | | | 583,041 | | | | 505,449 | |
Depreciation | | | 13,776 | | | | 13,502 | |
| | | | | | | | |
Total Operating Expenses | | | 1,575,457 | | | | 1,239,979 | |
| | | | | | | | |
Loss from Operations | | | (118,532 | ) | | | (108,063 | ) |
Other Income (Expense): | | | | | | | | |
Interest income | | | 11,985 | | | | 6,600 | |
Interest expense | | | (34,093 | ) | | | (32,041 | ) |
Loss on disposal of equipment | | | (937 | ) | | | — | |
| | | | | | | | |
Total Other Expense | | | (23,045 | ) | | | (25,441 | ) |
| | | | | | | | |
Loss before equity in loss from affiliates | | | (141,577 | ) | | | (133,504 | ) |
Equity in loss from affiliates | | | (25,706 | ) | | | (30,957 | ) |
| | | | | | | | |
Net Loss | | $ | (167,283 | ) | | $ | (164,461 | ) |
| | | | | | | | |
See accompanying notes to the financial statements.
F-2
GLOBAL HR RESEARCH, LLC
Statements of Cash Flows (Unaudited)
For the six months ended June 30,
| | | | | | | | |
| | | 2015 | | | 2014 | |
Cash Flows from Operating Activities | | | | | | | | |
Net Loss | | $ | (167,283 | ) | | $ | (164,461 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation | | | 13,776 | | | | 13,502 | |
Bad debt expense | | | 1,019 | | | | 321 | |
Loss on disposal of equipment | | | 937 | | | | — | |
Pass-through loss from investments in affiliates | | | 25,706 | | | | 30,957 | |
Changes in assets and liabilities: | | | | | | | | |
Increase in accounts receivable | | | (379,062 | ) | | | (194,890 | ) |
Decrease (increase) in prepaid expenses and other current assets | | | 4,893 | | | | (108,858 | ) |
Increase in accounts payable | | | 250,684 | | | | 508,437 | |
Increase (decrease) in accrued expenses | | | 12,286 | | | | (325,129 | ) |
| | | | | | | | |
Net Cash Used in Operating Activities | | | (237,044 | ) | | | (240,121 | ) |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
Platform development in progress | | | (66,201 | ) | | | (179,261 | ) |
Investments in affiliates | | | (30,256 | ) | | | (21,873 | ) |
| | | | | | | | |
Net Cash Used in Investing Activities | | | (96,457 | ) | | | (201,134 | ) |
| | | | | | | | |
Cash Flows from Financing Activities | | | | | | | | |
Principal payments of notes payable | | | (80,286 | ) | | | (136,043 | ) |
Proceeds from notes payable | | | — | | | | 250,000 | |
Proceeds from line of credit | | | 50,000 | | | | 805,000 | |
Payments to line of credit | | | — | | | | (705,000 | ) |
Loans to members | | | (103,986 | ) | | | (6,600 | ) |
Loans from affiliates, net | | | (15,173 | ) | | | — | |
Distributions to members | | | (118,000 | ) | | | — | |
Proceeds from member contributions | | | 50,000 | | | | 123,898 | |
| | | | | | | | |
Net Cash (Used in) Provided by Financing Activities | | | (217,445 | ) | | | 331,255 | |
| | | | | | | | |
Net decrease in cash | | | (550,946 | ) | | | (110,000 | ) |
Cash, beginning of period | | | 311,197 | | | | 35,932 | |
| | | | | | | | |
Bank overdraft, end of period | | $ | (239,749 | ) | | $ | (74,068 | ) |
| | | | | | | | |
Supplemental disclosure of cash flows data: | | | | | | | | |
Cash paid for interest | | $ | 34,093 | | | $ | 30,317 | |
| | | | | | | | |
See accompanying notes to the financial statements.
F-3
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 1 – Nature of Operations
Business Activity
Global HR Research, LLC, (the Company) provides background screening, drug testing and other pre-employment services for employers primarily in the United States and Canada.
The existence of the LLC is perpetual. Members’ personal liability is limited to their investment in the Company.
