Item 1. Financial Statements
The unaudited interim consolidated financial
statements of our company have been prepared in accordance with generally accepted accounting principles in the United States
of America and are presented in US dollars, unless otherwise noted.
SPECTRUM GLOBAL SOLUTIONS, INC.
|
Page
Number
|
|
|
Condensed Consolidated
balance sheets as of September 30, 2018 (unaudited) and December 31, 2017
|
3
|
|
|
Condensed
Consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)
|
4
|
|
|
Condensed Consolidated
statements of cash flows for the nine months ended September 30, 2018 and 2017 (unaudited)
|
5
|
|
|
Notes to unaudited
condensed consolidated financial statements
|
6
– 26
|
SPECTRUM GLOBAL SOLUTIONS, INC.
Condensed consolidated balance sheets
(Expressed in U.S. dollars)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
$
|
|
|
$
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
|
301,080
|
|
|
|
28,893
|
|
Accounts receivable (net of allowance for doubtful accounts
of $562,969 and $54,482, respectively)
|
|
|
8,022,749
|
|
|
|
1,473,377
|
|
Prepaid expenses and deposits
|
|
|
16,126
|
|
|
|
41,063
|
|
Total current assets
|
|
|
8,339,955
|
|
|
|
1,543,333
|
|
Property and equipment (net of accumulated depreciation
of $1,097,565 and $999,769, respectively)
|
|
|
62,400
|
|
|
|
61,159
|
|
Goodwill
|
|
|
1,834,856
|
|
|
|
1,503,633
|
|
Customer lists (net of accumulated amortization of $155,477 and $65,269, respectively)
|
|
|
882,071
|
|
|
|
836,279
|
|
Tradenames (net of accumulated amortization of $98,698 and $41,600, respectively)
|
|
|
1,106,907
|
|
|
|
533,005
|
|
Other assets
|
|
|
31,137
|
|
|
|
27,931
|
|
Total assets
|
|
|
12,257,326
|
|
|
|
4,505,340
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
4,675,156
|
|
|
|
2,368,652
|
|
Due to related parties
|
|
|
11,351
|
|
|
|
159,782
|
|
Loans payable
|
|
|
411,257
|
|
|
|
363,081
|
|
Loans payable to related parties
|
|
|
313,858
|
|
|
|
148,858
|
|
Convertible debentures (net of discount of $2,433,320 and $573,776, respectively)
|
|
|
4,561,750
|
|
|
|
1,913,224
|
|
Factor financing
|
|
|
2,934,294
|
|
|
|
-
|
|
Derivative liability
|
|
|
5,932,521
|
|
|
|
4,749,712
|
|
Warrant liability
|
|
|
100,000
|
|
|
|
-
|
|
Contingent liability
|
|
|
-
|
|
|
|
793,893
|
|
Preferred stock liability:
|
|
|
|
|
|
|
|
|
Preferred stock authorized: 8,000,000
Series A preferred stock, par value $0.00001 Issued and outstanding: 403,326 (December 31, 2017 – 1,262,945) shares
|
|
|
-
|
|
|
|
435,138
|
|
Total current liabilities
|
|
|
18,940,187
|
|
|
|
10,932,340
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity
|
|
|
|
|
|
|
|
|
Preferred stock authorized: 8,000,000 Series A preferred
stock, par value $0.00001 Issued and outstanding: 403,326 (December 31, 2017 – 1,262,945) shares
|
|
|
89,012
|
|
|
|
-
|
|
Preferred stock authorized: 1,000 Series B stock, stated
value $3,500
Issued and outstanding: 1,000 (December 31, 2017 – 0) shares
|
|
|
484,530
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Common stock Authorized: 750,000,000 shares, par value
$0.00001 Issued 6,597,565 (December 31, 2017- 2,115,136); Outstanding: 5,976,307 (December 31, 2017 – 2,115,136)
|
|
|
66
|
|
|
|
21
|
|
Additional paid-in capital
|
|
|
17,985,375
|
|
|
|
15,909,612
|
|
Treasury stock, at cost
|
|
|
(277,436
|
)
|
|
|
-
|
|
Common stock subscribed
|
|
|
74,742
|
|
|
|
74,742
|
|
Subscriptions receivable
|
|
|
(222,964
|
)
|
|
|
-
|
|
Accumulated deficit
|
|
|
(24,816,186
|
)
|
|
|
(22,322,725
|
)
|
Total Spectrum Global Solutions, Inc. stockholders’ deficit
|
|
|
(6,682,861
|
)
|
|
|
(6,338,350
|
)
|
Non-controlling interest
|
|
|
-
|
|
|
|
(88,650
|
)
|
Total stockholders’ deficit
|
|
|
(6,682,861
|
)
|
|
|
(6,427,000
|
)
|
Total liabilities and stockholders’ deficit
|
|
|
12,257,326
|
|
|
|
4,505,340
|
|
Share and per share data have been adjusted
for all periods presented to reflect the one-for-two hundred reverse common stock split effective September 10, 2018.
(The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements)
SPECTRUM GLOBAL SOLUTIONS, INC.
Condensed consolidated statements of operations
(Expressed in U.S. dollars)
(Unaudited)
|
|
Three Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
2018
$
|
|
|
2017
$
|
|
|
2018
$
|
|
|
2017
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
9,671,990
|
|
|
|
2,336,376
|
|
|
|
24,963,876
|
|
|
|
4,566,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
8,067,227
|
|
|
|
2,222,505
|
|
|
|
21,223,736
|
|
|
|
3,822,854
|
|
Depreciation and amortization
|
|
|
56,874
|
|
|
|
66,900
|
|
|
|
161,480
|
|
|
|
131,163
|
|
General and administrative
|
|
|
1,248,441
|
|
|
|
561,876
|
|
|
|
3,409,804
|
|
|
|
1,273,539
|
|
Salaries and wages
|
|
|
606,900
|
|
|
|
262,446
|
|
|
|
2,502,408
|
|
|
|
4,484,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,979,442
|
|
|
|
3,113,727
|
|
|
|
27,297,428
|
|
|
|
9,711,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(307,452
|
)
|
|
|
(777,351
|
)
|
|
|
(2,333,552
|
)
|
|
|
(5,145,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on settlement of debt
|
|
|
202,000
|
|
|
|
–
|
|
|
|
776,375
|
|
|
|
(14,202
|
)
|
Gain on extinguishment of preferred stock liability
|
|
|
–
|
|
|
|
–
|
|
|
|
290,814
|
|
|
|
–
|
|
Loss on disposal of assets
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,067
|
)
|
Amortization of discounts on convertible debentures
|
|
|
(516,500
|
)
|
|
|
(589,645
|
)
|
|
|
(2,057,744
|
)
|
|
|
(900,473
|
)
|
Gain (loss) on change in fair value of derivatives
|
|
|
1,304,531
|
|
|
|
1,579,710
|
|
|
|
1,128,642
|
|
|
|
(2,628,005
|
)
|
Interest expense
|
|
|
(268,094
|
)
|
|
|
(85,657
|
)
|
|
|
(776,537
|
)
|
|
|
(226,805
|
)
|
Gain on disposal of subsidiaries
|
|
|
–
|
|
|
|
–
|
|
|
|
577,299
|
|
|
|
–
|
|
Impairment loss
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(103,480
|
)
|
Total other income (expense)
|
|
|
721,937
|
|
|
|
904,408
|
|
|
|
(61,151
|
)
|
|
|
(3,875,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for the period
|
|
|
414,485
|
|
|
|
127,057
|
|
|
|
(2,394,703
|
)
|
|
|
(9,020,342
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: net loss attributable to the non-controlling interest
|
|
|
–
|
|
|
|
87,853
|
|
|
|
53,429
|
|
|
|
57,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Spectrum Global Solutions, Inc.
|
|
|
414,485
|
|
|
|
214,910
|
|
|
|
(2,341,274
|
)
|
|
|
(8,962,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deemed dividend- Series A preferred stock redemption
|
|
|
–
|
|
|
|
–
|
|
|
|
(152,187
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
|
414,485
|
|
|
|
214,910
|
|
|
|
(2,493,461
|
)
|
|
|
(8,962,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Spectrum
Global Solutions, Inc. common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.27
|
|
|
|
0.16
|
|
|
|
(1.44
|
)
|
|
|
(6.52
|
)
|
Diluted
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
(1.44
|
)
|
|
|
(6.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in
the calculation of net loss attributable to Spectrum Global Solutions, Inc. per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,557,763
|
|
|
|
1,374,994
|
|
|
|
1,737,473
|
|
|
|
1,374,994
|
|
Diluted
|
|
|
14,668,805
|
|
|
|
9,317,503
|
|
|
|
1,737,473
|
|
|
|
1,374,994
|
|
Share and per share data have been adjusted
for all periods presented to reflect the one-for-two hundred reverse common stock split effective September 10, 2018.
(The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements)
SPECTRUM GLOBAL SOLUTIONS, INC.
