Attached files
| file | filename |
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| EX-4.1 - CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE PREFERRED STOCK OF SPECTRUM G - HWN, INC. | f10k2019ex4-1_spectrum.htm |
| EX-32.1 - CERTIFICATION - HWN, INC. | f10k2019ex32-1_spectrum.htm |
| EX-31.1 - CERTIFICATION - HWN, INC. | f10k2019ex31-1_spectrum.htm |
| EX-21.1 - LIST OF SUBSIDIARIES - HWN, INC. | f10k2019ex21-1_spectrum.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 000-53461
SPECTRUM GLOBAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 26-0592672 | |
| (State or other jurisdiction of | (IRS Employer | |
| incorporation or organization) | Identification No.) |
| 300 Crown Oak Centre Drive | ||||
| Longwood, Florida | 32750 | (407) 512-9102 | ||
(Address of principal executive offices) |
(Zip Code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.00001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2019 based on the closing sales price of the Common Stock as quoted on the OTC Pink was $1,174,691. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.
As of May 8, 2020, there were 1,736,203 shares of registrant’s common stock outstanding.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Forward-looking statements include all statements that do not directly or exclusively relate to historical facts. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “predicts,” “potential,” or the negative of those terms, and similar expressions and comparable terminology. These include, but are not limited to, statements relating to future events or our future financial and operating results, plans, objectives, expectations and intentions. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these expectations may not be achieved. Forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to known and unknown risks, uncertainties and other factors outside of our control that could cause our actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements. Actual results may differ materially from those anticipated or implied in the forward-looking statements.
You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. You should also consider carefully the statements under Item 1A. Risk Factors appearing in this report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements. Such risks and uncertainties include:
| ● | our ability to successfully execute our business strategies, including the acquisition of other businesses to grow our company and integration of recent and future acquisitions; |
| ● | changes in aggregate capital spending, cyclicality and other economic conditions, and domestic and international demand in the industries we serve; |
| ● | our ability to adopt and master new technologies and adjust certain fixed costs and expenses to adapt to our industry’s and customers’ evolving demands; |
| ● | our ability to obtain additional financing in sufficient amounts or on acceptable terms when required; |
| ● | our ability to adequately expand our sales force and attract and retain key personnel and skilled labor; |
| ● | shifts in geographic concentration of our customers, supplies and labor pools and seasonal fluctuations in demand for our services; |
| ● | our dependence on third-party subcontractors to perform some of the work on our contracts; |
| ● | our ability to comply with certain financial covenants of our debt obligations; |
| ● | the impact of new or changed laws, regulations or other industry standards that could adversely affect our ability to conduct our business; and | |
| ● | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters. |
These risk factors also should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. All written and oral forward looking statements made in connection with this report that are attributable to our company or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given these uncertainties, you are cautioned not to place undue reliance on any forward-looking statements and you should carefully review this report in its entirety. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.
Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as required by applicable law or regulation.
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Unless specifically set forth to the contrary, when used in this report the terms “we,” “our,” the “Company” and similar terms refer to Spectrum Global Solutions, Inc., a Nevada Corporation and its consolidated subsidiaries.
The information that appears on our website at www.SpectrumGlobalSolutions.com is not part of this report.
Business Overview
On February 5, 2018, we completed our corporate jurisdiction continuation from the jurisdiction of the Province of British Columbia to the jurisdiction of the State of Nevada in accordance with the Articles of Conversion and the Articles of Incorporation filed with the Nevada Secretary of State. Our principal offices are located at 300 Crown Oak Centre, Longwood, Florida 32750. Our telephone number is (407) 512-9102. On January 2, 2018, we changed our fiscal year end to December 31.
Our telecommunications division, which was acquired on April 25, 2017, is supported by its subsidiaries: AW Solutions, Inc., AW Solutions Puerto Rico, LLC and Tropical Communications, Inc. (collectively known as “AWS” or the “AWS Entities”), ADEX CORP and ADEX Puerto Rico LLC (acquired February 27, 2018) and ADEX Canada (formed in September 2019), (collectively known as “ADEX” or the “ADEX Entities”) and TNS, Inc (acquired January 4, 2019). The AWS Entities provide a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers. The telecommunication division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear Master Service Agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEM’s) and prime contractor/project management organization provides us a significant opportunity as a long term leading and well respected industry leader in this marketplace. ADEX is a leading outsource provider of engineering and installation services, professional services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and Enterprise customers. ADEX’s managed solutions diversifies the ability to service customers domestically and internationally throughout the project lifecycle. ADEX customers include many leading wireless and wireline telecommunications providers, cable broadband MSOs and Original Equipment Manufacturers (“OEM”). On a weekly basis, we deploy hundreds of telecommunication professionals in support of its customers. We believe that our global footprint of support is a differentiating factor for national and international-based customers needing a broad range of technical expertise for management of their legacy and next generation networks. Our company seeks to assist our customers throughout the entire life cycle of a network deployment via our comprehensive suite of managed solutions that include Consulting and Professional Staffing services to service providers as well as Enterprise customers, Network Implementation, Network Installation, Network Upgrades, Rebuilds, Design, Engineering and Integration Wireless Network Support, Wireless Network Integration, Wireless and Wireline Equipment Installation & Commissioning, Wireless Site Development & Construction Management, Network Engineering, Project Management, Disaster Recovery design engineering and integration. TNS, Inc. (“TNS”) is a Chicago-based structured cabling and Next-Generation DAS design and installation firm that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures. TNS extends our geographic reach to the Midwest area and our client reach to end-users, such as multinational corporations, universities, school districts and other large organizations and enterprise clientele that have significant ongoing next generation network needs. TNS works both in the US and Internationally.
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We provide the following categories of offerings to our customers:
| ● | Telecommunications: We provide a comprehensive technology platform and array of professional services and solutions to our clients that are applicable across multiple platforms and technologies to include but not limited to: Wi-Fi , Wi-Max and wide-area networks, fiber networks (ISP/OSP), DAS networks (iDAS/oDAS), small cell distributed networks, public safety networks and enterprise networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs), tower and network aggregators, utility entities, government and enterprise customers. Our services teams support the deployment of new networks and technologies, as well as expand, maintain and decommission existing networks. |
| ● | WaveTech GmbH, which is under a definitive agreement to be acquired by us, is a global next-generation technology platform that is creating an efficient and reliable energy infrastructure. WaveTech GmbH’s platform of products makes energy supply more cost-efficient, reliable and eco-friendly. WaveTech GmbH’s patented approach, Crystal Control Technology (CCT®), dramatically reduces the need for backup energy capital expenditure and associated operating costs for the environmental control and maintenance needed to protect and operate these critical energy assets. |
As of the date of this report, we have acquired approximately 60% of the outstanding shares of WaveTech GmbH. The transaction is not considered closed for accounting purposes because as of the date of this report we have not acquired 90% or more of the outstanding shares of WaveTech GmbH and the Series C preferred stock shares have not been issued. Upon completion of our proposed acquisition of WaveTech GmbH, we will be a leading technology platform company that provides software, services, and solutions that dramatically increase the availability and cost efficiency of global communication networks. The global communication networks our software and services address include data-center, wireless, and wireline-based networks across the globe.
Our Operating Units
Our company is comprised of the following:
| ● | The AWS Entities. The AWS Entities are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The AWS Entities services include network systems design, site acquisition services, asset audits, architectural and engineering services, program management, construction management and inspection, construction, installation, maintenance and other technical services. The AWS Entities provide in-field design, computer aided design and drawing services (CADD), fiber and DAS deployments for facilities and outdoor environments. |
| ● | The ADEX Entities. The ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally. ADEX seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration. |
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| ● | TNS. TNS is a Chicago-based structured cabling and next-generation DAS design and installation firm that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures. TNS extends our geographic reach to the Midwest area and our client reach to end-users, such as multinational corporations, universities, school districts and other large organizations and enterprise clientele that have significant ongoing next generation network needs. TNS works both in the U.S. and internationally. |
Our Industry
Advances in technology and communications architectures as well as the robust demand outlook of the telecommunication industry is generating remarkable spending trends at top tier carriers and enterprise customers. Innovative new technologies, rising network utilization and dwindling broadband capacity are fueling the fundamental need for infrastructure expansion. The adoption of next generation technologies, quality of service and network availability will be key drivers in enabling service providers to enjoy continued subscriber growth and market competitiveness.
Wireless infrastructure which has been in place since the 1980’s includes towers, buildings, telephone poles and other facilities to place critical antennas and associated electronics to support a wind range of wireless protocols including WiMax, LTE and now 5G technologies. These wireless trends combined with the wireline transition from copper to fiber, and its corresponding order of magnitude change in bandwidth, are occurring to satisfy the world’s ever-increasing demand for data, which are significant long term drivers of our business model and continued success. According to iSuppli, 4G Long Term Evolution (LTE) will garner the largest share of wireless infrastructure capital spending through 2019 with 5G enhanced mobile technologies trials commencing in the United States in 2017 and deployment past 2025. This important transition will accelerate migration to the next generation standard that allows for higher capacity, lower latency, and the architecture required to support new applications. The roll-out of enhanced mobile broadband, small cell architectures, 5G services and billions of new Internet of Things (IoT) connected devices greatly increases the need to modernize networks to accommodate this new breed of connectivity. This long-term trend is a significant enduring opportunity for companies like ours. The transition from trial-based deployments of 5G to a full nationwide implementations is expected to continue beyond 2025. Necessary investments in supporting infrastructure such as fiber optic backhaul is expected by Deloitte Consulting LLP to require $130-$150 Billion over the next 5-7 years to adequately support the consumer demand for broadband and wireless densification projects in the United States alone. It is mission-critical for these providers to deliver broadband capacity, reliably, securely and cost-effectively in a solution that supports the massive for data consumption of emerging applications such as: augmented reality/virtual reality, video streaming, mobile advertising, IoT, self-driving cars, personalized health monitoring and much more. The explosion of devices harnessing distributed mobility will require, innovative approaches like small cell deployments to handle the increased demands on both the wireline and wireless delivery networks
The outlook indicator and anticipated growth in the telecommunications sector is at a faster rate over the next five (5) years to 2025 than experienced in the previous five (5) year period. Industry revenue is forecasted for the next five (5) years is to grow at an annual rate between 5%-7%. As a result, major carriers and enterprises are increasingly requiring rapid deployment of broadband solutions and network infrastructure upgrades to support an evolving array of communication technologies that attempt to cope with the mounting demand for higher mobile traffic capacity and coverage.
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INDUSTRY TRENDS AND OPPORTUNITIES
| ● | 5G technology trials and deployments |
| ● | Network densification |
| ● | IOT opportunities |
| ● | FirstNet Public Safety Deployment |
| ● | FCC auctioning more spectrum for wireless deployments |
| ● | Growth of wireless and wireline/fiber infrastructure |
| ● | Commercialization of alternative energy technologies |
| ● | Monetize existing technology patents |
| ● | International growth, developing and emerging markets |
| ● | Increased development of the Wi-Fi and Wi-MAX market |
Competitors
We provide, professional and infrastructure services to carriers, service provider, utilities and enterprise clients on a national and international basis. Our primary business market is somewhat consolidated, and the business is characterized by several large companies, however the market servicing the telecommunications sector is fragmented with a large number of small, privately held, local competitors.
Our current and potential larger competitors include MasTec, Dycom Industries, Inc., Goodman Networks, Inc., Ericsson, and Black and Veatch. A significant portion of our services revenue is currently derived from MSAs and price is often an important factor in awarding such agreements. Accordingly, our competitors may underbid us if they elect to price their services aggressively to procure such business. It must be recognized that while these companies are competitors, under the right circumstance they are also our clients or potential clients. Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price to our services, and we may not be able to maintain or enhance our competitive position based on thresholds for margin and profitability that has been established as benchmarks within our telecommunications division. The principal competitive factors for our professional services include; agility to respond, geographic presence, breadth of service offerings, technical skills “in-house” professional licenses, price, quality of service, safety record, proven performance and industry reputation. We believe we compete favorably with our competitors on the basis of all of these factors.
Our Competitive Strengths
On the telecommunication sector we believe our market advantage is the long-term relationships, Master Service Agreements (MSAs), industry leading provider of wireless and wireline solutions and a reputations and track record of our ability to perform with agility, quality on a seamless and flawless manner for our clients is key in our success to date. Spectrum Global’s ability to provide a wide range of services in a turn-key integrated solution is critical to our clients. Our highly experienced and professional team provide such services as: RF, civil, electrical, architectural engineering and design, structural engineering, analysis and design, value engineering, network engineering services, network planning, site acquisition, land use planning, feasibility/environmental studies, lease/contract negotiations, Build-To-Suit (BTS) services, audits functions, program planning, professional services, product development, construction and installation, technical services, warehouse and logistics, network decommissioning and maintenance.
We believe our additional strengths described below will enable us to continue to compete effectively and to take advantage of anticipated growth in the telecommunications industry segment:
| ● | Service Provider Relationships: We have established relationships with leading wireless and wireline telecommunications providers, cable broadband MSOs, Original Equipment Manufacturers (OEMs), utility companies, Project Management Organizations (PMOs), enterprise clientele and others. |
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SAMPLE CUSTOMERS
| ● | Commercial Operators (Carriers): AT&T, Sprint, Verizon Communications, T-Mobile, Frontier, COX, Open Mobile, Claro |
| ● | Aggregators: Crown Castle, Extenet Systems, SBA Wireless, Global Tower Partners (GTP), American Tower, United Fiber, Vertical Bridge, Boingo, Zayo |
| ● | Utilities: Entergy, MidAmerica Energy, Southern Company, PacificCorp, |
| ● | OEMs: Alcatel-Lucent USA Inc., Ericsson, Nokia, Samsung, Tait Radio |
| ● | PMOs: MasTec Network Solutions, Nexius, Bechtel, Goodman Networks, General Dynamics, Ericsson, SAC Wireless, Nokia, TekMark, Jacobs Engineering |
| ● | Enterprise/Government: Google, Oracle, FDOT, Texas Exchange Bank, Miami Dade County |
| ● | Long-Term Master Service Agreements (MSA) and Contracts: We have over 100 MSA’s and agreements with service providers, OEMs and other clients. Our relationships with our customers and existing master service agreements position us to continue to capture existing and emerging opportunities, both domestically and internationally. We believe the barriers are extremely high for new entrants to obtain master service agreements with service providers and OEMs unless there are established relationships, proven ability to execute, national coverage and licensing, spotless safety records and broad and deep insurance coverage. |
| ● | Global Professional Engineering Talents: Our extensive geographical reach and licensing that covers all US states and territories, majority of Canadian Provinces and select areas in the Caribbean and Pacific Rim coupled with our vast engineering experience and expertise supported by talented staff enables our customers to take advantage of our end-to-end solutions and one-stop full turn-key solution. |
| ● | Proven Ability to Recruit, Manage and Retain High-Quality Personnel. Our ability to recruit, manage and retain skilled labor is a critical advantage in an industry where a shortage of highly skilled and experience personal is limited. This is often a key factor in our customers selecting Spectrum Global over our competitors. We believe that our highly skilled professionals with professional licenses consisting of Professional Engineer (PE), Electrical Engineer (EE) and our General Contracting licenses (GC) in the United States, Canada and Caribbean gives us a competitive edge over our competitors as we continue to expand and meet our national and international clients needs across their entire service footprints. |
| ● | Expansion of our recurring revenue streams through increased professional services, software as a services (SaaS) offerings, customer CAPEX to OPEX models, high margin technology leasing models and client cost saving sharing models. |
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| ● | Increased value creation through continued expansion of our intellectual property (IP). Battery life extension, power monitoring analytics, drone “Optical Caliper” measuring system. |
| ● | Expansion of our service territory and client base through penetration into the Central and South American, European, African and Asian markets. |
| ● | Strong Senior Management Team with Proven Ability to Execute. Our highly experienced management team has deep industry knowledge and brings an average of over 180 years of combined experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy. |
KEY ASPECTS
| ● | Strong management team in place |
| ● | Opportunity exists for sustained growth |
| ● | Operational - U.S., Canada, U.S.-Virgin Islands and Puerto Rico |
| ● | Turnkey deployment solutions |
| ● | Experience in all wireless and wireline technologies |
| ● | Provides services direct to carriers, tower and DAS/Small Cell aggregators, OEM’s, enterprise, Utility Entities and consulting companies |
| ● | Diverse customer base featuring top tier carriers |
| ● | Focused on high growth markets |
| ● | Excellent industry reputation |
Our Growth Strategy
| ● | Under the leadership of our senior management team, we intend to continue to build our operational groups, invest in our sales/account management resources and continue to market our capabilities to support our rapid growth focusing on optimizing our operating margins. While organic growth will be a continued main focus in our telecommunications division to drive our business forward, acquisitions will play a strategic role in augmenting existing product and service lines, expanding geographic reach, diversifying customers and cross-selling opportunities. We are pursuing several strategies, including: |
| ● | Expand Engineering and Telecom Offerings. We are building a company that can manage the existing network infrastructures of the largest domestic and international service providers, utilities, aggregators, Original Equipment Manufacturers (OEM’s) and Project Management Organizations (PMO’s) while delivering a broad range of professional services to meet accelerated demand for these services. We believe the ability to provide such solutions and services is a critical differentiator as we already have relationships for these professional services in place today. Each of our three operating units within Spectrum Global intends to continue to expand into additional service offerings. |
| ● | Grow Revenues and Market Share through Selective Acquisitions. We plan to continue to acquire private companies that enhance our earnings and offer complementary services plus expand our geographic reach and client base. We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths, and capture and retain more work “in-house” from our clients, thereby contributing to our profitability. We also believe that increased scale will enable us to bid and take on larger project and contracts. We believe there are potential acquisition candidates in the somewhat fragmented professional services market and infrastructure arena which would be likely candidates for consolidation opportunities. |
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| ● | Aggressively Expand Our Organic Growth Initiatives. Our customers include leading wireless and wireline telecommunications providers, cable broadband MSOs, OEMs, Utility Entities and enterprise customers. As we have expanded the breadth of our service offerings through both organic growth and selective acquisitions, we believe we have opportunities to expand revenues with our existing clients. |
| ● | Expand Our Relationships with New Service Providers. We plan to capture and expand new relationships with cable broadband providers, competitive local exchange carriers (CLECs), Fortune 1000 enterprise clients, institutional clients, competitive access providers (CAPs), etc. We believe that the business model for the expansion of these relationships, leveraging our core strengths, experience and broad array of service solutions, will support our business model for organic growth. |
| ● | Increase Operating Margins by Leveraging Operating Efficiencies. We believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our newly acquired businesses, we will be positioned to offer more integrated end-to-end solutions and increase operating margins. |
| ● | Cross Selling and Marketing. We believe that through our acquisitions we will be able to effectively cross sell between business units and enhanced services offerings and gain even greater traction through coordinated and branded marketing indicatives. |
Our Services
We are a leading provider of professional services and infrastructure solutions to both the telecommunications industry, utility entities and enterprises sectors. Our engineering, design, construction, installation, maintenance service offerings supported by our professional teams to support the build-out, maintenance, upgrade and operation of some of the most advanced fiber optic, Ethernet, copper, wireless, wireline, utility and enterprise networks. Our breadth of comprehensive services enables our customers to selectively augment existing services or to outsource entire projects or operational functions. We divide our service offering into Infrastructure and Professional Services.
We offer a full array of operations, construction, project and program management professional required to facilitate the full turn-key completion of networks from the design and planning phase, engineer evaluation and sign off, regulatory, installation, commissioning and maintain various types of Wi-Fi and wide-area networks, DAS networks, and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers. Our services and teams support the deployment of new networks and technologies, expand and maintain existing networks, as well as decommissioning obsolete legacy networks. We also design, install and maintain hardware solutions for the leading OEMs that support voice, data and optical networks. Our consulting and professional solutions to the service-provider and enterprise market in support of all facets of telecommunications and next-generation networks, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services. Our global certified professional services organization offers consulting, design, engineering, integration, implementation and ongoing support of all solutions offered by our company. We believe our ability to respond rapidly is a differentiating factor for national and international-based customers needing a broad range of our services and solutions.
We seek to assist our customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions and Professional Staffing services. We actively maintain a Proprietary Candidate Database with profiles of more than 138,000 telecommunications professionals. The database contains domestic and international based telecommunications professionals of all levels. Our recruiters are able to search the database by any number of criteria including, but not limited to: technical skill sets, equipment types, technology experience, education, years of experience, past employment history, geographic location.
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Customers
Our customers include many Fortune 1000 enterprises, wireless and wireline service providers, cable broadband MSOs and telecommunications OEMs. Our current service provider and OEM customers include leading telecommunications companies, such as Ericsson, Inc., Verizon Communications, Sprint Corporation, T-Mobile and AT&T.
During the year ended December 31, 2019, our top four customers, Ericsson, Inc., AT&T, SAC Wireless, and Frontier Communications accounted for approximately 61% of our total revenues. During the year ended December 31, 2018, our top four customers, SAC Wireless, AT&T, Ericsson, Inc and Crown Castle accounted for approximately 68% of our total revenues.
A substantial portion of our revenue is derived from work performed under multi-year master service agreements and multi-year service contracts. We have entered into master service agreements, or MSAs, with numerous service providers and OEMs, and generally have multiple agreements with each of our customers. MSAs are generally the contracting vehicle with work awarded primarily through a competitive bidding process based on the depth of our service offerings, experience, price, geographic coverage and capacity. MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks, but do not require our customers to purchase a minimum amount of services. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers. Most of our MSAs may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether we are or are not in default. In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any prior notice but do allow for payment for services performed up to the point of hold or cancellation.
Suppliers and Vendors
We have supply agreements with major technology vendors and material supply houses. However, for a majority of the professional services we perform, our customers supply the necessary major equipment and materials. We expect to continue to further develop our relationships with our technology vendors and to broaden our scope of work with each of our partners. In many cases, our relationships with our partners have extended for over a decade, which we attribute to our commitment to excellence. It is our objective to selectively expand our partnerships moving forward in order to expand our service offerings.
Safety and Risk Management
We require our employees to participate in internal training and service programs from time to time relevant to their employment and to complete any training programs required by law. The telecommunications division has not had any OSHA recordable incidents, lost work days or fatalities since inception which includes: 2006 through 2018. Our policy is to review accidents and claims from our operations, examine trends and implement changes in procedures to address safety issues. We have no Claims in our business related to: workers’ compensation claims, general liability and damage claims, or claims related to vehicle accidents, including personal injury and property damage. We insure against the risk of loss arising from our operations up to certain deductible limits in all of the states in which we operate. In addition, we retain risk of loss, up to certain limits, under our employee group health plan. We evaluate our insurance requirements on an ongoing basis to help ensure we maintain adequate levels of coverage internally and externally for our clients.
Our internal policy is to carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments. The estimated costs of claims are accrued as liabilities and include estimates for claims incurred but not reported. If we experience future insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.
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Employees
As of December 31, 2019, we had 260 full-time employees and 5 part-time employees, of whom 32 were in administration and corporate management, 5 were accounting personnel, 5 were sales personnel and 223 are engaged in professional engineering, operations, project managerial and technical roles.
We maintain a core of professional, technical and managerial personnel and add employees as deemed appropriate to address operational and scale requirement related to growth. Additionally, we will “flex” our work force through the use of temporary or agency staff and through subcontractors.
Environmental Matters
A portion of the work related to the telecommunication division which is work associated with above ground and underground networks of our customers. As a result, we are potentially subject to material liabilities related to encountering underground objects that may cause the release of hazardous materials or substances. We are subject to federal, state and local environmental laws and regulations, including those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.
Regulation
Our operations are subject to various federal, state, local and international laws and regulations, including licensing, permitting and inspection requirements applicable to electricians and engineers; building codes; permitting and inspection requirements applicable to construction and installation projects; regulations relating to worker safety and environmental protection; telecommunication regulations affecting our wireless, wireline and fiber optic business; labor and employment laws; laws governing advertising, and laws governing our public business.
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Investing in our securities involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this report before purchasing our securities. If any of the following risks occur, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that case, the market price of our common stock could decline, and you could lose some or all of your investment.
Risks Related to Our Financial Results and Financing Plans
We have a history of losses and may continue to incur losses in the future.
We have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our common stock. We incurred losses from operations of $4,354,615 and $2,539,657 for the years ended December 31, 2019 and 2018, respectively. In addition, we incurred a net loss attributable to common stockholders of $6,322,330 and $1,847,380 for the years ended December 31, 2019 and 2018, respectively. We may continue to incur operating and net losses in future periods. These losses may increase and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the unified communications industry and other factors described elsewhere in this “Risk Factors” section. If we cannot achieve sustained profitability, our stockholders may lose all or a portion of their investment in our company.
If we are unable to sustain our recent revenue growth rates, we may never achieve or sustain profitability.
To become profitable, we must, among other things, continue increase our revenues. We experienced significant growth in recent years, primarily due to our strategic acquisitions. Our total revenues decreased from $34,549,157 in the year ended December 31, 2018 to $34,010,597 in the year ended December 31, 2019. In order to become profitable and maintain our profitability, we must, among other things, increase our revenues. We may be unable to sustain our recent revenue growth, particularly if we are unable to develop and market our telecommunications, increase our sales to existing customers or develop new customers. However, even if our revenues continue to grow, they may not be sufficient to exceed increases in our operating expenses or to enable us to achieve or sustain profitability.
Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.
As of December 31, 2019, we had total indebtedness of $10,847,728, consisting of $3,287,922 of convertible debentures, $3,858,560 of notes payable, and $3,701,258 of related-party indebtedness. All but $126,500 of this debt is due within the twelve months ending December 31, 2020. Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
| ● | increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business; |
| ● | place us at a competitive disadvantage compared to our competitors that have less debt; |
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| ● | limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and |
| ● | make us more vulnerable to a general economic downturn than a company that is less leveraged. |
A high level of indebtedness would increase the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include our ability to access the public equity and debt markets, financial market conditions, the value of our assets and our performance at the time we need capital.
Risks Related to Our Business
Our inability to obtain additional capital may prevent us from completing our acquisition strategy and successfully operating our business; however, additional financings may subject our existing stockholders to substantial dilution.
We expect to finance our anticipated future strategic acquisitions through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more strategic acquisitions or business plans. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.
Our future funding requirements will depend on many factors, including, but not limited to, the costs and timing of our future acquisitions.
A failure to successfully execute our strategy of acquiring other businesses to grow our company could adversely affect our business, financial condition, results of operations and prospects.
