| Note 2: Summary of significant accounting policies | Basis
of Presentation The
accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange
Commission (“SEC”) applicable to interim reports of companies filing as a smaller reporting company. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included.
The results of operations for the three and six months ended February 28, 2018, are not necessarily indicative of the results
that may be expected for the year ending August 31, 2018. The
condensed consolidated balance sheet as of August 31, 2017, has been derived from the audited consolidated financial statements
at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete
financial information. For
further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual
report on Form 10-K for the year ended August 31, 2017, filed with the SEC on December 14, 2017. The
following table sets forth our gross profit for the three and six months ended February 28, 2017, as follows:
· On
an as reported basis and on an as restated basis; and
· The
restatement for the three and six months ended February 28, 2017, was for the following: (i) the Social Security Act requires
a reduction in the Federal Unemployment Tax (“FUTA”) tax credit when a state has outstanding federal loans on
January 1st of two consecutive years. The reduction in the FUTA tax credit is 0.3% for the first year and an additional 0.3%
(or more) for each succeeding year until the loan is repaid. The state of California faced a potential FUTA credit reduction
because there was an outstanding loan balance as of January 1 in each of the years of 2011 through 2017. As a result, and
because a loan balance continued as of November 10, 2017, California had a 2.1% credit reduction for 2017, for a total FUTA
rate of 2.7%. The state notified the Company of such credit reduction in November 2017 while the Company was reporting its
fiscal year-end 2017 financial statements in Form 10-K. The Company recorded in the month of August 2017 all credit reductions
from January 2017 to August 2017, hence negatively impacting the Company’s fourth fiscal quarter of FYE 2017. Had the
accrual basis of accounting been applied in the three months ended February 28, 2017, employer-side taxes would have been
$2,677,641 as opposed to $2,345,233. Had the accrual basis of accounting been applied in the six months ended February 28,
2017, employer-side taxes would have been $5,290,974 as opposed to the reported level of $4,813,566 and (ii) the workers’
compensation insurance premiums were recognized on a cash basis in the three and six months ended February 28, 2017, compared
to an accrual basis in the three and six months ended February 28, 2018. Had the accrual basis of accounting been applied
in the three months ended February 28, 2017, workers’ compensation expense would have been $1,451,438 as opposed to
the reported level of $1,423,188. Had the accrual basis of accounting been applied in the six months ended February 28, 2017,
workers’ compensation expense would have been $2,435,580 as opposed to the reported level of $2,091,110.
For the Three Months Ended February 28,
For the Six Months Ended February 28,
As Reported Restated As Reported Restated
Cost of Revenues $ 3,942,314 $ 4,302,972 $ 7,211,646 $ 8,033,525
Gross Profit 1,466,429 1,105,771 3,878,773 3,056,894
Net Income (Loss) 599,694 (960,352 ) 239,624 (582,253 )
Earnings/(loss) per share (Basic and Diluted) $ 0.02 $ (0.04 ) $ 0.01 $ (0.02 ) Principles
of Consolidation The
Company and its wholly-owned subsidiary have been consolidated in the accompanying unaudited condensed consolidated financial
statements. All intercompany balances have been eliminated. Use
of Estimates The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect certain
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.
Significant estimates include:
· Liability
for legal contingencies,
· Useful
lives of property and equipment,
· Assumptions
made in valuing equity instruments issued for service, and
· Deferred
income taxes and related valuation allowance. Computer
Software Development Software
development costs relate primarily to software coding, systems interfaces and testing of our proprietary professional employer
information systems and are accounted for in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal
Use Software. Internal software development costs are capitalized from the time the internal use software is considered probable
of completion until the software is ready for use. Business analysis, system evaluation and software maintenance costs are expensed
as incurred. Capitalized software development costs are amortized using the straight-line method over the estimated useful life
of the software. Revenue
Recognition The
Company’s revenues are primarily attributable to fees for providing staffing solutions and PEO/ASO services. The Company
recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the services
have been rendered to the customer; (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. We
account for our PEO revenues in accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition,
Principal Agent Considerations. Our PEO solutions revenue is primarily derived from our gross billings, which are based on (i)
the payroll cost of its worksite employees and (ii) a mark-up computed as a percentage of payroll costs. The
gross billings are invoiced concurrently with each periodic payroll of its worksite employees. Revenues, which exclude the payroll
cost component of gross billings and therefore consist solely of markup are recognized ratably over the payroll period as worksite
employees perform their service at the client worksite. Consistent
with our revenue recognition policy, our direct costs do not include the payroll cost of our worksite employees. Our cost
of revenue is primarily comprised of all other costs related to our worksite employees, such as the employer portion of payroll-related
taxes, employee benefit plan premiums and workers’ compensation insurance costs. Cash
and Cash Equivalents and Concentration of Credit Risk The
Company considers all highly liquid investments with an original maturity of three months or less when purchased as cash equivalents.