Condensed consolidated statements of cash flows
(Expressed in U.S. dollars)
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
$
|
|
|
2017
$
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,546,890
|
)
|
|
|
(9,020,342
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Loss (gain) on change in fair value of derivative
liability
|
|
|
(1,128,642
|
)
|
|
|
2,628,005
|
|
Amortization of discounts on convertible debentures
|
|
|
2,057,744
|
|
|
|
900,473
|
|
Depreciation and amortization
|
|
|
161,480
|
|
|
|
131,163
|
|
Foreign exchange loss (gain)
|
|
|
(4,721
|
)
|
|
|
18,994
|
|
Shares issued for services
|
|
|
1,447,683
|
|
|
|
3,976,068
|
|
Interest related to cash redemption premium on
convertible notes
|
|
|
–
|
|
|
|
71,881
|
|
Gain on disposition of subsidiary
|
|
|
(577,299
|
)
|
|
|
–
|
|
Derivative warrants issued for services
|
|
|
68,536
|
|
|
|
–
|
|
Impairment loss
|
|
|
–
|
|
|
|
103,480
|
|
(Gain) loss on settlement of debt
|
|
|
(776,375
|
)
|
|
|
14,202
|
|
Gain on extinguishment of preferred stock liability
|
|
|
(290,814
|
)
|
|
|
–
|
|
Deemed dividend- Series A preferred stock redemption
|
|
|
152,187
|
|
|
|
–
|
|
Loss on disposal of assets
|
|
|
–
|
|
|
|
2,067
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,406,100
|
)
|
|
|
218,254
|
|
Prepaid expenses and deposits
|
|
|
24,808
|
|
|
|
(8,883
|
)
|
Accounts payable and accrued liabilities
|
|
|
1,156,652
|
|
|
|
120,102
|
|
Other assets
|
|
|
3,595
|
|
|
|
(1,823
|
)
|
Due to related parties
|
|
|
(42,872
|
)
|
|
|
142,185
|
|
Net cash used in operating activities
|
|
|
(1,701,028
|
)
|
|
|
(704,174
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Cash received upon acquisition of subsidiary
|
|
|
191,744
|
|
|
|
115,112
|
|
Cash disposed upon disposition of subsidiary
|
|
|
(328
|
)
|
|
|
–
|
|
Purchase of equipment
|
|
|
(15,415
|
)
|
|
|
–
|
|
Net
cash provided by investing activities,
|
|
|
176,001
|
|
|
|
115,112
|
|
Financing activities
|
|
|
|
|
|
|
|
|
Cash paid for lease obligation
|
|
|
–
|
|
|
|
(7,911
|
)
|
Repayment of loans payable
|
|
|
(1,723,000
|
)
|
|
|
(100,000
|
)
|
Repayment of convertible notes
|
|
|
(131,579
|
)
|
|
|
–
|
|
Proceeds from notes payable
|
|
|
302,500
|
|
|
|
283,030
|
|
Proceeds from factoring agreement
|
|
|
1,034,294
|
|
|
|
–
|
|
Proceeds from related party loans
|
|
|
165,000
|
|
|
|
–
|
|
Proceeds from issuance of convertible debentures
|
|
|
2,430,959
|
|
|
|
431,839
|
|
Repurchase of Series A
preferred stock
|
|
|
(280,960
|
)
|
|
|
–
|
|
Net
cash provided by financing activities
|
|
|
1,797,214
|
|
|
|
606,958
|
|
Change in cash
|
|
|
272,187
|
|
|
|
17,896
|
|
Cash, beginning of period
|
|
|
28,893
|
|
|
|
1,401
|
|
Cash, end of period
|
|
|
301,080
|
|
|
|
19,297
|
|
Non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Common stock issued to settle accounts payable
and debt
|
|
|
2,640
|
|
|
|
20,400
|
|
Common stock issued for conversion of notes payable
|
|
|
232,833
|
|
|
|
49,925
|
|
Net assets acquired in ADEX Acquisition
|
|
|
4,332,577
|
|
|
|
–
|
|
Net assets acquired in AW Solutions Acquisition
|
|
|
–
|
|
|
|
2,360,675
|
|
Non-controlling interest
|
|
|
–
|
|
|
|
(339,309
|
)
|
Goodwill
|
|
|
331,223
|
|
|
|
1,503,634
|
|
Warrant issued for non-controlling interest
|
|
|
133,256
|
|
|
|
–
|
|
Series A preferred stock issued to settle notes
payable and accrued interest
|
|
|
406,560
|
|
|
|
–
|
|
Series A preferred stock issued to settle derivative
liabilities
|
|
|
291,064
|
|
|
|
–
|
|
Convertible note issued to settle contingent
liability
|
|
|
793,893
|
|
|
|
–
|
|
Debt issuance cost
|
|
|
247,500
|
|
|
|
–
|
|
Original issuance discounts
|
|
|
504,130
|
|
|
|
72,244
|
|
Original debt discount against
derivative liability
|
|
|
3,365,959
|
|
|
|
1,860,483
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
357,986
|
|
|
|
2,709
|
|
Income taxes paid
|
|
|
–
|
|
|
|
–
|
|
(The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements)
SPECTRUM GLOBAL SOLUTIONS, INC.
Notes to the unaudited condensed consolidated financial statements
September 30, 2018
(Expressed in U.S. dollars)
1.
|
Organization
and Significant Accounting Policies
|
|
a.
|
Organization and
nature of operations
|
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
continued its corporate jurisdiction out of the State of Nevada and into 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” business. After the acquisition of AW Solutions, the Company provides professional, multi-service line,
telecommunications infrastructure and outsource services to the wireless and wireline industry. On November 15, 2017, the Company
changed its name to “Spectrum Global Solutions, Inc.” 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 Asset Purchase Agreement, the Company purchased all of the issued and outstanding capital stock and membership interests
of ADEX Corp. (“ADEX”). The Company closed and completed the acquisition on February 27, 2018. After the acquisition
of ADEX, the Company provides professional, multi-service line, telecommunications infrastructure, outsource services and staffing
solutions to the wireless and wireline industry. 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.
|
b.
|
Condensed financial
statements
|
The accompanying unaudited interim
consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and
accompanying notes filed with the U.S. Securities and Exchange Commission in the Company’s Transition Report on Form 10-K
for the seven month period from June 1, 2017 to December 31, 2017. In the opinion of management, the accompanying financial statements
reflect all adjustments of a recurring nature considered necessary to present fairly the Company’s financial position and
the results of its operations and its cash flows for the periods shown.
The preparation of financial
statements in accordance with accounting principles generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. The results of
operations and cash flows for the periods shown are not necessarily indicative of the results to be expected for the full year.
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 AW Solutions and ADEX business has also incurred losses
and experienced negative cash flows from operations during its 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 September
30, 2018, the Company has an accumulated deficit of $24,816,186, and a working capital deficit of $10,600,232. 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.
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.
|
d.
|
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, AW Solutions, Inc. (from the date
of acquisition, April 25, 2017), Tropical Communications, Inc. (from the date of acquisition, April 25, 2017), AW Solutions Puerto
Rico, LLC. (from the date of acquisition, April 25, 2017), ADEX Corp., ADEX Puerto Rico, LLC and ADEXCOMM (from the date of acquisition,
February 27, 2018). All the subsidiaries are wholly-owned. As described in Note 4, during the nine months ended September 30,
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.
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.
|
f.
|
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.
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. At September 30, 2018 and December 31, 2017, unbilled receivables totaled $1,786,096 and $11,429, respectively, and
are included in accounts receivable. 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 September 30, 2018 and December 31, 2017 was $562,969
and $54,482, respectively.
|
h.
|
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 was generated through
the acquisition of AW Solutions and ADEX 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 31
st
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 nine months ended September 30, 2018.
At September 30, 2018 and December
31, 2017, 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 3-20 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.
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.
On May 28, 2014, the FASB issued
ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), to update the financial reporting requirements
for revenue recognition. Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising
from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and
cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from
costs incurred to fulfill a contract. This guidance became effective for the Company beginning on January 1, 2018, and entities
have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard.
The Company adopted this standard using the modified retrospective approach on January 1, 2018.
In preparation for adoption
of the standard, the Company evaluated each of the five steps in Topic 606, which are as follows: 1) Identify the contract with
the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction
price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied.
Reported revenue will not be
affected materially in any period due to the adoption of ASC Topic 606 because: (1) the Company expects to identify similar performance
obligations under Topic 606 as compared with deliverables and separate units of account previously identified; (2) the Company
has determined the transaction price to be consistent; and (3) the Company records revenue at the same point in time, upon delivery
of services, under both ASC Topic 605 and Topic 606, as applicable under the terms of the contract with the customer. Additionally,
the Company does not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be affected materially
in any period due to the adoption of Topic 606.
There are also certain considerations
related to accounting policies, business processes and internal control over financial reporting that are associated with implementing
Topic 606. The Company has evaluated its policies, processes, and control framework for revenue recognition, and identified and
implemented the changes needed in response to the new guidance.
Lastly, disclosure
requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure
requirements under the current guidance, including disclosures related to disaggregation of revenue into appropriate
categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which
relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill
contracts. The Company’s disaggregated revenues are reported in Note 16.
The infrastructure and professional
services revenues are derived from contracts to provide technical engineering services along with contracting services to commercial
and governmental customers. The Company’s service contracts generally require specific tasks or services that the Company
must perform under the contract. These contracts were accounted for under the proportional performance method. Under this method,
revenue was recognized in proportion to the value provided to the customer for each project as of each reporting date. Direct
costs incurred related to performance of the task or service are deferred and recorded as prepaid expense and are expensed when
the related revenue is recognized.
The Company also generates revenue
from service contracts with certain customers. These contracts are accounted for under the proportional performance method. Under
this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting date.
The Company records unbilled
receivables for revenues earned, but not yet billed.
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.
|
n.
|
Stock-based Compensation
|
The Company records stock-based
compensation in accordance with ASC 718, “
Compensation – Stock Compensation
”, 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 applies ASC 505-50,
“
Equity-Based Payments to Non-Employees
” with respect to options and warrants issued to non-employees which
requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.
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.
|
o.
|
Earnings (Loss)
Per Share
|
The Company computes earnings
(loss) per share in accordance with ASC 260, “
Earnings per Share
” which requires presentation of both basic
and diluted earnings (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 September 30, 2018, the Company had
13,111,043 (September 30, 2017 – 8,368,303) common stock equivalents outstanding.
|
p.
|
Recent Accounting
Pronouncements
|
On January 1, 2018, we adopted
the new accounting standard ASC 606,
Revenue from Contracts with Customers
, and all of the related amendments (“new
revenue standard”) as discussed in Revenue Recognition accounting policy description.
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.
|
q.
|
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 nine months ended September 30, 2018,
four customers accounted for 22%, 19%, 16% and 13%, respectively, of consolidated revenues for the period. In addition, amounts
due from these customers represented 12%, 12%, 25% and 14%, respectively, of trade accounts receivable as of September 30, 2018.
For the nine months ended September 30, 2017, three customers accounted for 23%, 39% and 7%, respectively, of consolidated revenues
for the period. In addition, amounts due from these customers represented 38%, 14% and 9%, respectively, of trade accounts receivable
as of September 30, 2017.
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 93% of consolidated revenues for the nine month period ended September 30, 2018
(77% - 2017). Revenues generated from customers in Puerto Rico accounted for approximately 7% of consolidated revenues for the
nine month period ended September 30, 2018 (23% - 2017).
|
r.
|
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 nine months ended September
30, 2018 and 2017. 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 September 30, 2018 and December 31, 2017, consisted of the following:
|
|
|
Total fair value at
September 30,
2018
$
|
|
|
Quoted prices in active markets
(Level 1)
$
|
|
|
Significant other observable inputs
(Level
2)
$
|
|
|
Significant unobservable inputs
(Level 3)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability (1)
|
|
|
5,932,521
|
|
|
|
–
|
|
|
|
–
|
|
|
|
5,932,521
|
|
|
|
|
Total fair value at
December 31,
2017
$
|
|
|
Quoted prices in active markets
(Level 1)
$
|
|
|
Significant other observable inputs
(Level
2)
$
|
|
|
Significant unobservable inputs
(Level 3)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability (1)
|
|
|
4,749,712
|
|
|
|
–
|
|
|
|
–
|
|
|
|
4,749,712
|
|
|
(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. See Note 10 for additional information.
|
s.
|
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 September 30, 2018 and December 31, 2017, the Company had a $5,932,521 and
$4,749,712 derivative liability, respectively.
Certain prior period
amounts have been reclassified to conform to current presentation.
On February 6, 2018, pursuant
to the Stock Purchase Agreement with InterCloud, the Company purchased all of the issued and outstanding capital stock and membership
interests of ADEX. The Company closed and completed the acquisition on February 27, 2018.
The purchase price paid by the
Company for the assets includes the assumption of certain liabilities and contracts associated with ADEX, $3,000,000 in cash,
of which $2,500,000 was paid at closing and $500,000 was be retained by the Company for 90 days in order to satisfy any outstanding
liabilities of ADEX incurred prior to the closing date, and the issuance to InterCloud of a one-year convertible promissory note
in the aggregate principal amount of $2,000,000 (the “ADEX Note”).