We intend to continue pursuing growth through the acquisition of companies or assets to expand our product offerings, project skill-sets and capabilities, enlarge our geographic markets, and increase critical mass to enable us to bid on larger contracts. However, we may be unable to find suitable acquisition candidates or to complete acquisitions on favorable terms, if at all. Moreover, any completed acquisition may not result in the intended benefits. For example, while the historical financial and operating performance of an acquisition target are among the criteria we evaluate in determining which acquisition targets we will pursue, there can be no assurance that any business or assets we acquire will continue to perform in accordance with past practices or will achieve financial or operating results that are consistent with or exceed past results. Any such failure could adversely affect our business, financial condition or results of operations. In addition, any completed acquisition may not result in the intended benefits for other reasons and our acquisitions will involve a number of other risks, including:
| ● | We may have difficulty integrating the acquired companies; |
| ● | Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; |
| ● | We may not realize the anticipated cost savings or other financial benefits we anticipated; |
| ● | We may have difficulty retaining or hiring key personnel, customers and suppliers to maintain expanded operations; |
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| ● | Our internal resources may not be adequate to support our operations as we expand, particularly if we are awarded a significant number of contracts in a short time period; |
| ● | We may have difficulty retaining and obtaining required regulatory approvals, licenses and permits; |
| ● | We may not be able to obtain additional equity or debt financing on terms acceptable to us or at all, and any such financing could result in dilution to our stockholders, impact our ability to service our debt within the scheduled repayment terms and include covenants or other restrictions that would impede our ability to manage our operations; |
| ● | We may have failed to, or be unable to, discover liabilities of the acquired companies during the course of performing our due diligence; and |
| ● | We may be required to record additional goodwill as a result of an acquisition, which will reduce our tangible net worth. |
Any of these risks could prevent us from executing our acquisition growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
Our engagements can require longer implementations and other professional services engagements.
Our implementations can involve a longer period of delivery of telecommunication and infrastructure services and technologies. In addition, existing customers for other professional services projects often retain us for those projects sometime beyond an initial implementation. A successful implementation or other professional services project requires a close working relationship between us, the customer and often third- party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given project award/sale, increase the timeline risks of collection of amounts due during implementations or other professional services projects, and increase risks of delay of such projects. Delays in the completion of an implementation or any other professional services project may require that the revenues associated with such implementation or project be recognized over a longer period than originally anticipated, or may result in disputes with customers, third-party consultants or systems integrators regarding performance as originally anticipated. Such delays in the implementation may cause material fluctuations in our operating results. In addition, customers may defer implementation projects or portions of such projects and such deferrals could have a material adverse effect on our business and results of operations.
Our future success is substantially dependent on third-party relationships.
An element of our strategy is to establish and maintain alliances with other companies, such as suppliers of products and services for construction and maintenance. These relationships enhance our status in the marketplace, which generates new business opportunities and marketing channels and, in certain cases, additional revenue and profitability. To effectively generate revenue out of these relationships, each party must coordinate and support required hence the sales and marketing efforts of the other, often including making a sizable investment in such sales and marketing activity. Our inability to establish and maintain effective alliances with other companies could impact our success in the marketplace, which could materially and adversely impact our results of operations. In addition, as we cannot control the actions of these third-party alliances, if these companies suffer business downturns or fail to meet their objectives, we may experience a resulting diminished revenue and decline in results of operations.
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If we do not accurately estimate the overall costs when we bid on a contract that is awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.
A portion of our telecommunications revenues from our engineering and professional services offerings are derived from fixed unit price contracts that require us to perform the contract for a fixed unit price irrespective of our actual costs. We bid for these contracts based on our estimates of overall costs, but cost overruns may cause us to incur losses. The costs incurred and any net profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
| ● | onsite conditions that differ from those assumed in the original bid; |
| ● | delays in project starts or completion; |
| ● | fluctuations in the cost of materials to perform under a contract; |
| ● | contract modifications creating unanticipated costs not covered by change orders; |
| ● | development of new technologies; |
| ● | availability and skill level of workers in the geographic location of a project; |
| ● | our suppliers’ or subcontractors’ failure to perform due to various reasons, including bankruptcy; |
| ● | fraud or theft committed by our employees or others; |
| ● | citations or fines issued by any governmental authority; |
| ● | delays caused by any government authority; |
| ● | difficulties in obtaining required governmental permits or approvals or performance bonds; |
| ● | labor and material cost greater than anticipated; |
| ● | changes in applicable laws and regulations; and |
| ● | claims or demands from third parties alleging damages arising from our work or from the project of which our work is a part. |
These factors may cause actual reduced profitability or losses on projects, which could adversely affect our business, financial condition, results of operations and prospects.
Our contracts may require us to perform extra or change order work, which can result in disputes and adversely affect our business, financial condition, results of operations and prospects.
Our contracts generally require us to perform extra or change order work as directed by the customer, even if the customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could adversely affect our reported working capital and results of operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
We derive a significant portion of our revenue from a few customers and the loss of one of these customers, or a reduction in their demand for our services, could adversely affect our business, financial condition, results of operations and prospects.
Our customer base on the telecommunication sector is highly concentrated. Due to the size and nature of our contracts, one or a few customers have represented a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. Our top four customers accounted for approximately 61% and 68% of our revenue in the years ended December 31, 2019 and 2018, respectively. Revenues under our contracts with significant customers may continue to vary from period to period depending on the timing or volume of work that those customers order or perform with in-house service organizations. A limited number of customers may continue to comprise a substantial portion of our revenue for the foreseeable future.
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Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could adversely affect our business, financial condition, results of operations and prospects. We could lose business from a significant customer for a variety of reasons, including:
| ● | the consolidation, merger or acquisition of an existing customer, resulting in a change in procurement strategies employed by the surviving entity that could reduce the amount of work we receive; |
| ● | our performance on individual contracts or relationships with one or more significant customers could become impaired due to another reason, which may cause us to lose future business with such customers and, as a result, our ability to generate income would be adversely impacted; |
| ● | key customers could slow or stop spending on initiatives related to projects we are performing for them due to increased difficulty in the markets as a result of economic downturns or other reasons. |
Since many of our customer contracts allow our customers to terminate the contract without cause, our customers may terminate their contracts with us at will, which could impair our business, financial condition, results of operations and prospects.
Our failure to adequately expand our direct sales force will impede our growth.
We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our account management/sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. If we are unable to hire, develop and retain talented account management/sales personnel or if the personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the intended benefits of this investment or increase our revenue.
If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.
We depend on the continued efforts and abilities of our management, as well as the senior management of our subsidiaries, to establish and maintain our customer relationships and identify strategic opportunities. The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects. Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors. Although we have entered into employment agreements with certain of our senior level management, we cannot guarantee that any of them or other key management personnel will remain employed by us for any length of time.
We derive a significant portion of our revenues from master service agreements that may be cancelled by customers on short notice, or which we may be unable to renew on favorable terms or at all.
During the years ended December 31, 2019 and 2018 we derived approximately 99% of our revenues from master service agreements and long-term contracts, none of which require our customers to purchase a minimum amount of services. The majority of these contracts may be cancelled by our customers upon minimal notice (typically 60 days), regardless of whether or not we are in default. In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any notice.
These agreements typically do not require our customers to assign a specific amount of work to us until a purchase order or statement of work is signed. Consequently, projected expenditures by customers are not assured until a definitive purchase order or statement of work is placed with us and the work is completed. Furthermore, our customers generally require competitive bidding of these contracts. As a result, we could be underbid by our competitors or be required to lower the prices charged under a contract being rebid. The loss of work obtained through master service agreements and long-term contracts or the reduced profitability of such work could adversely affect our business or results of operations.
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Unanticipated delays due to adverse weather conditions, global climate change and difficult work sites and environments may slow completion of our contracts, impair our customer relationships and adversely affect our business, financial condition, results of operations and prospects.
Because some of our work in the telecommunication sector is performed outdoors, our business is impacted by extended periods of inclement weather and is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur. Generally, inclement weather is more likely to occur during the winter season, which falls during our first and fourth fiscal quarters. Additionally, adverse weather conditions can result in project delays or cancellations, potentially causing us to incur additional unanticipated costs, reductions in revenues or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk that actual site conditions vary from those expected. Significant periods of bad weather typically reduce profitability of affected contracts, both in the current period and during the future life of affected contracts, which can negatively affect our results of operations in current and future periods until the affected contracts are completed.
Some of our projects involve challenging engineering, procurement and construction phases that may occur over extended time periods, sometimes up to several years. We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but which may impact our ability to complete a project within the original delivery schedule. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of these costs. Any such delays, cancellations, defects, errors or other failures to meet customer expectations could result in damage claims substantially in excess of revenue associated with a project. These factors could also negatively impact our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could adversely affect our business, financial condition, results of operations and prospects.
Our operations are subject to laws and regulations relating to workplace safety and worker health that, among other things, regulate employee exposure to hazardous substances. While immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, we may nonetheless unknowingly employ illegal immigrants. Violations of laws and regulations could subject us to substantial fines and penalties, cleanup costs, third- party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
Fines, judgments and other consequences resulting from our failure to comply with regulations or adverse outcomes in litigation proceedings could adversely affect our business, financial condition, results of operations and prospects.
From time to time, we may be involved in lawsuits and regulatory actions, including class action lawsuits that are brought or threatened against us in the ordinary course of business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, violations of the Fair Labor Standards Act and state wage and hour laws, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, and consequential damages or other losses, or injunctive or declaratory relief. Any defects or errors, or failures to meet our customers’ expectations could result in large damage claims against us. Claimants may seek large damage awards and, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. Any failure to properly estimate or manage cost, or delay in the completion of projects, could subject us to penalties.
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The ultimate resolution of these matters through settlement, mediation or court judgment could have a material impact on our financial condition, results of operations and cash flows. Regardless of the outcome of any litigation, these proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves. When appropriate, we establish reserves for litigation and claims that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to developments. If our reserves are inadequate or insurance coverage proves to be inadequate or unavailable, our business, financial condition, results of operations and prospects may suffer.
If we are required to reclassify independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial condition, results of operations and prospects.
We use a significant number of independent contractors in our operations for whom we do not pay or withhold any federal, state or provincial employment tax. There are a number of different tests used in determining whether an individual is an employee or an independent contractor and such tests generally take into account multiple factors. There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent contractors. Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties. If we are required to pay employer taxes or pay backup withholding with respect to prior periods with respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business, financial condition, results of operations and prospects.
Our dependence on subcontractors and suppliers could increase our cost and impair our ability to complete contracts on a timely basis or at all.
We rely on third-party subcontractors to perform some of the work on our contracts. We also rely on third-party suppliers to provide materials needed to perform our obligations under those contracts. We generally do not bid on contracts unless we have the necessary subcontractors and suppliers committed for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot engage subcontractors or suppliers, our ability to bid for contracts may be impaired. In addition, if a subcontractor or third-party supplier is unable to deliver its goods or services according to the negotiated terms for any reason, we may suffer delays and be required to purchase the services from another source at a higher price. We sometimes pay our subcontractors and suppliers before our customers pay us for the related services. If customers fail to pay us and we choose, or are required, to pay our subcontractors for work performed or pay our suppliers for goods received, we could suffer an adverse effect on our business, financial condition, results of operations and prospects.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We will be exposed to liabilities that are unique to the services we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, results of operations and prospects.
A portion of our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
Our workers are subject to hazards associated with providing construction and related services on construction sites. For example, some of the work we perform is underground. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants that could result in a rupture and discharge of pollutants. In such a case, we may be liable for fines and damages. These operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. Even though we believe that the insurance coverage we maintain is in amounts and against the risks that we believe are consistent with industry practice, this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our business, financial condition, results of operations and prospects could be adversely affected.
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The Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes certain employer responsibilities, including the maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Health and Safety and Health Administration and various recordkeeping, disclosure and procedural requirements. While we have invested, and will continue to invest, substantial resources in occupational health and safety programs, serious accidents or violations of OSHA rules may subject us to substantial penalties, civil litigation or criminal prosecution, which could adversely affect our business, financial condition, results of operations and prospects. However our record to date has had no incidents or losses and we are in full compliance with a 100% safety record.
Defects in our specialty contracting services may give rise to claims against us, increase our expenses, or harm our reputation.
Our specialty contracting services are complex and our final work product may contain defects. We have not historically accrued reserves for potential claims as they have been immaterial. The costs associated with such claims, including any legal proceedings, could adversely affect our business, financial condition, results of operations and prospects.
The extent to which the coronavirus (“COVID-19”) outbreak and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Global health concerns relating to the coronavirus outbreak have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. Risks related to consumers and businesses lowering or changing spending, which impact domestic and international spend. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and may further impact our workforce and operations and the operations of our customers, suppliers and business partners. These measures may remain in place for a significant period of time and they are likely to continue to adversely affect our business, results of operations and financial condition.
The spread of the coronavirus has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the coronavirus outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of the coronavirus and a global pandemic, and, as a result, the ultimate impact of the coronavirus outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations, and we will continue to monitor the coronavirus situation closely.
Risks Related to Our Industry
Our industry is highly competitive, with a variety of larger companies with greater resources competing with us, and our failure to compete effectively could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance.
The contracts on which we bid are generally awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes based on other factors, such as shorter contract schedules, larger scale to complete projects or prior experience with the customer. Within our markets, we compete with many national, regional, local and international service providers, including Dycom Industries, Inc., Goodman Networks, Inc., Ericsson, Nokia and MasTec, Inc. Price is often the principal factor in determining which service provider is selected by our customers, especially on smaller, less complex projects. As a result, any organization with adequate financial resources and access to technical expertise may become a competitor. Smaller competitors are sometimes able to win bids for these projects based on price alone because of their lower costs and financial return requirements. Additionally, our competitors may develop the expertise, experience and resources to provide services that are equal or superior in price to our services, and we may not be able to maintain or enhance our competitive position.
Some of our competitors have already achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. A number of national companies in our industry are larger than we are and, if they so desire, could establish a presence in our markets and compete with us for contracts. As a result of this competition, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer. If we are unable to compete successfully in our markets, our business, financial condition, results of operations and prospects could be adversely affected.
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Many of the industries we serve are subject to consolidation and rapid technological and regulatory change, and our inability or failure to adjust to our customers’ changing needs could reduce demand for our services.
We derive, and anticipate that we will continue to derive, a substantial portion of our revenue from customers in the telecommunications and utilities industries. The telecommunications and utilities industries are subject to rapid changes in technology and governmental regulation. Changes in technology may reduce the demand for the services we provide. For example, new or developing technologies could displace the wireline systems used for the transmission of voice, video and data, and improvements in existing technology may allow telecommunications providers to significantly improve their networks without physically upgrading them. Alternatively, our customers could perform more tasks themselves, which would cause our business to suffer. Additionally, the telecommunications and utilities industries have been characterized by a high level of consolidation that may result in the loss of one or more of our customers. Our failure to rapidly adopt and master new technologies as they are developed in any of the industries we serve or the consolidation of one or more of our significant customers could adversely affect our business, financial condition, results of operations and prospects.
Further, many of our telecommunications customers are regulated by the Federal Communications Commission, or the FCC, and other international regulators. The FCC and other regulators may interpret the application of their regulations in a manner that is different than the way such regulations are currently interpreted and may impose additional regulations, either of which could reduce demand for our services and adversely affect our business and results of operations.
Economic downturns could cause capital expenditures in the industries we serve to decrease, which may adversely affect our business, financial condition, results of operations and prospects.
The demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the United States economy. The current election cycle may cause economic uncertainty. The wireless and wireline telecommunications industry are cyclical in nature and vulnerable to general downturns in the United States and international economies. Our customers are affected by economic changes that decrease the need for or the profitability of their services. This can result in a decrease in the demand for our services and potentially result in the delay or cancellation of projects by our customers. Slow-downs in real estate, fluctuations in commodity prices and decreased demand by end-customers for services could affect our customers and their capital expenditure plans. As a result, some of our customers may opt to defer or cancel pending projects. A downturn in overall economic conditions also affects the priorities placed on various projects funded by governmental entities and federal, state and local spending levels.
In general, economic uncertainty makes it difficult to estimate our customers’ requirements for our services. Our plan for growth depends on expanding our company both in the United States and internationally. If economic factors in any of the regions in which we plan to expand are not favorable to the growth and development of the telecommunications industries in those countries, we may not be able to carry out our growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
Other Risks Relating to Our Company and Results of Operations
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our past telecommunications operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance.
Our operating results have fluctuated and could fluctuate in the future. Factors that may contribute to fluctuations include:
| ● | changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries we serve; |
| ● | our ability to effectively manage our working capital; |
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| ● | our ability to satisfy consumer demands in a timely and cost-effective manner; |
| ● | pricing and availability of labor and materials; |
| ● | shifts in geographic concentration of customers, supplies and labor pools; and |
| ● | seasonal fluctuations in demand and our revenue |
Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
To prepare financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the financial statements that affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:
| ● | contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims; |
| ● | provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others; |
| ● | valuation of assets acquired and liabilities assumed in connection with business combinations; |
| ● | accruals for estimated liabilities, including litigation and insurance reserves; and |
| ● | goodwill and intangible asset impairment assessment. |
At the time the estimates and assumptions are made, we believe they are accurate based on the information available. However, our actual results could differ from, and could require adjustments to, those estimates.
We exercise judgment in determining our provision for taxes in the Canada, United States and Puerto Rico that are subject to tax authority audit review that could result in additional tax liability and potential penalties that would negatively affect our net income.
The amounts we record in intercompany transactions for services, licenses, funding and other items affects our potential tax liabilities. Our tax filings are subject to review or audit by the U.S. Internal Revenue Service and state, local and foreign taxing authorities. We exercise judgment in determining our worldwide provision for income and other taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain. Examinations of our tax returns could result in significant proposed adjustments and assessment of additional taxes that could adversely affect our tax provision and net income in the period or periods for which that determination is made.
Risks Related to our Common Stock
Our common stock price has fluctuated in recent years, and the trading price of our common stock is likely to continue to reflect changes, which could result in losses to investors and litigation.
In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:
| ● | the results of operating and financial performance and prospects of other companies in our industry; |
| ● | strategic actions by us or our competitors, such as acquisitions or restructurings; |
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| ● | announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors; |
| ● | the public’s reaction to our press releases, media coverage and other public announcements, and filings with the SEC; |
| ● | market conditions for providers of services to telecommunications, utilities OEM’s and PMO’s service customers; |
| ● | lack of securities analyst coverage or speculation in the press or investment community about us or opportunities in the markets in which we compete; |
| ● | changes in government policies in the United States and, as our international business increases, in other foreign countries; |
| ● | changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations; |
| ● | dilution caused by the conversion into common stock of convertible debt securities or by the exercise of outstanding warrants; |
| ● | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
| ● | changes in accounting standards, policies, guidance, interpretations or principles; |
| ● | any lawsuit involving us, our services or our products; |
| ● | arrival and departure of key personnel; |
| ● | sales of common stock by us, our investors or members of our management team; and |
| ● | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters. |
Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent stockholders from being able to sell their shares at or above the price they paid for shares of our common stock, if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding, including the existing lawsuits filed against us and described elsewhere in this report, could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.
The sale or availability for sale of substantial amounts of our common stock could adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through common stock offerings. As of December 31, 2019, we had 195,715 shares of common stock issued and 193,644 shares outstanding, of which 135,004 shares were restricted securities pursuant to Rule 144 promulgated by the SEC. The sale of these shares into the open market may adversely affect the market price of our common stock.
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In addition, at December 31, 2019, we also had outstanding $3,287,910 aggregate principal and $145,105 accrued interest of convertible notes that were convertible into 180,575 shares of common stock on that date. However, we cannot currently determine the total number of shares of our common stock that may be issued upon the conversion or repayment of our convertible notes because the total number of shares and the conversion prices or the prices at which we can issue our common stock to pay down the principal of and interest on our convertible notes depend on a number of factors, including the prices and nature of any equity securities we may issue in the future and the market prices of our common stock in the periods leading up to any particular amortization payment date on which we elect to make amortization payments on our convertible notes in shares of our common stock. Refer to Note 8, Convertible Debentures, to the notes to our consolidated financial statements in this report. For conversions completed between January 1 and May 8, 2020, refer to Note 17, Subsequent Events, to the notes to our consolidated financial statements in this report. As of December 31, 2019, there were also outstanding warrants to purchase an aggregate of 14,003 shares of our common stock at a weighted-average exercise price of $331.32 per share, all of which warrants were exercisable as of such date. The conversion of a significant principal amount of our outstanding convertible debt securities into shares of our common stock, our repayment of a significant amount of principal, interest or other amounts payable under such debt securities in shares of our common stock or the exercise of outstanding warrants at prices below the market price of our common stock could adversely affect the market price of our common stock. The market price of our common stock also may be adversely affected by our issuance of shares of our capital stock or convertible securities in connection with future acquisitions, or in connection with other financing efforts.
We may have insufficient authorized capital stock to issue common stock to all of the holders of our outstanding warrants and other convertible securities and may be required to reverse split our outstanding shares of common stock or to request our stockholders to authorize additional shares of common stock in connection with the exercise or conversion of such outstanding securities or subsequent equity finance transactions.
We are authorized to issue 750,000,000 shares of common stock, of which 193,644 shares were outstanding on December 31, 2019 and, primarily as a result of the conversion of convertible debt securities since December 31, 2019, 1,736,203 shares were issued and outstanding on May 8, 2020. At May 8, 2020, we had reserved 99,745,320 shares of common stock for issuance upon conversion of certain of our outstanding convertible debt securities and warrants. In addition, at such date, we had outstanding $1,125,392 aggregate principal amount of additional convertible debt securities for which we are not required to reserve a specific number of shares of common stock for conversions but that is convertible into an undeterminable number of shares of common stock based upon a discount to the then-current market price of our common stock. If all of these securities were converted or exercised, the total number of shares of our common stock that we would be required to issue would greatly exceed the number of our remaining authorized but unissued shares of common stock.
As a result of such potential shortfall in the number of our authorized shares of common stock, it is likely that we will have insufficient shares of common stock available to issue in connection with the conversion or exercise of our outstanding options, warrants and convertible debt securities or any future equity finance transaction we may seek to undertake. Accordingly, we may be required to take steps at an annual or special meeting of stockholders to seek approval of an increase in the number of our authorized shares of common stock. However, we cannot assure you that our stockholders would authorize an increase in the number of shares of our common stock. Alternatively, we may be required to reverse split our outstanding shares of common stock to create additional authorized but unissued shares. Our failure to have a sufficient number of authorized shares of common stock for issuance upon future exercise or conversion of our outstanding options, warrants and convertible debt securities could create an event of default under such securities, which could adversely affect our business, financial condition, results of operations and prospects.
If we do not meet the listing standards of a national securities exchange our investors’ ability to make transactions in our securities will be limited and we will be subject us to additional trading restrictions.
Our securities currently are traded over-the-counter on the OTC QB market and are not qualified to be listed on a national securities exchange, such as NASDAQ. Accordingly, we face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; |
| ● | reduced liquidity with respect to our securities; |
| ● | our shares of common stock are currently classified as “penny stock” which requires brokers trading in our shares of common stock to adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock; |
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| ● | a limited amount of news and analyst coverage for our company; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Since our common stock is traded on the OTC Pink, our common stock is a covered security. Although the states are preempted from regulating the sale of our securities, the federal statute allows the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer traded over-the-counter, our common stock would not be a covered security and we would be subject to regulation in each state in which we offer our securities.
Our shares of common stock are subject to penny stock regulations. Because our common stock is a penny stock, holders of our common stock may find it difficult or may be unable to sell their shares.
The SEC has adopted rules that regulate broker/dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker/dealer, and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker/dealer must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules, and accordingly, holders of our common stock may find it difficult or may be unable to sell their shares.
We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock.
We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any earnings to finance our operations and growth. As a result, any short-term return on your investment will depend on the market price of our common stock, and only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including, but not limited to, factors such as our financial condition, results of operations, capital requirements, business conditions, and covenants under any applicable contractual arrangements. Investors seeking cash dividends should not invest in our common stock.
If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock will likely decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts, over whom we have no control, publish about us and our business. We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the market price for our common stock could decline. In the event we obtain securities or industry analyst coverage, the market price of our common stock could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it is inaccurate, or cease publishing reports about us or our business.
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ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
Our principal executive offices are located in Longwood, Florida. We were occupying our offices under a 12-month lease that expired in February 2020 and provided for monthly lease payments of $14,423. In March 2020, we renewed the lease through July 2020. The agreement contains space reductions throughout the term, with monthly lease payments beginning at $14,396 and ending at $8,573 in July.
Set forth below are the locations of the other properties leased by us, the businesses that use the properties, and the size of each such property. All of such properties are used by our company or by one of our subsidiaries principally as office facilities to house their administrative, marketing, and engineering and professional services personnel. We believe our facilities and equipment to be in good condition and reasonably suited and adequate for our current needs.
| Location | Owned or Leased | User | Size (Sq Ft) | |||
| Longwood, FL | Leased (1) | AW Solutions | 9,226 | |||
| Puerto Rico | Leased (2) | AW Solutions | 1,575 | |||
| Boca Raton, FL | Leased (3) | AW Solutions | 1,282 | |||
| Miami, FL | Leased (4) | Tropical Communications, Inc. | 3,400 | |||
| Upland, CA | Leased (5) | ADEX Corporation | 2,047 | |||
| Oakwood Village, OH | Leased (6) | ADEX Corporation | 4,498 | |||
| Alpharetta, GA | Leased (7) | ADEX Corporation | 4,800 |
| (1) | This multi-building facility is leased pursuant to a lease which the latest expires on July 31, 2020 and provides for monthly rental payments between $14,396 and $8,573. |
| (2) | This facility is leased on a month to month basis and provides for monthly payments of $1,500. |
| (3) | This facility is leased pursuant to a three-year lease that expires in August 2022 and provides for monthly base rental payments of $2,771, with 3% increases annually on September 1 beginning in 2020. |
| (4) | This facility is leased on a month to month basis and provides for monthly base rental payments of $3,792. |
| (5) | This facility is leased pursuant to a month to month lease that provides for monthly payments of $3,378 |
| (6) | This facility is leased pursuant to a month to month basis and provides for monthly payments of $2,390. |
| (7) | This facility is leased pursuant to a four-year lease which expires in April 2023 and provides for monthly lease payments of $4,880, with 3% increases annually on June 1 beginning in 2020. |
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
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ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock is currently available for quotation on the OTC Pink market under the symbol “SGSI”.
On May 8, 2019, the closing sale price of our common stock, as reported by OTC Markets, was $0.60 per share. On May 8, 2019, there were 380 holders of record of our common stock and 1,736,203 common shares outstanding. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends
We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant. During the year ended December 31, 2018, we modified our Series A Preferred Stock. In connection with this redemption, we recorded a deemed dividend of $191,261. During the year ended December 31, 2019, we modified our Series A Preferred Stock. In connection with this redemption, we recorded a deemed dividend of $488,072.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans is set forth in Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Unregistered Sales of Equity Securities
In the fourth quarter of 2019, we issued securities in the following transactions, each of which was exempt from the registration requirements of the Securities Act. Except for the shares of our common stock that were issued upon the conversion of our convertible debt securities or the grants of shares of common stock under our 2012 Performance Incentive Plan, all of the below-referenced securities were issued pursuant to the exemption from registration under Section 4(2) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act. There were no underwriters or placement agents employed in connection with any of these transactions. Use of the exemption provided in Section 4(2) for transactions not involving a public offering is based on the following facts:
| ● | Neither we nor any person acting on our behalf solicited any offer to buy or sell securities by any form of general solicitation or advertising. | |
| ● | The recipients were either accredited or otherwise sophisticated individuals who had such knowledge and experience in business matters that they were capable of evaluating the merits and risks of the prospective investment in our securities. | |
| ● | The recipients had access to business and financial information concerning our company. | |
| ● | All securities issued were issued with a restrictive legend and may only be disposed of pursuant to an effective registration or exemption from registration in compliance with federal and state securities laws. |
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The shares of our common stock that were issued upon the conversion of our convertible debt securities were issued pursuant to the exemption from registration under Section 3(a)(9) of the Securities Act and are deemed to be restricted securities for purposes of the Securities Act.