The Company has a 40% ownership position in each of six separate Product Placement Companies (PPCs) that sell the Company’s products via its web based order system. The PPCs are located throughout the United States. The PPCs are as follows: GHRR CF, LLC (CF), GHRR NE, LLC (NE), GHRR NW, LLC (NW), GHRR SE, LLC (SE), GHRR SF, LLC (SF), GHRR WF, LLC (WF). Ownership ranging from 51%-60% of the PPC’s are held by unrelated third parties. The PPCs bear all of the credit and collection risk associated with their customers, and they set their own credit and collection policies. The Company and the PPCs have executed operating agreements setting forth their business relationship including but not limited to revenue sharing and cost reimbursement. The Company invoices the PPCs the first day of each month for products sold to customers in the previous month. Those invoices are due to the Company by the 10th of the month. The PPCs are separate and distinct companies that file their own tax returns and maintain their own set of books and records apart from the Company. The operations of the PPCs are not consolidated with these financial statements.
The Company’s headquarters are in Fort Myers, Florida.
Note 2 – Summary of Significant Accounting Policies
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all highly liquid, short term investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the amount the Company expects to collect on balances outstanding at period end. The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral from its customers. Management closely monitors outstanding balances and considers all of its accounts receivable to be collectible.
Concentration of Credit Risk
At June 30, 2015, the Company maintained its cash at a financial institution in bank deposits which, at times, may exceed federally insured limits. The Company has not experienced any losses on such accounts and believes it is not exposed to any significant risk. No amounts exceeded those limits as of June 30, 2015 or December 31, 2014.
F-4
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 2 – Summary of Significant Accounting Policies - continued
Concentration of Credit Risk - continued
Approximately 41% of the total outstanding accounts receivable is due collectively from the PPC’s as of June 30, 2015 and December 31, 2014. Accounts receivable from three customers represents another 14% and 13% of the total accounts receivable at June 30, 2015 and December 31, 2014, respectively
In addition, approximately 58% of the Company’s revenue for the six months ended June 30, 2015 was received from four customers and 41% was received from one customer. Approximately 66% of revenue for the six months ended June 30, 2014 was received from 4 customers and 40% was received from one customer.
Property and Equipment
Property and equipment are stated at original cost to the Company less accumulated depreciation. Repairs, maintenance, and minor replacements are charged to operations as incurred. Major repairs and replacements that improve or extend the lives of assets are capitalized. Depreciation is recognized on a straight-line basis over the useful lives of the related assets as follows:
| | | | |
Leasehold improvements | | | 7-10 years | |
Furniture and equipment | | | 5-10 years | |
Signage | | | 7-10 years | |
Investments in Affiliates
The Company owns a 40% interest in the six PPCs and also owns a 50% interest in VIP Commercial Coach, LLC. These investments are recorded on the equity method in accordance with Accounting Standards Codification323 Investments – Equity Method and Joint Ventures.Under the equity method, the Company’s original investment is recorded at cost and adjusted by the Company’s share of undistributed earnings or losses as well as distributions received from or contributions made to the investee. The investor ordinarily shall discontinue applying the equity method if the investment (and net advances) is reduced to zero and shall not provide for additional losses unless the investor has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee.
GAAP requires the consolidation of all variable interest entities (“VIEs”) for which a Company is deemed to be the primary beneficiary. An entity is generally a VIE if it meets any of the following criteria: (i) the entity has insufficient equity to finance its activities without additional subordinated financial support from other parties, (ii) the equity investors cannot make significant decisions about the entity’s operations or (iii) the voting rights of some investors are not proportional to their obligations to absorb the expected losses of the entity or receive the expected returns of the entity and substantially all of the entity’s activities involve or are conducted on behalf of the investor with disproportionately few voting rights.
Based on these criteria, management has determined that the affiliated entities do not constitute VIE’s.