The Company has performed a
valuation analysis of the fair market value of ADEX’s assets and liabilities. The following table summarizes the allocation
of the preliminary purchase price as of the acquisition date:
|
Purchase Price
|
|
|
|
|
$2,000,000 Convertible Note
|
|
$
|
1,663,800
|
|
|
Cash
|
|
|
2,500,000
|
|
|
Cash retained for 90 days
|
|
|
500,000
|
|
|
Total Purchase Price
|
|
$
|
4,663,800
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price
|
|
|
|
|
|
Cash
|
|
$
|
191,744
|
|
|
Accounts receivable
|
|
|
5,143,749
|
|
|
Other assets
|
|
|
6,800
|
|
|
Tradenames
|
|
|
631,000
|
|
|
Customer lists
|
|
|
136,000
|
|
|
Accounts payable
|
|
|
(136,684
|
)
|
|
Accrued expenses
|
|
|
(1,627,116
|
)
|
|
Other current liabilities
|
|
|
(12,916
|
)
|
|
Goodwill
|
|
|
331,223
|
|
|
Net assets acquired
|
|
$
|
4,663,800
|
|
The following table summarizes
our consolidated results of operations for the nine months ended September 30, 2018, as well as unaudited pro forma consolidated
results of operations as though the acquisition had occurred on January 1, 2017:
|
|
|
September 30, 2018
$
|
|
|
September 30, 2017
$
|
|
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
24,963,876
|
|
|
|
28,528,647
|
|
|
|
4,566,625
|
|
|
|
18,821,459
|
|
|
Net Loss
|
|
|
(2,493,461
|
)
|
|
|
(2,348,225
|
)
|
|
|
(8,962,591
|
)
|
|
|
(12,434,982
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(1.44
|
)
|
|
|
(1.35
|
)
|
|
|
(6.52
|
)
|
|
|
(9.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
(1.44
|
)
|
|
|
(1.35
|
)
|
|
|
(6.52
|
)
|
|
|
(9.04
|
)
|
On April 25, 2017, pursuant
to the Asset Purchase Agreement with InterCloud, the Company purchased 80.1% of the assets associated with InterCloud’s
“AW Solutions” business (“AWS”) including, but not limited to, fixed assets, real property, intellectual
property, and accounts receivables (collectively, the “Assets”).
The purchase price paid by the
Company for the Assets includes the assumption of certain liabilities and contracts associated with AWS, the issuance to InterCloud
of a convertible promissory note in the aggregate principal amount of $2,000,000 (as described in Note 9(e)), and a potential
earn-out after three months in an amount equal to the lesser of (i) three times EBITDA (as defined in the Asset Purchase Agreement)
of the business for the nine-month period immediately following the closing and (ii) $1,500,000. During the seven months ended
December 31, 2017, InterCloud agreed to reduce the contingent liability to $793,893, as a result, the Company recorded a $615,518
gain on settlement of debt. The Company also issued InterCloud the convertible note described in Note 9(h) with a principal amount
of $793,894 to settle a contingent liability of $793,893.
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 (collectively, the “Remaining
Assets”). The acquisition of the initial 80.1% of AWS took place during the fiscal year ended December 31, 2017. As consideration
for the Remaining Assets, the Company issued InterCloud a common stock purchase warrant that entitles InterCloud to purchase a
number of shares equal to 4% of the number of shares of the Company’s common stock outstanding at the time of exercise at
an exercise price of $1.20 per share. The warrant has a three year term.
The Company recorded the fair
value of the warrant of $259,000, reduced the carrying value of the AWS non-controlling interest from $133,256 to $0 and recorded
the difference of $125,744 as additional paid in capital.
4.
|
Disposition of Subsidiaries
|
During the nine months ended
September 30, 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. (collectively the Mantra Venture Group) 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 and
the Company will have no further involvement with the deconsolidated subsidiaries.
The Company recorded a gain
on the disposal of the Mantra Venture Group of $577,299. The Mantra Venture Group was essentially inactive and its operations
were immaterial to the rest of the Company’s operations.
5.
|
Property and Equipment
|
|
|
|
September 30,
2018
$
|
|
|
December 31,
2017
$
|
|
|
|
|
|
|
|
|
|
|
Computers and office equipment
|
|
324,219
|
|
|
308,649
|
|
|
Equipment
|
|
|
382,140
|
|
|
|
382,140
|
|
|
Research equipment
|
|
|
143,129
|
|
|
|
143,129
|
|
|
Software
|
|
|
177,073
|
|
|
|
177,073
|
|
|
Vehicles
|
|
|
94,202
|
|
|
|
94,356
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,120,763
|
|
|
|
1,105,347
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment
|
|
|
(44,419
|
)
|
|
|
(44,419
|
)
|
|
Less: accumulated depreciation
|
|
|
(1,013,944
|
)
|
|
|
(999,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
|
62,400
|
|
|
|
61,159
|
|
During the nine months ended
September 30, 2018, the Company recorded $14,174 (2017 - $32,083) of depreciation expense.
|
|
|
Cost
$
|
|
|
Accumulated amortization
$
|
|
|
Impairment
$
|
|
|
September 30,
2018
Net carrying
value
$
|
|
|
December 31,
2017
Net carrying
value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship and lists
|
|
|
1,037,548
|
|
|
|
155,477
|
|
|
|
–
|
|
|
|
882,071
|
|
|
|
836,279
|
|
|
Trade names
|
|
|
1,205,605
|
|
|
|
98,698
|
|
|
|
–
|
|
|
|
1,106,907
|
|
|
|
533,005
|
|
|
|
|
|
2,243,153
|
|
|
|
254,175
|
|
|
|
–
|
|
|
|
1,988,978
|
|
|
|
1,369,284
|
|
During the nine months ended
September 30, 2018, the Company recorded $147,306 (2017 - $28,489) of amortization expense.
Estimated Future Amortization
Expense:
|
|
|
$
|
|
|
For year ending December 31, 2018
|
|
|
51,847
|
|
|
For year ending December 31, 2019
|
|
|
207,387
|
|
|
For year ending December 31, 2020
|
|
|
207,387
|
|
|
For year ending December 31, 2021
|
|
|
207,387
|
|
|
For year ending December 31, 2022
|
|
|
207,387
|
|
|
For year ending December 31, 2023 to December 31, 2027
|
|
|
1,107,583
|
|
|
Total
|
|
|
1,988,978
|
|
7.
|
Related Party Transactions
|
|
(a)
|
As of September
30, 2018, the Company owes a total of $11,351 (December 31, 2017 - $109,978) to the former President of the Company and his
spouse, and a company controlled by the former President of the Company which is non-interest bearing, unsecured, and due
on demand.
|
|
(b)
|
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, due on November 30, 2018 and bears interest at a rate of 8% per annum. At September 30, 2018, the
amount of $18,858 was owed.
|
|
(
c)
|
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 8% per annum. At September 30, 2018, the amount of
$130,000 was owed.
|
|
(d)
|
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 10, 2019 and bears interest at a rate of 8% per annum. At September 30, 2018, the amount of $85,000 was owed.
|
|
(e)
|
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 542,500 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter
exchanged 542,500 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.
|
|
(f)
|
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,
due on August 20, 2019 and bears interest at a rate of 8% per annum. At September 30, 2018, the amount of $80,000 was owed.
|
8.
|
Loans Payable and Factor Financing
|
|
(a)
|
As of September
30, 2018, the amount of $41,361 (Cdn$53,300) (December 31, 2017 - $50,349 (Cdn$63,300)) is owed to a non-related party which
is non-interest bearing, unsecured, and due on demand. A loan of $7,760 (Cdn$10,000) was owed by a subsidiary of the Company
at December 31, 2017. The subsidiary was disposed of during the nine months ended September 30, 2018.
|
|
(b)
|
As of December 31,
2017, $17,500 was owed by a subsidiary of the Company to a non-related party which was non-interest bearing, unsecured, and
due on demand. During the nine months ended September 30, 2018, the Company disposed of the subsidiary.
|
|
(c)
|
As of September
30, 2018, the amounts of $7,500 and $2,636 (Cdn$3,400) (December 31, 2017 - $7,500 and $29,430 (Cdn$33,600)) are owed
to a non-related party which are non-interest bearing, unsecured, and due on demand. The loan of $28,712 (Cdn$37,000) was
owed by a subsidiary of the Company at December 31, 2017. The subsidiary was disposed of during the nine months ended September
30, 2018.
|
|
(d)
|
As of December 31,
2017, the amount of $4,490 was owed by a subsidiary to a non-related party which is non-interest bearing, unsecured, and due
on demand. During the nine months ended September 30, 2018, the Company disposed of the subsidiary.
|
|
(e)
|
As of December 31,
2017, $14,370 (Cdn$18,066) was owed by a subsidiary to a non-related party. The amount owing is non-interest bearing, unsecured,
and due on demand. During the nine months ended September 30, 2018, the Company disposed of the subsidiary.
|
|
(f)
|
In March 2012, the
Company received $50,000 for the subscription of 50,000 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.
|
|
(g)
|
On August 4, 2015,
the Company borrowed $50,000 pursuant to a promissory note. The note was due on September 4, 2015. The note bears interest
at 120% per annum prior September 4, 2015, and at 180% per annum after September 4, 2015. The holder of the note was also
granted the rights to buy 500 shares of the Company’s common stock at a price of $30 per share until August 4, 2017.
During the year ended May 31, 2016, the Company repaid the $50,000 note and $1,200 of accrued interest remains owing. At September
30, 2018, the amount of $1,200 was owed.
|
|
(h)
|
As of December 31,
2017, the amounts of $15,000 and $43,361 (Cdn$55,878) was owed to non-related parties. A loan of $35,601 (Cdn$45,878)
owed by a subsidiary of the Company at December 31, 2017, and the subsidiary was disposed of during the nine months ended
September 30, 2018. As of September 30, 2018, and December 31, 2017, the amounts of $15,000 and $7,760 (Cdn$10,000)
was owed to non-related parties. These advances are non-interest bearing, unsecured, and due on demand.
|
|
(i)
|
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. At September 30, 2018, the amount of $12,000 was owed.
|
|
(j)
|
On June 27, 2017,
received $250,200 net of a $27,800 Original Issue Discount pursuant to a $278,000 promissory note. The note issued is unsecured,
due on demand and bears interest at a rate of 12% per annum. The Company also issued a warrant with a term of three years
to purchase up to 250,000 shares of common stock of the Company at an exercise price of $1.00 per share. The fair value of
the warrants of $332,966 resulted in a discount to the note payable of $250,200 and the recognition of a loss on derivatives
of $82,766. During the period ended December 31, 2017, the Company repaid $160,000 of the loan and recorded accretion of $278,000,
increasing the carrying value of the note to $118,000. During the nine month period ended September 30, 2018, the Company
repaid the remaining balance outstanding.
|
|
(k)
|
On February 27,
2018, the Company, and its subsidiaries entered into a Business Loan and Security Agreement with Super G Capital, LLC, a Delaware
limited liability company (“Super G”), as lender and received a term loan from Super G in an amount equal to $1,150,000,
a portion of the proceeds of which were used to fund the Acquisition.
|
Borrowings under the Super G Loan
Agreement are to be repaid in semi-monthly installments (including interest) of $43,125 for 36 months starting on March 16, 2018,
for total payments of $1,552,500. The total interest charge is expected to total $402,500 and the company paid additional finance
fees of $247,500. The obligations of the Company under the Super G Loan Agreement are secured by a lien on substantially all of
the assets of the Company and its subsidiaries, including accounts receivable, intellectual property, equipment and other personal
property. The Super G Loan Agreement contains certain restrictions and covenants and requires the Company to comply with certain
financial covenants, including maintaining unrestricted cash and minimum levels of revenue and adjusted EBITDA.