On October 15, 2019, we issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 21, 2019, we issued 1,806 shares of common stock to Silverback Capital upon the conversion of $627 of accrued interest pursuant to a convertible debenture.
On October 21, 2019, we issued 1,112 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 24, 2019, we issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6 – SELECTED FINANCIAL DATA
Not required under Regulation S-K for “smaller reporting companies.”
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ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of our company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our services, fluctuations in pricing for materials, and competition.
Business Overview
Telecommunications
Telecommunications providers and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring. As a result, we believe there is significant opportunity to expand both our United States and international telecommunications solutions services and staffing services capabilities. As we continue to expand our presence in the marketplace, we will target those customers going through new network deployments and wireless service upgrades.
We expect to continue to increase our gross margins by leveraging our single-source end-to-end network to efficiently provide a full spectrum of end-to-end next-generation network solutions and staffing services to our customers. We believe our solutions and services offerings can alleviate some of the inefficiencies typically present in our industry, which result, in part, from the highly-fragmented nature of the telecommunications industry, limited access to skilled labor and the difficulty industry participants have in managing multiple specialty-service providers to address their needs. As a result, we believe we can provide superior service to our customers and eliminate certain redundancies and costs for them. We believe our ability to address a wide range of end-to-end solutions, network infrastructure and project-staffing service needs of our telecommunications industry clients is a key competitive advantage. Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, and installation and integration services) allows customers to turn to a single source for those specific specialty services, as well as to entrust us with the execution of entire turn-key solutions.
We have become a multi-faceted company with an international presence. We believe this platform will allow us to leverage our corporate and other fixed costs and capture gross margin benefits. Our platform is highly scalable. We typically hire workers to staff projects on a project-by-project basis and our other operating expenses are primarily fixed. Accordingly, we are generally able to deploy personnel to infrastructure projects in the United States and beyond without incremental increases in operating costs, allowing us to achieve greater margins. We believe this business model enables us to staff our business efficiently to meet changes in demand.
Finally, given the worldwide popularity of telecommunications and wireless products and services, we will selectively pursue international expansion, which we believe represents a compelling opportunity for additional long-term growth.
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Our planned expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our operations management systems, financial and management controls and information systems and to hire, train and retain skilled telecommunications personnel. The timing and amount of investments in our expansion could affect the comparability of our results of operations in future periods.
Our planned acquisitions will be timed with additions to our management team of skilled professionals with deep industry knowledge and a strong track record of execution. Our senior management team brings an average of over 30 years of individual experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.
We were incorporated in 2007 and functioned as a development stage company with limited activities through 2017.
Factors Affecting Our Performance
Changes in Demand for Data Capacity and Reliability.
The telecommunications industry has undergone and continues to undergo significant changes due to advances in technology, increased competition as telephone and cable companies converge, the growing consumer demand for enhanced and bundled services and increased governmental broadband stimulus funding. As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services.
The proliferation of smart phones and other wireless data devices has driven demand for mobile broadband. This demand and other advances in technology have prompted wireless carriers to upgrade their networks. Wireless carriers are actively increasing spending on their networks to respond to the explosion in wireless data traffic, upgrade network technologies to improve performance and efficiency and consolidate disparate technology platforms. These customer initiatives present long-term opportunities for us for the wireless services we provide. Further, the demand for mobile broadband has increased bandwidth requirements on the wired networks of our customers. As the demand for mobile broadband grows, the amount of cellular traffic that must be “backhauled” over customers’ fiber and coaxial networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites. These trends are increasing the demand for the types of services we provide.
Our Ability to Recruit, Manage and Retain High-Quality IT and Telecommunications Personnel.
The shortage of skilled labor in the telecommunications industry and the difficulties in recruiting and retaining skilled personnel can frequently limit the ability of specialty contractors to bid for and complete certain contracts. We believe our access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.
Our Ability to Integrate Our Acquired Business and Expand Internationally
We have completed three material acquisitions on April 25, 2017, February 27, 2018 and January 4, 2019, respectively, and plan to consummate additional acquisitions in the near term. Our success will depend, in part, on our ability to successfully integrate these businesses into our telecommunications platform. In addition, we believe international expansion represents a compelling opportunity for additional growth over the long-term because of the worldwide need for telecommunications infrastructure. We plan to expand our global presence either by expanding our current operations or by acquiring subsidiaries with international platforms.
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Our Ability to Expand and Diversify Our Customer Base.
Our customers for specialty contracting services consist of leading telephone, wireless, cable television, utility and other companies. Historically, our revenue has been significantly concentrated in a small number of customers. Although we still operate at a net loss, we have acquired additional subsidiaries and diversified our customer base and revenue streams.
Impact of Recently-Completed Acquisitions
We have grown significantly and expanded our service offerings and geographic reach through a strategic acquisition of the ADEX Entities on February 27, 2018 and TNS on January 4, 2019. Additionally, we continue to work on the acquisition of WaveTech GmbH. We expect to regularly review opportunities, and periodically to engage in discussions, regarding possible additional acquisitions. Our ability to sustain our growth and maintain our competitive position may be affected by our ability to identify, acquire and successfully integrate companies.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our historical consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported therein and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to recognition of revenue for costs, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, income taxes, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense, contingent consideration and accruals for contingencies, including legal matters. These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and as a result, actual results could differ materially from these estimates.
We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve making significant judgments and estimates that are used in the preparation of our historical consolidated financial statements. The impact of these policies affects our reported and expected financial results and are discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have discussed the development, selection and application of our critical accounting policies with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also important to understanding our historical consolidated financial statements. The notes to our consolidated financial statements in this report contain additional information related to our accounting policies, including the critical accounting policies described herein, and should be read in conjunction with this discussion.
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management.
Liquidity
Management believes that there is substantial doubt about our ability to continue as a going concern. Management believes that our available cash balance as of the date of this filing will not be sufficient to fund our anticipated level of operations for at least the next 12 months. Our ability to continue operations depends on our ability to sustain and grow revenue and results of operations as well as our ability to access capital markets when necessary to accomplish our strategic objectives. For the year ended December 31, 2019 we were unable to achieve positive cash flow from operations. Management expects to finance future cash needs from the results of operations and, depending on the results of operations, we may need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever.
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During the years ended December 31, 2019 and 2018, we suffered recurring losses from operations. At December 31, 2019 and 2018, we had a stockholders’ deficit of $5,439,836 and $5,691,332, respectively. At December 31, 2019, we had a working capital deficit of $9,790,032, as compared to a working capital deficit of $8,464,969 at December 31, 2018.
On, or prior to May 31, 2021, we have obligations relating to the payment of indebtedness on loans payable to related parties, loans payable and convertible debentures of $3,701,258, $6,413,389 and $3,002,119, respectively. We anticipate meeting our cash obligations on indebtedness that is payable on or prior to May 31, 2021 from results of operations and from the proceeds of additional indebtedness or equity raises. If we are not successful in obtaining additional financing when required, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our remaining debt obligations as they become due, although there can be no assurance that we will be able to do so.
Our future capital requirements for operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of operations. Management has taken several actions to ensure that we will have sufficient liquidity to meet our obligations, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. Additionally, if our actual revenues are less than forecasted, we anticipate implementing headcount reductions to a level that more appropriately matches then-current revenue and expense levels. We are evaluating other measures to further improve our liquidity, including the sale of certain operating assets or businesses, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common shares. Management believes that these actions will enable us to meet our liquidity requirements through May 31, 2021. There is no assurance that we will be successful in any capital-raising efforts that we may undertake to fund operations over the next 12 months.
To execute our business plan, service existing indebtedness and implement its business strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership and could also result in a decrease in the market price of our common stock. The terms of any securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. We also may be required to recognize non-cash expenses in connection with certain securities we issues, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in our current form.
Basis of Presentation/Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of our company and our subsidiaries, the AWS Entities, the ADEX Entities (from the date of acquisition, February 27, 2018), and TNS (from the date of acquisition, January 4, 2019). All the subsidiaries are wholly-owned. During the year ended December 31, 2018, we disposed of the following subsidiaries; Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc. All inter-company balances and transactions have been eliminated.
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Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. We regularly evaluate estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
We consider all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We record unbilled receivables for services performed but not billed. Management reviews a customer’s credit history before extending credit. We maintain an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts at December 31, 2019 and 2018 was $504,785 and $502,868, respectively.
Property and Equipment
Property and equipment are stated at cost. We depreciate the cost of property and equipment over their estimated useful lives at the following annual rates:
| Automotive | 3-5 years straight-line basis | |
| Computer equipment and software | 3-7 years straight-line basis | |
| Leasehold improvements | 5 years straight-line basis | |
| Office equipment and furniture | 5 years straight-line basis | |
| Research equipment | 5 years straight-line basis |
Goodwill
Goodwill was generated through the acquisitions of the AWS Entities in 2017, the ADEX Entities in 2018, and TNS in 2019, as the total consideration paid exceeded the fair value of the net assets acquired.
We test our goodwill for impairment at least annually on December 31st and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and our consolidated financial results.
We test goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during the years ended December 31, 2019 and 2018.
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Intangible Assets
At December 31, 2019 and 2018, definite-lived intangible assets primarily consist of non-compete agreements, tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 5-35 years.
We periodically evaluate the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. We have no intangibles with indefinite lives.
For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
Long-lived Assets
In accordance with ASC 360, “Property, Plant and Equipment”, we test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Foreign Currency Translation
Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.
Our integrated foreign subsidiaries are financially or operationally dependent on our company. We use the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.
Income Taxes
We account for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct business, and file federal and state income, franchise or net worth, tax returns in Canada, the United States, in various states within the United States and the Commonwealth of Puerto Rico. We determine our filing obligations in a jurisdiction in accordance with existing statutory and case law. We may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010 to 2019. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of our company’s, or our subsidiaries’, income tax returns for the open taxation years noted above.
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Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against our deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. We currently have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
We follow the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.
We received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as of December 31, 2019 was $156,711 plus penalties and interest of $126,700 for a total obligation due of $283,411. The amount due as of December 31, 2018 was $156,711 plus penalties and interest of $111,200 for a total obligation due of $267,911. This tax assessment is included in accrued expenses at December 31, 2019 and 2018.
Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
We recognize revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract Types
Our contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of our revenues come from customers with whom we have a master service agreement (“MSA”). These MSA’s generally contain customer specific service requirements.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For our different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets.
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Revenue Service Types
The following is a description of our revenue service types, which include professional services and construction:
| ● | Professional services are services provided to the clients where we deliver distinct contractual deliverables and/or services. Deliverables may include but are not be limited to: engineering drawings, designs, reports and specification. Services may include, but are not be limited to: consulting or professional staffing to support our client’s objectives. Consulting or professional staffing services may be provided remotely or on client premises and under their direction and supervision. |
| ● | Construction Services are services provided to the client where we may self-perform or subcontract services that require the physical construction of infrastructure or installation of equipment and materials. |
Disaggregation of Revenues
We disaggregate our revenue from contracts with customers by service type, contract type, contract duration, and timing of transfer of goods or services. See the below tables:
| Revenue by service type | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Professional Services | $ | 24,006,853 | $ | 21,472,410 | ||||
| Construction | 10,003,744 | 13,076,747 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
| Revenue by contract duration | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Short-term | $ | 264,177 | $ | 251,735 | ||||
| Long-term | 33,746,420 | 34,297,422 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
| Revenue by contract type | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Unit-price | $ | 5,007,541 | $ | 6,786,614 | ||||
| Fixed-price | $ | 4,996,203 | $ | 6,290,133 | ||||
| Time-and-materials | 24,006,853 | 21,472,410 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
We also disaggregate our revenue by operating segment and geographic location.
Accounts Receivable
Accounts receivable include amounts from work completed in which we have billed. The amounts due are stated at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.
Contract Assets and Liabilities
Contract assets include unbilled amounts for costs and services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. At December 31, 2019 and 2018, contract assets totaled $461,681 and $1,861,895, respectively.
Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets. At December 31, 2019 and 2018, contract liabilities totaled $704,544 and $271,788, respectively.
Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
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Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
We record stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
We account for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.
We use the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by our stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss Per Share
We compute loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted loss per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of December 31, 2019 and 2018, respectively, we had 286,736 and 57,826 common stock equivalents outstanding.
Leases
We adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient that allows us not to restate our comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, we presented the disclosures which were required under ASC 840.
The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent our right to use underlying assets for the lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we uses our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
We recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months as of January 1, 2019. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, unamortized lease incentives provided by lessors, and restructuring liabilities, Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur.
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Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. Expanded disclosures with additional qualitative and quantitative information are also required. ASU 2016-02 and its amendments are effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted.
We adopted ASU 2016-02 and its amendments and applied the transition provisions as of January 1, 2019, which included recognizing a cumulative-effect adjustment through opening retained earnings as of that date. Prior year amounts were not recast under this transition approach and, therefore, prior year amounts are excluded from the leased properties footnote. We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, we did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. We elected a policy of not recording leases on our consolidated balance sheets when the leases have a term of 12 months or less and we are not reasonably certain to elect an option to purchase the leased asset. We recognize payments on these leases within selling, administrative and other expenses on a straight-line basis over the lease term. The standard did not materially impact consolidated net income or liquidity.
In June 2018, the FASB issued ASU 2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting”, which addresses aspects of the accounting for nonemployee share-based payment transactions. This pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. We early adopted ASU 2018-07 on January 1, 2019. The adoption of this ASU did not have a material impact on our consolidated financial statements.
We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or result of operations
Concentrations of Risk
Financial instruments that potentially subject our company to concentrations of credit risk consist principally of cash and accounts receivables. We maintain our cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
We provide credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the year ended December 31, 2019, three customers accounted for 27%, 14% and 11%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 43%, 2% and 1%, respectively, of trade accounts receivable as of December 31, 2019. For the year ended December 31, 2018, four customers accounted for 20%, 17%, 16% and 15%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 7%, 23%, 27% and 2%, respectively, of trade accounts receivable as of December 31, 2018.
Our customers are primarily located within the domestic United States of America and Puerto Rico. Revenues generated within the domestic United States of America accounted for approximately 96% of consolidated revenues for the year ended December 31, 2019. Revenues generated from customers in Puerto Rico accounted for approximately 4% of consolidated revenues for the year ended December 31, 2019. Revenues generated within the domestic United States of America accounted for approximately 94% of consolidated revenues for the year ended December 31, 2018. Revenues generated from customers in Puerto Rico accounted for approximately 6% of consolidated revenues for the year ended December 31, 2018.
Fair Value Measurements
We measure and disclose the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
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Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended December 31, 2019 and 2018. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
Our financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019 and 2018, consisted of the following:
| Total fair value at December 31, 2019 | Quoted prices in active markets (Level 1) | Quoted prices in active markets (Level 2) | Quoted prices in active markets (Level 3) | |||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 992,733 | $ | - | $ | - | $ | 992,733 | ||||||||
| Total fair value at December 31, 2018 | Quoted prices in active markets (Level 1) | Quoted prices in active markets (Level 2) | Quoted prices in active markets (Level 3) | |||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 3,166,886 | $ | - | $ | - | $ | 3,166,886 | ||||||||
| (1) | We have estimated the fair value of these derivatives using the Monte-Carlo model and/or a Binomial Model. |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Derivative Liabilities
We account for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. We use estimates of fair value to value our derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, our policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. We categorize our fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2019 and 2018, we had a derivative liability of $992,733 and $3,166,886, respectively.
Sequencing Policy
Under ASC 815-40-35, we have adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to our inability to demonstrate we have sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to our employees or directors are not subject to the sequencing policy.
Reclassifications
Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.
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Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The following summary of our results of operations should be read in conjunction with our financial statements for the years ended December 31, 2019 and 2018.
Our operating results for the years ended December 31, 2019 and 2018 are summarized as follows:
| Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||
| Statement of Operations Data: | ||||||||
| Revenues | $ | 34,010,597 | $ | 34,549,157 | ||||
| Operating expenses | 38,365,212 | 37,088,814 | ||||||
| Loss from operations | (4,354,615 | ) | (2,539,657 | ) | ||||
| Total other (expense) income | (1,275,412 | ) | 1,441,581 | |||||
| Net loss attributable to common stockholders | (6,322,330 | ) | (1,847,380 | ) | ||||
| Net loss per share, basic and diluted | (52.98 | ) | (177.12 | ) | ||||
| Weighted average common shares outstanding, basic and diluted | 119,344 | 10,430 | ||||||
Our significant balances sheet accounts as of December 31, 2019 and December 31, 2018 are summarized as follows:
| December 31, 2019 | December 31, 2018 | |||||||
| Balance Sheet Data: | ||||||||
| Cash | $ | 468,819 | $ | 620,593 | ||||
| Accounts receivable, net | 5,167,261 | 6,562,182 | ||||||
| Total current assets | 6,297,880 | 9,067,352 | ||||||
| Goodwill and intangible assets, net | 5,583,741 | 3,771,900 | ||||||
| Total assets | 12,168,818 | 12,930,396 | ||||||
| Total current liabilities | 16,087,912 | 17,532,321 | ||||||
| Total long-term liabilities | 28,324 | - | ||||||
| Mezzanine equity | 1,492,418 | 1,089,407 | ||||||
| Stockholders’ deficit | $ | (5,439,836 | ) | $ | (5,691,332 | ) | ||
Revenue
Our revenue decreased from $34,549,157 for the year ended December 31, 2018 to $34,010,597 for the year ended December 31, 2019. The decrease is primarily related to a decrease in sales for the AWS Entities due to decreased sales from a major customer. This decrease is partially offset by having a full year of revenue for the ADEX Entities along with the January 4, 2019 acquisition of TNS.
A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers. Master Service Agreements (MSAs) generally contain customer-specified service requirements, such as discreet pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally of three to four months in duration. The percentage of revenue from long-term contracts varies between periods depending on the mix of work performed under our contracts.
Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools and equipment. Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of revenues. We expect cost of revenues to continue to increase if we succeed in continuing to grow our revenue.
Our cost of revenues increased from $29,101,308 for the year ended December 31, 2018 to $29,190,105 for the year ended December 31, 2019. The increase was primarily related to our January 4, 2019 acquisition of TNS and us having a full year of revenue from the ADEX Entities. The increase was partially offset by the decrease in sales from the AWS Entities.
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General and Administrative Costs
General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries’ management personnel and administrative overhead. These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense and other costs that are not directly related to performance of our services under customer contracts. Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency. We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenues will decrease if we succeed in increasing revenues.
General and administrative costs were $4,119,807 for the year ended December 31, 2019 compared to $4,098,777 for the year ended December 31, 2018. The increase in general and administrative expenses was primarily due to a full year of expenses for the ADEX Entities along with the January 4, 2019 acquisition of TNS. The increase was partially offset by our ongoing cost cutting measures.
Salaries and Wages Expenses
Salaries and wages were $4,670,365 for the year ended December 31, 2019 compared to $3,668,298 for the year ended December 31, 2018. The increase during the year ended December 31, 2019 was primarily due to a full year of expenses for the ADEX Entities along with the January 4, 2019 acquisition of TNS.
Net Income (Loss)
Our net loss attributable to common stockholders increased from $1,847,380 for the year ended December 31, 2018 to $6,322,330 for the year ended December 31, 2019. As of December 31, 2019, our stockholders’ deficit was $5,439,836.
Accounts Receivable
We had accounts receivable, net of allowance for doubtful accounts at December 31, 2019 and 2018 of $5,167,261 and $6,562,182, respectively. The decrease in accounts receivable was a result of decreased revenues in the final quarter of 2019 compared to the same period of 2018.
Capital expenditures
We had capital expenditures of $69,822 and $21,288 for the years ended December 31, 2019 and 2018, respectively. We expect our capital expenditures for the 12 months ended December 31, 2020 to increase to some degree. These capital expenditures will be primarily utilized for equipment needed related to fiber operations and office equipment. We expect to fund such capital expenditures out of our working capital.
Goodwill and Indefinite Lived Intangible Assets
Goodwill was $1,905,822 and $1,834,856 as of December 31, 2019 and 2018, respectively.
Goodwill was generated through the acquisitions we have made during 2017, 2018 and 2019. As the total consideration we paid for our completed acquisitions exceeded the value of the net assets acquired, we recorded goodwill for each of our completed acquisitions. At the date of acquisition, we performed a valuation to determine the value of the goodwill and intangible assets, along with the allocation of assets and liabilities acquired. The goodwill is attributable to synergies and economies of scale provided to us by the acquired entity.
We perform our annual impairment test on December 31st at the reporting unit level, which is consistent with our operating segments. Our reportable segment is infrastructure and professional services. Infrastructure and professional services comprised of the AWS Entities, the ADEX Entities, and TNS. These reporting units are aggregated to form one (1) operating segment and one (1) reportable segment for financial reporting. These reporting units are three (3) reportable segments for the evaluation of goodwill for impairment. As our business evolves and the acquired entities continue to be integrated, our operating segments may change. This may require us to reassess how goodwill at our reporting units are evaluated for impairment.
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We perform the impairment testing at least annually or at other times if we believe that it is more likely than not that there may be an impairment to the carrying value of our intangible assets with indefinite lives and goodwill. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test should be performed to measure the amount of impairment loss, if any.
We consider the results of an income approach and a market approach in determining the fair value of the reportable units. We evaluated the forecasted revenue using a discounted cash flow model for each of the reporting units. We also noted no unusual cost factors that would impact operations based on the nature of the working capital requirements of the components comprising the reportable units. Current operating results, including any losses, are evaluated by us in the assessment of goodwill and other intangible assets. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Key assumptions used in the income approach in evaluating goodwill are forecasts for each of the reporting unit revenue growth rates along with forecasted discounted free cash flows for each reporting unit, aggregated into each reporting segment. For the market approach, we used the guideline public company method, under which the fair value of a business is estimated by comparing the subject company to similar companies with publicly-traded ownership interests. From these “guideline” companies, valuation multiples are derived and then applied to the appropriate operating statistics of the subject company to arrive at indications of value.
While we use available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in impairment related to recorded goodwill balances. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units. We can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible assets in future periods.
Events that could cause the risk for impairment to increase are the loss of a major customer or group of customers, the loss of key personnel and changes to current legislation that may impact our industry or its customers’ industries.
Income Taxes
As of December 31, 2019, we had federal net operating loss carryforwards (“NOL’s”) of $17,212,941 that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2027.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss, capital loss and credit carryforwards if we were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating losses capital losses and credits prior to full utilization.
We have not completed a study to assess whether ownership change has occurred as a result of our acquisition of AWS and related issuance of shares. However, as a result of the issuance of common shares in 2017, we believe an ownership change under Sec. 382 may have occurred. As a result of this ownership change, certain of our net operating loss, capital loss and credit carryforwards will expire prior to full utilization. Additionally, further share issuances such as the shares issuances to InterCloud Systems, Inc. may result in additional ownership changes.
We perform an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. Our recent operating results and projections of future income weigh heavily in our overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because we had sustained cumulative losses since the commencement of operations.
Our continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2019, there was no accrued interest and penalties related to uncertain tax positions.
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We are subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to our net operating loss carryforwards all years remain open to examination by the major domestic taxing jurisdictions to which we are subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years are still subject to adjustment.
Liquidity and Financial Condition
As of December 31, 2019, our total current assets were $6,297,880 and our total current liabilities were $16,087,912, resulting in a working capital deficit of $9,790,032 compared to working capital deficit of $8,464,969 as of December 31, 2018.
We have suffered recurring losses from operations. The continuation of our company is dependent upon us attaining and maintaining profitable operations and raising additional capital as needed. In this regard we have historically raised additional capital through equity offerings and loan transactions.
Cash Flows
| Year Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash used in operating activities | $ | (2,217,080 | ) | $ | (1,489,418 | ) | ||
| Net cash (used in) provided by investing activities | $ | (1,011,415 | ) | $ | 170,128 | |||
| Net cash provided by financing activities | $ | 3,076,721 | $ | 1,910,990 | ||||
| Change in cash | $ | (151,774 | ) | $ | 591,700 | |||
The decrease in cash that we experienced during the year ended December 31, 2019 as compared to the increase in cash during the year ended December 31, 2019 was primarily a result of net cash used in operating activities in 2019 and the 2019 acquisition of TNS. The decrease was partially offset by an increase in cash provided by financing activities. We have not been able to reach the break-even point since our inception and have had to rely on raising capital. We anticipate generating increased revenues over the next year. Over the next 12 months, we anticipate raising additional funds, and we plan to primarily concentrate on our telecommunications business and associated projects along with our anticipated acquisition of WaveTech GmbH.
In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders’ loans. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to preserve our liquidity.
Indebtedness
As of December 31, 2019, the outstanding balances of loans payable to related parties, loans payable and convertible debentures were $3,701,258, $3,578,386 and $2,837,678, respectively, net of debt discounts of $0, $280,174 and $450,231, respectively.
The total outstanding principal balance per the loan agreements due to our debt holders was $10,847,728 at December 31, 2019. We are currently in discussions with certain of our creditors to restructure some of these loan agreements to reduce the principal balance and extend maturity dates. However, there can be no assurance that we will be successful in reducing the principal balance or extending the maturity dates of any of our outstanding notes.