F-5
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 2 – Summary of Significant Accounting Policies - continued
Platform Development in Progress
The Company’s platform development costs are related primarily to software developed for internal use and, accordingly, the Company accounts for these costs under FASB ASC Topic 350-40 “Internal-Use Software” Such costs are being capitalized during the application development stage and when placed in service will be amortized over the estimated useful life of the platform.
Goodwill
The Company accounts for goodwill in accordance with the provisions of FASB ASC Topic 350, “Intangibles—Goodwill and Other”. Goodwill recorded in the financial statements represents the excess of the purchase price over the fair value of acquired net assets on the date of acquisition. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.
The Company tests goodwill for impairment under a two-step approach. The first step of the goodwill impairment test compares the fair value of the Company with its carrying amount, including goodwill. If the carrying amount exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss. This is determined by comparing the implied fair value of the Company’s goodwill with the carrying amount of that goodwill. If the carrying amount of the goodwill exceeds the implied fair value of that goodwill, the Company recognizes an impairment loss as an expense. Management has determined there is no impairment of goodwill at June 30, 2015.
Deferred rent
The Company’s operating lease for its corporate office is in Fort Myers, Florida and includes schedule rent increases over the term of the lease. The Company has accounted for the lease to provide straight-line charges to operations over the life of the lease.
Revenue Recognition
Sales are recognized when revenue is realized or becomes realizable and has been earned. In general revenue is recognized when the earnings process is complete, which is upon performance of services. Revenue is recorded at gross amounts and payments to affiliates under revenue sharing agreements are recorded as cost of revenue in accordance with FASB ASC 605-45 “Principal Agent Considerations.”
Revenue Sharing Agreements with Product Placement Companies
The operating agreements with the PPCs make provision for a revenue sharing agreement between the Company and the PPCs of 50% of the net sales. Net sales is defined as the amount paid by the customer less commissions (if applicable), and the Company’s published costs, development fees, set- up fees, access fees, and any third party fees. The agreements also stipulate that when a PPC achieves gross revenues in excess of $1,800,000 during a calendar year, the revenue-sharing percentage is reduced to 40%.
F-6
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 2 – Summary of Significant Accounting Policies - continued
Cost of Revenues
Included in cost of revenues are payments made and due to the PPC’s under revenue sharing agreements totaling $930,276 and $776,206 for the six months ended June 30, 2015 and 2014, respectively and salaries of researchers and personnel directly engaged in providing background screenings and other services totaling $505,468 and $435,522 for the six months ended June 30, 2015 and 2014, respectively.
Advertising Costs
The Company’s policy is to expense advertising costs in the period they are incurred. Advertising and marketing expenses were $306,200 and $146,188 for the six months ended June 30, 2015 and 2014, respectively.
Income Taxes
The Company is a Florida Limited Liability Company taxed as a partnership for federal income tax purposes. Accordingly, the Company does not pay income tax and its income is passed through and taxed directly to its members. Therefore, no provision, liability or refund for federal income tax is reflected in the accompanying financial statements.
Management has evaluated its tax positions taken for all open tax years. Currently, the last three tax years are open and subject to examination by the Internal Revenue Service. Based on an evaluation of the Company’s tax positions, management believes all positions taken would be upheld under an examination. Therefore, no provision for tax effects of uncertain tax positions has been recorded for the six months ended June 30, 2015.
The Company is not currently under audit nor has the Company been contacted by any tax jurisdiction.
Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
ASC Topic 820, “Fair Value Measurements and Disclosures” defines fair value as the price that would be received in an asset sale or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
ASC 820 also sets forth a valuation hierarchy of the inputs (assumptions that market participants would use in pricing an asset or liability) used to measure fair value. This hierarchy prioritizes the inputs into the following three levels:
F-7
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 2 – Summary of Significant Accounting Policies - continued
Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The carrying amounts of the Company’s short-term financial instruments, including accounts receivable, accounts payable, accrued expenses and line of credit approximate their fair value due to the relatively short period to maturity for these instruments.
Note 3 – Related Party Transactions
In the ordinary course of business, the Company has transactions, including borrowings, to and from its affiliated PPCs and its managing member. In the opinion of management, these transactions were made on substantially the same terms as comparable transactions with other persons and companies and did not involve more than a normal risk of collectability or present any other unfavorable features to the Company.