The Super G Loan Agreement contains
customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants,
breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults
and failure to own 100% of the Company’s subsidiaries. Upon the occurrence of an event of default, the outstanding obligations
may be accelerated and become immediately due and payable. During the period ended September 30, 2018, the Company repaid the
loan and recorded accretion equal to the debt discount of $477,500.
|
(l)
|
The Company owed
InterCloud $500,000 of the acquisition price of ADEX (described in Note 3) which was retained by the Company in order to satisfy
outstanding liabilities acquired by ADEX. During the nine month period ended September 30, 2018, the Company repaid $225,000
of this amount, leaving an ending balance of $275,000.
|
|
(m)
|
On February 27,
2018, a subsidiary of the Company, ADEX, entered into a Purchase and Sale Agreement with Prestige Capital Corporation (“Prestige”)
pursuant to which ADEX agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owing
to ADEX. Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of accounts,
Prestige will pay ADEX eighty percent (80%) of the face value of the assigned Accounts, up to a maximum total borrowings of
$5,000,000 outstanding at any point in time. ADEX additionally granted Prestige a continuing security interest in and lien
upon all accounts receivable, inventory, fixed assets, general intangibles and other assets. Prestige shall have the right
to chargeback to the Company any account that is not paid within 100 days of the invoice date for any reason other than insolvency. Prestige
shall have no recourse against the Company if payments are not received solely due to the insolvency of an account debtor
within 100 days of the invoice date. At September 30, 2018, the Company owed $2,934,294 pursuant to this agreement. Subsequent
to September 30, 2018, Prestige was repaid all amounts owing and the Purchase and Sale Agreement was terminated. Refer
to Note 18(a)
|
9.
|
Convertible Debentures
|
|
(a)
|
In October 2008,
the Company issued three convertible debentures for total proceeds of $250,000 which bear interest at 10% per annum, are unsecured,
and due one year from date of issuance. The unpaid amount of principal and accrued interest can be converted at any time at
the holder’s option into 3,125 shares of the Company’s common stock at a price of $80 per share. The Company also
issued 1,250 detachable, non-transferable share purchase warrants. Each share purchase warrant entitles the holder to purchase
one additional share of the Company’s common stock for a period of two years from the date of issuance at an exercise
price of $100 per share.
|
In accordance with ASC 470-20,
“
Debt with Conversion and Other Options
”, the Company determined that the convertible debentures contained
no embedded beneficial conversion feature as the convertible debentures were issued with a conversion price higher than the fair
market value of the Company’s common shares at the time of issuance.
In accordance with ASC 470-20,
the Company allocated the proceeds of issuance between the convertible debt and the detachable share purchase warrants based on
their relative fair values. Accordingly, the Company recognized the fair value of the share purchase warrants of $45,930 as additional
paid-in capital and an equivalent discount against the convertible debentures. The Company had recorded accretion expense of $45,930,
increasing the carrying value of the convertible debentures to $250,000.
On January 19, 2012, the Company
entered into a settlement agreement with one of the debenture holders to settle a $50,000 convertible debenture and $122,535 in
accounts payable and accrued interest with the debt holder. Pursuant to the agreement, the debt holder agreed to reduce the debt
to Cdn$100,000 on the condition that the Company pays the amount of Cdn$2,500 per month for 40 months, beginning March 1, 2012
and continuing on the first day of each month thereafter.
On July 18, 2012, the Company
entered into a settlement agreement with the $150,000 debenture holder. Pursuant to the settlement agreement, the lender agreed
to extend the due date until April 11, 2013 and the Company agreed to pay $43,890 of accrued interest within five days of the
agreement (paid), pay the accruing interest on a monthly basis (paid), and pay a $10,000 premium in addition to the $150,000 principal
outstanding on April 11, 2013. On April 29, 2013, the Company entered into an amended settlement agreement whereby the lender
agreed to extend the due date to September 15, 2013 and the Company agreed to pay $6,836 of interest for the period from April
1 to September 15, 2013 upon execution of the agreement (paid) and granted the lender 100,000 stock options exercisable at $24
per share for a period of two years.
On November 15, 2013, the Company
entered into a second settlement agreement amendment. Pursuant to the second amendment, on November 15, 2013, the Company agreed
to pay interest of $4,438 (paid) and commencing February 1, 2014, the Company would make monthly payments of $10,000 on the outstanding
principal and interest. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign
the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.
The Company evaluated the modifications
and determined that the creditor did not grant a concession. In addition, as the present value of the amended future cash flows
had a difference of less than 10% of the cash flows of the original debt, it was determined that the original and new debt instruments
are not substantially different. As a result, the modification was not treated as an extinguishment of the debt and no gain or
loss was recognized because the fair value of the old debt and new debt remained the same. The Company recorded the fair value
of $12,901 for the stock options as additional paid-in capital and a discount. During the year ended May 31, 2014, the Company
repaid $40,000 of the debenture. As of May 31, 2014, the Company had accreted $12,901 of the discount bring the carrying value
of the convertible debenture to $114,661. During the year ended May 31, 2015, the Company repaid $54,808 decreasing the carrying
value to $59,853. During the year ended May 31, 2017, the Company recorded an additional fee of $21,266 increasing the carrying
value to $81,119. On November 16, 2017, the debenture and $15,423 of accrued interest was converted into Series A Preferred Stock
as described in Note 10(b).
At December 31, 2017, the other
remaining debenture of $50,000 remained owed by a subsidiary and past due. During the nine months ended September 30, 2018, the
Company disposed of the subsidiary and no amounts remained owed by the Company.
|
(b)
|
On August 19, 2013,
the Company issued a convertible debenture for total proceeds of $10,000, which bears interest at 10% per annum, is unsecured,
and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s
option into shares of the Company’s common stock at $8 per share at any time after the first anniversary of the notes.
The Company recognized the intrinsic value of the embedded beneficial conversion feature of $10,000 as additional paid-in
capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the
term of the convertible debenture up to its face value of $10,000. The loan was owed by a subsidiary and during the nine months
ended September 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.
|
|
(c)
|
On December 27,
2013, the Company issued a convertible debenture for total proceeds of $5,000, which bear interest at 10% per annum, is unsecured,
and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s
option into shares of the Company’s common stock at $8 per share at any time after the first anniversary of the notes.
The Company recognized the intrinsic value of the embedded beneficial conversion features of $5,000 as additional paid-in
capital and reduced the carrying value of the convertible debenture to $nil. The carrying value was be accreted over the term
of the convertible debenture up to its face value of $5,000. The loan was owed by a subsidiary and during the nine months
ended September 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.
|
|
(d)
|
On February 4, 2014,
the Company issued a convertible debenture for total proceeds of $15,000, which bears interest at 10% per annum, is unsecured,
and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s
option into shares of the Company’s common stock at $8 per share at any time after the first anniversary of the notes.
The Company recognized the intrinsic value of the embedded beneficial conversion feature of $15,000 as additional paid-in
capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the
term of the convertible debenture up to its face value of $15,000. The loan was owed by a subsidiary and during the nine months
ended September 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.
|
|
(e)
|
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 accrues at a rate of 8% per annum. All principal and accrued interest under the unsecured
note is due one year following the issue date of the unsecured Note and is 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
qualifies 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. During the year ended
May 31, 2017, the Company recorded accretion of $77,465 increasing the carrying value of the note to $1,134,166. On December 15,
2017, February 14, 2018, February 21, 2018 and June 7, 2018, the holder of the convertible promissory note entered into agreement
to sell and assign a total of $354,375 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 conversion price for the $354,375 of notes assigned is now equal
to the lesser 70% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion
and $8. 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. During the nine-month period ended September 30, 2018, $190,000 of the
note was converted into 279,213 shares of common stock. During the nine-month period ended September 30, 2018, the Company recorded
accretion of $361,333 increasing the carrying value of the notes to $1,810,000.
|
(f)
|
On April 28, 2017,
the Company entered into and closed on a Securities Purchase Agreement with an institutional investor (the “Lender”),
pursuant to which the Company issued to the Lender a senior secured convertible promissory note in the aggregate principal
amount of $440,000 for an aggregate purchase price of $400,000, and a warrant with a term of three years to purchase up to
137,500 shares of common stock of the Company at an exercise price of $5.10 per share. The interest on the outstanding principal
due under the secured note accrues at a rate of 8% per annum. All principal and accrued interest under the secured note is
due on April 27, 2018 and is convertible into shares of the Company’s common stock at a conversion price equal to 75%
of the lowest volume-weighted average price during the 15 trading days immediately preceding the conversion, subject to adjustment
upon the occurrence of certain events.
|
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 $1,744,661 and the fair value of the warrants of $425,918 resulted in a discount to the
note payable of $400,000 and the recognition of a loss on derivatives of $1,770,579. During the year ended May 31, 2017, the Company
recorded accretion of $54,526, increasing the carrying value of the note to $54,526. During the nine-month period ended December
31, 2017, the Company recorded accretion of $173,031 increasing the carrying value of the note to $194,557. On March 12, 2018,
the Company issued 52,800 shares of common stock upon the conversion of $33,000 of principal pursuant of accrued interest of $2,640.