Loans Payable to Related Parties
At December 31, 2019 and 2018, we had outstanding the following loans payable to related parties:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Promissory note issued to Roger Ponder, 10% interest, unsecured, due on demand | $ | 18,858 | $ | 18,858 | ||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, due on demand | 130,000 | 130,000 | ||||||
| Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020 | 85,000 | 85,000 | ||||||
| Promissory note issued to Keith Hayter, 8% interest, unsecured, due on demand | 80,000 | 80,000 | ||||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020 | 170,000 | - | ||||||
| Loan with WaveTech GmbH, 8% interest, matures May 18, 2020 | 3,000,000 | - | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 8% interest, unsecured, matured April 27, 2018 | - | 1,645,625 | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 1% interest, unsecured, matures August 16, 2019, net of debt discount of $0 and $171,557 | - | 622,392 | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 6% interest, unsecured, matured March 27, 2019, net of debt discount of $0 and $286,749 | - | 1,515,674 | ||||||
| Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand | 217,400 | 275,000 | ||||||
| Total | $ | 3,701,258 | $ | 4,372,549 | ||||
Additional information on our notes payable to related parties is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
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Loans Payable
As of December 31, 2019 and 2018, loans payable consisted of the following:
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand | $ | 41,361 | $ | 41,361 | ||||
| Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand | 7,760 | 7,760 | ||||||
| Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand | 2,636 | 2,636 | ||||||
| Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand | 15,000 | 15,000 | ||||||
| Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand | 7,500 | 7,500 | ||||||
| Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand | 50,000 | 50,000 | ||||||
| Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand | 12,000 | 12,000 | ||||||
| Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020, net of debt discount of $149,180 and $257,194 | 2,973,458 | 3,225,821 | ||||||
| Promissory note issued to C6 Capital, non-interest bearing, matures April 15, 2020, net of debt discount of $20,272 | 136,424 | - | ||||||
| Promissory note issued to Pawn Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $31,365 | 94,928 | - | ||||||
| Promissory note issued to RDM Capital Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $79,087 | 237,319 | - | ||||||
| Total | $ | 3,578,386 | $ | 3,362,078 | ||||
Additional information on our loans payable is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
Convertible Debentures
At December 31, 2019 and 2018, we had outstanding the following convertible debentures:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Convertible promissory note, Barn 11, 6% interest, unsecured, matured June 1, 2019, net of debt discount of $0 and $55,000 | $ | 594,362 | $ | 445,000 | ||||
| Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020, net of debt discount of $105,752 and $0 | 1,461,265 | - | ||||||
| Convertible promissory note, Michael Roeske, 6% interest, unsecured, due on demand, net of debt discount of $3,512 and $0 | 112,488 | - | ||||||
| Convertible promissory note, Joel Raven, 6% interest, unsecured, due on demand, net of debt discount of $8,658 and $0 | 355,342 | - | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures August 2, 2020, net of debt discount of $24,819 | 98,181 | - | ||||||
| Convertible promissory note, SCS, LLC, 8% interest, unsecured, matured March 30, 2020, due on demand, net of debt discount of $13,005 | 38,025 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020, net of debt discount of $113,674 | 34,326 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021, net of debt discount of $53,051 | 15,449 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021, net of debt discount of $45,125 | 12,875 | - | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures October 24 2020, net of debt discount of $23,986 | 99,014 | - | ||||||
| Convertible promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matures November 21, 2020, net of debt discount of $58,648 | 16,352 | - | ||||||
| Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019, net of debt discount of $0 and $1,009,630 | - | 240,370 | ||||||
| Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019, net of debt discount of $0 and $172,570 | - | 123,176 | ||||||
| Convertible promissory note, Silverback, 8% interest, unsecured, matures December 4, 2019, net of debt discount of $0 and $24,140 | - | 3,367 | ||||||
| Convertible promissory note, RDW Capital, February 21, 2018 assignment | - | 50,000 | ||||||
| Convertible promissory note, RDW Capital, June 7, 2018 assignment | - | 39,375 | ||||||
| Convertible promissory note, Silverback Capital, December 3, 2018 assignment | - | 50,000 | ||||||
| Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $9,087 | - | 69,860 | ||||||
| Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $41,395 | - | 37,552 | ||||||
| Total | 2,837,679 | 1,058,700 | ||||||
| Less: Long-term portion of convertible debentures, net of debt discount | (28,324 | ) | - | |||||
| Convertible debentures, current portion, net of debt discount | $ | 2,809,355 | $ | 1,058,700 | ||||
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Additional information on our convertible debentures is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Inflation
The effect of inflation on our revenue and operating results has not been significant.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed pursuant to this Item 8 are appended to this report. An index of those financial statements is found in Item 15.
ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
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ITEM 9A – CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on management’s evaluation, our Chief Executive Officer concluded that, as a result of the material weaknesses described below, as of December 31, 2019, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:
| a) | Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; | |
| b) | we do not have any formally adopted internal controls surrounding its cash and financial reporting procedures; and |
| c) | the lack of the quantity of resources to implement an appropriate level of review controls to properly evaluate the completeness and accuracy of transactions entered into by our company. |
We are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters.
Management’s report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2019 for the reasons discussed above.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our bylaws state that the authorized number of directors shall be not less than one and not more than fifteen and shall be set by resolution of the board of directors. Our board of directors consists of five (5) members, all of whom are not considered “independent directors,” as defined in applicable rules of the SEC and NASDAQ. Officers are appointed and serve at the discretion of our board of directors. There are no family relationships among any of our directors or executive officers.
Our current directors and officers are as follows:
| Name | Position | Age | Date First Elected or Appointed | |||||
| Roger M. Ponder | Chief Executive Officer and Chairman of the Board | 67 | June 6, 2017 | |||||
| Keith W. Hayter | President and Director | 56 | June 6, 2017 | |||||
| Dag Arild Valand | Director | 54 | November 14, 2019 | |||||
| Silas Poel | Chief Operating Officer and Director | 35 | November 14, 2019 | |||||
| Brynjar N. Meling | Director | 53 | February 19, 2020 | |||||
Our directors serve until our next annual shareholder meeting or until his successor is elected who accepts the position. Officers hold their positions at the pleasure of the board of directors. There are no arrangements, agreements or understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the management of our affairs.
The following is information about the experience and attributes of the members of our board of directors and senior executive officers as of the date of this report. The experience and attributes of our directors discussed below provide the reasons that these individuals were selected for board membership, as well as why they continue to serve in such positions.
Roger M. Ponder, Chief Executive Officer and Chairman of the Board
Mr. Ponder, age 67, has served as a director of our company since April 2017. Mr. Ponder was the President and Chief Executive Officer of Summit Capital Advisors LLC and Summit Broadband LLC, a provider of consulting services to private equity and institutional banking entities in the telecommunications, cable and media/internet sectors, since August 2009. Mr. Ponder prior served as Chief Operating Officer of InterCloud Systems, Inc. from November 2012 to March 2015. From January 2005 to August 2009, he was the President - Midwest/Kansas City Division of Time Warner Cable. Mr. Ponder was a member of the United Way Board of Trustees - Kansas City from January 2006 to January 2011. Mr. Ponder received his B.S. from Rollins College in Business Administration and Economics. Mr. Ponder brings extensive business development, strategic planning and operational experience to our company.
We entered into an employment agreement (the “Ponder Agreement”) with Mr. Ponder, effective as of June 1, 2018. The form of the Ponder Agreement was approved by the Board. The Ponder Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Ponder elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Ponder will receive a base annual salary of $350,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Ponder is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Ponder’s base salary for that fiscal year. Mr. Ponder was also granted a stock option to purchase shares of our common stock as determined by the Board under our Performance Incentive Plan, to participate in various employee benefit plans and to be reimbursed for out-of-pocket expenses. Mr. Ponder currently holds 7,031 shares of our common stock.
Keith W. Hayter, President and Director
On June 6, 2017, the Board appointed Keith W. Hayter to serve as President of our company, effective immediately. Mr. Hayter, age 55, has served as a director of our company since April 2017. Mr. Hayter has served as the Chief Executive Officer and President of AW Solutions Inc. and AW Solutions Puerto Rico LLC since 2006. Mr. Hayter attended Platt College, the City and Guilds Institute and the City and East London College. Mr. Hayter brings extensive multi-national experience in the start-up, development and management in the telecommunication and construction industry.
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We entered into an employment agreement (the “Hayter Agreement”) with Mr. Hayter, effective as of June 1, 2018. The Hayter Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Hayter elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Hayter will receive a base annual salary of $340,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Hayter is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Hayter’s base salary for that fiscal year. Mr. Hayter was also granted a stock option to purchase shares of our common stock as determined by the Board under our Performance Incentive Plan, to participate in various employee benefit plans and to be reimbursed for out-of-pocket expenses. Mr. Hayter currently holds 6,939 shares of our common stock.
Dag Valand, Director
On November 14, 2019, in connection with our planned acquisition of WaveTech GmbH, Dag Viland was appointed director of our company. Mr. Valand is the CEO and co-founder of WaveTech GmbH. He established the company together with PhD Ove T. Aanensen in 2003 and has since then served as its CEO. Mr. Valand is a civil engineer with over 25 years of international experience in the battery industry, and was one of the first to introduce battery pulsing to the European market. He has been part of several businesses that have proved successful in the market, and also made his mark as founder and director of several businesses, from trade companies to establishing sales companies becoming a market leader in its segment in the country.
Silas Poel, Chief Operating Officer and Director
On November 14, 2019, in connection with our planned acquisition of WaveTech GmbH, Silas Poel was appointed Chief Operating Officer and director of our company. Mr. Poel is COO of WaveTech GmbH. Mr. Poel’s background is in taxation and business administration and he is a Certified IFRS Accountant. Mr. Poel holds a Bachelor (CCI) in Accounting. Mr. Poel has a broad international background in the “clean-tech” arena and is a specialist in establishing and developing companies. He co-founded a private investment office for Asian and European families and managed both the office and investor relations. Mr. Poel also worked as Executive Consultant for a Munich-based Investment Office and supported a Switzerland-based Private Equity Fund as an industry expert. Prior to that, he worked as the Investment Manager in a venture capital arm of a Munich-based investment firm where he built their investment portfolio with a strong focus on energy and water and was responsible for the growth of the companies it contained.
We entered into an employment agreement (the “Poel Agreement”) with Mr. Poel, effective as of November 14, 2019. The Poel Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Poel elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Poel will receive a base annual salary of $340,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Poel is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Poel’s base salary for that fiscal year.
Brynjar N. Meling, Director
On February 19, 2020, the Board appointed Brynjar N. Meling as a director of our company, effective immediately. Mr. Meling is one of Norway’s most respected and well-known legal experts. He is the Chairman and owner of the Meling AS law firm in Norway, with offices in Stavanger and Oslo. Mr. Meling previously served as a board member of WaveTech GmbH. Mr. Meling received his law degree from the University of Oslo in 1994.
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Family Relationships
None.
Board Independence and Committees
We are not required to have any independent members of the Board of Directors.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
| 1. | been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offences); |
| 2. | had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time; |
| 3. | been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons engaged in any such activity; |
| 4. | been found by a court of competent jurisdiction in a civil action or by the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; |
| 5. | been 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 (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal or state securities or commodities law or regulation, 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 any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| 6. | been 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. |
Code of Ethics
We adopted a Code of Ethics applicable to all of our directors, officers, employees and consultants, which is a “code of ethics” as defined by applicable rules of the SEC. Our Code of Ethics was attached as an exhibit to our Registration Statement filed on Form S-1 filed with the SEC on February 26, 2008. If we make any amendments to our Code of Ethics other than technical, administrative, or other non-substantive amendments, or grant any waivers, including implicit waivers, from a provision of our Code of Ethics to our Chief Executive Officer, Chief Financial Officer, or certain other finance executives, we will disclose the nature of the amendment or waiver, its effective date and to whom it applies in a Current Report on Form 8-K filed with the SEC.
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. We will provide a copy of our Code of Business Conduct and Ethics, without charge, to any person desiring a copy, by written request to our company at 300 Crown Oak Centre Drive, Longwood, Florida, 32750.
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Section 16(a) Beneficial Ownership Compliance Reporting
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our shares of common stock and other equity securities, on Forms 3, 4 and 5, respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file.
ITEM 11 – EXECUTIVE COMPENSATION
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer, the two highest paid executive officers and up to two other highest paid individuals whose total annual salary and bonus exceeded $100,000 for the years ended December 31, 2019 and 2018.
| Changes in | ||||||||||||||||||||||||||||||||||||
| Pension Value and | ||||||||||||||||||||||||||||||||||||
| Non-Equity | Non-Qualified | |||||||||||||||||||||||||||||||||||
| Incentive | Deferred | All | ||||||||||||||||||||||||||||||||||
| Stock | Option | Plan | Compensation | Other | ||||||||||||||||||||||||||||||||
| Name and Principal | Fiscal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | |||||||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||||||
| Roger M. Ponder | 2019 | 317,500 | — | 79,200 | — | — | — | 6,000 | (a) | 402,700 | ||||||||||||||||||||||||||
| Chief Executive Officer | 2018 | 226,000 | — | 2,109,231 | — | — | — | — | 2,335,231 | |||||||||||||||||||||||||||
| Keith W. Hayter | 2019 | 327,500 | — | 75,600 | — | — | — | 6,000 | (a) | 409,100 | ||||||||||||||||||||||||||
| President | 2018 | 216,000 | — | 2,084,538 | — | — | — | — | 2,300,538 | |||||||||||||||||||||||||||
| (a) | This amount represent a car allowance. |
Outstanding Equity Awards at Fiscal Year-End Table
The following table itemizes outstanding equity awards held by the named executive officers as of December 31, 2019.
| Stock Awards | ||||||||||||||
| Name | Number of Shares or Units of Stock (#) That Have Not Vested(1) | Stock Award Grant Date | Market Value of Shares or Units of Stock ($) That Have Not Vested | |||||||||||
| Roger Ponder | 3,500 | 9/28/2018 | $ | 682,500 | (2, 3) | |||||||||
| Keith Hayter | 3,500 | 9/28/2018 | 682,500 | (4, 5) | ||||||||||
| Roger Ponder | 2,031 | 2/1/2019 | 79,200 | (6, 7) | ||||||||||
| Keith Hayter | 1,938 | 2/1/2019 | 75,600 | (8, 9) | ||||||||||
| (1) | Unvested shares of restricted stock are generally forfeited if the named executive officer’s employment terminates, except to the extent otherwise provided for in an employment or award agreement. |
| (2) | The market value of this stock award is computed by multiplying the number of shares of restricted stock granted by $195.00, which was the closing market price of one share of our common stock on September 28, 2018. |
| (3) | This restricted stock vested 30% on September 28, 2019 and vests 30% on September 28, 2020 and 40% on September 28, 2021. |
| (4) | The market value of this stock award is computed by multiplying the number of shares of restricted stock granted by $195.00, which was the closing market price of one share of our common stock on September 28, 2018. |
| (5) | This restricted stock vested 30% on September 28, 2019 and vests 30% on September 28, 2020 and 40% on September 28, 2021. |
| (6) | The market value of this stock award is computed by multiplying the number of shares of restricted stock granted by $39.00, which was the closing market price of one share of our common stock on February 1, 2019. |
| (7) | This restricted stock vested 30% on February 1, 2020 and vests 30% on February 1, 2021 and 40% on February 1, 2022 |
| (8) | The market value of this stock award is computed by multiplying the number of shares of restricted stock granted by $39.00, which was the closing market price of one share of our common stock on February 1, 2019. |
| (9) | This restricted stock vested 30% on February 1, 2020 and vests 30% on February 1, 2021 and 40% on February 1, 2022. |
47
Employment Contracts and Termination of Employment and Change-In-Control Arrangements
Roger M. Ponder employee agreement
On June 6, 2017, the Board of Directors (the “Board”) of our company appointed Roger M. Ponder to serve as our Chief Executive Officer, effective immediately. Mr. Ponder, age 67, has served as a director of our company since April 2017. Mr. Ponder has been the President and Chief Executive Officer of Summit Capital Advisors LLC and Summit Broadband LLC a provider of consulting services to private equity and institutional banking entities in the telecommunications, cable and media/internet sectors, since August 2009. Mr. Ponder had served as a member of the board of directors of InterCloud Systems, Inc., and served as its Chief Operating Officer from November 2012 to March 2015. From January 2005 to August 2009, he was the President - Midwest/Kansas City Division of Time Warner Cable. Mr. Ponder was a member of the United Way Board of Trustees - Kansas City from January 2006 to January 2011. Mr. Ponder received his B.S. from Rollins College in Business Administration and Economics. Mr. Ponder brings extensive business development, strategic planning and operational experience to our company.
We entered into an employment agreement (the “Ponder Agreement”) with Mr. Ponder, effective as of June 1, 2018. The form of the Ponder Agreement was approved by the Board. The following is a brief summary of the material terms of the Ponder Agreement.
The Ponder Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Ponder elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Ponder will receive a base annual salary of $350,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Ponder is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Ponder’s base salary for that fiscal year. Mr. Ponder was also granted a stock option to purchase shares of our common stock as determined by the Board under our Performance Incentive Plan, to participate in various employee benefit plans and to be reimbursed for out-of-pocket expenses. Mr. Ponder currently holds 7,031 shares of our common stock.
In the event that Mr. Ponder’s employment is terminated without “Cause” or he terminates his employment for “Good Reason” not in connection with a “Change in Control” (as such terms are defined in the Ponder Agreement), our company shall pay to Mr. Ponder an amount equal to the sum of (x) twenty-four (24) months of his base salary at the monthly rate in effect on the date of termination, plus (y) two (2) times his target bonus for the fiscal year in which the termination occurs, an amount equal to any unpaid bonus from the previous year, and all equity-based awards shall vest. In addition, we shall pay Mr. Ponder an amount equal to the cost of continuation of group health coverage under COBRA for 12 months.
The Ponder Agreement contains a non-compete provision during the term of Mr. Ponder’s employment and for a period of one year thereafter. Mr. Ponder would also be prohibited from soliciting customers or clients of our company with whom he dealt during his employment and from soliciting employees of our company for the one-year period.
There are no family relationships between Mr. Ponder and any director or executive officer of our company, and he does not have any direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
Keith W. Hayter employment agreement
On June 6, 2017, the Board appointed Keith W. Hayter to serve as President of our company, effective immediately. Mr. Hayter, age 55, has served as a director of our company since April 2017. Mr. Hayter has served as the Chief Executive Officer and President of AW Solutions Inc. and AW Solutions Puerto Rico LLC since 2006. Mr. Hayter attended Platt College, the City and Guilds Institute and the City and East London College. Mr. Hayter brings extensive multi-national experience in the start-up, development and management in the telecommunication and construction industry.
We entered into an employment agreement (the “Hayter Agreement”) with Mr. Hayter, effective as of June 1, 2018. The form of the Hayter Agreement was approved by the Board. The following is a brief summary of the material terms of the Hayter Agreement.
48
The Hayter Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Hayter elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Hayter will receive a base annual salary of $340,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Hayter is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Hayter’s base salary for that fiscal year. Mr. Hayter was also granted a stock option to purchase shares of our common stock as determined by the Board under our Performance Incentive Plan, to participate in various employee benefit plans and to be reimbursed for out-of-pocket expenses. Mr. Hayter currently holds 6,939 shares of our common stock.
In the event that Mr. Hayter’s employment is terminated without “Cause” or he terminates his employment for “Good Reason” not in connection with a “Change in Control” (as such terms are defined in the Hayter Agreement), our company shall pay to Mr. Hayter an amount equal to the sum of (x) twenty-four (24) months of his base salary at the monthly rate in effect on the date of termination, plus (y) two (2) times his target bonus for the fiscal year in which the termination occurs, an amount equal to any unpaid bonus from the previous year, and all equity-based awards shall vest. In addition, our company shall pay Mr. Hayter an amount equal to the cost of continuation of group health coverage under COBRA for 12 months.
The Hayter Agreement contains a non-compete provision during the term of Mr. Hayter’s employment and for a period of one year thereafter. Mr. Hayter would also be prohibited from soliciting customers or clients of our company with whom he dealt during his employment and from soliciting employees of our company for the one-year period.
There are no family relationships between Mr. Hayter and any director or executive officer of our company, and he does not have any direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
Silas Poel employee agreement
We entered into an employment agreement (the “Poel Agreement”) with Mr. Poel, effective as of November 14, 2019. The Poel Agreement has a three-year term and will automatically renew for successive one-year terms unless our company or Mr. Poel elects to terminate the agreement by giving 60 days’ notice prior to the end of the current term. Mr. Poel will receive a base annual salary of $340,000, which may be increased (but not decreased) by the Board (or a committee thereof) in its sole discretion.
In addition, Mr. Poel is entitled to receive annual incentive (bonus) compensation as the Board shall determine. His target bonus is equal to 60% of Mr. Poel’s base salary for that fiscal year
There are no family relationships between Mr. Poel and any director or executive officer of our company, and he does not have any direct or indirect material interest in any transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
Director Compensation
There was no director compensation during the years ended December 31, 2019 and 2018.
ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of May 8, 2020:
| ● | by each person who is known by us to beneficially own more than 5% of our common stock; |
| ● | by each of our officers and directors; and |
| ● | by all of our officers and directors as a group. |
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power.
| Name of Owner | Title of Class | Number of Shares Owned (1) | Percentage of Common Stock (2) | |||||||
| Roger M. Ponder | Common Stock | 14,062 | 0.8 | % | ||||||
| Keith W. Hayter | Common Stock | 13,877 | 0.8 | % | ||||||
| Philip Kuhn | Common Stock | 101,520 | 5.8 | % | ||||||
| Officers, Directors and 5% or Greater Owners as a Group | Common Stock | 129,459 | 7.5 | % | ||||||
| (1) | Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person. |
| (2) | Percentage based upon 1,736,203 shares of common stock issued and outstanding as of May 8, 2020. |
49
Securities Authorized for Issuance Under Equity Compensation Plans
On November 24, 2009, we registered a 2009 Stock Compensation Plan and a 2009 Stock Option Plan which permits our company to grant up to an aggregate of 3,500,000 options to acquire shares of common stock, to directors, officers, employees and consultants of our company.
Our board of directors may amend or terminate the Plans at any time, but no action will affect any outstanding awards in any manner materially adverse to participant without the consent of the participants. Plan amendments will be submitted to the stockholders for their approval as required by applicable law or any listing agency. Our plans provide additional means to attract, motivate, retain and reward employees or other eligible persons by allow them the ability to purchase additional shares of common stock.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Except as set forth below, we have not entered into any transactions with our officers, directors, persons nominated for these positions, beneficial owners of 5% or more of our common stock, or family members of these persons wherein the amount involved in the transaction or a series of similar transactions exceeded the lesser of $120,000 or 1% of the average of our total assets for the last fiscal year:
Issuance of Shares Pursuant to InterCloud Systems, Inc. Convertible Debentures
On May 6, 2019, we issued 52,538 shares of common stock to InterCloud Systems, Inc. upon the conversion of $2,897,924 of principal and $429,135 of accrued interest pursuant to convertible debentures.
On August 16, 2019, we issued 68,681 shares of common stock to InterCloud Systems, Inc. upon the conversion of $793,894 of principal and $12,063 of accrued interest pursuant to convertible debentures.
As a result of the May 6, 2019 issuance, we determined that InterCloud Systems is a related party. The effective date of the reclassification was January 1, 2018.
Loan with WaveTech GmbH., matures May 18, 2020
In connection with the share purchase agreement with WaveTech GmbH, we were to receive $3,000,000 in cash at or before consummation of the transactions described in the agreement. We received $1,325,895 which was placed into escrow to satisfy the amounts outstanding to WaveTech Global, Inc. We received an additional $1,664,083 during July 2019 to satisfy the $3,000,000 of cash per the share purchase agreement. The remaining $10,022 was recorded as a foreign exchange loss.
As a result of our company acquiring 60% of the outstanding shares of WaveTech GmbH on November 14, 2019, we determined that WaveTech GmbH is a related party. The effective date of the reclassification was January 1, 2019.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
The aggregate fees billed for the years ended December 31, 2019 and 2018 for professional services rendered by the principal accountant for the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
| For the year ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Sadler, Gibb & Associates, LLC | ||||||||
| Audit Fees | $ | 96,500 | $ | 75,000 | ||||
| Audit-Related Fees | 30,000 | 18,500 | ||||||
| Tax Fees | - | - | ||||||
| All Other Fees | - | - | ||||||
| Total | $ | 126,500 | $ | 93,500 | ||||
Our board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
Our board of directors has considered the nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.
50
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Financial Statements.
See the “Index to Consolidated Financial Statements” on page F-1 below for the list of financial statements filed as part of this report.
Financial Statement Schedules.
All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto set forth below beginning on page F-1.
Exhibits.
See the Exhibit Index immediately following the signature page of this Report on Form 10-K. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Report on Form 10-K.
None.
51
SPECTRUM GLOBAL SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Spectrum Global Solutions Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spectrum Global Solutions Inc. (“the Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses, experienced negative cash flow from operations, and has a capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 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 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2014.
