EXHIBIT 99.3
PALADIN CONSULTING, INC.
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014
AND SEPTEMBER 30, 2015
PALADIN CONSULTING, INC.
TABLE OF CONTENTS
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Financial Statements | | | | |
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Balance Sheets | | | 3 | |
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Statements of Income and Accumulated Deficit | | | 4 | |
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Statements of Cash Flows | | | 5 | |
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Notes to Financial Statements | | | 6 | |
PALADIN CONSULTING, INC. |
|
BALANCE SHEETS |
(Unaudited) |
| | December 31, 2015 | | | September 30, 2015 | |
| | | | | | | |
ASSETS | | | | | | |
Current assets | | | | | | |
Cash | | $ | 78,654 | | | $ | 29,383 | |
Accounts receivable, net | | | 2,167,896 | | | | 2,063,123 | |
Prepaid expenses and other current assets | | | 109,106 | | | | 95,454 | |
Total current assets | | | 2,355,656 | | | | 2,187,960 | |
| | | | | | | | | |
Property and equipment - at cost, less accumulated depreciation and amortization | | | 121,588 | | | | 139,816 | |
Other assets | | | 18,249 | | | | 18,249 | |
| | | $ | 2,495,493 | | | $ | 2,346,025 | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDER'S DEFICIT | | | | | | | | |
Current liabilities | | | | | | | | |
Line of credit | | $ | 2,438,221 | | | $ | 2,293,286 | |
Accounts payable | | | 146,075 | | | | 144,097 | |
Accrued expenses | | | 709,937 | | | | 696,388 | |
Short term debt | | | 81,173 | | | | 127,054 | |
Current portion of deferred rent | | | 18,465 | | | | 34,369 | |
Other current liabilities | | | 255,825 | | | | 73,159 | |
Total current liabilities | | | 3,649,696 | | | | 3,368,353 | |
| | | | | | | | | |
Deferred rent | | | 35,051 | | | | 38,836 | |
Total long-term liabilities | | | 35,051 | | | | 38,836 | |
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Stockholder's deficit | | | | | | | | |
Capital stock, $1 par value, 100,000 shares authorized and 3,000 shares issued and outstanding | | | 3,000 | | | | 3,000 | |
Additional paid in capital | | | 3,500 | | | | 3,500 | |
Accumulated deficit | | | (1,195,754 | ) | | | (1,067,664 | ) |
| | | | (1,189,254 | ) | | | (1,061,164 | ) |
| | | $ | 2,495,493 | | | $ | 2,346,025 | |
See notes to financial statements
PALADIN CONSULTING, INC. |
|
STATEMENTS OF INCOME AND ACCUMULATED DEFICIT |
(Unaudited) |
| |
| | 3 Months Ending December 31, | |
| | 2015 | | | 2014 | |
| | | | | | | |
Net revenues | | | | | | |
Consulting | | $ | 4,747,532 | | | $ | 6,601,930 | |
Permanent placement | | | 37,800 | | | | 64,216 | |
| | | | 4,785,332 | | | | 6,666,146 | |
| | | | | | | | | |
Cost of revenues | | | 3,896,075 | | | | 5,382,119 | |
Gross profit | | | 889,257 | | | | 1,284,027 | |
| | | | | | | | | |
Operating expenses | | | | | | | | |
Selling, general and administrative expenses | | | 948,066 | | | | 1,260,996 | |
| | | | | | | | | |
Income (loss) from operations | | | (58,809 | ) | | | 23,031 | |
| | | | | | | | | |
Other income (expense) | | | | | | | | |
Interest expense | | | 24,281 | | | | 42,862 | |
Net income | | | (83,090 | ) | | | (19,831 | ) |
| | | | | | | | | |
Accumulated deficit, beginning of quarter | | | (1,067,664 | ) | | | (882,470 | ) |
| | | | | | | | | |
Distributions, net | | | (45,000 | ) | | | (163,082 | ) |
Accumulated deficit, end of period | | $ | (1,195,754 | ) | | $ | (1,065,383 | ) |
See notes to financial statements.