On February 6, 2018, $374,000 of the debenture and $32,560 of accrued interest was converted into Series A Preferred Stock as
described in Note 12.
|
(g)
|
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 accrues at a rate of 6% per annum. All principal and accrued interest under
the ADEX Note is due one year following the issue date of the ADEX Note and is 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 is in default, at which
time the Floor terminates.
|
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 $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 is bound by the assignment and sale agreement. As a result of the assignment, the assigned
note bears interest at 5% and the conversion price for the $75,000 of notes assigned is now equal to the lesser 75% of the lowest
volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $8. 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. During the nine-month period ended September 30, 2018, $9,833 of the note was converted into
30,000 shares of common stock. During the nine-month period ended September 30, 2018, the Company recorded accretion of $235,900
increasing the carrying value of the notes to $1,587,068.
|
(h)
|
The Company also
issued InterCloud a convertible note with a principal amount of $793,894 to settle a contingent liability of $793,893 owed
as a result of the acquisition of AWS. The note is due on August 16, 2019 and bears interest at 1% per annum. The note is
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
qualifies for derivative accounting and bifurcation under ASC 815-15 “
Derivatives and Hedging
”. The initial
fair value of the conversion feature of $348,000 resulted in a discount to the note payable of $348,000. During the nine-month
period ended September 30, 2018, the Company recorded accretion of $118,585 increasing the carrying value of the notes to $564,479.
|
(i)
|
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 125,000 shares of common stock of the Company at an exercise price of $1.60 per share. The exercise price of
the warrant will reduce to 85% of the closing price of the Company’s common stock if the closing price of the Company’s
common stock is less than $1.60 on July 31, 2018. The note is due on January 15, 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 $1 (the “Floor”), unless
the note is in default, at which time the Floor terminates.
|
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. During the nine-month period ended September
30, 2018, the Company recorded accretion of $233,726 increasing the carrying value of the notes to $233,726.
|
(j)
|
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 accrues at a rate of 12% per annum. All principal and accrued interest under the
secured note is due on October 23, 2019 and is convertible into shares of the Company’s common stock at a fixed
conversion price of $1.00. While during the first three months that the secured note is outstanding, only interest payments
are due to the lender, beginning in month four, and on each monthly anniversary thereafter until maturity, amortization
payments are due for principal and interest due under the secured note. The secured note includes 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 will become immediately due and payable.
If the Company issues any common
stock or common stock equivalents at an effective price per share less than $1 then the conversion price of the note will
be reduced to the lower price. As long as the note is not in default the Company may repay the note at 110% of the outstanding
principal amount. If the Company defaults upon the note it bears 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. During the nine-month period ended September 30,
2018, the Company repaid $131,579 of the note which resulted in a $202,000 gain on the extinguishment of the note and
associated derivative liability. During the nine-month period ended September 30, 2018, the Company recorded accretion
of $349,785 increasing the carrying value of the notes to $218,206.
|
|
k)
|
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 accrues at a rate of 12% per annum. All principal and accrued but unpaid
interest under the secured note is due on May 18, 2019. The secured note is convertible into shares of the Company’s
common stock at a fixed conversion price of $1 per share. Interest is payable monthly on the 18th of each month. While interest
payments must be made in cash during the first six months that the secured note is outstanding, beginning in month seven,
and on each monthly anniversary thereafter until maturity, the Company has 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 is
made in cash will be subject to a 5% prepayment premium. Any other prepayment is subject to a 10% premium. The secured note
includes 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 will 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. The investor was granted a right to participate
in future financing transactions of the Company while the secured note remains outstanding.
|
|
|
If the Company issues any common
stock or common stock equivalents at an effective price per share less than $1 then the conversion price of the note will
be reduced to the lower price. As long as the note is not in default the Company may repay the note at 110% of the outstanding
principal amount. If the Company defaults upon the note it bears interest at 18% per annum.
In connection with the Securities
Purchase Agreement, the Company entered into an amendment to the existing Security Agreement described in Note 9(j). 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. During the nine-month period ended September 30, 2018,
the Company recorded accretion of $70,585 increasing the carrying value of the notes to $70,585.
|
|
l)
|
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 accrues at a rate of 12% per annum. All principal and accrued but unpaid
interest under the secured note is due on March 15, 2019. The secured note is convertible into shares of the Company’s
at the greater of $0.80 or 75% of the lowest VWAP in the 10 trading days prior to conversion.
|
|
|
The Company may repay the note
at 115% 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 $23,000 resulted in a discount to the note
payable of $23,000. During the nine-month period ended September 30, 2018, the Company recorded accretion of $8,135 increasing
the carrying value of the notes to $60,135.
|
|
m)
|
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.
|
|
|
The interest on
the outstanding principal due under the secured note accrues at a rate of 12% per annum. All principal and accrued but unpaid
interest under the secured note is due on March 15, 2019. The secured note is convertible into shares of the Company’s
at the greater of $1 or 75% of the lowest VWAP in the 10 trading days prior to conversion.
|
|
|
The Company may repay the note
at 115% 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 $103,000 resulted in a discount to the note
payable of $75,000 and an initial derivative expense of $28,000. During the nine-month period ended September 30, 2018,
the Company recorded accretion of $17,554 increasing the carrying value of the notes to $17,554.
|
10.
|
Derivative Liabilities
|
The embedded conversion option
of the convertible debenture described in Note 9(e) contains a conversion feature that qualifies for embedded derivative classification.
The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be
reported in the statement of operations as a gain or loss on derivative financial instruments.
Upon the issuance of the convertible
note payable described in Note 9(e), the Company concluded that it only has sufficient shares to satisfy the conversion of some
but not all of the outstanding convertible notes, warrants and options. The Company elected to reclassify contracts from equity
with the earliest inception date first. As a result, none of the Company’s previously outstanding convertible instruments
qualified for derivative reclassification, however, any convertible securities issued after the election, including the convertible
note described in Notes 9(e) to 9(l), qualified for derivative classification. The Company reassesses the classification of the
instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is
reclassified as of the date of the event that caused the reclassification.
During the year ended May 31,
2017, the Company reclassified 1,750 options exercisable at $6 until March 16, 2017 with a fair value of $2,350, 10,000 warrants
exercisable at $6 until August 29, 2018 with a fair value of $13,745, 2,667 warrants exercisable at $160 with a fair value of
$Nil, 20,375 warrants exercisable at $74 with a fair value of $16,978, and a $59,853 note convertible at $80 with a fair value
of $41 that qualified for treatment as derivative liabilities.
The table below sets forth a
summary of changes in the fair value of the Company’s Level 3 financial liabilities.
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of period
|
|
$
|
4,749,712
|
|
|
$
|
3,760,067
|
|
|
Derivative issued as part of acquisition
|
|
|
302,800
|
|
|
|
-
|
|
|
Original discount limited to proceeds of notes
|
|
|
3,365,959
|
|
|
|
250,200
|
|
|
Fair value of derivative liabilities in excess of notes proceeds received
|
|
|
2,269,892
|
|
|
|
82,766
|
|
|
Derivative warrants issued for services and to acquire non-controlling interest
|
|
|
327,536
|
|
|
|
-
|
|
|
Derivative liability settled through the issuance of preferred stock
|
|
|
(458,556
|
)
|
|
|
(2,591,345
|
)
|
|
Conversion of derivative liability
|
|
|
(486,584
|
)
|
|
|
-
|
|
|
Repayment of convertible note
|
|
|
(202,000
|
)
|
|
|
-
|
|
|
Change in fair value of embedded conversion option
|
|
|
(3,936,238
|
)
|
|
|
3,248,024
|
|
|
Balance at the end of the period
|
|
$
|
5,932,521
|
|
|
$
|
4,749,712
|
|
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 issuance
|
|
|
0-299
|
%
|
|
|
0.07-2.81
|
%
|
|
|
0
|
%
|
|
|
0.50-3.00
|
|
|
At December 31, 2017
|
|
|
259-294
|
%
|
|
|
1.39-1.89
|
%
|
|
|
0
|
%
|
|
|
0.30-2.33
|
|
|
At January 3, 2018 upon conversion
|
|
|
280
|
%
|
|
|
1.41
|
%
|
|
|
0
|
%
|
|
|
0.31
|
|
|
At February 6, 2018 upon conversion
|
|
|
331
|
%
|
|
|
1.52
|
%
|
|
|
0
|
%
|
|
|
0.22
|
|
|
At March 12, 2018 upon conversion
|
|
|
340
|
%
|
|
|
1.71
|
%
|
|
|
0
|
%
|
|
|
0.13
|
|
|
At March 30, 2018 upon conversion
|
|
|
192
|
%
|
|
|
1.63
|
%
|
|
|
0
|
%
|
|
|
0.07
|
|
|
At May 3, 2018 upon conversion
|
|
|
289
|
%
|
|
|
2.02
|
%
|
|
|
0
|
%
|
|
|
0.79
|
|
|
At May 24, 2018 upon conversion
|
|
|
293
|
%
|
|
|
2.09
|
%
|
|
|
0
|
%
|
|
|
0.73
|
|
|
At September 30, 2018
|
|
|
184-408
|
%
|
|
|
1.76-2.81
|
%
|
|
|
0
|
%
|
|
|
0.19-2.40
|
|
|
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.
On September 5, 2018, the Company
effected a 1-for-200 reverse stock split (the “Reverse Stock Split”) with respect to the outstanding shares
of the Company’s common stock. The Reverse Stock Split was deemed effective at the open of business on September
10, 2018. The Reverse Stock Split will not affect the total number of shares of common stock that the Company is authorized
to issue, which is 750,000,000 shares. The Reverse Stock Split will also not affect the total number of shares of Series
A preferred stock that the Company is authorized to issue, which is 8,000,000 shares, and the total number of shares of
Series B preferred stock that the Company is authorized to issue, which is 1,000 shares. Share and per share data have
been adjusted for all periods presented to reflect the Reverse Stock Split unless otherwise noted.
Treasury stock- The Company holds
621,258 shares in treasury at a cost of $277,436.
|
|
(a)
|
As of December 31,
2017, the Company’s subsidiary, Mantra Energy Alternatives Ltd., had received subscriptions for 67,000 shares of common
stock at Cdn$1.00 per share for proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of the
non-controlling interest portion of $7,231.
|
|
(b)
|
As of December 31,
2017, the Company’s subsidiary, Climate ESCO Ltd., had received subscriptions for 210,000 shares of common stock at
$0.10 per share for proceeds of $21,000, which is included in common stock subscribed, net of the non-controlling interest
portion of $7,384.
|
|
(c)
|
On January 3, 2018,
the Company issued 102,580 shares of common stock upon the conversion of $67,703 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $13,718 which was equal to the difference between the
fair value of the shares issued and the liabilities settled.
|
|
(d)
|
On March 12, 2018,
the Company issued 52,800 shares of common stock upon the conversion of $33,000 of principal and accrued interest of $2,640
pursuant to the loan described in Note 9(f). The Company recorded a loss on extinguishment of debt of $8,092 which was equal
to the difference between the fair value of the shares issued and the liabilities settled.
|
|
(e)
|
On March 30, 2018,
the Company issued 32,895 shares of common stock upon the conversion of $25,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $1,794 which was equal to the difference between the
fair value of the shares issued and the liabilities settled.
|
|
(f)
|
On December 28,
2017, the Company issued 231,871 shares of common stock with a fair value of $510,117 to the President of the Company and
231,871 shares of common stock with a fair value of $510,117 to the Chief Executive Officer of the Company in exchange for
services for the Company. The shares vest over 12 months. During the nine months ended September 30, 2018, the Company recorded
$505,927 for the vested portion of the shares.
|
|
(g)
|
On December 28,
2017, the Company issued 217,000 shares of common stock with a fair value of $477,400 to a consultant for compensation and
services rendered to the Company. The shares vest over 12 months. During the nine months ended September 30, 2018, the Company
recorded $136,858 for the vested portion of the shares.
|
|
(h)
|
On April 18, 2018,
the Company issued 17,079 shares of common stock upon the conversion of $12,297 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $2,049 which was equal to the difference between the
fair value of the shares issued and the liabilities settled.
|
|
(i)
|
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 542,500 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter
exchanged 542,500 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock. Of the 1,085,000
common shares exchanged, 463,742 shares were unvested. The remaining stock-based compensation related to the unvested shares
in the amount of $715,561 was recorded during the period. Of the 1,085,000 common shares exchanged, 621,258 were fully vested,
these shares were placed in treasury.
|
|
(j)
|
On May 2, 2018,
27,188 Series A Preferred Shares were converted by the holders into 61,651 common shares of the Company and on May 18, 2018,
19,945 Series A Preferred Shares were converted by the holders into 66,113 common shares of the Company in error. The
Company has recorded the fair value of the common shares of $222,964 as subscriptions receivable while the Company attempts
to regain the shares.
|
|
(k)
|
On May 3, 2018,
the Company issued 27,778 shares of common stock upon the conversion of $20,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $13,432 which was equal to the difference between the
fair value of the shares issued and the liabilities settled.
|
|
(l)
|
On May 24, 2018,
the Company issued 20,833 shares of common stock upon the conversion of $20,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $15,386 which was equal to the difference between the
fair value of the shares issued and the liabilities settled.
|
|
(m)
|
On June 2, 2018, 13,622 Series
A Preferred Shares were converted by the holders into 17,078 common shares of the Company pursuant to the conversion terms
of the Series A Preferred Shares.