Product Placement Companies
Accounts receivable from the PPCs were $359,629 and $202,472 at June 30, 2015 and December 31, 2014, respectively. Accounts payable to the PPCs were $488,306 and $419,629 at June 30, 2015 and December 31, 2014, respectively.
The six PPCs generated gross sales of $3,141,474 and $2,739,242 during the six months ended June 30, 2015 and 2014, respectively. The related revenue split paid to the PPCs was $930,276 and $776,206 for the six months ended June 30, 2015 and June 30, 2014, respectively.
The Company also charged the PPCs for costs that were not part of the revenue sharing agreement. The PPCs reimbursed the Company $93,565 and $52,353 for costs it incurred in connection with the products to be provided to its customers pursuant to the operating agreement during the six months ended June 30, 2015 and 2014, respectively.
The operating agreements further provide for circumstances in the event that the Company sells all or substantially all of its assets or ownership interests. In the event of a substantial sale of assets or ownership interests, the PPCs have agreed to transfer all of their interests (Tag Along Rights; Drag Along Rights) to the Company or its successors for an amount as determined in the agreements. Subsequent to a sale, the Company (or its successors) would no longer be obligated to the revenue sharing provisions of the operating agreements and would continue its client relationships under the existing service contracts.
F-8
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 3 – Related Party Transactions - continued
Outta Touch Holdings, LLC
The managing member of the Company is a 50% equity member in Outta Touch Holdings, LLC. This LLC provides marketing services to the Company. During the six months ended June 30, 2015 and 2014 the Company paid Outta Touch Holdings, LLC $285,000 and $164,351, respectively for marketing and travel.
Loans to Members
At June 30, 2015 and December 31, 2014, there are two notes receivable from the President of the Company totaling $83,046. These notes bear interest at 7% and are unsecured.
At June 30, 2015 and December 31, 2014, there are two notes receivable from the managing member of the Company totaling $321,000 and $229,000, respectively. These notes bear interest at 7% and unsecured.
Interest receivable on the aforementioned notes receivable was $25,113 and $13,127 at June 30, 2015 and December 31, 2014, respectively and is included in Loans to Members on the balance sheet. Subsequent to June 30, 2015, all notes receivable and related interest was repaid to the Company in full.
Guaranteed Payments
Guaranteed payments to the Company’s managing member of $229,500 and $99,304 are included in Salaries and Related Expenses for the six months ended June 30, 2015 and 2014, respectively.
Note 4 – Investments in Affiliates
Investment in affiliates consists of Investment in affiliate consists of $4,641 in GHRR SE, LLC and $4,550 in VIP Commercial Coach, LLC as of June 30, 2015 and $4,641 in GHRR SE, LLC as of December 31, 2014, There are no investment balances for the other PPCs as of June 30, 2015 and December 31, 2014, respectively.
Note 5 – Property and Equipment, net
As of June 30, 2015 and December 31, 2014, property and equipment consisted of the following:
| | | | | | | | |
| | | June 30, | | | December 31, | |
| | | 2015 | | | 2014 | |
Leasehold improvements | | $ | 45,945 | | | $ | 45,945 | |
Signage | | | 16,071 | | | | 16,071 | |
Furniture and equipment | | | 173,257 | | | | 185,580 | |
| | | | | | | | |
| | | 235,273 | | | | 247,596 | |
Less: Accumulated depreciation | | | (82,038 | ) | | | (79,648 | ) |
| | | | | | | | |
Property and Equipment, net | | $ | 153,235 | | | $ | 167,948 | |
| | | | | | | | |
The Company disposed of $12,323 of equipment during the six months ended June 30, 2015, resulting in a loss on disposal of $937. Depreciation expense for the six months ended June 30, 2015 and 2014 was $13,776 and $13,502, respectively.