PALADIN CONSULTING, INC. |
| |
STATEMENTS OF CASH FLOWS |
(Unaudited) |
| | 3 Months Ended December 31, | |
| | 2015 | | | 2014 | |
Cash flows from operating activities | | | | | | |
Net income | | $ | (83,090 | ) | | $ | (19,831 | ) |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | |
Depreciation and amortization | | | 18,618 | | | | 14,501 | |
Changes in assets and liabilities | | | | | | | | |
Accounts receivable | | | (104,773 | ) | | | 661,962 | |
Prepaid expenses and other current assets | | | (13,652 | ) | | | (32,998 | ) |
Accounts payable | | | 1,588 | | | | (23,435 | ) |
Accrued expenses | | | 13,549 | | | | (89,717 | ) |
Other current liabilities | | | 182,666 | | | | 14,297 | |
Deferred rent | | | (19,689 | ) | | | - | |
Net cash (used in)/provided by operating activities | | | (4,783 | ) | | | 524,779 | |
| | | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Acquisition of property and equipment | | | - | | | | (12,896 | ) |
Net cash provided by/(used in) investing activities | | | - | | | | (12,896 | ) |
| | | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Borrowing (repayments) on WF line of credit | | | 144,935 | | | | (235,326 | ) |
Repayments of short term notes | | | (45,881 | ) | | | - | |
Stockholder's contributions | | | 695,000 | | | | 170,956 | |
Stockholder's distributions | | | (740,000 | ) | | | (334,038 | ) |
Net cash provided by/(used in) financing activities | | | 54,054 | | | | (398,408 | ) |
| | | | | | | | | |
Net increase (decrease) in cash | | | 49,271 | | | | 113,475 | |
Cash, beginning of period | | | 29,383 | | | | 2,860 | |
Cash, end of period | | $ | 78,654 | | | $ | 116,335 | |
| | | | | | | | | |
Supplemental cash flow disclosures | | | | | | | | |
Interest paid | | $ | 24,281 | | | $ | 42,862 | |
See notes to financial statements
PALADIN CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
1 – SUMMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Paladin Consulting, Inc. (the "Company") is incorporated in the state of Texas. The Company provides permanent and temporary professional services in and near several major U.S. cities to a diverse client base across various industries.
Use of Estimates
Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates.
Revenue Recognition
Direct hire placement service revenues are recognized when applicants accept offers of employment, less a provision for estimated losses due to applicants not remaining employed for the Company's guarantee period. Contract staffing service revenues are recognized when services are rendered.
Refunds during the period are reflected in the statements of income as a reduction of revenue. Expected future refunds are reflected in the balance sheets as a reduction of accounts receivable and were approximately $52,357 and $15,087 as of December 31, 2015 and September 30, 2015, respectively.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company's cash balances are maintained at various banks. Balances are insured by the Federal Deposit Insurance Corporation subject to certain limitations.
Accounts Receivable
Accounts receivable are stated at the amounts management expects to collect. An allowance for placement fall-offs is recorded as a reduction of revenues, for estimated losses due to applicants not remaining employed for the Company's guarantee period. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect the Company's estimate of potential losses inherent in accounts receivable balances, based on historical loss and known factors impacting its customers. Management has determined that an allowance of $147,834 and $44,252 is required at December 31, 2015 and September 30, 2015, respectively. Expected future fall-offs and refunds are reflected in the balance sheet as a reduction of accounts receivable and were approximately $52,357 and $15,087 as of December 31, 2015 and September 30, 2015, respectively.
PALADIN CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is providing using the straight-line method over estimated useful life of one to ten years. Leasehold improvements are amortized over the shorter of the useful life of the related asset or the period of the lease.
Long-Lived Assets
The Company reviews the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying values may no longer be appropriate. Recoverability of carrying values is assessed by estimating future net cash flows from the assets. Based on management's evaluations, no impairment charge was deemed necessary at December 31, 2015 and September 30, 2015. Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact management's assumptions as to sales prices, rental rates, costs, holding periods or other factors that may result in changes in the Company's estimates of future cash flows. Although management believes the assumptions used in testing for impairment are reasonable, changes in any one of the assumptions could produce a significantly different result.
Advertising Costs
Advertising costs, which are expensed as incurred, totaled approximately $18,739 and $0 for the three months ended December 31, 2015 and 2014, respectively.
Income Taxes
The Company has elected S Corporation status for federal income tax purposes. Under these elections, the Company is not a taxpaying entity for federal tax purposes and, accordingly, no provision has been made for such income taxes, except for a minimum state corporate business tax. The stockholder's allocable share of the Company's income or loss is reportable on their income tax returns.
Subsequent Events
These financial statements were approved by management and available for issuance on March 15, 2016. Management has evaluated subsequent events through this date.
PALADIN CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
2 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
| | 2015 | |
| | December 31, | | | September 30, | |
Furniture and equipment | | $ | 355,970 | | | $ | 355,970 | |
Computer equipment and software | | | 364,677 | | | | 364,677 | |
Leasehold improvements | | | 60,000 | | | | 60,000 | |
| | | | 781,037 | | | | 780,647 | |
Less - Accumulated depreciation and amortization | | | (659,449 | ) | | | (640,831 | ) |
| | | $ | 121,588 | | | $ | 139,816 | |
Depreciation expense for the three months ended December 31, 2015 and 2014 was $18,618 and $14,501, respectively.