The Company maintains cash with a commercial bank and from time to time exceed the federally insured limits. The deposits are
made with a reputable financial institution, and the Company had not experienced losses from these deposits. The Company did not
have any cash equivalents at February 28, 2018, and August 31, 2017. None of the Company’s clients represents more than
10% of our annualized revenues for fiscal years 2018 or 2017. Property,
Equipment and Depreciation Property
and equipment are stated at cost. Property and equipment are depreciated using the straight-line method over the estimated useful
lives of the assets as follows: Equipment
5 years Furnitures
& Fixtures: 5 – 7 years Leasehold
Improvement: 5 years Software
Development cost: 5 years Upon
retirement or disposition of an asset, the cost and accumulated depreciation are removed from the accounts and any resulting gain
or loss is reflected in operations. Repairs and maintenance are charged to expense as incurred and expenditures for additions
and improvements are capitalized. Impairment
and Disposal of long-lived Assets The
Company evaluates the carrying value of its long-lived assets when indicators of impairment are present. Impairment is assessed
when the undiscounted future cash flows estimated to be generated by those assets are less than the assets’ carrying amount.
If such assets are impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying value or fair value,
less cost to sell. There were no impairments recognized for the periods ended February 28, 2018 and 2017. Workers’
compensation A
portion of the Company’s workers’ compensation risk is covered by a retrospective rated policy, which calculates the
final policy premium based on the Company’s loss experience during the term of the policy and the stipulated formula set
forth in the policy. The Company funds the policy premium based on standard premium rates on a monthly basis and based on the
gross payroll applicable to workers covered by the policy. During the policy term and thereafter, periodic adjustments may involve
either a return of previously paid premiums or a payment of additional premiums by the Company or a combination of both. If the
Company’s losses under that policy exceed the expected losses under that policy, then the Company could receive a demand
for additional premium payments. The Company funded an initial deposit of $2.3 million, which is included in prepaid expenses
on the condensed consolidated balance sheet. As of February 28, 2018, the Company has not been notified of any adverse loss ratio
as compared to the standard premium. Fair
Value Measurements The
fair value accounting guidance defines the fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date. The definition is based on an exit
price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance establishes
a fair value hierarchy to prioritize inputs used in measuring fair value as follows: Level
1: Observable inputs such as quoted prices in active markets; Level
2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and Level
3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. The
carrying value of accounts receivable, and accounts payable approximates the fair value due to their short-term maturities. Advertising
Costs The
Company expenses all advertising as incurred. The Company incurred advertising costs totaling $68,087 and $180,250 for the three
and six months ended February 28, 2018, respectively compared to $4,067 and $30,249 for the three and six months ended February
28, 2017, respectively. Earnings
(Loss) Per Share The
Company utilizes Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
260, “Earnings per Share.” Basic earnings (loss) per share is computed by dividing earnings (loss) attributable to
common stockholders by the weighted-average number of common shares outstanding during the reporting period. Diluted earnings
(loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include additional
common share equivalents available upon exercise of stock options and warrants using the treasury stock method. Dilutive common
share equivalents include the dilutive effect of in-the-money share equivalents, which are calculated based on the average share
price for each period using the treasury stock method, excluding any common share equivalents if their effect would be anti-dilutive.
