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.
SPECTRUM
GLOBAL SOLUTIONS, INC.
Condensed
consolidated balance sheets
|
|
March 31,
|
|
|
December 31,
|
|
ASSETS
|
|
2020
|
|
|
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
73,985
|
|
|
$
|
468,819
|
|
Accounts receivable, net of allowances of $470,303 and $504,785, respectively
|
|
|
4,807,283
|
|
|
|
5,167,261
|
|
Contract assets
|
|
|
237,862
|
|
|
|
461,681
|
|
Due from related party
|
|
|
5,207,585
|
|
|
|
-
|
|
Prepaid expenses and deposits
|
|
|
169,925
|
|
|
|
200,119
|
|
Total current assets
|
|
|
10,496,640
|
|
|
|
6,297,880
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $1,069,416 and $1,058,973, respectively
|
|
|
82,624
|
|
|
|
93,067
|
|
Goodwill
|
|
|
1,905,822
|
|
|
|
1,905,822
|
|
Customer lists, net of accumulated amortization of $504,181 and $440,805, respectively
|
|
|
2,426,648
|
|
|
|
2,490,024
|
|
Tradenames, net accumulated amortization of $235,580 and $212,226, respectively
|
|
|
1,164,541
|
|
|
|
1,187,895
|
|
Operating lease right-of-use assets
|
|
|
136,211
|
|
|
|
168,384
|
|
Other assets
|
|
|
96,189
|
|
|
|
25,746
|
|
Total assets
|
|
$
|
16,308,675
|
|
|
$
|
12,168,818
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
4,885,191
|
|
|
$
|
4,028,285
|
|
Contract liabilities
|
|
|
705,396
|
|
|
|
704,544
|
|
Loans payable to related parties
|
|
|
701,258
|
|
|
|
3,701,258
|
|
Loans payable, net of debt discount of $39,409 and $280,174, respectively
|
|
|
347,862
|
|
|
|
3,578,386
|
|
Convertible debentures, current portion, net of discount of $501,346 and $352,055, respectively
|
|
|
3,242,205
|
|
|
|
2,809,355
|
|
Factor financing
|
|
|
2,844,381
|
|
|
|
-
|
|
Derivative liability
|
|
|
2,063,063
|
|
|
|
992,733
|
|
Warrant liability
|
|
|
100,000
|
|
|
|
100,000
|
|
Operating lease liabilities
|
|
|
141,688
|
|
|
|
173,351
|
|
Total current liabilities
|
|
|
15,031,044
|
|
|
|
16,087,912
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Convertible debentures, net of current portion, net of debt discount of $0 and $98,176, respectively
|
|
|
-
|
|
|
|
28,324
|
|
Total long-term liabilities
|
|
|
-
|
|
|
|
28,324
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,031,044
|
|
|
|
16,116,236
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A preferred stock; $0.00001 par value; 8,000,000 shares authorized; 899,427 issued and 794,427 and 829,427 outstanding as of March 31, 2020 and December 31, 2019, respectively
|
|
|
965,357
|
|
|
|
1,007,888
|
|
Series B preferred stock; $3,500 stated value; 1,000 shares authorized; 1,000 issued and outstanding as of March 31, 2020 and December 31, 2019
|
|
|
484,530
|
|
|
|
484,530
|
|
Total mezzanine equity
|
|
|
1,449,887
|
|
|
|
1,492,418
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Deficit:
|
|
|
|
|
|
|
|
|
Common stock; $0.00001 par value; 750,000,000 shares authorized; 1,314,705 and 195,715 issued and 1,312,634 and 193,644 outstanding as of March 31, 2020 and December 31, 2019, respectively
|
|
|
13
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
34,174,562
|
|
|
|
25,255,291
|
|
Treasury stock, at cost
|
|
|
(277,436
|
)
|
|
|
(277,436
|
)
|
Common stock subscribed
|
|
|
74,742
|
|
|
|
74,742
|
|
Accumulated deficit
|
|
|
(34,144,137
|
)
|
|
|
(30,492,435
|
)
|
Total stockholders' deficit
|
|
|
(172,256
|
)
|
|
|
(5,439,836
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
16,308,675
|
|
|
$
|
12,168,818
|
|
(The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
SPECTRUM
GLOBAL SOLUTIONS, INC.
