NOTES TO CONDENSED FINANCIAL STATEMENTS APRIL 30, 2018
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Hammer Fiber Optics Holdings Corp. (“the Company”) is an alternative telecommunications carrier formed to provide high capacity broadband through a wireless access network. Hammer Fiber Optics Holdings Corp. is the parent company and sole shareholder of Hammer Wireless Corporation. The financial statements for Hammer Fiber Optics Holdings Corp. and its wholly-owned subsidiary are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.
The interim financial statements for the fiscal quarter ending April 30, 2018 are unaudited. These financial statements are prepared in accordance with requirements for unaudited interim periods and consequently do not include all disclosures required to be in conformity with accounting principles generally accepted in the United States of America. The results of operations for the interim periods are not necessarily indicative of the results for the full year. In management's opinion, all adjustments necessary for a fair presentation of the Company's financial statements are reflected in the interim periods included and are of a normal recurring nature. These interim financial statements should be read in conjunction with the financial statements included in our Form 10-K, for the year ended July 31, 2017, as filed with the Securities and Exchange Commission (“the SEC”) at www.sec.gov.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Reclassifications
Costs incurred during the three and nine month periods ended April 30, 2017, and previously recorded as Cost of Sales, have been reclassified as Operations and Maintenance expenses in the comparable periods in 2018.
Use of estimates
The preparation of financial statements in conformity with GAAP 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include cash in banks, money market funds, and certificates of term deposits with maturities of less than three months from inception, which are readily convertible to known amounts of cash and which, in the opinion of management, are subject to an insignificant risk of loss in value.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided for on a straight-line basis over the useful lives of the assets. For network service equipment, the useful life is ten years. For furniture and fixtures, the useful life is five years. Leasehold Improvements are depreciated over six years. Expenditures for additions and improvements are capitalized; repairs and maintenance are expensed as incurred.
Impairment of long-lived assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to future undiscounted cash flows to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company has not recognized impairment losses.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Notes Receivable
These assets are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent
to initial recognition, they are recorded at amortized cost less any provision for impairment. Individually significant receivables are considered for impairment when they are past due or when other objective evidence is received that a specific counterparty is more likely than not to default.
Indefinite lived intangible assets
The Company reviews property, plant and equipment, inventory component prepayments and certain identifiable intangibles, excluding goodwill, for impairment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amounts to future undiscounted cash flows the assets are expected to generate. If property, plant and equipment, inventory component prepayments and certain identifiable intangibles are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the assets exceeds its fair value. The Company has not recorded any related impairment losses.
The Company does not amortize goodwill and intangible assets with indefinite useful lives, rather such assets are required to be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the assets may be impaired. The Company has not recorded any related impairment losses.
Capitalized software costs
Costs incurred during the application development stage for software programs are capitalized. These costs consist primarily of direct costs incurred for professional services provided by third parties and compensation costs of employees which relate to software developed for internal use during the application stage. Costs incurred in the preliminary project stage of development and the post-implementation stage are expensed in the periods when they are incurred. Capitalized software costs are included in property and equipment, net and are being amortized over their estimated useful life of five years.
Revenue recognition
The Company recognizes revenues and the related costs when a sales or service arrangement exists, delivery and acceptance has occurred or service has been rendered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Amounts invoiced or collected in advance of product delivery or providing services are recorded as unearned revenue or customer deposits. The company accrues for sales returns, bad debts, and other allowances based on its historical experience.
Revenue is recorded net of discounts provided to customers. Discounts applied during the three and nine month periods ended April 30, 2018 were $4,278 and $17,467, respectively.
The Company’s revenues consist primarily of subscription agreements for its broadband internet and voice-over-IP phone services. Residential broadband service delivered to customers over the Company’s hybrid fiber and wireless network in Atlantic County, New Jersey is the primary revenue source. Revenues are supplemented by phone and add-on services. Broadband services delivered via fiber optics to enterprise businesses account for the remaining sources of revenue. Services are billed monthly to subscribers on either a one- year or two-year contract for residential customers and three-year contracts for enterprise business customers. Revenue begins accruing as service is delivered at commencement of the customer’s service contract.
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.