Salt Lake City, UT
May 14, 2020
F-2
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated balance sheets
| December 31, | ||||||||
| ASSETS | 2019 | 2018 | ||||||
| Current assets: | ||||||||
| Cash | $ | 468,819 | $ | 620,593 | ||||
| Accounts receivable, net of allowances of $504,785 and $502,868, respectively | 5,167,261 | 6,562,182 | ||||||
| Contract assets | 461,681 | 1,861,895 | ||||||
| Prepaid expenses and deposits | 200,119 | 22,682 | ||||||
| Total current assets | 6,297,880 | 9,067,352 | ||||||
| Property and equipment, net of accumulated depreciation of $1,058,973 and $1,020,959, respectively | 93,067 | 61,257 | ||||||
| Goodwill | 1,905,822 | 1,834,856 | ||||||
| Customer lists, net of accumulated amortization of $440,805 and $187,299, respectively | 2,490,024 | 850,249 | ||||||
| Tradenames, net accumulated amortization of $212,226 and $118,810, respectively | 1,187,895 | 1,086,795 | ||||||
| Operating lease right-of-use assets | 168,384 | - | ||||||
| Other assets | 25,746 | 29,887 | ||||||
| Total assets | $ | 12,168,818 | $ | 12,930,396 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | 4,028,285 | $ | 5,200,320 | ||||
| Contract liabilities | 704,544 | 271,788 | ||||||
| Loans payable to related parties, net of debt discount of $0 and $458,306, respectively | 3,701,258 | 4,372,549 | ||||||
| Loans payable, net of debt discount of $280,174 and $257,194, respectively | 3,578,386 | 3,362,078 | ||||||
| Convertible debentures, current portion, net of discount of $352,055 and $1,311,821, respectively | 2,809,355 | 1,058,700 | ||||||
| Derivative liability | 992,733 | 3,166,886 | ||||||
| Warrant liability | 100,000 | 100,000 | ||||||
| Operating lease liabilities | 173,351 | - | ||||||
| Total current liabilities | 16,087,912 | 17,532,321 | ||||||
| Long-term liabilities: | ||||||||
| Convertible debentures, net of current portion, net of debt discount of $98,176 | 28,324 | - | ||||||
| Total long-term liabilities | 28,324 | - | ||||||
| Total liabilities | 16,116,236 | 17,532,321 | ||||||
| Commitments and contingencies | ||||||||
| Series A preferred stock; $0.00001 par value; 8,000,000 shares authorized; 899,427 issued and 829,427 and 899,427 outstanding as of December 31, 2019 and 2018, respectively | 1,007,888 | 604,877 | ||||||
| Series B preferred stock; $3,500 stated value; 1,000 shares authorized; 1,000 issued and outstanding as of December 31, 2019 and 2018 | 484,530 | 484,530 | ||||||
| Total mezzanine equity | 1,492,418 | 1,089,407 | ||||||
| Stockholders’ deficit: | ||||||||
| Common stock; $0.00001 par value; 750,000,000 shares authorized; 195,715 and 25,703 issued and 193,644 and 23,632 outstanding as of December 31, 2019 and 2018, respectively | 2 | - | ||||||
| Additional paid-in capital | 25,255,291 | 18,681,467 | ||||||
| Treasury stock, at cost | (277,436 | ) | (277,436 | ) | ||||
| Common stock subscribed | 74,742 | 74,742 | ||||||
| Accumulated deficit | (30,492,435 | ) | (24,170,105 | ) | ||||
| Total stockholders’ deficit | (5,439,836 | ) | (5,691,332 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 12,168,818 | $ | 12,930,396 | ||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-3
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of operations
| For the years ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 34,010,597 | $ | 34,549,157 | ||||
| Operating expenses: | ||||||||
| Cost of revenues | 29,190,105 | 29,101,308 | ||||||
| Depreciation and amortization | 384,935 | 220,431 | ||||||
| General and administrative | 4,119,807 | 4,098,777 | ||||||
| Salaries and wages | 4,670,365 | 3,668,298 | ||||||
| Total operating expenses | 38,365,212 | 37,088,814 | ||||||
| Loss from operations | (4,354,615 | ) | (2,539,657 | ) | ||||
| Other (expenses) income: | ||||||||
| Gain on settlement of debt | 267,282 | 884,415 | ||||||
| Amortization of discounts on convertible debentures and loans payable | (1,560,657 | ) | (2,768,706 | ) | ||||
| Gain on change in fair value of derivatives | 1,843,935 | 3,581,071 | ||||||
| Interest expense | (1,699,312 | ) | (1,118,353 | ) | ||||
| Foreign exchange loss | (10,022 | ) | - | |||||
| Initial derivative expense | (116,638 | ) | - | |||||
| Gain on extinguishment of preferred stock liability | - | 285,855 | ||||||
| Gain on disposal of subsidiaries | - | 577,299 | ||||||
| Total other (expense) income | (1,275,412 | ) | 1,441,581 | |||||
| Net loss before income taxes | (5,630,027 | ) | (1,098,076 | ) | ||||
| Provision for income taxes | 204,231 | 247,558 | ||||||
| Net loss | (5,834,258 | ) | (1,345,634 | ) | ||||
| Less: net loss attributable to the non-controlling interest | - | 53,429 | ||||||
| Net loss attributable to Spectrum Global Solutions, Inc. | (5,834,258 | ) | (1,292,205 | ) | ||||
| Less: deemed dividend - Series A preferred stock modification | (488,072 | ) | (191,261 | ) | ||||
| Less: preferred stock extinguishment | - | (363,914 | ) | |||||
| Net loss attributable to Spectrum Global Solutions, Inc. common shareholders | $ | (6,322,330 | ) | $ | (1,847,380 | ) | ||
| Net loss per share attributable to Spectrum Global Solutions, Inc. common shareholders, basic and diluted: | $ | (52.98 | ) | $ | (177.12 | ) | ||
| Weighted average common shares outstanding, basic and diluted: | 119,344 | 10,430 | ||||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-4
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of stockholder’s deficit
| Common stock | Additional paid-in | Common stock | Treasury | Accumulated | ||||||||||||||||||||||||
| Shares | $ | capital | subscribed | stock | deficit | Total | ||||||||||||||||||||||
| Balances, January 1, 2019 | 25,703 | $ | - | $ | 18,681,467 | $ | 74,742 | $ | (277,436 | ) | $ | (24,170,105 | ) | $ | (5,691,332 | ) | ||||||||||||
| Issuance of common stock to Dominion Capital | 3,104 | - | 36,454 | - | - | - | 36,454 | |||||||||||||||||||||
| Issuance of common stock to InterCloud Systems | 121,019 | 2 | 3,381,839 | - | - | - | 3,381,841 | |||||||||||||||||||||
| Issuance of common stock to M2B Funding | 4,448 | - | 48,608 | - | - | - | 48,608 | |||||||||||||||||||||
| Issuance of common stock to MZ Group for services | 2,778 | - | 37,500 | - | - | - | 37,500 | |||||||||||||||||||||
| Issuance of common stock to RDW Capital | 4,126 | - | 304,028 | - | - | - | 304,028 | |||||||||||||||||||||
| Issuance of common stock to Silverback Capital | 7,700 | - | 207,052 | - | - | - | 207,052 | |||||||||||||||||||||
| Issuance of common stock to Virtual Capital | 13,239 | - | 698,921 | - | - | - | 698,921 | |||||||||||||||||||||
| Issuance of common stock to employees pursuant to the conversions of convertible debt | 4,667 | - | 308,000 | - | - | - | 308,000 | |||||||||||||||||||||
| Impact of Dominion Capital beneficial conversion feature | - | - | 314,228 | - | - | - | 314,228 | |||||||||||||||||||||
| Shares issued for services | 9,565 | - | 1,237,194 | - | - | - | 1,237,194 | |||||||||||||||||||||
| Cancellation of shares for services | (634 | ) | - | - | - | - | - | - | ||||||||||||||||||||
| Deemed dividend - Series A preferred stock modification | - | - | - | - | - | (488,072 | ) | (488,072 | ) | |||||||||||||||||||
| Net loss for the period | - | - | - | - | - | (5,834,258 | ) | (5,834,258 | ) | |||||||||||||||||||
| Ending balance, December 31, 2019 | 195,715 | $ | 2 | $ | 25,255,291 | $ | 74,742 | $ | (277,436 | ) | $ | (30,492,435 | ) | $ | (5,439,836 | ) | ||||||||||||
F-5
| Common stock | Additional paid-in | Common stock | Treasury | Subscriptions | Accumulated | Non-controlling | ||||||||||||||||||||||||||||||
| Shares | $ | Capital | subscribed | stock | receivable | deficit | interest | Total | ||||||||||||||||||||||||||||
| Balances, January 1, 2018 | 7,052 | $ | - | $ | 15,909,633 | $ | 74,742 | $ | - | $ | - | $ | (22,322,725 | ) | $ | (88,650 | ) | $ | (6,427,000 | ) | ||||||||||||||||
| Issuance of common stock to Dominion Capital | 176 | - | 95,040 | - | - | - | - | - | 95,040 | |||||||||||||||||||||||||||
| Issuance of common stock to RDW Capital | 2,211 | - | 773,939 | - | - | - | - | - | 773,939 | |||||||||||||||||||||||||||
| Issuance of common stock to Silverback Capital | 1,073 | - | 130,325 | - | - | - | - | - | 130,325 | |||||||||||||||||||||||||||
| Shares issued upon conversion of preferred shares | 652 | - | 225,887 | - | - | - | - | - | 225,887 | |||||||||||||||||||||||||||
| Additional shares issued to Dominion upon conversion of preferred shares | - | - | 30,550 | - | - | - | - | - | 30,550 | |||||||||||||||||||||||||||
| Pryor Cashman warrant for services | - | - | 276,428 | - | - | - | - | - | 276,428 | |||||||||||||||||||||||||||
| Shares issued upon conversion of common shares to preferred | (3,618 | ) | - | (207,095 | ) | (277,436 | ) | - | - | - | (484,531 | ) | ||||||||||||||||||||||||
| Shares returned by River North | (277 | ) | - | (167,923 | ) | - | - | 222,964 | - | - | 55,041 | |||||||||||||||||||||||||
| Subscriptions receivable | - | - | - | - | - | (222,964 | ) | - | - | (222,964 | ) | |||||||||||||||||||||||||
| Shares issued for services | 18,434 | - | 1,740,427 | - | - | - | - | - | 1,740,427 | |||||||||||||||||||||||||||
| Warrant issued to acquire non-controlling interest | - | - | (125,744 | ) | - | - | - | - | (133,254 | ) | (258,998 | ) | ||||||||||||||||||||||||
| Disposal of subsidiaries | - | - | - | - | - | - | - | 275,333 | 275,333 | |||||||||||||||||||||||||||
| Deemed dividend - Series A preferred stock modification | - | - | - | - | - | - | (152,187 | ) | - | (152,187 | ) | |||||||||||||||||||||||||
| Net loss for the period | - | - | - | - | - | - | (1,695,193 | ) | (53,429 | ) | (1,748,622 | ) | ||||||||||||||||||||||||
| Ending balance, December 31, 2018 | 25,703 | $ | - | $ | 18,681,467 | $ | 74,742 | $ | (277,436 | ) | $ | - | $ | (24,170,105 | ) | $ | - | $ | (5,691,332 | ) | ||||||||||||||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-6
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of cash flows
| For the years ended | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,834,258 | ) | $ | (1,345,634 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on change in fair value of derivative liability | (1,843,935 | ) | (3,581,071 | ) | ||||
| Amortization of discounts on convertible debentures, loans payable, and loans payable to related parties | 1,560,657 | 2,768,706 | ||||||
| Depreciation and amortization | 384,935 | 220,431 | ||||||
| Shares issued for services | 1,274,694 | 2,016,856 | ||||||
| Gain on settlement of debt | (267,282 | ) | (884,415 | ) | ||||
| Foreign exchange loss (gain) | 10,022 | (4,712 | ) | |||||
| Initial derivative expense | 116,638 | - | ||||||
| Gain on disposal of subsidiaries | - | (577,299 | ) | |||||
| Derivative warrants issued for services | - | 68,536 | ||||||
| Gain on extinguishment of preferred stock liability | - | (285,855 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 1,460,087 | 43,128 | ||||||
| Prepaid expenses and deposits | (137,333 | ) | 18,252 | |||||
| Accounts payable and accrued liabilities | (860,735 | ) | 1,681,805 | |||||
| Other assets | 4,141 | 4,845 | ||||||
| Contract assets | 1,477,566 | (1,850,556 | ) | |||||
| Operating lease right-of-use assets | 148,215 | - | ||||||
| Operating lease liabilities | (143,248 | ) | - | |||||
| Contract liabilities | 432,756 | 271,788 | ||||||
| Due to related parties | - | (54,223 | ) | |||||
| Net cash used in operating activities | (2,217,080 | ) | (1,489,418 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Net cash paid upon acquisition | (941,593 | ) | (328 | ) | ||||
| Purchase of equipment | (69,822 | ) | (21,288 | ) | ||||
| Cash received upon acquisition of subsidiary | - | 191,744 | ||||||
| Net cash (used in) provided by investing activities | (1,011,415 | ) | 170,128 | |||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable | 28,656,567 | 1,695,515 | ||||||
| Repayments of loans payable | (28,795,279 | ) | (1,723,000 | ) | ||||
| Proceeds from loans payable to related parties | 3,159,978 | 165,000 | ||||||
| Repayments of loans payable to related parties | (112,724 | ) | - | |||||
| Proceeds from convertible debentures | 534,500 | 2,455,959 | ||||||
| Repayments of convertible debentures | (366,321 | ) | (401,524 | ) | ||||
| Repurchase of preferred shares | - | (280,960 | ) | |||||
| Net cash provided by financing activities | 3,076,721 | 1,910,990 | ||||||
| Net (decrease) increase in cash | (151,774 | ) | 591,700 | |||||
| Cash, beginning of period | 620,593 | 28,893 | ||||||
| Cash, end of period | $ | 468,819 | $ | 620,593 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 374,737 | $ | 758,470 | ||||
| Cash paid for income taxes | $ | 109,099 | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for conversion of loans payable | $ | 4,899,842 | $ | 372,993 | ||||
| Common stock issued for conversion of Series A preferred stock | $ | 85,061 | $ | - | ||||
| Original issue discounts | $ | 581,000 | $ | 437,500 | ||||
| Third-party payment of third-party debt | $ | 1,023,365 | $ | - | ||||
| Addition to principal of convertible debenture due to Barn 11 default | $ | 167,093 | $ | - | ||||
| Addition to derivative liability due to Barn 11 default | $ | 466,000 | $ | - | ||||
| Deemed dividend - Series A preferred stock modification | $ | 488,072 | $ | 191,261 | ||||
| Right-of-use operating lease assets obtained in exchange for operating lease liabilities | $ | 316,599 | $ | - | ||||
| Accounts payable exchanged for convertible note | $ | 51,030 | $ | - | ||||
| Assignment of related party debt | $ | 200,000 | $ | - | ||||
| Original debt discount against derivative liability | $ | - | $ | 506,630 | ||||
| Convertible notes issued to settle contingent liability | $ | - | $ | 793,893 | ||||
| Common stock issued to settle accounts payable and debt | $ | - | $ | 2,640 | ||||
| Net assets acquired in ADEX acquisition | $ | - | $ | 4,663,800 | ||||
| Warrant issued for non-controlling interest | $ | - | $ | 133,256 | ||||
| Series A preferred stock issued to settle loans payable and accrued interest | $ | - | $ | 406,560 | ||||
| Preferred stock issued to settle derivative liabilities | $ | - | $ | 291,064 | ||||
| Preferred share extinguishment | $ | - | $ | 363,914 | ||||
| Preferred shares issued with convertible debt | $ | - | $ | 193,509 | ||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-7
SPECTRUM GLOBAL SOLUTIONS, INC.
Notes to the consolidated financial statements
December 31, 2019
| 1. | Organization and Going Concern |
Spectrum Global Solutions, Inc., (the “Company”) (f/k/a Mantra Venture Group Ltd.) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company reincorporated in the province of British Columbia, Canada.
On April 25, 2017, the Company entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased 80.1% of the assets associated with InterCloud’s AW Solutions, Inc., AW Solutions Puerto Rico, LLC, and Tropical Communications, Inc. (collectively “AWS” or the “AWS Entities”) subsidiaries.
On November 15, 2017, the Company changed its name to “Spectrum Global Solutions, Inc.” and reincorporated in the state of Nevada.
On February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to the Company of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by the Company.
On February 6, 2018, the Company entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Stock Purchase Agreement, the Company purchased all of the issued and outstanding capital stock and membership interests of ADEX Corporation, ADEX Puerto Rico LLC, ADEX Towers, Inc. and ADEX Telecom, Inc. (collectively “ADEX” or the “ADEX Entities”). The Company completed the acquisition on February 27, 2018.
On May 18, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation, Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives Ltd. to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned entities assumed all liabilities and obligations with respect to such entities.
On January 4, 2019, the Company entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and the Company agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporation.
During September 2019, the Company formed ADEX Canada, which is included in the ADEX Entities.
The Company’s AWS Entities are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally. The Company’s TNS subsidiary is a Chicago-based structured cabling and next-generation DAS design and installation firm that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures.
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The recently acquired AWS and ADEX businesses have also incurred losses and experienced negative cash flows from operations during their most recent fiscal years. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of December 31, 2019, the Company had an accumulated deficit of $30,492,435, and a working capital deficit of $9,790,032. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
F-8
Management requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be no certainty that these sources will provide the additional funds required for the next twelve months.
| 2. | Significant Accounting Policies |
Basis of Presentation/Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, the AWS Entities (from the date of acquisition, April 25, 2017), the ADEX Entities (from the date of acquisition, February 27, 2018), and TNS (from the date of acquisition, January 4, 2019). All of the subsidiaries are wholly-owned.
During the year ended December 31, 2018, the Company disposed of the following subsidiaries; Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc.
All inter-company balances and transactions have been eliminated.
Reverse Stock Split
On April 14, 2020, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The reverse stock split was previously approved by the board of directors and the majority of stockholders of the Company. The reverse stock split was deemed effective at the open of business on April 21, 2020. As a result of the reverse stock split, every three hundred (300) shares of outstanding common stock of the Company as of April 14, 2020 were converted into one (1) share of common stock. Fractional shares resulting from the reverse stock split will be rounded up to the next whole number.
All common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock of the Company as a result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.00001 per share post-split.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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. The Company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records unbilled receivables for services performed but not billed. Management reviews a customer’s credit history before extending credit. The Company maintains an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts at December 31, 2019 and 2018 was $504,785 and $502,868, respectively.
F-9
Property and Equipment
Property and equipment are stated at cost. The Company depreciates the cost of property and equipment over their estimated useful lives at the following annual rates:
| Automotive | 3-5 years straight-line basis |
| Computer equipment and software | 3-7 years straight-line basis |
| Leasehold improvements | 5 years straight-line basis |
| Office equipment and furniture | 5 years straight-line basis |
| Research equipment | 5 years straight-line basis |
Goodwill
Goodwill was generated through the acquisition of AWS, ADEX and TNS as the total consideration paid exceeded the fair value of the net assets acquired.
The Company tests its goodwill for impairment at least annually on December 31st and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.
The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during the years ended December 31, 2019 and 2018.
Intangible Assets
At December 31, 2019 and 2018, definite-lived intangible assets primarily consisted of tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 5-35 years.
The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were no impairment charges during the years ended December 31, 2019 and 2018.
Long-lived Assets
In accordance with ASC 360, “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. There were no impairment charges recorded during the years ended December 31, 2019 and 2019.
F-10
Foreign Currency Translation
Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting foreign exchange gains and losses are recognized in income.
The Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting foreign exchange gains or losses are recognized in income.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company conducts business, and files federal and state income, franchise or net worth, tax returns in Canada, the United States, in various states within the United States and the Commonwealth of Puerto Rico. The Company determines it’s filing obligations in a jurisdiction in accordance with existing statutory and case law. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010 to 2019. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of the Company’s, or its subsidiaries’, income tax returns for the open taxation years noted above.
Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
The Company follows the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.
The Company received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as of December 31, 2019 was $156,711 plus penalties and interest of $126,700 for a total obligation due of $283,411. The amount due as of December 31, 2018 was $156,711 plus penalties and interest of $111,200 for a total obligation due of $267,911. This tax assessment was included in accrued expenses at December 31, 2019 and 2018.
F-11
Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
The Company recognizes revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract Types
The Company’s contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of the Company’s revenues come from customers with whom the Company has a master service agreement (“MSA”). These MSA’s generally contain customer specific service requirements.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For the Company’s different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets.
Revenue Service Types
The following is a description of the Company’s revenue service types, which include professional services and construction:
| ● | Professional services are services provided to the clients where the Company delivers distinct contractual deliverables and/or services. Deliverables may include but are not be limited to: engineering drawings, designs, reports and specification. Services may include, but are not be limited to: consulting or professional staffing to support our client’s objectives. Consulting or professional staffing services may be provided remotely or on client premises and under their direction and supervision. |
| ● | Construction Services are services provided to the client where the Company may self-perform or subcontract services that require the physical construction of infrastructure or installation of equipment and materials. |
Disaggregation of Revenues
The Company disaggregates its revenue from contracts with customers by service type, contract type, contract duration, and timing of transfer of goods or services. See the below tables:
| Revenue by service type | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Professional Services | $ | 24,006,853 | $ | 21,472,410 | ||||
| Construction | 10,003,744 | 13,076,747 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
| Revenue by contract duration | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Short-term | $ | 264,177 | $ | 251,735 | ||||
| Long-term | 33,746,420 | 34,297,422 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
F-12
| Revenue by contract type | Year Ended December 31, 2019 | Year Ended December 31, 2018 | ||||||
| Unit-price | $ | 5,007,541 | $ | 6,786,614 | ||||
| Fixed-price | $ | 4,996,203 | $ | 6,290,133 | ||||
| Time-and-materials | 24,006,853 | 21,472,410 | ||||||
| Total | $ | 34,010,597 | $ | 34,549,157 | ||||
The Company also disaggregates its revenue by operating segment and geographic location (refer to Note 15, Segment Disclosures, for additional information).
Accounts Receivable
Accounts receivable include amounts from work completed in which the Company has billed. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.
Contract Assets and Liabilities
Contract assets include costs and services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. At December 31, 2019 and 2018, contract assets totaled $461,681 and $1,861,895, respectively.
Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets. At December 31, 2019 and 2018, contract liabilities totaled $704,544 and $271,788, respectively.
Cost of Revenues
Cost of revenues includes all direct costs of providing services under the Company’s contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted loss per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of December 31, 2019 and 2018, respectively, the Company had 286,736 and 57,826 common stock equivalents outstanding.
F-13
Leases
The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, the Company presented the disclosures which were required under ASC 840.
The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
The Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months as of January 1, 2019. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, unamortized lease incentives provided by lessors, and restructuring liabilities, Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. Expanded disclosures with additional qualitative and quantitative information are also required. ASU 2016-02 and its amendments are effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted.
The Company adopted ASU 2016-02 and its amendments and applied the transition provisions as of January 1, 2019, which included recognizing a cumulative-effect adjustment through opening retained earnings as of that date. Prior year amounts were not recast under this transition approach and, therefore, prior year amounts are excluded from the leased properties footnote. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company elected a policy of not recording leases on its consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset. The Company recognizes payments on these leases within selling, administrative and other expenses on a straight-line basis over the lease term. Refer to Note 13, Leases, for additional detail on the adoption of ASU 2016-02.
F-14
In June 2018, the FASB issued ASU 2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting”, which addresses aspects of the accounting for nonemployee share-based payment transactions. This pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company early adopted ASU 2018-07 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or result of operations
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables. The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
The Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the year ended December 31, 2019, three customers accounted for 27%, 14% and 11%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 43%, 2% and 1%, respectively, of trade accounts receivable as of December 31, 2019. For the year ended December 31, 2018, four customers accounted for 20%, 17%, 16% and 15%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 7%, 23%, 27% and 2%, respectively, of trade accounts receivable as of December 31, 2018.
The Company’s customers are primarily located within the domestic United States of America and Puerto Rico. Revenues generated within the domestic United States of America accounted for approximately 96% and 94% of consolidated revenues for the years ended December 31, 2019 and 2018, respectively. Revenues generated from customers in Puerto Rico accounted for approximately 4% and 6% of consolidated revenues for the years ended December 31, 2019 and 2018, respectively.
Fair Value Measurements
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended December 31, 2019 and 2018. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
F-15
The Company’s financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2019 and 2018 consisted of the following:
| Total fair value at December 31, 2019 | Quoted prices in active markets (Level 1) | Quoted prices in active markets (Level 2) | Quoted prices in active markets (Level 3) | |||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 992,733 | $ | - | $ | - | $ | 992,733 | ||||||||
| Total fair value at December 31, 2018 | Quoted prices in active markets (Level 1) | Quoted prices in active markets (Level 2) | Quoted prices in active markets (Level 3) | |||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 3,166,886 | $ | - | $ | - | $ | 3,166,886 | ||||||||
| (1) | The Company has estimated the fair value of these derivatives using the Monte-Carlo model and/or a Binomial Model. |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Refer to Note 9, Derivative Liabilities, for additional information.
Derivative Liabilities
The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2019 and 2018, the Company had a derivative liability of $992,733 and $3,166,886, respectively.
Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to the Company’s employees or directors are not subject to the sequencing policy.
Reclassifications
Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.
| 3. | Acquisition of TNS, Inc. |
On January 4, 2019, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with InterCloud Systems, Inc., a Delaware corporation (“InterCloud”). Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and the Company agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc., an Illinois corporation (“TNS”). The Company closed and completed the acquisition on January 4, 2019. The purpose of the acquisition was to extend the Company’s geographic reach to the Midwest area, as well as extend its client reach to end-users, such as multinational corporations, universities, school districts and other large organizations and enterprise clientele that have significant ongoing next generation network needs.
The purchase price paid by the Company includes $980,000 in cash, paid at closing, and the issuance to InterCloud of a convertible promissory note in the aggregate principal amount of $620,000 (the “Note”).
The Company has performed a valuation analysis of the fair market value of TNS’ assets and liabilities. The fair value of the purchase consideration issued to the sellers of TNS was allocated to the net assets acquired. The Company accounted for the acquisition of TNS as the purchase of a business under GAAP under the acquisition method of accounting, the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of the Company. The excess of the aggregate fair value of the net tangible assets has been allocated to intangible assets, value of customer accounts and tradenames, and the remainder to goodwill. The purchase price allocation was based, in part, on management’s knowledge of TNS’ business.
F-16
The following table summarizes the allocation of the purchase price as of the acquisition date:
| Purchase consideration | ||||
| Cash | $ | 980,000 | ||
| Seller’s note | 665,000 | |||
| Total purchase price | $ | 1,645,000 | ||
| Allocation of purchase price | ||||
| Cash | $ | 38,407 | ||
| Accounts receivable, net | 65,166 | |||
| Other assets | 40,104 | |||
| Contract assets | 77,352 | |||
| Customer lists | 1,893,281 | |||
| Tradenames | 194,516 | |||
| Goodwill | 70,966 | |||
| Accounts payable | (275,331 | ) | ||
| Accrued expenses | (459,461 | ) | ||
| Net assets acquired | $ | 1,645,000 | ||
The following table summarizes the Company’s consolidated results of operations for the years ended December 31, 2019 and 2018, as well as pro forma consolidated results of operations as though the acquisition had occurred on January 1, 2018:
| Year ended December 31, 2019 | Year ended December 31, 2018 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
| Net sales | $ | 34,010,597 | $ | 34,010,597 | $ | 34,549,157 | $ | 40,251,424 | ||||||||
| Net loss attributable to common shareholders | (6,322,330 | ) | (6,329,884 | ) | (1,847,380 | ) | (939,566 | ) | ||||||||
| Loss per common share, basic and diluted: | (52.98 | ) | (53.04 | ) | (177.12 | ) | (90.08 | ) | ||||||||
| 4. | Property and Equipment |
Property and equipment as of December 31, 2019 and 2018 consisted of the following:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Computers and office equipment | $ | 349,271 | $ | 329,937 | ||||
| Equipment | 382,140 | 382,140 | ||||||
| Research equipment | 143,129 | 143,129 | ||||||
| Software | 227,563 | 177,073 | ||||||
| Vehicles | 94,356 | 94,356 | ||||||
| Vehicles under capital lease | - | - | ||||||
| Total | 1,196,459 | 1,126,635 | ||||||
| Less: impairment | (44,419 | ) | (44,419 | ) | ||||
| Less: accumulated depreciation | (1,058,973 | ) | (1,020,959 | ) | ||||
| Equipment, net | $ | 93,067 | $ | 61,257 | ||||
During the years ended December 31, 2019 and 2018, the Company recorded depreciation expense of $38,013 and $21,190, respectively.
F-17
| 5. | Intangible Assets |
Intangible assets as of December 31, 2019 and 2018 consisted of the following:
| Cost | Accumulated Amortization | Impairment | Net carrying value at December 31, 2019 | Net carrying value at December 31, 2018 | ||||||||||||||||
| Customer relationship and lists | $ | 2,930,829 | $ | 440,805 | $ | - | $ | 2,490,024 | $ | 850,249 | ||||||||||
| Trade names | 1,400,121 | 212,226 | - | 1,187,895 | 1,086,795 | |||||||||||||||
| Total intangible assets | $ | 4,330,950 | $ | 653,031 | $ | - | $ | 3,677,919 | $ | 1,937,044 | ||||||||||
During the years ended December 31, 2019 and 2018, the Company recorded amortization expense of $346,922 and $199,240, respectively.