As the Series A Preferred Shares
are equity classified and the conversion was pursuant to the terms of the agreement, the conversion did not result in
a deemed dividend or a gain/loss upon conversion.
Upon conversion the Company derecognized
the Preferred Shares and adjusted the par value of Common stock and APIC.
|
|
(
n)
|
On July 2, 2018,
47,520 Series A Preferred Shares were converted by the holders into 50,286 common shares of the Company.
|
|
(o)
|
On July 18, 2018,
the Company issued 27,778 shares of common stock upon the conversion of $15,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $0 which was equal to the difference between the fair
value of the shares issued and the liabilities settled.
|
|
(p)
|
On August 20, 2018,
the Company issued 30,000 shares of common stock upon the conversion of $15,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $0 which was equal to the difference between the fair
value of the shares issued and the liabilities settled.
|
|
(q)
|
On September 5,
2018, the Company issued 20,270 shares of common stock upon the conversion of $15,000 of principal pursuant to the loan described
in Note 9(e). The Company recorded a gain on extinguishment of debt of $0 which was equal to the difference between the fair
value of the shares issued and the liabilities settled.
|
|
(r)
|
On September 28,
2018, the Company issued 30,000 shares of common stock upon the conversion of $9,833 of principal pursuant to the loan described
in Note 9(g). The Company recorded a gain on extinguishment of debt of $0 which was equal to the difference between the fair
value of the shares issued and the liabilities settled.
|
|
(s)
|
On September 28,
2018, the Company issued 5,010,000 shares of common stock with a fair value of $3,256,500 to employees of the Company in exchange
for services for the Company. The shares vest over periods between 18 and 36 months. During the period ended September
30, 2018, the Company recorded $19,516 for the vested portion of the shares, leaving $3,236,984 of unvested compensation expense
to be recognized in future periods.
|
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 Shares. The principal terms of the Series A Preferred Shares are as follows:
Voting rights
–
The Series A Preferred Shares do not have voting rights.
Dividend rights
–
The holders of the Series A Preferred 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 Shares during any fiscal year of the Corporation until there shall have been paid or declared and set
apart during that fiscal year for the holders of the Series A Preferred 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 Shares have the right to convert each Class A Preferred 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 Corporation. The number of shares of common stock into which each share
of the Series A Preferred Shares may be converted shall be determined by dividing the sum of the Stated Value of the Series A
Preferred Shares ($0.25 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 Shares may be converted at an initial conversion price of the greater of 75% of
the lowest VWAP during the ten (10) trading day period immediately preceding the date a conversion notice is delivered or $0.004.
,
Liquidation rights
-
Upon the occurrence of any liquidation, each holder of Series A Preferred Shares then outstanding shall be entitled to receive,
out of the assets of the Corporation 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
Shares upon liquidation, an amount per share of Series A Preferred Shares equal to the amount that would be receivable if the
Series A Preferred Shares had been converted into common stock immediately prior to such liquidation distribution, plus, accrued
and unpaid dividends.
In accordance with ASC 480
Distinguishing
Liabilities from Equity
, the Company has classified the following Series A Preferred Shares as a liability. On March 23, 2018,
the Company revised the conversion rights of the Series A Preferred Stock to include a minimum conversion price of $0.004. This
modification resulted in the reclassification of the Series A Preferred Shares from a liability to temporary equity or “mezzanine”.
As a result of the reclassification the Company recognized a gain on extinguishment of $290,814.
Subsequent to September 30,
2018, the Company amended and restated the Company’s Series A Convertible Preferred Stock to increase the Stated Value of
the Series A Convertible Preferred Stock from $0.25 to $1.00, and revise the Conversion Price to the greater of 75% of the lowest
VWAP during the ten (10) trading day period immediately preceding the Conversion Date (as defined below) or $0.40 (subject to
adjustment for any subdivision or combination of the Company’s outstanding shares of Common Stock).
|
●
|
On February 6, 2018,
the Company issued 505,494 shares of Series A Preferred Stock with a fair value of $170,445 to settle $374,000 of principal,
and $29,920 of accrued interest on the convertible notes described in Note 9(f). The Company recognized a gain on settlement
of debt of $538,359. On June 7, 2018, the Company cancelled 40,986 of the Series A Preferred Stock issued. The
Company reduced the gain on settlement of debt by $6,455.
|
|
●
|
On February 14,
2018, the Company issued 57,350 shares of Series A Preferred Stock with a fair value of $19,759 to settle $1,304 of amounts
owed. The Company recognized a loss on settlement of debt of $18,455.
|
|
●
|
On May 18, 2018,
the Company paid $280,959 and issued a warrant to purchase up to 500,000 shares of our common stock at an exercise price of
$1 per share for 2 years to repurchase and retire 1,273,161 shares of Series A Preferred Stock. The warrant qualified for
derivative accounting under ASC 815-15 “
Derivatives and Hedging
” and had an initial fair value of $100,000.
The carrying value of the retired Series A Preferred Shares was $228,772. There was a deficit between the carrying value and
the repurchase price of $380,959 which resulted in an increase to net income attributable to common shareholders of $152,187.
|
|
●
|
On June 22, 2018,
13,622 Series A Preferred Shares were converted by the holders into 17,078 common shares of the Company pursuant to the conversion
terms of the Series A Preferred Shares.
|
|
●
|
On May 2, 2018,
27,188 Series A Preferred Shares were converted by the holders into 61,651 common shares of the Company and on May 18, 2018,
19,945 Series A Preferred Shares were converted by the holders into 66,113 common shares of the Company in error. August
1, 2018, the Company entered into and closed on a Settlement Agreement pursuant to which the shareholders agreed to cancel
the remaining Series A Preferred shares held by them and return up to 25,000 common shares on a best effort basis. As
of September 30, 2018, no common shares had been cancelled.
|
|
●
|
On July 2, 2018,
47,520 Series A Preferred Shares were converted by the holders into 50,286 common shares of the Company.
|
Series B
On April 6, 2018, the Company
designated 1,000 shares of Series B preferred stock of the Company (the “Series B Preferred Stock”) 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 A Preferred Shares are as follows:
Issue Price -
The stated
price for the Series B Preferred shall be $3,500 per share.
Redemption -
The Series
B Preferred are not redeemable.
Dividends -
The holders
of the Series B Preferred 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. Upon any Fundamental Transaction, liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the Holders of the shares of the Series B Preferred shall be entitled, after any distribution
or payment is made upon any shares of capital stock of the Corporation having a liquidation preference senior to the Series B
Preferred, 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 Corporation having a liquidation preference junior to the Series B Preferred, 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 Holders and all other shares of capital stock of the Corporation having the same liquidation preference as the Series
B Preferred shall be insufficient to permit payment to said holders of such amounts, then all of the assets of the Corporation
then remaining shall be distributed ratably among the Series B Preferred Holders and such other capital stock of the Corporation
having the same liquidation preference as the Series B Preferred, if any. Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after provision is made for Series B Preferred Holders and all other shares of
capital stock of the Corporation having the same liquidation preference as the Series B Preferred, if any, then-outstanding as
provided above, the holders of Common Stock and other capital stock of the Corporation having a liquidation preference junior
to the Series B Preferred shall be entitled to receive ratably all remaining assets of the Corporation to be distributed.
Voting -
The holders
of shares of Series B Preferred shall be voted together with the shares of Common Stock such that the aggregate voting power of
the Series B Preferred is equal to 51% of the total voting power of the Company.
Conversion -
There are
no conversion rights.
|
●
|
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
542,500 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter exchanged 542,500
shares of common stock for an aggregate of 500 shares of Series B Preferred Stock. Of the 1,085,000 common shares exchanged,
463,742 shares were unvested. The remaining stock-based compensation related to the unvested shares in the amount of $715,561
was recorded during the period. Of the 1,085,000 common shares exchanged, 621,258 were fully vested, these shares were placed
in treasury.
|
13.
|
Share Purchase
Warrants
|
On September 5, 2018, the Company effected a 1-for-200 Reverse
Stock Split. Share and per share data for share purchase warrants have been adjusted for all periods presented to reflect the Reverse
Stock Split.
As of September 30, 2018, the following table summarizes
the continuity of share purchase warrants:
|
|
|
Number of
warrants
|
|
|
Weighted average exercise price
$
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
|
417,875
|
|
|
|
6.03
|
|
|
Expired
|
|
|
(10,000
|
)
|
|
|
6.00
|
|
|
Issued
|
|
|
1,148,903
|
|
|
|
0.90
|
|
|
Balance, September 30, 2018
|
|
|
1,556,778
|
|
|
|
2.24
|
|
As of September 30, 2018, the following share purchase
warrants were outstanding:
|
Number of warrants
|
|
|
Exercise
price
$
|
|
|
Expiry date
|
|
|
|
|
|
|
|
|
|
|
20,375
|
|
|
|
74.00
|
|
|
April 10, 2019
|
|
|
137,500
|
|
|
|
5.10
|
|
|
April 28, 2020
|
|
|
250,000
|
|
|
|
0.10
|
|
|
June 27, 2020
|
|
|
263,903
|
*
|
|
|
1.20
|
|
|
February 13, 2021
|
|
|
125,000
|
|
|
|
1.60
|
|
|
February 21, 2021
|
|
|
60,000
|
|
|
|
0.32
|
|
|
March 22, 2019
|
|
|
500,000
|
|
|
|
1.00
|
|
|
May 17, 2020
|
|
|
200,000
|
|
|
|
0.00010
|
|
|
September 10, 2019
|
|
|
1,556,778
|
|
|
|
|
|
|
|
|
*
|
This warrant is
convertible into 4% of the number of common shares of the Company outstanding. At September 30, 2018, 4% of the number of
shares of the Company outstanding was 263,903 shares.
|
As of September 30, 2018, the
embedded conversion feature of the warrant issued as an inducement to repurchase the series A preferred shares had a fair value
of $100,000.