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NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair value measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions) The Company has no assets or liabilities valued at fair value on a recurring basis.
Consolidation of financial statements
Hammer Fiber Optics Holdings Corp. is the parent company and sole shareholder of Hammer Wireless Corporation. The financial statements for Hammer Fiber Optics Holdings Corp. and its wholly-owned subsidiary are reported on a consolidated basis. All significant intercompany accounts and transactions have been eliminated.
Basic and Diluted Earnings (Loss) per Common Share
The basic earnings (loss) per share are calculated by dividing the Company's net income available to common shareholders by the weighted average number of common shares during the year. The diluted earnings (loss) per share is calculated by dividing the Company's net income (loss) available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. Diluted earnings (loss) per share are the same as basic earnings (loss) per share due to the lack of dilutive items in the Company. As of April 30, 2018 and 2017, there were no common stock equivalents outstanding.
Recent accounting pronouncements
The Company does not expect the adoption of any recent accounting pronouncements to have a material impact on its financial statements.
NOTE 3 – NOTES RECEIVABLE
During the fiscal year ended July 31, 2016, the Company entered into a loan agreement with MEK Investments Inc. for an aggregate amount of $235,000. The loan matures June 30, 2018 at which time the principal is due in its entirety, in addition to simple interest accrued at 3%.
The Company had entered into a loan agreement during the year ended July 2016 with Zena Capital, LLC for an aggregate amount of $1,000,000. Payments of $250,000 had been made against the loan however the loan was in default as of July 31, 2017. The Company recorded a reserve against the outstanding balance of $750,000 in July 2017. Payments totaling $289,000 were received during the nine months ended April 30, 2018 and were recorded as Other Income.
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NOTE 4 – INDEFINITE LIVED INTANGIBLE ASSETS
The Company has $18,934 of recognized indefinite lived intangible assets, which consist of the ownership of Internet Protocol version 4 (IPv4) address blocks. These assets are not amortized and are evaluated routinely for potential impairment. If a determination is made that the intangible asset is impaired after performing the initial qualitative assessment, the asset’s fair value will be calculated and compared with the carrying value to determine whether an impairment loss should be recognized.
NOTE 5 – RELATED PARTY TRANSACTIONS
On October 9, 2016, the Company entered into a short-term loan agreement with a family member of a member of the Company’s Board of Directors. Under the agreement, the lender advanced $100,000 to the Company for the purpose of providing working capital. The loan is for a period of 6 months and shall accumulate interest at an annual rate of 3%. The Company is currently in default on this loan. On September 15, 2016, the Company received $210,000 from a family member of a member of the Board of Directors, also for the purpose of working capital, and has recorded such amount as a deposit in anticipation of executing a loan agreement. As of April 30, 2018, the full $310,000 is due and outstanding.
During the fiscal year ended July 31, 2016, the Company entered into two promissory notes with a related party for an aggregate amount of $2,400,000 and $1,000,000, respectively. The $2,400,000 note matures on January 4, 2019. The terms consist of ten principal and interest payments due quarterly in the amount of $300,000 for total payments of $3,000,000. The Company is currently in default on this loan. To date, the Company has made payments on this note amounting to $725,831. The payments were applied to interest accrued as of the time of payment as well as to principal. The principal balance was $2,294,067 at April 30, 2018 and July 31, 2017 respectively. The interest accrued was $137,052 at April 30, 2018 and $69,594 at July 31, 2017 respectively.
The $1,000,000 note matured June 9, 2018 at which time the principal was due in its entirety, in addition to simple interest accrued at 3%. The principal balance was $1,000,000 at April 30, 2018 and July 31, 2017 respectively. The company is currently in default on this loan.
NOTE 6 – CONVERTIBLE DEBT
On February 12, 2018 the Company entered into an agreement for a convertible promissory note for the sum of $103,000. The note accrues interest at a rate of 12 percent per annum due at maturity. The note matures nine months from issuance date. Prepayment of the note is subject to a premium charge based on the amount of days prepaid before the maturity date. The conversion aspect of the note allows conversion into the Company’s common stock at a discount of 37 percent of the stock’s market price. The holder shall have the right after 180 days to convert all or part of the note at their discretion.