The estimated future amortization expense for the next five years and thereafter is as follows:
| Year ending December 31, | ||||
| 2020 | $ | 343,803 | ||
| 2021 | 343,803 | |||
| 2022 | 343,803 | |||
| 2023 | 343,803 | |||
| 2024 | 343,803 | |||
| Thereafter | 1,958,904 | |||
| Total | $ | 3,677,919 | ||
| 6. | Related Party Transactions |
Unsecured Amounts Due to InterCloud
As of December 31, 2019 and 2018, the Company owed $50,577 and $51,889, respectively, to InterCloud, which is non-interest bearing, unsecured, and due on demand and included in accounts payable and accrued liabilities.
Exchange of Shares of Common Stock for Series B Preferred Stock
On April 23, 2018, each of Roger Ponder, the Company’s Chief Executive Officer, and Keith Hayter, the Company’s President, exchanged certain shares of common stock of the Company held by each of them for shares of the newly designated Series B preferred stock. Mr. Ponder exchanged 1,809 shares of common stock for an aggregate of 500 shares of Series B preferred stock, and Mr. Hayter exchanged 1,809 shares of common stock for an aggregate of 500 shares of Series B preferred stock. The Company recorded the fair value of the Series B preferred stock of $484,530 as mezzanine equity and reduced common shares and additional paid in capital an equal amount (refer to Note 11, Preferred Stock, for additional information).
InterCloud Related Party Reclassification
During May 2019, as a result of shares of common stock issued to InterCloud as a result of conversions of convertible debentures, the Company determined that InterCloud is a related party. The effective date of the reclassification was January 1, 2018.
WaveTech GmbH Related Party Reclassification
During November 2019, as a result of the Company acquiring 60% of the outstanding shares of WaveTech GmbH (refer to Note 14, Commitments and Contingencies, for additional detail), the Company determined that WaveTech GmbH is a related party. The effective date of the reclassification was January 1, 2019. The transaction is not considered closed for accounting purposes because as of the date of this report the Company has not acquired 90% or more of the outstanding shares of WaveTech GmbH and the Series C preferred stock shares have not been issued.
F-18
Loans Payable to Related Parties
As of December 31, 2019 and 2018, the Company had outstanding the following loans payable to related parties:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Promissory note issued to Roger Ponder, 10% interest, unsecured, due on demand | $ | 18,858 | $ | 18,858 | ||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, due on demand | 130,000 | 130,000 | ||||||
| Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020 | 85,000 | 85,000 | ||||||
| Promissory note issued to Keith Hayter, 8% interest, unsecured, due on demand | 80,000 | 80,000 | ||||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020 | 170,000 | - | ||||||
| Loan with WaveTech GmbH, 8% interest, matures May 18, 2020 | 3,000,000 | - | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 8% interest, unsecured, matured April 27, 2018 | - | 1,645,625 | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 1% interest, unsecured, matures August 16, 2019, net of debt discount of $0 and $171,557 | - | 622,392 | ||||||
| Convertible promissory note, InterCloud Systems, Inc., 6% interest, unsecured, matured March 27, 2019, net of debt discount of $0 and $286,749 | - | 1,515,674 | ||||||
| Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand | 217,400 | 275,000 | ||||||
| Total | $ | 3,701,258 | $ | 4,372,549 | ||||
Promissory note issued to Roger Ponder, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019
On November 30, 2017, the Company received $18,858 pursuant to a promissory note issued to the Chief Executive Officer of the Company. The note issued is unsecured, was due on November 30, 2018 and bears interest at a rate of 10% per annum. On November 30, 2018, the lender agreed to extend the maturity of the loan to November 30, 2019. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.
The note matured on November 30, 2019 and is now due on demand.
Promissory note issued to Keith Hayter, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019
On November 30, 2017, the Company received $130,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, due on November 30, 2018 and bears interest at a rate of 10% per annum. On November 30, 2018, the lender agreed to extend the maturity of the loan to November 30, 2019. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.
The note matured on November 30, 2019 and is now due on demand.
Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020
On April 13, 2018, the Company received $85,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, due on April 13, 2019 and bears interest at a rate of 8% per annum. At December 31, 2018, the amount of $85,000 was owed. On April 13, 2019, the note was amended to a maturity date of April 13, 2020 and an interest rate of 10%. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.
Promissory note issued to Keith Hayter, 8% interest, unsecured, matured October 1, 2019
On August 21, 2018, the Company received $80,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, was due on August 20, 2019 and bears interest at a rate of 8% per annum. On August 20, 2019, the note was amended to a maturity date of October 1, 2019 and an interest rate of 10%. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.
The note matured on October 1, 2019 and is now due on demand.
Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020
On August 12, 2019, the Company received $170,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, is due on August 11, 2020 and bears interest at a rate of 10% per annum.
F-19
Convertible promissory note, InterCloud Systems, Inc, 8% interest, unsecured, matured April 27, 2018
On April 27, 2017, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest on the outstanding principal due under the unsecured note accrued at a rate of 8% per annum. All principal and accrued interest under the unsecured note was due one year following the issue date of the unsecured note and was convertible into shares of common stock at a conversion price equal to 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion.
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $1,174,000 resulted in a discount to the note payable of $943,299. On December 15, 2017, February 14, 2018, February 21, 2018, June 7, 2018, January 24, 2019, and March 15, 2019 the holder of the convertible promissory note entered into agreement to sell and assign a total of $105,000, $105,000, $105,000, $39,375, $100,000 and $100,000 of the outstanding principal, respectively to a third party. The Company approved and was bound by the assignment and sale agreement. As a result of the assignment, the conversion price for the total of $354,375 of notes assigned was equal to the lesser 70% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $2,400.00. The Company accounted for this assignment in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date. Refer to Note 8, Convertible Debentures, for additional information on the assignments.
On May 6, 2019, the remaining principal balance of $1,445,625 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information). As a result of the conversion, the Company recorded a gain on settlement of debt of $252,261 to the consolidated statement of operations for the year ended December 31, 2019.
Convertible promissory note, InterCloud Systems, Inc, 1% interest, unsecured, matures August 16, 2019
On February 16, 2018, the Company issued InterCloud a convertible note with a principal amount of $793,894 to settle a contingent liability of $793,894 owed to InterCloud as a result of the acquisition of AWS. The note was originally due on August 16, 2019 and bore interest at 1% per annum. The note was convertible into common shares of the Company at a conversion price equal to the 80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion.
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging” (refer to Note 9, Derivative Liabilities, for additional information on embedded conversion features). The initial fair value of the conversion feature of $348,000 resulted in a discount to the note payable of $348,000.
On August 16, 2019, the remaining principal balance of $793,894 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information). As a result of the conversion, the Company recorded a loss on settlement of debt of $182,128 to the consolidated statement of operations for the year ended December 31, 2019.
Convertible promissory note, InterCloud Systems, Inc, 6% interest, unsecured, matured March 27, 2019
On February 27, 2018, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest on the outstanding principal due under the ADEX note accrued at a rate of 6% per annum. All principal and accrued interest under the ADEX note was due one year following the issue date of the ADEX note and was convertible into shares of common stock at a conversion price equal to of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion, but in no event ever lower than $1 (the “Floor”), unless the note was in default, at which time the Floor would have terminated.
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $2,455,000 resulted in a discount to the note payable of $639,000.
On September 26, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $75,000 of the outstanding principal to a third party. The Company approved and was bound by the assignment and sale agreement. As a result of the assignment, the assigned note bore interest at 5% and the conversion price for the $75,000 of notes assigned was equal to the lesser 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $2,400.00. On December 3, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $50,000 of the outstanding principal to a third party. The Company accounted for the assignments in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date. Refer to Note 8, Convertible Debentures, for additional information on the assignments.
During the year ended December 31, 2019, the Company repaid $55,124 of principal outstanding.
During the year ended December 31, 2019, the principal amount was reduced by $295,000 as a result of a working capital adjustment.
On May 6, 2019, the remaining principal balance of $1,452,299 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information). As a result of the conversion, the Company recorded a loss on settlement of debt of $1,473,560 to the consolidated statement of operations for the year ended December 31, 2019.
F-20
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
In connection with the acquisition of ADEX from InterCloud, $500,000 of the purchase price was retained by the Company to satisfy any outstanding liabilities of ADEX incurred prior to the closing date.
During the year ended December 31, 2018, the Company repaid $225,000 of this amount. During the year ended December 31, 2019, the Company repaid $57,600 of this amount.
As of December 31, 2019, principal of $217,400 remains outstanding.
Loan with WaveTech GmbH., 8% interest, matures May 18, 2020
On July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German Corporation (refer to Note 14, Commitments and Contingencies, for additional detail). In connection with the share purchase agreement, the Company was to receive $3,000,000 in cash at or before consummation of the transactions described in the agreement. The Company received $1,325,895 which was placed into escrow to satisfy the amounts outstanding to WaveTech Global, Inc. The Company received an additional $1,664,083 during July 2019 to satisfy the $3,000,000 of cash per the share purchase agreement. The remaining $10,022 was recorded as a foreign exchange loss in the consolidated statement of operations for the year ended December 31, 2019. The loan bears interest at a rate of 8% per annum.
On November 14, 2019, the Company acquired 60% of the outstanding shares of WaveTech GmbH (refer to Note 14, Commitments and Contingencies, for additional detail). As a result, the $1,325,895 in escrow was returned to the Company.
| 7. | Loans Payable |
As of December 31, 2019 and 2018, the Company had outstanding the following loans payable:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand | $ | 41,361 | $ | 41,361 | ||||
| Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand | 7,760 | 7,760 | ||||||
| Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand | 2,636 | 2,636 | ||||||
| Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand | 15,000 | 15,000 | ||||||
| Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand | 7,500 | 7,500 | ||||||
| Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand | 50,000 | 50,000 | ||||||
| Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand | 12,000 | 12,000 | ||||||
| Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020, net of debt discount of $149,180 and $257,194 | 2,973,458 | 3,225,821 | ||||||
| Promissory note issued to C6 Capital, non-interest bearing, matures April 15, 2020, net of debt discount of $20,272 | 136,424 | - | ||||||
| Promissory note issued to Pawn Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $31,365 | 94,928 | - | ||||||
| Promissory note issued to RDM Capital Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $79,087 | 237,319 | - | ||||||
| Total | $ | 3,578,386 | $ | 3,362,078 | ||||
Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand
The Company owed $41,361 ($53,300 Canadian dollars) to a non-related party as of December 31, 2019 and 2018. This promissory note is non-interest bearing, unsecured, and due on demand.
Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand
The Company owed $7,760 ($10,000 Canadian dollars) to a non-related party as of December 31, 2019 and 2018. This promissory note is non-interest bearing, unsecured, and due on demand.
Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand
The Company owed $2,636 ($3,400 Canadian dollars) to a non-related party as of December 31, 2019 and 2018. This promissory note is non-interest bearing, unsecured, and due on demand.
Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand
The Company owed $15,000 to a non-related party as of December 31, 2019 and 2018. This promissory note is non-interest bearing, unsecured, and due on demand.
F-21
Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand
The Company owed $7,500 to a non-related party as of December 31, 2019 and 2018. This promissory note is non-interest bearing, unsecured, and due on demand.
Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand
In March 2012, the Company received $50,000 for the subscription of 167 shares of the Company’s common stock. During the year ended May 31, 2013, the Company and the subscriber agreed that the shares would not be issued and that the subscription would be returned. The subscription has been reclassified as a non-interest bearing demand loan until the funds are refunded to the subscriber. The Company owed $50,000 as of December 31, 2019 and 2018.
Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand
On April 12, 2017, received $12,000 pursuant to a promissory note. The note issued is unsecured, due on demand and bears interest at a rate of 10% per annum. The Company owed $12,000 as of December 31, 2019 and 2018.
Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020
On October 10, 2018, the Company’s wholly-owned subsidiary, ADEX (the “Borrower”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with Heritage Bank of Commerce (the “Lender”). Under the Loan and Security Agreement, the Borrower may borrow an aggregate outstanding amount not to exceed the lesser of up to (i) $5,000,000 or (ii) the Borrowing Base (as defined in the Loan and Security Agreement) through one or more advances through October 10, 2020 (the “Maturity Date”), subject to the Lender’s satisfactory annual review of the Borrower which is currently ongoing. On the Maturity Date, all advances must be repaid. The Lender may, in its sole discretion and upon the Borrower’s request, make advances to the Borrower after the Maturity Date subject to the terms and conditions under the Loan and Security Agreement. Part of the proceeds of the initial credit extension of the Loan and Security Agreement were used to pay off borrowings owed to Prestige Capital Corporation described in Note 8, Convertible Debentures.
Interest is payable under the Loan and Security Agreement at a per annum rate equal to the Prime Rate (as defined in the Loan and Security Agreement) plus 2%. The Borrower’s obligations under the Loan and Security Agreement are secured by all assets of the Company. In addition, the Company issued a warrant (the “Warrant”) to the Lender to purchase an amount of shares of the Company’s common stock equal to $150,000 divided by the Warrant Price (as defined in the Warrant) at a price per share equal to 125% of the prior day’s closing price.
The Loan and Security Agreement provides that upon the occurrence of an event of default, among other things, all outstanding amounts under the Loan and Security Agreement or any portion thereof becomes immediately due and payable. Events of default under the Loan and Security Agreement include, among other items, the Borrower’s failure to comply with certain affirmative and negative covenants relating to the Company, its securities and its financial condition.
In connection with the financing, on October 10, 2018, the Company also issued a warrant to purchase 380 shares of the Company’s common stock at $375.00 per share for three years. The fair value of the warrants of $87,410 and $190,000 of debt issuance costs resulted in a discount to the note payable of $277,410. At December 31, 2018, the Company owed $3,483,015 pursuant to this agreement and will record accretion equal to the debt discount of $257,194 over the remaining term of the note.
During the year ended December 31, 2019, the Company received an aggregate of $26,772,037 and repaid an aggregate of $27,132,642, for a net repaid amount of $360,605. At December 31, 2019, the Company owed $3,122,638 pursuant to this agreement and was to record accretion equal to the debt discount of $149,180 over the remaining term of the note.
On February 11, 2020, pursuant to an assignment and consent agreement, Heritage sold, transferred and assigned to Bay View Funding all of Heritage’s right, title, and interest in the loan and security agreement (refer to Note 17, Subsequent Events, for additional detail).
Loan with Libertas Funding LLC
On January 4, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Libertas Funding LLC, a Connecticut limited liability company (“Libertas”). Under the Financing Agreement, the Financing Parties sold to Libertas future receivables in an aggregate amount equal to $1,460,000 for a purchase price of $1,000,000.
Pursuant to the terms of the Financing Agreement, the Company agreed to pay Libertas $31,602 each week based upon an anticipated 20% of its future receivables until such time as $1,460,000 had been paid, a period Libertas and the Financing Parties estimated to be approximately eleven months. In the event that the Financing Agreement was paid off earlier than eleven months, there was to be a discount to the sum owed. The Financing Agreement also contained customary affirmative and negative covenants, representations and warranties, and default and termination provisions. The Company used the proceeds of the Financing Agreement for the acquisition of TNS, as discussed in Note 3, Acquisition of TNS, Inc.
On February 1, 2019, the Company fully repaid the Financing Agreement. As a result, the amount owed at December 31, 2019 was $0.
F-22
Loan with WaveTech Global, Inc., matured April 28, 2019
On February 4, 2019, the Company entered into a share purchase agreement with WaveTech Global. This agreement included a promissory note in the principal amount of $1,325,895, which matured on April 28, 2019. On July 9, 2019, the share purchase agreement was terminated. As a result, the Company placed the amount due to WaveTech Global into escrow using cash received from the WaveTech GmbH share purchase agreement (refer to Note 14, Commitments and Contingencies for additional detail). In connection with the WaveTech GmbH transaction dated November 14, 2019, the escrow amount was returned to the Company.
Loan with C6 Capital
On August 16, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with C6 Capital. Under the Financing Agreement, the Financing Parties sold to C6 Capital future receivables in an aggregate amount equal to $337,500 for a purchase price of $250,000. The Company received cash of $242,500 and recorded a debt discount of $95,000.
Pursuant to the terms of the Financing Agreement, the Company agreed to pay C6 Capital $10,045 each week based upon an anticipated 20% of its future receivables until such time as $337,500 has been paid, a period C6 Capital and the Financing Parties estimate to be approximately eight months. In the event that the Financing Agreement is paid off earlier than eight months, there is to be a discount to the sum owed. The Financing Agreement also contains customary affirmative and negative covenants, representations and warranties, and default and termination provisions.
During the year ended December 31, 2019, the Company paid $180,804 of the original balance under the agreement.
At December 31, 2019, the Company owed $156,696 pursuant to this agreement and will record accretion equal to the debt discount of $20,272 over the remaining term of the note.
Loan with Pawn Funding
On December 10, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Pawn Funding. Under the Financing Agreement, the Financing Parties sold to Pawn Funding future receivables in an aggregate amount equal to $135,000 for a purchase price of $100,000. The Company received cash of $97,000 and recorded a debt discount of $38,000.
Pursuant to the terms of the Financing Agreement, the Company agreed to pay Pawn Funding $4,219 each week based upon an anticipated 15% of its future receivables until such time as $135,000 has been paid, a period Pawn Funding and the Financing Parties estimate to be approximately eight months. In the event that the Financing Agreement is paid off earlier than eight months, there is to be a discount to the sum owed. The Financing Agreement also contains customary affirmative and negative covenants, representations and warranties, and default and termination provisions.
During the year ended December 31, 2019, the Company paid $8,437 of the original balance under the agreement.
At December 31, 2019, the Company owed $126,563 pursuant to this agreement and will record accretion equal to the debt discount of $31,635 over the remaining term of the note.
Loan with RDM Capital Funding
On December 10, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with RDM Capital Funding. Under the Financing Agreement, the Financing Parties sold to RDM Capital Funding future receivables in an aggregate amount equal to $337,500 for a purchase price of $250,000. The Company received cash of $242,500 and recorded a debt discount of $95,000.
Pursuant to the terms of the Financing Agreement, the Company agreed to pay RDM Capital Funding $10,574 each week based upon an anticipated 3% of its future receivables until such time as $337,500 has been paid, a period RDM Capital Funding and the Financing Parties estimate to be approximately eight months. In the event that the Financing Agreement was paid off earlier than eight months, there was to be a discount to the sum owed. The Financing Agreement also contains customary affirmative and negative covenants, representations and warranties, and default and termination provisions.
During the year ended December 31, 2019, the Company paid $21,094 of the original balance under the agreement.
F-23
At December 31, 2019, the Company owed $316,406 pursuant to this agreement and was to record accretion equal to the debt discount of $79,087 over the remaining term of the note.
During the period of January 1, 2020 through May 8, 2020, the Company repaid the full balance. This payment included the discount described above (refer to Note 17, Subsequent Events, for additional detail).
| 8. | Convertible Debentures |
As of December 31, 2019 and 2018, the Company had outstanding the following convertible debentures:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Convertible promissory note, Barn 11, 6% interest, unsecured, matured June 1, 2019, net of debt discount of $0 and $55,000 | $ | 594,362 | $ | 445,000 | ||||
| Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020, net of debt discount of $105,752 and $0 | 1,461,265 | - | ||||||
| Convertible promissory note, Michael Roeske, 6% interest, unsecured, due on demand, net of debt discount of $3,512 and $0 | 112,488 | - | ||||||
| Convertible promissory note, Joel Raven, 6% interest, unsecured, due on demand, net of debt discount of $8,658 and $0 | 355,342 | - | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures August 2, 2020, net of debt discount of $24,819 | 98,181 | - | ||||||
| Convertible promissory note, SCS, LLC, 8% interest, unsecured, matured March 30, 2020, due on demand, net of debt discount of $13,005 | 38,025 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020, net of debt discount of $113,674 | 34,326 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021, net of debt discount of $53,051 | 15,449 | - | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021, net of debt discount of $45,125 | 12,875 | - | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures October 24 2020, net of debt discount of $23,986 | 99,014 | - | ||||||
| Convertible promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matures November 21, 2020, net of debt discount of $58,648 | 16,352 | - | ||||||
| Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019, net of debt discount of $0 and $1,009,630 | - | 240,370 | ||||||
| Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019, net of debt discount of $0 and $172,570 | - | 123,176 | ||||||
| Convertible promissory note, Silverback, 8% interest, unsecured, matures December 4, 2019, net of debt discount of $0 and $24,140 | - | 3,367 | ||||||
| Convertible promissory note, RDW Capital, February 21, 2018 assignment | - | 50,000 | ||||||
| Convertible promissory note, RDW Capital, June 7, 2018 assignment | - | 39,375 | ||||||
| Convertible promissory note, Silverback Capital, December 3, 2018 assignment | - | 50,000 | ||||||
| Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $9,087 | - | 69,860 | ||||||
| Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $41,395 | - | 37,552 | ||||||
| Total | 2,837,679 | 1,058,700 | ||||||
| Less: Long-term portion of convertible debentures, net of debt discount | (28,324 | ) | - | |||||
| Convertible debentures, current portion, net of debt discount | $ | 2,809,355 | $ | 1,058,700 | ||||
Convertible promissory note, Barn 11, 6% interest, unsecured, matured June 1, 2019
On February 21, 2018, the Company issued a convertible note with a principal amount of $500,000 and a warrant with a term of three years to purchase up to 417 shares of common stock of the Company at an exercise price of $480.00 per share to Barn 11. The exercise price of the warrant was to reduce to 85% of the closing price of the Company’s common stock if the closing price of the Company’s common stock was less than $480.00 on July 31, 2018. The note was due on January 15, 2019, and in February 2019, the maturity date was extended to June 1, 2019, and bears interest at 6% per annum. The note is convertible into common shares of the Company at a conversion price equal to the lower of 80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion and $300.00 (the “Floor”), unless the note is in default, at which time the Floor terminates.
F-24
The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $571,079 and the warrant of $158,772 resulted in a discount to the note payable of $500,000 and an initial derivative expense of $229,851.
On June 1, 2019, the Company was in default on the note. As a result of the default, a 15% premium was added to the balance owed, including all accrued interest. Subsequent to the default, the new principal balance of the note is $619,362, with interest now accruing at 18% per annum. Additionally, $466,000 was added to the derivative liability balance in connection with the default.
During the year ended December 31, 2019, the Company paid $25,000 of principal. The Company owed $594,362 as of December 31, 2019.
Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019
On April 23, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the lender a senior secured convertible promissory note in the aggregate principal amount of $1,578,947 for an aggregate purchase price of $1,500,000.
The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued interest under the secured note was originally due on October 23, 2019 and was convertible into shares of the Company’s common stock at a fixed conversion price of $300.00. While during the first three months that the secured note is outstanding, only interest payments were due to the lender, beginning in month four, and on each monthly anniversary thereafter until maturity, amortization payments were due for principal and interest due under the secured note. The secured note included customary events of default, including non-payment of the principal or accrued interest due on the secured note. Upon an event of default, all obligations under the secured note would become immediately due and payable.
If the Company issued any common stock or common stock equivalents at an effective price per share less than $300.00 then the conversion price of the note would be reduced to the lower price. As long as the note was not in default the Company could repay the note at 110% of the outstanding principal amount. If the Company defaulted upon the note it would accrue interest at 18% per annum.
In connection with the Purchase Agreement, the Company entered into a security agreement, dated as of April 23, 2018, with the Lender (the “Security Agreement”) and an intellectual property security agreement, dated as of April 23, 2018, with the Lender pursuant to which the Company granted a security interest in substantially all of the assets of the Company, but for those assets over which Prestige Capital Corporation holds a lien, to secure the Company’s obligations under the secured note. In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Lender pursuant to the Secured Note.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $3,325,000 resulted in a discount to the note payable of $1,500,000 and an initial derivative expense of $1,825,000.
On April 17, 2019, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020” section of this note for additional detail).
Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019
On May 18, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $295,746 for an aggregate purchase price of $280,959.
The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was originally due on May 18, 2019. The secured note was convertible into shares of the Company’s common stock at a fixed conversion price of $300.00 per share. Interest was payable monthly on the 18th of each month. While interest payments were to be made in cash during the first six months that the secured note was outstanding, beginning in month seven, and on each monthly anniversary thereafter until maturity, the Company had the option to pay interest payments in stock, subject to certain equity conditions being satisfied. Any payment of interest or principal scheduled after December 1, 2018 that was made in cash would be subject to a 5% prepayment premium. Any other prepayment is subject to a 10% premium. The secured note included customary events of default, including non-payment of the principal or accrued interest due on the secured note and cross default to other notes owing to the investor. Upon an event of default, all obligations under the secured note and other notes owing to the investor would become immediately due and payable. In connection with the issuance of the secured note, the Company issued the investor 496,101 shares of Series A Preferred Stock with a fair value of $193,509 which was expensed. The investor was granted a right to participate in future financing transactions of the Company while the secured note remains outstanding.
If the Company issued any common stock or common stock equivalents at an effective price per share less than $300.00 then the conversion price of the note would be reduced to the lower price. As long as the note is not in default the Company could repay the note at 110% of the outstanding principal amount. If the Company defaulted upon the note it would accrue interest at 18% per annum.
F-25
In connection with the Securities Purchase Agreement, the Company entered into an amendment to the existing Security Agreement described in Note 10(o). Pursuant to the amendment, the Company agreed that obligations under the secured note and related documents will be secured pursuant to the existing security interest in substantially all of the assets of the Company securing other notes issued to the Investor (except for those assets over which Prestige Capital Corporation holds a lien). In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Investor pursuant to the Secured Note and have granted a similar security interest over substantially their assets.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $468,000 resulted in a discount to the note payable of $280,959 and an initial derivative expense of $187,041.
On April 17, 2019, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020” section of this note for additional detail).
Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020
On April 17, 2019, Dominion Capital exchanged the notes described in the “Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019” and “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019” sections above into a new note (the “Exchange Note”) with a principal amount of $1,571,134. Interest accrues on the new note at 12% per annum. All principal and accrued interest under the Exchange Note is due on October 17, 2020 and is convertible into shares of the Company’s common stock. The conversion price in effect on the date such conversion is effected shall be equal to (i) initially, $30.00 or (ii) on or after the date of the closing of the next public or private offering of equity or equity-linked securities of the Company in which the Company receives gross proceeds in an amount greater than $100,000, one hundred and five percent (105%) of the price of the common stock issuable in the offering. While during the first six months that the Exchange Note is outstanding, only interest payments are due to the holder, beginning in October 2019, and on each monthly anniversary thereafter until maturity, amortization payments are due for principal and interest due under the Exchange Note. The Exchange Note includes customary events of default, including non-payment of the principal or accrued interest due on the Exchange Note. Upon an event of default, all obligations under the Exchange Note will become immediately due and payable. The Holder was granted a right to participate in future financing transactions of the Company while the Exchange Note remains outstanding.
As a result of the beneficial conversion feature associated with the Dominion notes, $314,228 was added to additional paid-in capital during the year ended December 31, 2019. In connection with the exchange, the Company recorded a loss on settlement of debt of $904,469 on the consolidated statement of operations for the year ended December 31, 2019.
The Company was to begin making principal payments in equal installments beginning on October 1, 2019. On October 22, 2019, the Company reached an agreement with Dominion Capital to postpone the principal payments. In exchange for the extension, the Company will pay to Dominion Capital an extension fee equal to 14% of the postponed payments. As a result of this agreement, the Company added $47,731 of principal to note during the year ended December 31, 2019.