On September 11, 2018, the Company
issued a warrant to purchase 200,000 shares of common stock at an exercise price of $0.0001. The Company recorded the fair value
of the warrant of $311,980 as professional fees.
On September 5, 2018,
the Company effected a 1-for-200 Reverse Stock Split. Share and per share data for stock options have
been adjusted for all periods presented to reflect the Reverse Stock Split.
The following table summarizes
the continuity of the Company’s stock options:
|
|
|
Number
of options
|
|
|
Weighted
average
exercise price
$
|
|
|
Weighted average remaining contractual life (years)
|
|
|
Aggregate
intrinsic
value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
1,750
|
|
|
|
6.00
|
|
|
|
0.38
|
|
|
|
–
|
|
|
Expired
|
|
|
(1,750
|
)
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2018
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Exercisable September 30, 2018
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
15.
|
Commitments and
Contingencies
|
|
(a)
|
On May 23, 2012,
a former employee of the Company delivered a Notice of Application seeking judgment against the Company for approximately
$55,000. The hearing of that Application took place on July 31, 2012, at which time the former employee obtained judgment
in the approximate amount of $55,000. The Company did not defend the amount of the judgment and the amount is included in
accounts payable, but claims a complete set-off on the basis that the former employee retains 5,000 shares of common stock
of the Company as security for payment of the outstanding consulting fees owed to him. On November 30, 2012, the Company commenced
a separate action against the former employee seeking a return of the 5,000 shares of common stock and a stay of execution
of the judgment. That application is pending and has not yet been heard or determined by the court. The payment of the judgment
claim of approximately $55,000 is dependent upon whether the former employee will first return the 5,000 shares of common
stock noted above. The probable outcome of the Company’s claim for the return of the shares cannot yet be determined
as the Company has not received a response from the former employee for two years.
|
|
(b)
|
On November 15,
2013, the Company entered into a second settlement agreement with the $150,000 debenture holder described in Note 9(a). Pursuant
to the second amendment, on November 15, 2013, the Company agreed to make monthly payments of $10,000 on the outstanding principal
and interest. Payments were made until December 2014, but have not been made after. The plaintiff was seeking relief of amounts
owed along with 10% interest per annum, from the date of judgments. All amounts are recorded in these financial statements.
On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding
principal to a third party. The Company approved and is bound by the assignment and sale agreement.
|
|
(c)
|
On September 3,
2015, a former prospective employee of the Company delivered a Notice of Claim seeking judgment against the Company for approximately
$11,400. During the year ended May 31, 2017 the prospective employee received a judgement which is recorded in these financial
statements.
|
|
(d)
|
On March 14, 2016,
the Company entered into a consulting agreement. Pursuant to the agreement, the Company will pay the consultant $10,000 per
month ($20,000 paid) and issue 2,750 shares per month for a period of three months. At December 31, 2017, the Company had
not issued the shares to the consultant due to non-performance.
|
|
(e)
|
On September 10,
2016, the Company entered into a debt settlement agreement to settle $7,500 of amounts owed for services in exchange for 10,000
common shares. The Company has not yet issued the shares. The Company will record the debt settlement upon the issuance of
shares.
|
|
(f)
|
On August 22, 2016,
the Company entered into a consulting agreement for the provision of consulting services until November 22, 2016. Pursuant
to the agreement the Company will pay the consultant $5,000 per month and issue 10,000 shares of common stock to the consultant.
On December 7, 2016, the Company entered into a settlement agreement. Pursuant to the agreement, the Company agreed to issue
the consultant 5,000 common shares in exchange for fully releasing and discharging the Company of any and all further obligations.
|
|
(g)
|
On February 27,
2018, a subsidiary of the Company, ADEX entered into a Purchase and Sale Agreement with Prestige pursuant to which ADEX agreed
to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owing to ADEX. Under the terms of the
Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of accounts, Prestige will pay ADEX eighty
percent (80%) of the face value of the assigned Accounts, up to a maximum total borrowings of $5,000,000 outstanding at any
point in time. ADEX additionally granted Prestige a continuing security interest in and lien upon all accounts receivable,
inventory, fixed assets, general intangibles and other assets.
|
|
(h)
|
The Company leases
certain of its properties under leases that expire on various dates through 2019. Some of these agreements include escalation
clauses and provide for renewal options ranging from one to five years.
|
|
(i)
|
Rent expense incurred
under the Company’s operating leases amounted to $320,293 during the nine months ended September 30, 2018.
|
|
(j)
|
The future minimum
obligation during each year through 2019 under the leases with non-cancelable terms in excess of one year is as follows:
|
|
|
|
Future
|
|
|
|
|
Minimum
|
|
|
|
|
Lease
|
|
|
Years Ending December 31,
|
|
Payments
|
|
|
2018
|
|
$
|
122,926
|
|
|
2019
|
|
|
71,184
|
|
|
2020
|
|
|
0
|
|
|
Total
|
|
$
|
194,110
|
|
During the nine months ended September 30, 2017,
the Company had two operating segments including:
|
●
|
AW Solutions Inc.,
a Longwood, Florida-based company and AW Solutions Puerto Rico LLC, which is in the business of the provision of professional,
multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry and,
|
|
●
|
Mantra Energy Alternatives
(MEA), which consists of the rest of the Company’s operations.
|
During the nine months ended September 30, 2018,
the Company had two operating segments including:
|
●
|
AW Solutions (AWS),
which is in the business of the provision of professional, multi-service line, telecommunications infrastructure and outsource
services to the wireless and wireline industry; ADEX Corporation, an Alpharetta, Georgia-based company and ADEX Puerto Rico
LLC (ADEX). offering turnkey wireless and wireline telecom services and project staffing; and,
|
|
●
|
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), the AW Solutions operating segment in two geographical
areas (the United States and Puerto Rico), and the ADEX operating segment in two geographical areas (the United States and Puerto
Rico).
Financial statement information
by operating segment for nine months ended September 30, 2018 is presented below:
|
|
|
Spectrum Global
$
|
|
|
AWS/ADEX
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
–
|
|
|
|
24,963,876
|
|
|
|
24,963,876
|
|
|
Operating (loss) income
|
|
|
(2,873,265
|
)
|
|
|
539,713
|
|
|
|
(2,333,551
|
)
|
|
Interest expense
|
|
|
(404,073
|
)
|
|
|
(372,464
|
)
|
|
|
(776,537
|
)
|
|
Depreciation and amortization
|
|
|
–
|
|
|
|
161,480
|
|
|
|
161,480
|
|
|
Total Assets as of September 30, 2018
|
|
|
5,018
|
|
|
|
12,252,308
|
|
|
|
12,257,326
|
|
Geographic information for the nine months ended
and as of September 30, 2018 is presented below:
|
|
|
Revenues
$
|
|
|
Long-Lived
Assets
$
|
|
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
|
1,653,878
|
|
|
|
5,223
|
|
|
United States
|
|
|
23,309,998
|
|
|
|
3,912,148
|
|
|
Consolidated Total
|
|
|
24,963,876
|
|
|
|
3,917,391
|
|
Financial statement information by operating segment
for the nine months ended September 30, 2017 is presented below:
|
|
|
Mantra Ventures
$
|
|
|
AW Solutions
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
–
|
|
|
|
4,566,625
|
|
|
|
4,566,625
|
|
|
Operating (loss) income
|
|
|
(4,987,182
|
)
|
|
|
(158,128
|
)
|
|
|
(5,145,310
|
)
|
|
Interest expense
|
|
|
225,647
|
|
|
|
1,158
|
|
|
|
226,805
|
|
|
Depreciation and amortization
|
|
|
5,603
|
|
|
|
125,560
|
|
|
|
131,163
|
|
|
Impairment loss
|
|
|
103,480
|
|
|
|
–
|
|
|
|
103,480
|
|
|
Total Assets as of September 30, 2017
|
|
|
5,606,
|
|
|
|
4,752,261
|
|
|
|
4,757,867
|
|
Geographic information for the nine months ended
and as at September 30, 2017 is presented below:
|
|
|
Revenues
$
|
|
|
Long-Lived
Assets
$
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
1,880,183
|
|
|
|
3,058,594
|
|
|
Puerto Rico
|
|
|
350,066
|
|
|
|
6,607
|
|
|
Consolidated Total
|
|
|
2,230,249
|
|
|
|
3,065,201
|
|
17.
|
Net Income (Loss) Per Share
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
Nine Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
414,485
|
|
|
|
214,910
|
|
|
|
(2,493,461
|
)
|
|
|
(8,962,591
|
)
|
|
Convertible note interest
|
|
|
147,789
|
|
|
|
75,882
|
|
|
|
-
|
|
|
|
-
|
|
|
Adjusted diluted net income
|
|
|
562,274
|
|
|
|
290,792
|
|
|
|
(2,493,461
|
)
|
|
|
(8,962,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding used in computing net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,557,763
|
|
|
|
1,374,994
|
|
|
|
1,737,473
|
|
|
|
1,374,994
|
|
|
Effect of dilutive stock options and convertible notes payable
|
|
|
12,707,716
|
|
|
|
7,942,509
|
|
|
|
-
|
|
|
|
–
|
|
|
Effect of preferred shares
|
|
|
403,326
|
|
|
|
–
|
|
|
|
-
|
|
|
|
–
|
|
|
Diluted
|
|
|
14,668,805
|
|
|
|
9,317,503
|
|
|
|
1,737,473
|
)
|
|
|
1,374,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share applicable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.27
|
|
|
|
0.16
|
|
|
|
(1.44
|
)
|
|
|
(6.52
|
)
|
|
Diluted
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
(1.44
|
)
|
|
|
(6.52
|
)
|
|
(a)
|
On October 1, 2018, the Company
cancelled 82,963 shares that were issued upon the conversion of a note in error and returned
to the Company.
|
|
(b)
|
On October 10, 2018, the Company’s
wholly-owned subsidiary, ADEX Corporation (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 on or around
October 10, 2019. 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(m).
|
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 and ADEX Puerto
Rico LLC. 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 113,953 shares of the Company’s common stock at $1.25
for three years.
|
(c)
|
On October 9, 2018, the Company
issued 520,000 shares of common stock to employees of the Company in exchange for services
for the Company.
|
|
(d)
|
On October 19, 2018, the Company
issued 62,170 shares of common stock upon the conversion of $20,000 of principal pursuant
to the loan described in Note 9(e).
|
|
(e)
|
On October 25, 2018, the Company
issued 40,000 shares of common stock upon the conversion of $13,008 of principal pursuant
to the loan described in Note 9(g).
|
|
(f)
|
On October 29, 2018, the Company
amended and restated the Company’s Series A Convertible Preferred Stock as follows:
|
|
●
|
The
Stated Value of the Series A Convertible Preferred Stock was increased from $0.25 to
$1.00.
|
|
●
|
The
Conversion Price of the Series A Preferred was revised from the greater of 75% of the
lowest VWAP during the ten (10) trading day period immediately preceding the Conversion
Date or .004; to a Conversion Price of the greater of 75% of the lowest VWAP during the
ten (10) trading day period immediately preceding the Conversion Date (as defined below)
or $0.40 (subject to adjustment for any subdivision or combination of the Company’s
outstanding shares of Common Stock).