NOTE 7 – DEFERRED REVENUE
On February 5, 2018 the Company entered into a customer service agreement with a third party for the licensing of a designated channel on the Company’s TV media platform. The agreement covers the licensing and support services to be provided in perpetuity to the customer to display their own created media over the platform. The total amount of the agreement is $239,000 with 50% of the contract, or $119,500, collected by April 30, 2018 over several installment. Commencement of the work did not begin until the 50% retainer was received. The Company is set to the deliver the services in six months and will collect the balance upon receipt, however the customer retains the rights to prepay the final balance in advance. The Company has recorded the cumulative transaction of $119,500 as unearned revenue as the service has yet to be provided and the licensing has yet to take effect.
On March 1, 2018 the Company entered into a service order agreement with a customer in the amount of $8,500. The service is schedule to be provided in July and work has not yet begun on the project. The Company has recorded unearned revenue for this transaction in the amount of $8,500
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NOTE 8 – STOCKHOLDERS’ EQUITY
In July 2016, certain shareholders of the Company contributed 9,291,670 restricted shares of their common stock to the Company’s wholly-owned subsidiary, Hammer Wireless Corporation, for the purpose of effecting acquisitions, joint ventures or other business combinations with third parties. Then, Hammer Wireless sold a portion of these restricted shares to third parties and contributed the proceeds to the Company. Since such contribution was an inter-company transaction, any impact on the financial statements is eliminated in the consolidation of these financial statements.
During the year ended July 31, 2016, the Company issued an additional 759,619 Class A shares and 992,481 Class B shares for proceeds of $3,140,094. After the merger effected July 19, 2016, the Company had 60,503,341 common shares outstanding with a par value of $0.001 per share. The Class A share of HFOI have been converted to common stock and as a result the company currently has only one class of stock (common).
During the nine months ended April 30, 2018, the Company received cash of $2,136,609 from the sale of 438,247 shares of Hammer Fiber Optics Holdings Corp. held by Hammer Wireless Corporation and sold to third parties from treasury stock. These transactions represent capital contributions and did not result in an increase in shares outstanding. The Company also issued 63,833 shares of Hammer Fiber Optics Holdings Corp. held by Hammer Wireless Corporation and issued to third parties from treasury stock for services. The award date for all stock issued was February 9, 2018 and the Company valued the transaction at the closing price of the $4.34 for the stock on that date.
NOTE 9 – GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has consistently sustained losses since its inception. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. The Company’s continuation as a going concern is dependent upon, among other things, its ability to increase revenues, adequately control operating expenses and receive debt and/or equity capital from third parties. No assurance can be given that the Company will be successful in these efforts.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company intends to continue to address this condition by seeking to raise additional capital through the issuance of debt and/or the sale of equity until such time that ongoing revenues can sustain the business, at which time capitalization may be considered through other means.
NOTE 10 – SUBSEQUENT EVENTS
Subsequent to April 30, 2018 the Company received cash of $10,001 from the sale of 6,667 shares of Hammer Fiber Optics Holdings Corp. held by Hammer Wireless Corporation and sold to third parties.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis should be read in conjunction with Hammer Fiber Optics Holdings Corp. condensed unaudited financial statements and the related notes thereto. The Management’s Discussion and Analysis contains forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections. We may use words such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “foresee,” “estimate” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted. You should read this Report completely and with the understanding that actual future results may be materially different from what we expect. The forward-looking statements included in this Report are made as of the date of this Report and should be evaluated with consideration of any changes occurring after the date of this Report. We will not update forward-looking statements even though our situation may change in the future and we assume no obligation to update any forward- looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our audited financial statements for the year ended July 31, 2017 and the related notes thereto. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
Our financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Results of Operations
Three Months Ended April 30, 2018 Compared to the Three Months Ended April 30, 2017
Revenues for the three months ended April 30, 2018 and April 30, 2017 were $56,550 and $20,315, respectively. The Company began earning revenues in 2017 as a result of completing the initial portion of its network infrastructure necessary to offer services.