During the year ended December 31, 2019, the Company paid $51,848 of principal. The Company owed $1,567,017 as of December 31, 2019 and will record accretion equal to the debt discount of $105,752 over the remaining term of the note.
Convertible promissory note, Silverback, 8% interest, unsecured, matures December 4, 2019
On December 4, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $27,500 for an aggregate purchase price of $25,000.
The interest on the outstanding principal due under the secured note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note is due on December 4, 2019. The secured note is convertible into shares of the Company’s at 65% of lowest trading price for the fifteen trading days prior to the conversion date.
The Company may repay the note at 150% of the outstanding principal amount. If the Company defaults upon the note it bears interest at 18% per annum.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $30,000 resulted in a discount to the note payable of $25,000 and an initial derivative expense of $5,000.
During the year ended December 31, 2019, Silverback converted $27,500 of principal into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information). As a result of these conversions, the balance of the note was $0 as of December 31, 2019.
F-26
Convertible promissory note issued in connection with the acquisition of TNS, Inc.
On January 4, 2019, as part of the acquisition described in Note 3, Acquisition of TNS, Inc., the Company issued to InterCloud a convertible promissory note in the aggregate principal amount of $620,000 (the “Note”). The interest on the outstanding principal due under the Note accrued at a rate of 6% per annum. All principal and accrued interest under the Note was due January 30, 2020, and was convertible, at any time at InterCloud’s election, into shares of common stock of the Company at a conversion price equal to the greater of 75% of the lowest volume-weighted average price during the 10 trading days immediately preceding the date of conversion and $30.00.
The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $189,000 resulted in a discount to the note payable of $144,000.
On January 28, 2019, the holder of the convertible promissory note entered into agreement to sell and assign a total of $620,000 of the $620,000 outstanding principal to two third parties, with $186,000 and $434,000 of principal assigned to each party (refer to the “Convertible promissory note, Michael Roeske, 6% interest, unsecured, matures, January 30, 2020” and “Convertible promissory note, Joel Raven, 6% interest, unsecured, matures January 30, 2020” sections of this note for further detail). The Company approved and is bound by the assignment and sale agreement.
Convertible promissory note, Michael Roeske, 6% interest, unsecured, matures, January 30, 2020
On January 28, 2019, InterCloud assigned $186,000 of the note issued in connection with the acquisition of TNS to Michael Roeske. The note accrues interest at a rate of 6% per annum and had a maturity date of January 30, 2020.
During the year ended December 31, 2019, Mr. Roeske converted $70,000 of principal of the note into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
At December 31, 2019, the Company owed $116,000 pursuant to this agreement and will record accretion equal to the debt discount of $3,512 over the remaining term of the note.
The note matured on January 30, 2020 and is now due on demand.
Convertible promissory note, Joel Raven, 6% interest, unsecured, matures January 30, 2020
On January 28, 2019, InterCloud assigned $434,000 of the note issued in connection with the acquisition of TNS to Joel Raven. The note accrues interest at a rate of 6% per annum and had a maturity date of January 30, 2020.
During the year ended December 31, 2019, Mr. Raven converted $70,000 of principal of the note into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
At December 31, 2019, the Company owed $364,000 pursuant to this agreement and will record accretion equal to the debt discount of $8,658 over the remaining term of the note.
The note matured on January 30, 2020 and is now due on demand.
Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured, matures August 2, 2020
On August 2, 2019, the Company entered into and closed on a Securities Purchase Agreement with GS Capital Partners, LLC, pursuant to which the Company issued to GS Capital Partners, LLC a senior secured convertible promissory note in the aggregate principal amount of $123,000 for an aggregate purchase price of $112,000.
The interest on the outstanding principal due under the secured note accrued at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note was originally due on August 2, 2020. The secured note was convertible into shares of the Company’s common stock at 71% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date. The conversion price had a floor of $3.00 per share.
F-27
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $28,000 resulted in an additional discount to the note payable of $28,000, for a total debt discount of $39,000.
At December 31, 2019, the Company owed $123,000 pursuant to this agreement and was to record accretion equal to the debt discount of $24,819 over the remaining term of the note.
Between January 1, 2020 and May 8, 2020, the holder of the note converted the full principal amount of the note along with the accrued interest (refer to Note 17, Subsequent Events, for additional detail).
Convertible promissory note, GS Capital Partners, LLC, 8% interest, unsecured, matures October 24, 2020
On October 24, 2019, the Company entered into and closed on a Securities Purchase Agreement with GS Capital Partners, LLC, pursuant to which the Company issued to GS Capital Partners, LLC a convertible promissory note in the aggregate principal amount of $123,000 for an aggregate purchase price of $112,000.
The interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the note is due on October 24, 2020. The note is convertible into shares of the Company’s common stock at 71% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date. The conversion price has a floor of $3.00 per share.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $20,000 resulted in an additional discount to the note payable of $20,000, for a total debt discount of $31,000.
At December 31, 2019, the Company owed $123,000 pursuant to this agreement and will record accretion equal to the debt discount of $23,986 over the remaining term of the note.
Convertible promissory note, SCS, LLC, 8% interest, unsecured, matured March 30, 2020
On September 1, 2019, the Company entered into and closed on a Securities Purchase Agreement with SCS, LLC, pursuant to which the Company issued to SCS, LLC an unsecured convertible promissory note in the aggregate principal amount of $51,030 in exchange for rent.
The interest on the outstanding principal due under the unsecured note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note and has a maturity date of March 30, 2020. The secured note is convertible into shares of the Company’s common stock at 75% of the lowest average VWAP in the 15 trading days prior to the conversion date. The conversion price has a floor of $1.50 per share.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $29,000 resulted in a discount to the note payable of $29,000.
At December 31, 2019, the Company owed $51,030 pursuant to this agreement and will record accretion equal to the debt discount of $13,005 over the remaining term of the note.
The note matured on March 30, 2020 and is now due on demand.
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020
On September 17, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $148,000 for an aggregate purchase price of $135,000. The Company received the cash on October 1, 2019.
The interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the note is due on September 17, 2020. The note is convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date. The conversion price has a floor of $1.50 per share.
F-28
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $159,000 resulted in an additional discount to the note payable of $135,000, for a total debt discount of $148,000. The remaining $24,000 of the initial fair value of the conversion feature was recorded as initial derivative expense on the consolidated statement of operations for the year ended December 31, 2019.
At December 31, 2019, the Company owed $148,000 pursuant to this agreement and will record accretion equal to the debt discount of $113,674 over the remaining term of the note.
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021
On October 22, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $68,500 for an aggregate purchase price of $60,000.
The interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the note is due on January 22, 2021. The note is convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date. The conversion price has a floor of $1.50 per share.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $56,000 resulted in an additional discount to the note payable of $56,000, for a total debt discount of $64,500.
At December 31, 2019, the Company owed $68,500 pursuant to this agreement and will record accretion equal to the debt discount of $53,051 over the remaining term of the note.
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021
On November 27, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $58,000 for an aggregate purchase price of $50,000.
The interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the note is due on February 26, 2021. The note is convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date. The conversion price has a floor of $1.50 per share.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $43,000 resulted in an additional discount to the note payable of $43,000, for a total debt discount of $51,000.
At December 31, 2019, the Company owed $58,000 pursuant to this agreement and will record accretion equal to the debt discount of $45,126 over the remaining term of the note.
Convertible promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matures November 21, 2020
On November 12, 2019, the Company entered into and closed on a Securities Purchase Agreement with Crown Bridge Partners, LLC, pursuant to which the Company issued to Crown Bridge Partners, LLC a convertible promissory note in the aggregate principal amount of $225,000 for an aggregate purchase price of $202,500. The Company received the first tranche of $75,000 on November 21, 2019 for an aggregate purchase price of $65,500. The Company also issued a warrant equal to the face amount of the note with a term of three years to purchase 2,500 shares of common stock at an exercise price of $30.00 per share.
F-29
The interest on the outstanding principal due under the first tranche of the note accrues at a rate of 10% per annum. All principal and accrued but unpaid interest under the first tranche of the note is due on November 21, 2020. The first tranche of the note is convertible into shares of the Company’s common stock at 60% of the average of the three lowest VWAPs in the 20 trading days prior to and including the conversion date.
The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion option feature of $138,000 and warrant feature of $20,138 resulted in an additional discount to the note payable of $65,500, for a total debt discount of $75,000. The remaining $92,638 of the initial fair value of the conversion feature was recorded as initial derivative expense on the consolidated statement of operations for the year ended December 31, 2019.
At December 31, 2019, the Company owed $75,000 pursuant to this agreement and will record accretion equal to the debt discount of $58,648 over the remaining term of the note.
Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019
On July 3, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $78,947 for an aggregate purchase price of $75,000.
The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was due on March 15, 2019. The secured note was convertible into shares of the Company’s common stock at the greater of $240.00 or 75% of the lowest VWAP in the 10 trading days prior to conversion.
The Company was allowed to repay the note at 115% of the outstanding principal amount. If the Company defaulted upon the note it would have accrued interest at 18% per annum.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $23,000 resulted in a discount to the note payable of $23,000.
During the year ended December 31, 2019, the Company repaid the note in full and recognized a loss on settlement of debt of $2,300 in the consolidated statement of operations.
Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019
On July 31, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $78,947 for an aggregate purchase price of $75,000.
The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was due on March 15, 2019. The secured note was convertible into shares of the Company’s common stock at the greater of $300.00 or 75% of the lowest VWAP in the 10 trading days prior to conversion.
The Company was allowed to repay the note at 115% of the outstanding principal amount. If the Company defaulted upon the note it would have accrued interest at 18% per annum.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $103,000 resulted in a discount to the note payable of $75,000 and an initial derivative expense of $28,000.
During the year ended December 31, 2019, the Company repaid the note in full and recognized a loss on settlement of debt of $90,000 in the consolidated statement of operations.
F-30
Assignments of Convertible Related Party Debt to RDW Capital LLC
On February 21, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $105,000 of the outstanding principal to a third party. During the year ended December 31, 2018, $55,000 of the note was converted. During the year ended December 31, 2019, the remaining $50,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
On June 7, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $39,375 of the outstanding principal to a third party. During the year ended December 31, 2019, the full $39,375 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
Assignments of Convertible Related Party Debt to Silverback
On September 26, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreement to sell and assign a total of $75,000 of the outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement. As a result of the assignment, the assigned note bore interest at 5% and the conversion price for the $75,000 of notes assigned was equal to the lesser 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $2,400.00. During the year ended December 31, 2018, the full $75,000 was converted into shares of the Company’s common stock.
On December 3, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $50,000 of the outstanding principal to a third party. During the year ended December 31, 2019, the full $50,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
Assignments of Convertible Related Party Debt to Virtual Capital
On January 24, 2019 and March 15, 2019, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $200,000 of the outstanding principal to a third party. During the year ended December 31, 2019, the full $200,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).
| 9. | Derivative Liabilities |
The embedded conversion options of the convertible debentures described in Note 8, Convertible Debentures, contain conversion features that qualify for embedded derivative classification. The fair value of the liability is re-measured at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on change in fair value of derivatives. Derivative liabilities also include the fair value of the Company’s share purchase warrants and stock options discussed in Note 12, Share Purchase Warrants and Stock Options. As of December 31, 2019, the derivative liability balance of $992,733 was comprised of $801,000 of derivatives related to the Company’s convertible debentures, ad $191,732 of derivatives related to the Company’s share purchase warrants and stock options.
F-31
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the years ended December 31, 2019 and 2018:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Balance at the beginning of the period | $ | 3,166,886 | $ | 4,749,712 | ||||
| Original discount limited to proceeds of notes | 376,500 | 2,839,369 | ||||||
| Conversion of derivative liability | (1,281,888 | ) | (678,142 | ) | ||||
| Repayment of convertible note | (164,468 | ) | (310,041 | ) | ||||
| Change in fair value of embedded conversion option | (1,843,935 | ) | (6,049,473 | ) | ||||
| Derivative issued as part of acquisition | 189,000 | 302,800 | ||||||
| Fair value of derivative liabilities in excess of notes proceeds received | 116,638 | 2,274,892 | ||||||
| Addition to derivative due to default penalty | 466,000 | - | ||||||
| Impact of note extinguishment | (32,000 | ) | - | |||||
| Derivative warrants issued for services and to acquire non-controlling interest | - | 328,833 | ||||||
| Derivative liability settled through the issuance of preferred stock | - | (291,064 | ) | |||||
| Balance at the end of the period | $ | 992,733 | $ | 3,166,886 | ||||
The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using Monte-Carlo model or a Binomial Model based on various assumptions.
Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
| Expected volatility | Risk-free interest rate | Expected dividend yield | Expected life (in years) | |||||||||||||
| At December 31, 2018 | 172 - 381 | % | 2.45 - 2.63 | % | 0 | % | 0.04 - 2.78 | |||||||||
| At December 31, 2019 | 230 - 304 | % | 1.55 - 1.75 | % | 0 | % | 0.25 - 1.16 | |||||||||
| 10. | Common Stock |
Authorized Shares
On November 15, 2017, the Company revised its authorized share capital to increase the number of authorized common shares from 275,000,000 common shares with a par value of $0.00001, to 750,000,000 common shares with a par value of $0.00001. The reverse stock split discussed in Note 2, Significant Accounting Policies, did not change the number of authorized shares of the Company’s common stock.
Treasury Stock
The Company holds 2,071 common shares in treasury at a cost of $277,436.
Issuance of Shares Pursuant to RDW Capital LLC Convertible Debentures
On January 3, 2018, the Company issued 342 shares of common stock to RDW Capital LLC upon the conversion of $67,703 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On March 30, 2018, the Company issued 110 shares of common stock to RDW Capital LLC upon the conversion of $25,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 18, 2018, the Company issued 57 shares of common stock to RDW Capital LLC upon the conversion of $12,297 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On May 3, 2018, the Company issued 93 shares of common stock to RDW Capital LLC upon the conversion of $20,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On May 24, 2018, the Company issued 70 shares of common stock to RDW Capital LLC upon the conversion of $20,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On July 18, 2018, the Company issued 93 shares of common stock to RDW Capital LLC upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On August 20, 2018, the Company issued 100 shares of common stock to RDW Capital LLC upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On September 5, 2018, the Company issued 68 shares of common stock to RDW Capital LLC upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
F-32
On October 19, 2018, the Company issued 208 shares of common stock to RDW Capital LLC upon the conversion of $20,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On November 13, 2018, the Company issued 295 shares of common stock to RDW Capital LLC upon the conversion of $25,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On December 4, 2018, the Company issued 219 shares of common stock to RDW Capital LLC upon the conversion of $10,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On December 17, 2018, the Company issued 236 shares of common stock to RDW Capital LLC upon the conversion of $10,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On December 27, 2018, the Company issued 320 shares of common stock to RDW Capital LLC upon the conversion of $10,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On January 14, 2019, the Company issued 370 shares of common stock to RDW Capital LLC upon the conversion of $10,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On February 7, 2019, the Company issued 575 shares of common stock to RDW Capital LLC upon the conversion of $12,500 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On February 12, 2019, the Company issued 1,000 shares of common stock to RDW Capital LLC upon the conversion of $21,750 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On March 7, 2019, the Company issued 1,922 shares of common stock to RDW Capital LLC upon the conversion of $39,375 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On May 21, 2019, the Company issued 259 shares of common stock to RDW Capital LLC upon the conversion of $5,750 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of Shares Pursuant to Silverback Capital Convertible Debentures
On September 28, 2018, the Company issued 100 shares of common stock to Silverback Capital upon the conversion of $9,833 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On October 25, 2018, the Company issued 134 shares of common stock to Silverback Capital upon the conversion of $13,008 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On November 8, 2018, the Company issued 200 shares of common stock to Silverback Capital upon the conversion of $18,206 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On November 26, 2018, the Company issued 250 shares of common stock to Silverback Capital upon the conversion of $18,206 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On December 12, 2018, the Company issued 389 shares of common stock to Silverback Capital upon the conversion of $17,858 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On January 14, 2019, the Company issued 334 shares of common stock to Silverback Capital upon the conversion of $9,746 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On January 28, 2019, the Company issued 667 shares of common stock to Silverback Capital upon the conversion of $15,552 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On February 11, 2019, the Company issued 1,059 shares of common stock to Silverback Capital upon the conversion of $24,697 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On May 17, 2019, the Company issued 667 shares of common stock to Silverback Capital upon the conversion of $13,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On July 2, 2019, the Company issued 1,000 shares of common stock to Silverback Capital upon the conversion of $8,500 of principal and $290 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
F-33
On August 29, 2019, the Company issued 2,167 shares of common stock to Silverback Capital upon the conversion of $6,000 of principal and $338 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On October 21, 2019, the Company issued 1,806 shares of common stock to Silverback Capital upon the conversion of $627 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of Shares Pursuant to Virtual Capital Convertible Debentures
On February 7, 2019, the Company issued 3,572 shares of common stock to Virtual Capital upon the conversion of $75,000 of principal and $7,499 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 1, 2019, the Company issued 4,667 shares of common stock to Virtual Capital upon the conversion of $70,000 of principal and $6,930 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 25, 2019, the Company issued 5,000 shares of common stock to Virtual Capital upon the conversion of $55,000 of principal and $19,998 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of Shares Pursuant to InterCloud Convertible Debentures
On May 6, 2019, the Company issued 52,358 shares of common stock to InterCloud upon the conversion of $2,897,924 of principal and $429,135 of accrued interest pursuant to the convertible debentures described in Note 6, Related Party Transactions.
On August 16, 2019, the Company issued 68,661 shares of common stock to InterCloud upon the conversion of $793,894 of principal and $12,063 of accrued interest pursuant to the convertible debentures described in Note 6, Related Party Transactions.
Issuance of Shares Pursuant to Employee Convertible Debentures
On February 14, 2019, the Company issued 4,667 shares of common stock to employees of the Company upon the conversion of $140,000 principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of Shares Pursuant to Dominion Capital Convertible Debentures
On March 12, 2018, the Company issued 176 shares of common stock to Dominion Capital upon the conversion of $33,000 of principal and $2,640 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of Shares Pursuant to Conversion of Series A Preferred Stock
On May 2, 2018, the Company issued 206 shares of common stock to RiverNorth Capital Management upon the conversion of 27,188 shares of Series A preferred stock with a stated value of $1 per share.
On May 18, 2018, the Company issued 221 shares of common stock to RiverNorth Capital Management upon the conversion of 19,945 shares of Series A preferred stock with a stated value of $1 per share.
On June 22, 2018, the Company issued 57 shares of common stock to Dominion Capital upon the conversion of 13,622 shares of Series A preferred stock with a stated value of $1 per share.
On July 2, 2018, the Company issued 168 shares of common stock to M2B Funding upon the conversion of 47,520 shares of Series A preferred stock with a stated value of $1 per share.
F-34
On August 26, 2019, the Company issued 880 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On August 30, 2019, the Company issued 1,112 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On September 18, 2019, the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On September 27, 2019, the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 15, 2019, the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 21, 2019, the Company issued 1,112 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 24, 2019, the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
Issuance of Shares for Services
On September 28, 2018, the Company issued 16,700 shares of common stock to employees and directors of the Company in exchange for services for the Company.
On October 9, 2018, the Company issued 1,734 shares of common stock to employees and directors of the Company in exchange for services for the Company.
On February 1, 2019, the Company issued 9,565 shares of common stock to employees and directors of the Company in exchange for services for the Company.
On July 18, 2019, the Company issued 2,778 shares of common stock to MZ Group in exchange for services for the Company.
As of December 31, 2019, there was $2,137,874 of stock compensation expense that had not yet vested.
Cancellation of Shares for Services
On April 12, 2019, the Company cancelled 300 shares of common stock issued to former employees for services.
On May 22, 2019, the Company cancelled 100 shares of common stock issued to former employees for services.
On June 18, 2019, the Company cancelled 67 shares of common stock issued to former employees for services.
On December 4, 2019, the Company cancelled 167 shares of common stock issued to a former employee for services.
Cancellation of Shares Issued Pursuant to Conversion of Series A Preferred Stock
On October 1, 2018, the Company cancelled 277 shares of common stock issued to RiverNorth Capital Management in error.
F-35
Exchange of Common Stock for Series B Preferred Stock
On April 23, 2018, each of Roger Ponder, the Company’s Chief Executive Officer, and Keith Hayter, the Company’s President, exchanged certain shares of common stock of the Company held by each of them for shares of the newly designated Series B Preferred Stock. Mr. Ponder exchanged 1,809 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter exchanged 1,809 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock. Of the 3,618 shares of common stock exchanged, 1,547 shares were unvested. The remaining 2,071 shares were fully vested and represent the shares of common stock held in treasury by the Company.
| 11. | Preferred Stock |
Series A
On November 15, 2017, the Company created one series of the 20,000,000 preferred shares it is authorized to issue, consisting of 8,000,000 shares, to be designated as Series A preferred stock.
On October 29, 2018, the Company made the first amendment to the Certificate of Designation of its Series A convertible preferred stock. This amendment updated the conversion price to be equal to the greater of 75% of the lowest VWAP during the ten trading day period immediately preceding the date a conversion notice is delivered or $120.00, subject to adjustment for any subdivision or combination of the Company’s outstanding shares of common stock.
On August 16, 2019, the Company made the second amendment to the Certificate of Designation of its Series A convertible preferred stock. As a result of this amendment, the Company recorded a deemed dividend of $488,072 for the year ended December 31, 2019 in accordance with ASC 260-10-599-2. Subsequent to the second amendment, the principal terms of the Series A preferred stock shares were as follows:
Voting rights – The Series A preferred stock shares do not have voting rights.
Dividend rights – The holders of the Series A preferred stock shares shall not be entitled to receive any dividends. No dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the Series A preferred stock shares during any fiscal year of the Company until there shall have been paid or declared and set apart during that fiscal year for the holders of the Series A preferred stock shares a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the Series A preferred stock times (ii) the amount per share of the dividend to be paid on the common stock.
Conversion rights – The holders of the Series A preferred stock shares have the right to convert each Series A preferred stock share and all accrued and unpaid dividends thereon shall be convertible at the option of the holder thereof, at any time after the issuance of such share into fully paid and nonassessable shares of common stock of the Company. The number of shares of common stock into which each share of the Series A preferred stock shares may be converted shall be determined by dividing the sum of the stated value of the Series A preferred stock shares ($1.00 per share) being converted and any accrued and unpaid dividends by the conversion price in effect at the time of the conversion. The Series A preferred stock shares may be converted at an initial conversion price of the lower of 80% of the lowest VWAP during the five trading day period immediately preceding the date a conversion notice is delivered or $15.00, subject to adjustment for any subdivision or combination of the Company’s outstanding shares of common stock. The conversion price has a floor of $9.00 per share.
Liquidation rights – Upon the occurrence of any liquidation, each holder of Series A preferred stock shares then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment shall be made in respect of the common stock, or other series of preferred stock then in existence that is outstanding and junior to the Series A preferred stock shares upon liquidation, an amount per share of Series A preferred stock shares equal to the amount that would be receivable if the Series A preferred stock shares had been converted into common stock immediately prior to such liquidation distribution, plus, accrued and unpaid dividends.
F-36
In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series A preferred stock shares as temporary equity or “mezzanine.”
Holders of Series A preferred stock shares began converting into shares of common stock during May 2018 (refer to Note 10, Common Stock, for additional detail).
On April 8, 2020, the Company made the third amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price and the conversion price floor to $3.00 per share (refer to Note 17, Subsequent Events, for additional detail).
Series B
On April 16, 2018, the Company designated 1,000 shares of Series B preferred stock of the Company with a stated value of $3,500 per share. The Series B preferred stock is neither redeemable nor convertible into common stock. The principal terms of the Series B preferred stock shares are as follows:
Issue Price - The stated price for the Series B preferred stock shares shall be $3,500 per share.
Redemption - The Series B preferred stock shares are not redeemable.
Dividends - The holders of the Series B preferred stock shares shall not be entitled to receive any dividends.
Preference of Liquidation - The Corporation’s Series A preferred stock (the “Senior Preferred Stock) shall have a liquidation preference senior to the Series B preferred stock. Upon any fundamental transaction, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of the Series B preferred stock shares shall be entitled, after any distribution or payment is made upon any shares of capital stock of the Company having a liquidation preference senior to the Series B preferred stock shares, including the Senior Preferred Stock, but before any distribution or payment is made upon any shares of common stock or other capital stock of the Company having a liquidation preference junior to the Series B preferred stock shares, to be paid in cash the sum of $3,500 per share. If upon such liquidation, dissolution or winding up, the assets to be distributed among the Series B preferred stock holders and all other shares of capital stock of the Company having the same liquidation preference as the Series B preferred stock shall be insufficient to permit payment to said holders of such amounts, then all of the assets of the Company then remaining shall be distributed ratably among the Series B preferred stock holders and such other capital stock of the Company having the same liquidation preference as the Series B preferred stock, if any. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after provision is made for Series B preferred stock holders and all other shares of capital stock of the Company having the same liquidation preference as the Series B preferred stock, if any, then-outstanding as provided above, the holders of common stock and other capital stock of the Company having a liquidation preference junior to the Series B preferred stock shall be entitled to receive ratably all remaining assets of the Company to be distributed.
Voting - The holders of shares of Series B preferred stock shall be voted together with the shares of common stock such that the aggregate voting power of the Series B preferred stock is equal to 51% of the total voting power of the Company.
Conversion - There are no conversion rights.
In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series B preferred stock shares as temporary equity or “mezzanine.”
Series C
On November 14, 2019, the Company designated 9,000,000 shares of Series C preferred stock of the Company with a stated value of $0.00001 per share. The principal terms of the Series C preferred stock shares are as follows:
Issue Price - The stated price for the Series C preferred stock shall be $0.00001 per share.
Redemption - The Series C preferred stock shares are not redeemable.
Dividends - The holders of the Series C preferred stock shares shall not be entitled to receive any dividends.
F-37
Preference of Liquidation - Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a “liquidation”), the Series C preferred stock shall (i) first be entitled to receive out of the assets, whether capital or surplus, of the Company an amount equal to $0.00001 for each share of Series C preferred stock before any distribution or payment shall be made to the holders of any junior securities and (ii) then be entitled to receive out of the assets, whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the Series C preferred stock were fully converted (disregarding for such purposes any conversion limitations hereunder) to common stock which amounts shall be paid pari passu with all holders of common stock.
Voting - Except as otherwise provided herein or as required by law, the Series C preferred stock shall be voted together with the shares of common stock, par value $0.00001 per share of the Company and any other series of preferred stock then outstanding, and not as a separate class, at any annual or special meeting of stockholders of the Company, with respect to any question or matter upon which the holders of common stock have the right to vote, such that the voting power of each share of Series C preferred stock is equal to the voting power of the shares of common stock that each such share of Series C preferred stock is convertible into pursuant hereto. The Series C preferred stock shall be entitled to notice of any stockholders’ meeting in accordance with the bylaws of the Company, and may act by written consent in the same manner as the holders of common stock of the Company.