F-9
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 6 – Line of Credit
The Company has a line of credit payable to Sanibel Captiva Community Bank. Interest is payable monthly at a rate of 5.25% per annum with the principal balance payable at maturity. The obligation is secured by all Company assets and has been personally guaranteed by a managing member of the Company and one other member. The maximum borrowing under the line increased from $350,000 to $650,000 in February 2015. The line matures in October 2016 and was paid in full in August 2015.
Interest expense for the line of credit was $10,104 and $14,548 for the six months ended June 30, 2015 and 2014, respectively.
Note 7 – Notes Payable
Notes payable consisted of the following as of June 30, 2015 and December 31, 2014:
| | | | | | | | |
| | | June 30,
2015 | | | December 31,
2014 | |
Note payable to Sanibel Captiva Community Bank, payable in monthly installments of $5,727 including interest at a fixed rate of 6.75% per annum. The obligation is secured by all Company assets and has been personally guaranteed by the managing member of the Company and another member. The note matures in October 2016. | | $ | 457,395 | | | $ | 475,865 | |
Note Payable to a third party, payable in monthly installments of $11,652 including interest at a fixed rate of 11.00% per annum. The obligation is unsecured. The note matures in April 2016. | | | 110,854 | | | | 172,671 | |
| | | | | | | | |
| | $ | 568,249 | | | $ | 648,536 | |
| | | | | | | | |
Both notes payable were paid in full in August 2015. Accordingly, the notes are considered current liabilities as of June 30, 2015 and December 31, 2014.
Interest expense on the notes payable was $23,989 and $15,769 for the six months ended June 30, 2015 and 2014, respectively.
Note 8 – Lease Commitments
The Company leases operating facilities under a lease agreement with an unrelated party. The agreement includes provisions providing that the Company pays all common area maintenance, property taxes and insurance as well as an annual escalation of the fixed portion of the rental payments. The lease expires in July 2020.
F-10
GLOBAL HR RESEARCH, LLC
Notes to Financial Statements
Note 8 – Lease Commitments - continued
Minimum future lease payments are due as follows:
| | | | |
| Year Ending | | | |
June 30, | | | |
2016 | | $ | 370,933 | |
2017 | | | 410,400 | |
2018 | | | 418,970 | |
2019 | | | 427,766 | |
2020 | | | 385,524 | |
| | | | |
| | $ | 2,013,592 | |
| | | | |
Rent expense for operating facilities amounted to $200,698 and $185,350, during the six months ended June 30, 2015 and 2014, respectively.
The Company has also entered into operating lease agreements for office equipment. The agreements require minimum monthly payments totaling $505, plus additional amounts based on usage. During the six months ended June 30, 2015 expense for office equipment rental was $8,698.
Note 9 – Litigation
During 2014, the Company was a defendant in a lawsuit filed by a vendor seeking payment for up to $300,000. The Company contended the vendor did not perform the services for which they were seeking payment. The lawsuit was settled out of court in January 2015, and the Company agreed to pay the plaintiff $70,000. This amount was accrued on the balance sheet as of December 31, 2014 and the judgement was paid in full in March 2015.
Note 10 – Subsequent Events
Subsequent events were evaluated through September 30, 2015, the date the financial statements were available to be issued.
On July 21, 2015, the Company entered into an agreement whereby the members of the Company sold all of their outstanding membership interests to a publicly-traded entity (“Purchaser”). The acquisition was consummated on August 21, 2015. Under the amendment the members received $24 million and 446,094 shares of common stock of the purchaser with a market value on the closing date of approximately $7,079,000. In addition, the purchaser agreed to pay future consideration to a member owning 75.5% of the Company in the form of 618,478 shares of common stock or $10,477,017 in cash. The deferred consideration is payable on the earlier of the following: 1) on November 20, 2015 2) twenty-one days after the Purchaser gives official notification to its shareholders of the acquisition or 3) when the Securities and Exchange Commission declares effective an impending registration statement to be filed by the Purchaser. Ten percent of the stock consideration and deferred stock consideration may be forfeited if the Company does not meet a certain revenue level for its 2016 operating year.
Concurrent with the acquisition, the PPC’s ceased operations and the Company has assumed the business operations of these entities.
F-11