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This
quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance.
In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”,
“plan”, “anticipates”, “believes”, “estimates”, “predicts”, “potential”
or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
Our
unaudited consolidated financial statements are stated in United States dollars ($) and are prepared in accordance with United
States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements
and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements
that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this quarterly report.
In
this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to
“$”refer to United States dollars and all references to "common stock" refer to the common shares in our
capital stock.
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.
Description
of Business
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.
We
are a leading provider of services and solutions in the telecommunications sector and research developer of alternative energy
alternatives in the energy sector. The telecommunications sector provides services and solutions throughout the United States,
Guam, Canada and the Caribbean. Our energy sector services are related to research and development of alternative energy technologies.
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 “AW Solutions”) and ADEX CORP and ADEX Puerto
Rico LLC (collectively known as “ADEX”). AW Solutions provides 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, 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, the Company deploys hundreds of telecommunication professionals in support
of its customers. The Company believes that its 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. The Company
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 & Commissioning, Wireless Site Development &
Construction Management, Network Engineering, Project Management, Disaster Recovery design engineering and integration.
We
provide the following categories of offerings to our customers:
|
●
|
Telecommunication
Division: We provide a comprehensive 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,
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 and enterprise customers. Our services teams support the deployment
of new networks and technologies, as well as expand and maintain existing networks.
|
Our
Operating Units
Our
company is comprised of the following:
|
●
|
AW
Solutions. - AW Solutions, Inc., a Florida corporation (April 17, 2006), AW Solutions Puerto Rico, LLC, Puerto Rico limited
liability company (March 14, 2011) and Tropical Communications, Inc., a Florida corporation (May 9, 1984), (collectively known
as “AW Solutions”). We are professional, multi-service line, telecommunications infrastructure companies that
provide outsourced services to the wireless and wireline industry. AW Solution’s 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. AW Solutions provides in-field design,
Computer Aided Design and Drawing services (CADD), fiber and DAS deployments.
|
|
●
|
ADEX
- ADEX CORP, a New York corporation (October 29, 1993) and ADEX Puerto Rico, LLC. a Puerto Rico limited liability company
(April 17, 2008), (collectively known as “ADEX”). ADEX is 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 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 & Commissioning, Wireless Site Development & Construction Management, Network Engineering,
Project Management, Disaster Recovery design engineering and integration.
|
Results
of Operations for the Three Month Periods Ended September 30, 2018 and September 30, 2017
Revenues
Our
operating results for the three month periods ended September 30, 2018 and 2017 are summarized as follows:
|
|
Three
Months Ended
September 30,
2018
|
|
|
Three
Months Ended
September 30,
2017
|
|
|
Difference
|
|
Revenue
|
|
$
|
9,671,990
|
|
|
$
|
2,336,376
|
|
|
$
|
7,335,614
|
|
Operating expenses
|
|
$
|
9,979,442
|
|
|
$
|
3,113,727
|
|
|
$
|
6,865,715
|
|
Other income (expense)
|
|
$
|
721,937
|
|
|
$
|
904,408
|
|
|
$
|
(182,471
|
)
|
Net income (loss)
|
|
$
|
414,485
|
|
|
$
|
127,057
|
|
|
$
|
287,428
|
|
Revenue generated during the three months
ended September 30, 2018, was $9,671,990 compared to $2,336,376 revenues during the same period ended September 30, 2017. During
this period ended September 30, 2018, all of our revenues and a significant portion of our expenses were generated by our acquired
telecommunications division (AW Solutions, Inc.; AW Solutions Puerto Rico, LLC, Tropical Communications, Inc. on April 25, 2017
and ADEX Corp.; ADEX PUERTO RICO LLC, ADEX TOWERS, INC., ADEX TELECOM, INC. on February 28, 2018).
Expenses
During
the three months ended September 30, 2018, our operating expenses were $9,979,442 compared to operating expenses of $3,113,727
for the three month period ended September 30, 2017. The increase in operating expense is as a result of the acquisition of ADEX
on February 28, 2018, which consisting of ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC and ADEX TELECOM, INC. These expenses
include general and administrative costs, all of our corporate costs, as well as costs from 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, provisions for recoveries of bad debt and other costs not directly related to performance
of our services under customer contracts. We expect these expenses to continue to generally increase as we expand our operations,
but expect that such expenses as a percentage of revenue will decrease if we succeed in increasing revenues.
General
and administrative costs were $1,248,441 for the three months ended September 30, 2018 compared to $561,876 for the three months
ended September 30, 2017. Salaries and wages were $606,900 for the three months ended September 30, 2018 compared to $262,446
for the three months ended September 30, 2017. Depreciation and amortization costs were $56,874 for the three months ended September
30, 2018 compared to $66,900 for the three months ended September 30, 2017.
Other
Income (Expense)
For
the three months ended September 30, 2018, we had other income of $721,937 compared to other income of $904,408 the same period
in 2017. The decrease was primarily due to a gain on settlement of debt of $202,000, a gain on the change in fair value of derivatives
of $1,304,531 and interest expense of $268,094 during the three months ended September 30, 2018, compared to a gain on settlement
of debt of $0, a gain on the change in fair value of derivatives of $1,579,710 and interest expense of $85,657 during the three
month period ended September 30, 2017.
Net
Income (Loss)
For
the three months ended September 30, 2018, we earned a net income of $414,485 compared to $127,057 for the same period in 2017.
Results
of Operations for the Nine Month Periods Ended September 30, 2018 and September 30, 2017
Revenues
Our
operating results for the nine month periods ended September 30, 2018 and 2017 are summarized as follows:
|
|
Nine
Months Ended
September 30,
2018
|
|
|
Nine
Months Ended
September 30,
2017
|
|
|
Difference
|
|
Revenue
|
|
$
|
24,963,876
|
|
|
$
|
4,566,625
|
|
|
$
|
20,397,251
|
|
Operating expenses
|
|
$
|
27,297,428
|
|
|
$
|
9,711,935
|
|
|
$
|
17,585,493
|
|
Other income (expense)
|
|
$
|
(61,151
|
)
|
|
$
|
(3,875,032
|
)
|
|
$
|
3,813,881
|
|
Net income (loss)
|
|
$
|
(2,394,703
|
)
|
|
$
|
(9,020,342
|
)
|
|
$
|
6,625,639
|
|
Revenue
generated during the nine months ended September 30, 2018, was $24,963,876 compared to $4,566,625 during the period ended September
30, 2017. During this period ended September 30, 2018, all of our revenues and a significant portion of our expenses were generated
by our acquired telecommunications division (AW Solutions, Inc.; AW Solutions Puerto Rico, LLC; Tropical Communications, Inc.)
on April 25, 2017 and (ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC., ADEX TELECOM, INC.) on February 28, 2018.
Expenses
During
the nine months ended September 30, 2018, our operating expenses were $27,297,428 compared to operating expenses of $9,711,935
for the nine month period ended September 30, 2017. The increase on operating expense is a result of the acquisition of ADEX on
February 28, 2018, which consisted of ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC and ADEX TELECOM, INC. These expenses
include general and administrative costs, all of our corporate costs, as well as costs from 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, provisions for recoveries of bad debt and other costs not directly related to performance
of our services under customer contracts. We expect these expenses to continue to generally increase as we expand our operations,
but expect that such expenses as a percentage of revenue will decrease if we succeed in increasing revenues.
General
and administrative costs were $3,409,804 for the nine months ended September 30, 2018 compared to $1,273,539 for the nine months
ended September 30, 2017. Salaries and wages were $2,502,408 for the nine months ended September 30, 2018 compared to $4,484,379
for the nine months ended September 30, 2017. This was due to a decrease in stock-based compensation of $2,528,385. Depreciation
and amortization costs were $161,480 for the nine months ended September 30, 2018 compared to $131,163 for the nine months ended
September 30, 2017.
Other
Income (Expense)
For
the nine months ended September 30, 2018, we had other expenses of $61,151 compared to other expenses of $3,875,032 the same period
in 2017. The increase was primarily due to a gain on disposal of subsidiaries of $577,299, gain on extinguishment of preferred
share liability of $290,814 during the nine months ended September 30, 2018, a gain on settlement of debt of $776,375 during the
nine months ended September 30, 2018, compared to a loss on settlement of debt of $14,202 during the same period in 2017, and
a decrease in loss from the change in fair value of conversion features of $3,756,647. This was offset by an increase in accretion
of discounts on convertible debentures of $1,157,271.
Net
Income (Loss)
For
the nine months ended September 30, 2018, we incurred a net loss of $2,394,703, compared to a net loss of $9,020,342 for the same
period in 2017.
Liquidity
and Capital Resources
As
of September 30, 2018, our total current assets were $8,339,955 and our total current liabilities were $18,940,187, resulting
in a working capital deficit of $10,600,232 compared to a working capital deficit of $9,389,007 as of December 31, 2017.
We
suffered recurring losses from operations. The continuation of our company is dependent upon our company 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
|
|
Nine
Months
Ended
September 30,
2018
|
|
|
Nine
Months
Ended
September 30,
2017
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Operating Activities
|
|
$
|
(1,701,028
|
)
|
|
$
|
(704,174
|
)
|
Net Cash Provided by Investing Activities
|
|
$
|
176,001
|
|
|
$
|
115,112
|
|
Net Cash Provided by Financing Activities
|
|
$
|
1,797,214
|
|
|
$
|
606,958
|
|
Change In Cash
|
|
$
|
272,187
|
|
|
|
19,297
|
|
The
increase in cash that we experienced in the period ended September 30, 2018, compared to the increase during the period ended
September 30, 2017, is primarily due to the acquisition of ADEX and its subsidiaries and increased funding requirements for ongoing
operating activities. During the period ended September 30, 2018, the repayment of loans payable of $1,723,000 and convertible
notes payable of $131,579 was made, and proceeds were received from notes and convertible notes payable of $3,729,452, which created
the cash balance as noted above. We expect that our cash position will increase due to operating profits in the telecommunications
division. Over the coming months and year, subject to raising additional funds, we plan to primarily concentrate on our telecommunications
business and associated projects.
In
order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities
or shareholders loans. There is no assurance that we will be successful in completing any further private placement financing.
If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts we spend on our business activities
and administrative expenses in order to be within the amount of capital resources that are available to us.
As
of September 30, 2018, we had cash of $301,080 compared to $19,297 as of September 30, 2017. Our cash balance at the beginning
of this year was $28,893.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Inflation
The
effect of inflation on our revenue and operating results has not been significant.