Condensed
consolidated statements of operations
(Unaudited)
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
7,130,480
|
|
|
$
|
11,335,732
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
6,619,826
|
|
|
|
8,824,165
|
|
Depreciation and amortization
|
|
|
97,173
|
|
|
|
93,952
|
|
General and administrative
|
|
|
946,131
|
|
|
|
1,044,706
|
|
Salaries and wages
|
|
|
1,128,902
|
|
|
|
1,358,208
|
|
Total operating expenses
|
|
|
8,792,032
|
|
|
|
11,321,031
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(1,661,552
|
)
|
|
|
14,701
|
|
|
|
|
|
|
|
|
|
|
Other (expenses) income:
|
|
|
|
|
|
|
|
|
(Loss) gain on settlement of debt
|
|
|
(190,902
|
)
|
|
|
164,467
|
|
Amortization of discounts on convertible debentures and loans payable
|
|
|
(388,982
|
)
|
|
|
(661,352
|
)
|
Loss on change in fair value of derivatives
|
|
|
(813,630
|
)
|
|
|
(369,391
|
)
|
Default and debt extension fees
|
|
|
(180,489
|
)
|
|
|
-
|
|
Interest expense
|
|
|
(416,147
|
)
|
|
|
(471,412
|
)
|
Total other (expense) income
|
|
|
(1,990,150
|
)
|
|
|
(1,337,688
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(3,651,702
|
)
|
|
|
(1,322,987
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
9,600
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,651,702
|
)
|
|
$
|
(1,332,587
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted:
|
|
$
|
(5.06
|
)
|
|
$
|
(33.96
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic and diluted
|
|
|
722,364
|
|
|
|
39,240
|
|
(The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
SPECTRUM
GLOBAL SOLUTIONS, INC.
Condensed
consolidated statements of stockholder’s deficit
(Unaudited)
|
|
For the three months ended March 31, 2020
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Common stock
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
$
|
|
|
paid-in capital
|
|
|
subscribed
|
|
|
stock
|
|
|
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2020
|
|
|
195,715
|
|
|
$
|
2
|
|
|
$
|
25,255,291
|
|
|
$
|
74,742
|
|
|
$
|
(277,436
|
)
|
|
$
|
(30,492,435
|
)
|
|
$
|
(5,439,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to M2B Funding
|
|
|
1,112
|
|
|
|
-
|
|
|
|
12,151
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,151
|
|
Issuance of common stock to CCAG Investments
|
|
|
9,755
|
|
|
|
-
|
|
|
|
51,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,500
|
|
Issuance of common stock to FJ Vulis
|
|
|
9,755
|
|
|
|
-
|
|
|
|
51,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51,500
|
|
Issuance of common stock to Dominion Capital
|
|
|
2,778
|
|
|
|
-
|
|
|
|
30,379
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,379
|
|
Issuance of common stock to GS Capital Partners
|
|
|
12,859
|
|
|
|
-
|
|
|
|
64,257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,257
|
|
Issuance of common stock to WaveTech GmbH debtholders
|
|
|
1,082,731
|
|
|
|
11
|
|
|
|
8,507,546
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,507,557
|
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
201,938
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,938
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,651,702
|
)
|
|
|
(3,651,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2020
|
|
|
1,314,705
|
|
|
$
|
13
|
|
|
$
|
34,174,562
|
|
|
$
|
74,742
|
|
|
$
|
(277,436
|
)
|
|
$
|
(34,144,137
|
)
|
|
$
|
(172,256
|
)
|
|
|
For the three months ended March 31, 2019
|
|
|
|
Common stock
|
|
|
Additional
|
|
|
Common stock
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
$
|
|
|
paid-in capital
|
|
|
subscribed
|
|
|
stock
|
|
|
deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2019
|
|
|
25,703
|
|
|
$
|
-
|
|
|
$
|
18,681,467
|
|
|
$
|
74,742
|
|
|
$
|
(277,436
|
)
|
|
$
|
(24,170,105
|
)
|
|
$
|
(5,691,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to RDW Capital, LLC
|
|
|
3,867
|
|
|
|
-
|
|
|
|
293,165
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
293,165
|
|
Issuance of common stock to Silverback Capital
|
|
|
2,060
|
|
|
|
-
|
|
|
|
119,663
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,663
|
|
Issuance of common stock to Virtual Capital
|
|
|
3,572
|
|
|
|
-
|
|
|
|
321,425
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
321,425
|
|
Issuance of common stock to employees pursuant to the conversions of convertible debt
|
|
|
4,667
|
|
|
|
-
|
|
|
|
308,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
308,000
|
|
Shares issued for services
|
|
|
9,565
|
|
|
|
-
|
|
|
|
471,343
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
471,343
|
|
Net loss for the period
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,332,587
|
)
|
|
|
(1,332,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance, March 31, 2019
|
|
|
49,434
|
|
|
$
|
-
|
|
|
$
|
20,195,063
|
|
|
$
|
74,742
|
|
|
$
|
(277,436
|
)
|
|
$
|
(25,502,692
|
)
|
|
$
|
(5,510,323
|
)
|
(The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
SPECTRUM
GLOBAL SOLUTIONS, INC.