3 – LINE OF CREDIT
Prior to October 1, 2013, the Company maintained a $5,000,000 revolving line of credit with First Community Financial Corporation ("FSFC"). The collateral on the line included accounts receivable and other assets as pledged by the Company. Interest was at the greater of prime rate plus 1% or 7.50%. On October 1, 2013, the Company paid off its line of credit with FCFC, with the proceeds noted below.
On October 1, 2013, the Company entered into a $5,000,000 revolving line of credit with Wells Fargo ("WF"). The line of credit has a borrowing base equal to 90% of eligible receivables less receivable reserves and indebtedness to Wells Fargo. The collateral on the line included the Company's accounts receivable. Interest is equal to the Daily One Month LIBOR plus 5% per annum. The interest rate at December 31, 2015 and September 30, 2015 was 5.43% and 5.19% respectively. The WF Line of Credit was guaranteed by one of the Company's shareholders. The line of credit had certain financial covenants, which the Company was not in compliance with. As discussed in Note 8, the line of credit was paid off as part of the Stock Purchase Agreement.
PALADIN CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
4 – SHORT TERM DEBT
| | | 2015 | |
| | | December 31, | | | September 30, | |
On June 6, 2015, the Company entered into a note payable with Funding Circle, payable in monthly installments of $13,274, including principal and interest. The note bears an interest rate of 11.24% per annum and matures on June 8, 2016. The note payable is collateralized by all Paladin's assets and by the owner's personal and non-affiliated business assets. | | $ | 75,000 | | | $ | 112,500 | |
| | | | | | | | | |
Note payable to Balboa Capital Corporation, payable in quarterly installments of $3,283, collateralized by the purchased computer equipment. | | | 6,173 | | | | 14,554 | |
| | | | | | | | |
Short term debt | | $ | 81,173 | | | $ | 127,054 | |
5 – LEASE COMMITMENTS
The Company leases office space in Houston, Texas, Dallas, Texas, and Sterling, Virginia, a suburb of Washington DC, at varying rental rates set in agreements through 2017, 2019, and 2017, respectively. Annual rent payments are exclusive of required payments for increases in real estate taxes and operating costs over base period amounts.
Total minimum future annual rentals, exclusive of real estate taxes and related costs, are approximately as follows:
Year Ending December 31, | | | |
2016 | | $ | 218,600 | |
2017 | | | 202,500 | |
2018 | | | 166,300 | |
2019 | | | 28,500 | |
| | | $ | 615,900 | |
Rent expense, including real estate taxes and related costs, for the three months ended December 31, 2015 and 2014 aggregated approximately $43,448 and $57,200, respectively.
PALADIN CONSULTING, INC.
NOTES TO FINANCIAL STATEMENTS
6 – RETIREMENT PLAN
The Company has a 401(k) plan for all employees who have attained the age of 21 and completed one year of service. The Company, at its discretion, may make matching contributions and/or bonus contributions. Retirement plan expense was $25,550 and $38,336 for the three months ended December 31, 2015 and 2014.
7 – MAJOR CUSTOMERS
The Company had major customers in each of the years presented. A major customer is defined as one that makes up ten-percent or more of total revenues in a particular year or has an outstanding accounts receivable balance as of the year end. Net revenues for the three months ended December 31, 2015 and 2014 include revenues from major customers as follows:
| | December 31, | |
| | 2015 | | | 2014 | |
| | | | | | | |
Customer A | | | 38 | % | | | 39 | % |
Accounts receivable balances as of December 31, 2015 and September 30, 2015 from major customers are as follows:
| | | 2015 | |
| | | December 31, | | | September 30, | |
| | | | | | | | |
Customer A | | | 26 | % | | | 28 | % |
Customer B | | | * | | | | 11 | % |
*- Below 10% not deemed a major customer
8 – SUBSEQUENT EVENTS
On January 1, 2016, the Company and the shareholder entered into a Stock Purchase Agreement with General Employment Enterprises ("GEE") to sell 100% of the outstanding stock of the Company. The purchase price was equal to $1,750,000 plus up to $1,000,000 in contingent promissory notes and earn-out payments of up to $1,250,000 less the Funding Circle Loan amount and the Net Working Capital Reduction amount. As part of the Stock Purchase Agreement, GEE repaid the remaining balance of the Wells Fargo line of credit.
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