During the three months ended April 30, 2018, the Company incurred total operating expenses of $1,262,912 compared with $1,240,656 for the comparable period ended April 30, 2017. The general consistency between comparable periods consisted primarily of a reduction in equipment leasing costs and reduced technical support costs but an increase of operations and maintenance costs due to refinement and further development of the Company’s service platform paid through cash and stock awards as a service for consulting and operational support.
The Company recorded depreciation and amortization expense of $286,956 and $244,562 during the three months ended April 30, 2018 and April 30, 2017, respectively. The increase was the result of additional capital assets placed into service to further expand the company’s technology platform.
During the three months ended April 30, 2018 and April 30, 2017, interest expense was $94,154 and $68,108, respectively. The increase was the result of the Company issuing additional interest bearing debt during the current period.
The Company had entered into a loan agreement during the year ended July 2016 with Zena Capital, LLC for an aggregate amount of $1,000,000. Payments of $250,000 had been made against the loan however the loan was in default as of July 31, 2017. The Company recorded a reserve against the outstanding balance of $750,000 in July 2017. Payments totaling $174,000 were received during the three months ended April 30, 2018 and were recorded as Other Income.
Nine Months Ended April 30, 2018 Compared to the Nine Months Ended April 30, 2017
Net revenues for the nine months ended April 30, 2018 and April 30, 2017 were $146,525 and $58,329, respectively. The increase in net revenues between the comparable fiscal periods is a result of the Company’s recent initial offering of services and its growing customer base.
During the nine months ended April 30, 2018, the Company incurred total operating expenses of $3,532,435 compared to $3,590,871 for the nine months ended April 30, 2017. This general consistency between comparable periods results generally from management’s efforts to apply tighter controls on its operating expenses including a reduction of staff and technical support.
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The Company recorded depreciation and amortization expense of $849,901 and $630,639 during the nine months ended April 30, 2018 and April 30, 2017, respectively. The increase was the result of additional capital assets placed into service to further expand the company’s technology platform.
Interest expense was $269,742 and $233,935 for the nine months ended April 30, 2018 and 2017, respectively. The increase was due to an increase in costs associated with financing of equipment purchases and related party debt.
Liquidity and Capital Resources
The Company is at risk of remaining a going concern. Its ability to remain a going concern is dependent upon the ability to raise debt and/or equity capital from third-party sources for both working capital and business development needs until such time as the Company may be substantially sustained as a going concern through cash flow from operations.
Cash Flow from Operating Activities
During the nine months ended April 30, 2018, the Company used $2,211,484 in cash for operating activities, compared to $3,626,405 in cash used for operating activities during the comparable 2017 period. The primary reason for this decrease is a reduction in the cash used to pay accounts payable which was initially utilized for increased general and administrative expenses required for the Company to assume initial operations on Absecon Island in New Jersey.
Cash Flow from Investing Activities
During the nine months ended April 30, 2018, the Company’s investing activities consumed $567,521 of cash, compared to $473,607 for the nine months ended April 30, 2017. This increase results primarily from the Company’s continued expenditures for additional equipment for the continued expansion of technology and infrastructure in New Jersey.
Cash Flow from Financing Activities
During the nine months ended April 30, 2018, the Company received $2,252,205 in cash from financing activities compared with the net cash of $3,611,096 for the nine months ended April 30, 2017. This change was the result of a decrease in the volume of both debt and equity fund raising activity.
Going Concern
As at April 30, 2018, substantial doubt existed as to the Company’s ability to continue as a going concern as the Company has earned only minimal revenue, has no certainty of earning additional revenues in the future, has a working capital deficit and an overall accumulated deficit since inception. The Company will require additional financing to continue operations either from management, existing shareholders, or new shareholders through equity financing and/or sources of debt financing. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The 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.
Future Financings
We will continue to rely on equity sales of our common shares presently held by the company’s wholly-owned subsidiary, Hammer Wireless Corporation, in order to continue to fund business operations. Any issuances of additional shares beyond those shares presently held by Hammer Wireless Corporation, may result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of shares held by Hammer Wireless Corporation or issue additional equity securities or arrange for debt or other financing in amounts sufficient to fund our operations and other development activities.
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 financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
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Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States, applied on a consistent basis. 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, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are relevant to the company and are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company 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 results of operations.