Conversion - on the second business day following the earlier of (i) the reverse split of the Company’s common stock, (ii) the listing of the Company on a national securities exchange and (iii) the six-month anniversary of the closing date (as defined below) (the “Series C Conversion Date”), without any further action, all outstanding shares of Series C shall automatically convert into an aggregate number of shares of the Company’s common stock equal to the greater of (i) $90,000,000 (the “Aggregate Value”)/Strike Price (as defined below), or (ii) the Aggregate Value/$9.75 (as adjusted for any reverse stock split or similar adjustment that may occur prior to the Series C Conversion Date). Provided, however, if a Triggering Event (as defined below) occurs, the Aggregate Value shall be reduced by the amount of any Losses (as defined below).
For purposes hereof, a “Triggering Event” shall include any liability arising from a breach of the representations or warranties of WaveTech GmbH (as defined below) contained in the share purchase agreement dated July 15, 2019 and all amendments thereto (as amended, the “SPA”), by and between the Company and WaveTech GmbH, a corporation organized under the laws of the Republic of Germany. “Closing Date” shall have the meaning ascribed to the term in the SPA. “Strike Price” shall mean the closing price per share of the Company’s common stock on the trading day immediately preceding the Series C Conversion Date.
On April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement with WaveTech GmbH. As a result of the amendment, certain terms of the Company’s Series C preferred stock were changed (refer to Note 17, Subsequent Events, for additional detail).
As of the date of this report, the Series C shares have not been issued.
| 12. | Share Purchase Warrants and Stock Options |
From time to time, the Company issues share purchase warrants and stock options, which are classified as liabilities. The total fair value of the Company’s share purchase warrants and stock options was $191,732 as of December 31, 2019. This amount is included in derivative liabilities on the consolidated balance sheet. The valuation methodology, including the assumptions used in the valuation, are discussed in Note 9, Derivative Liabilities. The weighted-average remaining life on the share purchase warrants as of December 31, 2019 was 1.3 years. The stock options outstanding at December 31, 2019 were not subject to any vesting terms.
The following table summarizes the activity of share purchase warrants for the year ended December 31, 2019:
| Number of warrants | Weighted average exercise price | |||||||
| Balance at December 31, 2018 | 5,638 | $ | 606.61 | |||||
| Issued | 9,300 | 271.29 | ||||||
| Expired | (935 | ) | 1,635.10 | |||||
| Balance at December 31, 2019 | 14,003 | $ | 331.32 | |||||
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As of December 31, 2019, the following share purchase warrants were outstanding:
| Number of warrants | Exercise price | Issuance Date | Expiry date | |||||||||||
| 459 | 1,530.00 | 4/28/2017 | 4/28/2020 | |||||||||||
| 834 | 300.00 | 6/27/2017 | 6/27/2020 | |||||||||||
| 7,818 | * | 360.00 | 2/14/2018 | 2/13/2021 | ||||||||||
| 417 | 480.00 | 2/21/2018 | 2/21/2021 | |||||||||||
| 1,667 | 300.00 | 5/17/2018 | 5/17/2020 | |||||||||||
| 380 | 324.00 | 10/10/2018 | 10/10/2021 | |||||||||||
| 2,500 | 30.00 | 11/21/2019 | 11/21/2022 | |||||||||||
| 14,075 | ||||||||||||||
| * | This warrant is convertible into 4% of the number of common shares of the Company outstanding. At December 31, 2019, it is 4% of the 193,644 shares outstanding as of that date. |
The following table summarizes the activity of stock options for the year ended December 31, 2019:
| Number of stock options | Weighted average exercise price | |||||||
| Balance at December 31, 2018 | - | $ | - | |||||
| Issued | 5,000 | 9.00 | ||||||
| Expired | - | - | ||||||
| Balance at December 31, 2019 | 5,000 | $ | 9.00 | |||||
As of December 31, 2019, the following stock options were outstanding:
| Number of stock options | Exercise price | Issuance Date | Expiry date | |||||||||||
| 5,000 | 9.00 | 11/25/2019 | 11/25/2021 | |||||||||||
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| 13. | Leases |
In February 2016, the FASB issued ASU No. 2016-02, Leases, which introduced a lessee model that requires the majority of leases to be recognized on the balance sheet. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of $269,341 as of January 1, 2019. During the year ended December 31, 2019, non-cash right of use assets recorded in exchange for non-cash operating lease liabilities was $316,600. The Company leases certain office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term. The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The Company used the incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The following table sets forth the operating lease right of use (“ROU”) assets and liabilities as of December 31, 2019:
| December 31, | ||||
| 2019 | ||||
| Operating lease assets | $ | 168,384 | ||
| Operating lease liabilities: | ||||
| Current operating lease liabilities | 173,351 | |||
| Total operating lease liabilities | $ | 173,351 | ||
Expense related to leases is recorded on a straight-line basis over the lease term, including rent holidays. During the year ended December 31, 2019, the Company recognized operating lease expense of $234,315. Operating lease costs are included within selling, administrative and other expenses on the consolidated statements of operations. During the year ended December 31, 2019, short-term lease costs were $246,380.
Cash paid for amounts included in the measurement of operating lease liabilities was $229,348 for the year ended December 31, 2019, and this amount is included in operating activities in the consolidated statements of cash flows. During the year ended December 31, 2019, the Company reduced its operating lease liabilities by $143,249 for cash paid.
The operating lease liabilities as of December 31, 2019 reflect a weighted average discount rate of 51%. The weighted average remaining term of the leases is 2.66 years. Lease payments over the next five years and thereafter are as follows:
| Year ending December 31, | ||||
| 2020 | $ | 122,001 | ||
| 2021 | 95,914 | |||
| 2022 | 86,681 | |||
| 2023 | 21,330 | |||
| 2024 | - | |||
| Thereafter | - | |||
| Total lease payments | 325,926 | |||
| Less: imputed interest | (152,575 | ) | ||
| Total | $ | 173,351 | ||
| 14. | Commitments and Contingencies |
Leases
The Company leases certain of its properties under leases that expire on various dates through 2023. Some of these agreements include escalation clauses and provide for renewal options ranging from one to five years. Leases with an initial term of 12 months or less and immaterial leases are not recorded on the balance sheet (refer to Note 13, Leases, for amount expensed during 2019).
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WaveTech GmbH Share Purchase Agreement
On July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German corporation.
The merger of WaveTech GmbH into the Company shall be effected through a sale and exchange of shares and cash. Pursuant to the share purchase agreement, in exchange for shares of common stock of the Company, the Company will acquire all right, title and interest in all of the issued and outstanding shares of stock of WaveTech GmbH in exchange for the issuance of the Company’s Series C preferred stock as well as the assumption by the Company of $8,444,706 of WaveTech GmbH debt. The Company will also receive $3,000,000 in cash at or before consummation of the transactions contemplated by the share purchase agreement (the “Transactions”). Upon consummation of the Transactions, the current WaveTech GmbH shareholders will beneficially own a majority of the outstanding shares of the Company.
The consummation of the Transactions is also subject to the satisfaction or waiver (if permitted by law) of certain closing conditions, including, among other things, (i) the accuracy of the representations and warranties of the parties in all material respects and (ii) the performance of and compliance with the covenants of the parties in all material respects.
The parties are required to use commercially reasonable efforts to cause to be taken and to do or cause to be done all actions and things as are necessary under the terms of the share purchase agreement or under applicable law, in order to consummate the Transactions. The parties are also required to, among other things, cooperate in all respects with each other in connection with any filing or submission to any governmental authority in connection with the Transactions.
The share purchase agreement also contains certain termination rights for both the Company and WaveTech GmbH, including that the Company or WaveTech GmbH may terminate the share purchase agreement if WaveTech GmbH has not obtained executed assignment agreements from its shareholders holding an aggregate of (i) fifty one percent (51%) of the issued and outstanding shares of WaveTech GmbH by the date that is ninety (90) days following the date of the share purchase agreement and (ii) ninety percent (90%) of the issued and outstanding shares of WaveTech GmbH by March 31, 2020. As of the date of this report, the executed assignment agreements had not been obtained and neither party had chosen to terminate the deal.
On November 14, 2019, the Company entered into Amendment Number 1 of the share purchase agreement and acquired approximately 60% of the outstanding shares of WaveTech GmbH. In connection with the Company acquiring these shares, the Company’s board appointed Dag Valand to be a director of the Company and appointed Silas Poel to be the Company’s Chief Operating Officer and director. Mr. Valand is the CEO and co-founder of WaveTech GmbH and Mr. Poel is the Chief Operating Officer of WaveTech GmbH. Additionally, on February 19, 2020, the Company’s board appointed Brynjar Meling to be a director of the Company. Mr. Meling previously served as a director of WaveTech GmbH.
As of December 31, 2019, the Company had not obtained executed assignment agreements from shareholders holding an aggregate of 90% of the issued and outstanding shares of WaveTech GmbH. The Company determined that the acquisition had not been completed for accounting purposes as of the year ended December 31, 2019 as the Series C preferred stock shares have not yet been issued.
As of the date of this report, the Company has received $2,989,978 in cash from WaveTech GmbH. Additionally, the Company recorded a foreign exchange loss of $10,022 in the consolidated statement of operations for the year ended December 31, 2019. This $3,000,000 is included in loans payable to related parties as of December 31, 2019. Additionally, as of the date of this report, the Company has not acquired 90% or more of the outstanding shares of WaveTech GmbH and the Series C preferred stock shares have not been issued.
On April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement (refer to Note 17, Subsequent Events, for additional detail).
Oasis Capital, LLC Equity Purchase Agreement and Registration Rights Agreement
On August 29, 2019, the Company entered into an equity purchase agreement and registration rights agreement with Oasis Capital, LLC, a Puerto Rico limited liability Company. Under the terms of the equity purchase agreement, Oasis Capital agreed to purchase from the Company up to $2,500,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with the SEC and subject to certain limitations and conditions set forth in the equity purchase agreement.
Following effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the equity purchase agreement, the Company shall have the discretion to deliver put notices to Oasis Capital and Oasis Capital will be obligated to purchase shares of the Company’s common stock, par value $0.00001 per share based on the investment amount specified in each put notice. The maximum amount that the Company shall be entitled to put to Oasis Capital in each put notice shall not exceed the lesser of $250,000 or two hundred percent (200%) of the average daily trading volume of the Company’s common stock during the ten (10) trading days preceding the put. Pursuant to the equity purchase agreement, Oasis Capital and its affiliates will not be permitted to purchase and the Company may not put shares of the Company’s common stock to Oasis Capital that would result in Oasis Capital’s beneficial ownership of the Company’s outstanding common stock exceeding 9.99%. The price of each put share shall be equal to eighty five percent (85%) of the market price (as defined in the equity purchase agreement). Puts may be delivered by the Company to Oasis Capital until the earlier of (i) the date on which Oasis Capital has purchased an aggregate of $2,500,000 worth of common stock under the terms of the equity purchase agreement, (ii) August 29, 2022, or (iii) written notice of termination delivered by the Company to Oasis Capital, subject to certain equity conditions set forth in the equity purchase agreement.
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As of the date of this report, the Company has not received the funds described in the equity purchase agreement and has not filed the Registration Statement with the SEC.
| 15. | Segment Disclosures |
During the year ended December 31, 2019, the Company had two operating segments including:
| ● | AWS/ADEX/TNS, which is comprised of the AWS Entities, the ADEX Entities, and TNS. |
| ● | Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations. |
During the year ended December 31, 2018, the Company had two operating segments including:
| ● | AWS/ADEX, which was comprised of the AWS Entities and the ADEX Entities. |
| ● | Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations. |
Factors used to identify the Company’s reportable segments include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative criteria. The Company operates the SGS reporting segment in one geographical area (the United States) and the AWS/ADEX/TNS operating segment in two geographical areas (the United States and Puerto Rico).
Financial statement information by operating segment for the year ended December 31, 2019 is presented below:
| Year Ended December 31, 2019 | ||||||||||||
| Spectrum Global | AWS/ADEX/TNS | Total | ||||||||||
| Net sales | $ | - | $ | 34,010,597 | $ | 34,010,597 | ||||||
| Operating (loss) income | (3,768,757 | ) | (585,858 | ) | (4,354,615 | ) | ||||||
| Interest expense | 1,208,441 | 490,871 | 1,699,312 | |||||||||
| Depreciation and amortization | - | 384,935 | 384,935 | |||||||||
| Total assets as of December 31, 2019 | 11,783 | 12,157,035 | 12,168,818 | |||||||||
Geographic information as of and for the year ended December 31, 2019 is presented below:
| Revenues For The Year Ended December 31, 2019 | Long-lived Assets as of December 31, 2019 | |||||||
| Puerto Rico | $ | 1,423,313 | $ | 9,698 | ||||
| United States | 32,587,284 | 5,861,240 | ||||||
| Consolidated total | 34,010,597 | 5,870,938 | ||||||
Financial statement information by operating segment for the year ended December 31, 2018 is presented below:
| Year Ended December 31, 2018 | ||||||||||||
| Spectrum Global | AWS/ADEX | Total | ||||||||||
| Net sales | $ | - | $ | 34,549,157 | $ | 34,549,157 | ||||||
| Operating (loss) income | (3,863,089 | ) | 1,323,432 | (2,539,657 | ) | |||||||
| Interest expense | 556,888 | 561,465 | 1,118,353 | |||||||||
| Depreciation and amortization | - | 220,431 | 220,431 | |||||||||
| Total assets as of December 31, 2018 | 12,626 | 12,917,770 | 12,930,396 | |||||||||
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Geographic information as of and for the year ended December 31, 2018 is presented below:
| Revenues For The Year Ended December 31, 2018 | Long-lived Assets as of December 31, 2018 | |||||||
| Puerto Rico | $ | 2,208,461 | $ | 3,657 | ||||
| United States | 32,340,696 | 3,859,387 | ||||||
| Consolidated total | 34,549,157 | 3,863,044 | ||||||
| 16. | Income Taxes |
The Company’s pre-tax loss for the years ended December 31, 2019 and 2018 consisted of the following:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Domestic | $ | (5,612,010 | ) | $ | (1,626,136 | ) | ||
| Foreign | (18,017 | ) | 528,060 | |||||
| Pre-tax Loss | $ | (5,630,027 | ) | $ | (1,098,076 | ) | ||
The provision for income taxes for the years ended December 31, 2019 and 2018 was as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Federal | $ | - | $ | - | ||||
| State | 49,038 | 63,171 | ||||||
| Foreign | 155,193 | 184,387 | ||||||
| Total current | $ | 204,231 | $ | 247,558 | ||||
| Deferred: | ||||||||
| Federal | $ | - | ||||||
| State | - | |||||||
| Total deferred | - | - | ||||||
| Total provision for income taxes | $ | 204,231 | $ | 247,558 | ||||
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The Company’s income taxes were calculated on the basis of foreign and domestic pre-tax loss of $18,017 and $5,612,010, respectively, for the year ended December 31, 2019. The Company’s income taxes were calculated on the basis of foreign pre-tax income and domestic pre-tax loss of $528,060 and $1,626,136, respectively, for the year ended December 31, 2018.
The Company’s effective tax rate for the years ended December 31, 2019 and 2018 differed from the U.S. federal statutory rate as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| % | % | |||||||
| Federal tax benefit at statutory rate | (21.0 | ) | (21.0 | ) | ||||
| Permanent differences | (22.2 | ) | (17.8 | ) | ||||
| State tax benefit, net of Federal benefits | 4.5 | 6.3 | ||||||
| Other | - | - | ||||||
| Effect of foreign income taxed in rates other than the U.S. Federal statutory rate | 14.1 | 18.5 | ||||||
| Net change in valuation allowance | 43.2 | 38.8 | ||||||
| Provision | 18.6 | 24.8 | ||||||
The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities were as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Net operating loss carryforwards | $ | 17,212,941 | $ | 13,248,096 | ||||
| Depreciation | 10,935 | 28,448 | ||||||
| Total assets | 17,223,876 | 13,276,544 | ||||||
| Total liabilities | - | - | ||||||
| Less: Valuation allowance | (17,223,876 | ) | (13,276,544 | ) | ||||
| Net deferred tax liabilities | $ | - | $ | - | ||||
As of December 31, 2019 and 2018, the Company had federal net operating loss carryforwards (“NOL’s”) of $17,212,941 and $13,248,096, respectively that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2027.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss, capital loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating losses capital losses and credits prior to full utilization.
The Company has not completed a study to assess whether ownership change has occurred as a result of the Company’s acquisition of AWS and related issuance of shares. However, as a result of the issuance of common shares in 2017, the Company believes an ownership change under Sec. 382 may have occurred. As a result of this ownership change certain of the Company’s net operating loss, capital loss and credit carryforwards will expire prior to full utilization. Additionally, further share issuances such as the shares issuances to InterCloud Systems, Inc. may result in additional ownership changes.
The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. The Company’s recent operating results and projections of future income weighed heavily in the Company’s overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because the Company had sustained cumulative losses since the commencement of operations.
The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2019 and 2018, there was no accrued interest and penalties related to uncertain tax positions.
The Company is subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to the Company’s net operating loss carryforwards all years remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years are still subject to adjustment.
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| 17. | Subsequent Events |
Issuance of Shares Pursuant to Conversion of Series A Preferred Stock
On January 7, 2020 the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On February 11, 2020, the Company issued 2,778 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of Series A preferred stock with a stated value of $1 per share.
On April 9, 2020, the Company issued 8,334 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of Series A preferred stock with a stated value of $1 per share.
On April 29, 2020, the Company issued 8,334 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of Series A preferred stock with a stated value of $1 per share.
Convertible promissory note, CCAG Investments, LLC, 20% interest, secured, matures June 30, 2020
On February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with CCAG Investments, LLC, pursuant to which the Company issued to CCAG Investments, LLC a secured convertible redeemable note in the aggregate principal amount of $175,000 for an aggregate purchase price of $157,500. The Company also issued a warrant equal to 50% of the face amount of the note with a term of three years to purchase 9,723 shares of common stock at an initial exercise price of $9.00 per share.
The interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In connection with the issuance of the note, the Company also issued to CCAG Investments, LLC 9,755 shares of common stock.
The Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal if paid greater than 90 days after issuance.
On May 6, 2020, the Company repaid 120% of the principal balance. The total payment was $218,534, which included accrued interest of $8,534.
Convertible promissory note, FJ Vulis and Associates LLC, 20% interest, secured, matures June 30, 2020
On February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with FJ Vulis and Associates LLC, pursuant to which the Company issued to FJ Vulis and Associates LLC a secured convertible redeemable note in the aggregate principal amount of $175,000 for an aggregate purchase price of $157,500. The Company also issued a warrant equal to 50% of the face amount of the note with a term of three years to purchase 9,723 shares of common stock at an initial exercise price of $9.00 per share.
The interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In connection with the issuance of the note, the Company also issued to FJ Vulis and Associates LLC 9,755 shares of common stock.
The Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal if paid greater than 90 days after issuance.
On May 6, 2020, the Company repaid 120% of the principal balance. The total payment was $218,247, which included accrued interest of $8,247.
Factoring Agreement with Bay View Funding
On February 11, 2020, pursuant to an assignment and consent agreement, Bay View Funding was sold, transferred and assigned all of Heritage’s right, title, and interest in the loan and security agreement with the Company’s wholly-owned subsidiary, ADEX, discussed in Note 7, Loans Payable. The beginning balance owed under the factoring agreement was $3,024,532, which was the outstanding balance due to Heritage at the time of the assignment and consent agreement. The initial term of the factoring agreement is twelve months from the initial funding date.
F-45
Under the factoring agreement, the Company’s ADEX subsidiary may borrow up to the lesser of $5,000,000 or an amount equal to the sum of all undisputed purchased receivables multiplied by the advance percentage, less any funds in reserve. ADEX will pay to Bay View Funding a factoring fee upon purchase of receivables by Bay View Funding equal to 0.75% of the gross face value of the purchased receivable for the first 30 day period from the date said purchased receivable is first purchased by Bay View Funding, and a factoring fee of 0.35% per 15 days thereafter until the date said purchased receivable is paid in full or otherwise repurchased by ADEX or otherwise written off by Bay View Funding within the write off period. ADEX will also pay a finance fee to Bay View Funding on the outstanding advances under the agreement at a floating rate per annum equal to the Prime Rate plus 3%. The finance rate will increase or decrease monthly, on the first day of each month, by the amount of any increase or decrease in the Prime Rate, but at no time will the finance fee be less than 7.75%.
Issuance of Shares Pursuant to GS Capital Partners, LLC Convertible Debentures
On February 12, 2020, the Company issued 1,647 shares of common stock to GS Capital Partners, LLC upon the conversion of $8,000 of principal and $323 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On Mach 13, 2020, the Company issued 11,212 shares of common stock to GS Capital Partners, LLC upon the conversion of $15,000 of principal and $704 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 30, 2020, the Company issued 302,121 shares of common stock to GS Capital Partners, LLC upon the conversion of $100,000 of principal and $5,742 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance of shares to WaveTech GmbH shareholders
On February 18, 2020, the Company issued 1,082,731 shares of common stock to debt holders of WaveTech GmbH in connection with the Company acquiring 60% of WaveTech GmbH shares on November 14, 2019. As of the date of the issuance, the debt holders held a total of $8,444,706 of WaveTech GmbH debt. This debt was converted at a per share price of $7.80.
Issuance of Shares Pursuant to Power Up Lending Group LTD. Convertible Debentures
On April 1, 2020, the Company issued 5,715 shares of common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 13, 2020, the Company issued 9,196 shares of common stock to Power Up Lending Group LTD. upon the conversion of $16,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 16, 2020, the Company issued 8,621 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 16, 2020, the Company issued 8,621 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 20, 2020, the Company issued 12,122 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On April 30, 2020, the Company issued 58,434 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Dominion Capital Modification
On April 2, 2020, in connection with the convertible debenture outstanding to Dominion Capital, the Company paid a $20,000 modification fee in order to avoid an event of default under the note and receive payment forbearance for a period of 30 days.
Third Amendment to the Certificate of Designation of the Company’s Series A Preferred Stock
On April 8, 2020, the Company made the third amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price and the conversion price floor to $3.00 per share (refer to Note 17, Subsequent Events, for additional detail).
Reverse Stock Split
On April 14, 2020, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The reverse stock split was previously approved by the board of directors and the majority of stockholders of the Company. The reverse stock split was deemed effective at the open of business on April 21, 2020. As a result of the reverse stock split, every three hundred (300) shares of outstanding common stock of the Company as of April 14, 2020 were converted into one (1) share of common stock. Fractional shares resulting from the reverse stock split will be rounded up to the next whole number.
All common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock of the Company as a result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.00001 per share post-split.
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Amendment Number 2 of the Share Purchase Agreement with WaveTech GmbH
On April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement with WaveTech GmbH. Amendment Number 2 replaced the conversion terms of the Series C preferred stock included with Amendment Number 1 with the following:
Conversion. On the second business day following the earlier of (i) the later of (A) April 30, 2020, or such later date as may be determined by the Board, and (B) a reverse split of the common stock. (ii) the listing of the Company on a national securities exchange and (iii) the six-month anniversary of the issuance of shares of Series C to such holder (such earliest date. the “Series C Conversion Date”), without any further action, all outstanding shares of Series C shall automatically convert into an aggregate number of shares of common stock equal to $90,000,000 (the “Aggregate Value”)/Strike Price (as defined below). Provided, however, if a Triggering Event (as defined below) occurs, the Aggregate Value shall be reduced by the amount of any losses (as defined below). “Strike Price” shall mean the closing price per share of the Company’s common stock on the trading day immediately preceding the Series C Conversion Date.
For purposes hereof, a “Triggering Event” shall include any liability arising from a breach by WaveTech GmbH, a corporation organized under the laws of the Republic of Germany, of any of its representations or warranties contained in that certain Share Purchase Agreement (the “SPA”), by and between the Corporation and WaveTech GmbH. “Losses” shall have the meaning set forth in the SPA.
Additionally, Amendment Number 2 adjusted the amount of common stock issued on the Series C Conversion Date as follows:
If on the earlier of (a) the tenth (l0th) business day prior to the listing of the Company on a national securities exchange (“Uplisting”), or (b) December 15, 2020, the aggregate value of the shares of common stock issued upon conversion of the Series C (the “Conversion Shares”) is less than 95% of the aggregate value of the Conversion Shares on the Series C Conversion Date (such difference in value, the “First Value Differential”), then the Company shall make a pro-rata issuance of additional shares of common stock to each holder in an aggregate amount equal to the First Value Differential (such additional shares, the “First True-Up Shares”). In the event (i) an Uplisting does not occur until sometime in 2021, and (ii) on such date in 2021 as the Board may determine, but in no event later than the tenth (10th) business day prior to the Uplisting (the “Second True-Up Date”), the aggregate value of the Conversion Shares as of the Second True-Up Date is less than 95% of the aggregate value of the Conversion Shares as of December 15, 2020 (such difference in value, the “Second Value Differential”), the Company shall, at the Board’s discretion, make a pro-rata issuance of additional shares of common stock to each holder in an aggregate amount equal to the Second Value Differential (such additional shares, the “Second True-Up Shares”). To the extent any shares of Series C are issued after the Series C Conversion Date, then the holder(s) of such shares shall receive the same number of Conversion Shares such holder(s) would have received had they held the Series C on the Series C Conversion Date.
Payments to RDM Capital Funding
During the period of January 1, 2020 through May 8, 2020, the Company repaid the full balance. Total cash payments during this period were $253,754, with a discount of $62,652 as a result of the Company paying the note off in under eight months from issuance.
COVID-19
Beginning in early 2020, there has been an outbreak of coronavirus (“COVID-19”), initially in China and which has spread globally. The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread are evolving. Therefore, the full extent to which COVID-19 may impact Company’s results of operations, liquidity or financial position is uncertain. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company and the economies in which the Company operates.
On April 21 and April 27, 2020, our AWS and ADEX subsidiaries received $672,400 and $2,682,125, respectively (the “PPP Funds”). AWS entered into a loan agreement with Iberia Bank, and ADEX entered into a loan agreement with Heritage Bank of Commerce. These loan agreements were pursuance to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act is eligible to be forgiven provided that (a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including benefits), rent, mortgage interest, and utility costs. The amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels. Principal and interest payments on any unforgiven portion of the PPP Funds (the “PPP Loan”) will be deferred for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SPECTRUM GLOBAL SOLUTIONS, INC. | ||
| Date: May 14, 2020 | By: | /s/ Roger M. Ponder |
| Roger M. Ponder | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Position | Date | ||
| /s/ Roger M. Ponder | Chief Executive Officer and | May 14, 2020 | ||
| Roger M. Ponder | Chairman of the Board of Directors | |||
| (Principal
Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
||||
| /s/ Keith W. Hayter | Director | May 14, 2020 | ||
| Keith W. Hayter |
52
Exhibit Index
| * | Filed herewith. |
53