In periods in which a net loss has been incurred, all potentially dilutive common shares are considered anti-dilutive and thus
are excluded from the calculation Securities
that are excluded from the calculation of weighted average dilutive common shares, because their inclusion would have been antidilutive
are:
For
the three Month Ended February
28, 2018 For
the three Month
Ended February 28, 2017
Options 820,000 -
Warrants 2,570,413 2,160,725
Total
potentially dilutive shares 3,390,413 2,160,725 Stock-Based
Compensation The
Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation
expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial
statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the
Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, the Company recognizes expense
over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting
period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including
the expected stock price volatility and expected term. Any changes in these highly subjective assumptions significantly impact
stock-based compensation expense. Following the adoption of Accounting Standards Update ASU 2016-09, the Company elected to account
for forfeitures as they occur, as such, compensation cost previously recognized for an award that is forfeited because of a failure
to satisfy a service condition is reversed in the period of the forfeiture. Recent
Accounting Standards In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific
guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services.” The standard provides enhancements to the quality and consistency of how revenue is reported
by companies, while also improving comparability in the financial statements of companies reporting using International Financial
Reporting Standards or U.S. GAAP. The new standard also will require enhanced revenue disclosures, provide guidance for transactions
that were not previously addressed comprehensively, and improve guidance for multiple-element arrangements. This accounting standard
becomes effective for the Company for reporting periods beginning after December 15, 2018, and interim reporting periods thereafter.
Early adoption is permitted for annual reporting periods (including interim periods) beginning after December 15, 2016. This new
standard permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations. The purpose of this standard is to clarify
the implementation of guidance on principal versus agent considerations related to ASU 2014-09. The standard has the same effective
date as ASU 2014-09 described above. In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarity related
to ASU 2014-09 regarding identifying performance obligations and licensing implementation. The standard has the same effective
date as ASU 2014-09 described above. In May 2016, the FASB issued ASU 2016-12: Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides narrow scope improvements
and practical expedients related to ASU 2014-09. The purpose of this standard is to clarify certain narrow aspects of ASU 2014-09,
such as assessing the collectability criterion, presentation of sales taxes, and other similar taxes collected from customers,
noncash consideration, contract modifications at transition, completed contracts at transition, and technical correction. The standard
has the same effective date as ASU 2014-09 described above. In December 2016, the FASB issued ASU 2016-20:
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers . The amendments in this standard affect
narrow aspects of guidance issued in ASU 2014-09. The standard has the same effective date as ASU 2014-09 described above. The Company is currently developing an adoption
plan of how it currently recognizes revenue compared to the accounting treatment required under the new guidance. This plan includes
a review of client contracts and revenue transactions to determine the impact of the accounting treatment under the new guidance,
evaluation of the adoption method and completing a rollout plan for the new guidance. Additionally, the Company is in the process
of assessing the impact of the new standard on its disclosures and internal controls. In February 2016, the FASB issued new accounting
guidance on leases ASU 2016-02, Leases. The new standard requires that a lessee recognize assets and liabilities on the balance
sheet for leases with terms longer than 12 months. The recognition, measurement and presentation of lease expenses and cash flows
by a lessee will depend on its classification as a finance or operating lease. The guidance also includes new disclosure requirements
providing information on the amounts recorded in the financial statements. The ASU is effective for fiscal years beginning after
December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020.The Company is currently evaluating
the impact that this standard will have on its consolidated financial statement. In the first quarter of 2018, the Company adopted
ASU 2016-09 amending several aspects of share-based payment accounting. This guidance requires all excess tax benefits and tax
deficiencies to be recorded in the income statement when the awards vest or are settled, with prospective application required.
The guidance also changes the classification of such tax benefits or tax deficiencies on the statement of cash flows from a financing
activity to an operating activity, with retrospective or prospective application allowed. Additionally, the standard also provides
an accounting policy election to account for forfeitures as they occur, allows us to withhold more of an employee’s vesting
shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities
on an employee’s behalf for withheld shares should be presented as a financing activity on our cash flow statement. This
ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, and interim
periods within annual periods beginning after December 15, 2018. For the six months ended February 28, 2018, the impact of adopting
this new guidance was immaterial. In the first quarter of 2018, the Company
adopted ASU 2017-09 clarifying when changes to the terms and conditions of a share-based payment award must be accounted for as
modifications. The new guidance will reduce diversity in practice and result in fewer changes to the terms of an award being accounted
for as modifications. It does not change the accounting for modifications. The ASU is effective prospectively for reporting periods
beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial
statements have not yet been issued. For the six months ended February 28, 2018, the impact of adopting this new guidance was
immaterial. |