Condensed
consolidated statements of cash flows
(Unaudited)
|
|
For the three months ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,651,702
|
)
|
|
$
|
(1,332,587
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on change in fair value of derivative liability
|
|
|
813,630
|
|
|
|
369,391
|
|
Amortization of discounts on convertible debentures and loans payable
|
|
|
388,982
|
|
|
|
661,352
|
|
Depreciation and amortization
|
|
|
97,173
|
|
|
|
93,952
|
|
Amortization of operating right-of-use assets
|
|
|
32,173
|
|
|
|
37,016
|
|
Amortization of operating right-of-use liabilities
|
|
|
(31,663
|
)
|
|
|
(36,150
|
)
|
Stock-based compensation
|
|
|
201,938
|
|
|
|
471,343
|
|
Loss (gain) on settlement of debt
|
|
|
190,902
|
|
|
|
(164,468
|
)
|
Default and debt extensions fees
|
|
|
180,489
|
|
|
|
-
|
|
Original issue discount
|
|
|
-
|
|
|
|
20,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
359,978
|
|
|
|
(1,131,653
|
)
|
Contract assets
|
|
|
223,819
|
|
|
|
(365,300
|
)
|
Prepaid expenses and deposits
|
|
|
30,194
|
|
|
|
390,717
|
|
Other assets
|
|
|
(70,443
|
)
|
|
|
3,591
|
|
Accounts payable and accrued liabilities
|
|
|
902,627
|
|
|
|
961,180
|
|
Contract liabilities
|
|
|
852
|
|
|
|
(523,083
|
)
|
Net cash used in operating activities
|
|
|
(331,051
|
)
|
|
|
(544,699
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net cash paid upon acquisition
|
|
|
-
|
|
|
|
(941,593
|
)
|
Purchase of equipment
|
|
|
-
|
|
|
|
(52,540
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(994,133
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from loans payable
|
|
|
3,044,690
|
|
|
|
8,367,190
|
|
Repayments of loans payable
|
|
|
(6,515,979
|
)
|
|
|
(6,147,609
|
)
|
Proceeds from loans payable to related parties
|
|
|
299,972
|
|
|
|
-
|
|
Proceeds from convertible debentures
|
|
|
315,000
|
|
|
|
-
|
|
Repayments of convertible debentures
|
|
|
(51,847
|
)
|
|
|
(334,552
|
)
|
Proceeds from factoring financing
|
|
|
4,685,390
|
|
|
|
-
|
|
Repayments of factor financing
|
|
|
(1,841,009
|
)
|
|
|
-
|
|
Net cash (used in) provided by financing activities
|
|
|
(63,783
|
)
|
|
|
1,885,029
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(394,834
|
)
|
|
|
346,197
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
468,819
|
|
|
|
620,593
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
73,985
|
|
|
$
|
966,790
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
56,847
|
|
|
$
|
206,467
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued for conversion of convertible debentures
|
|
$
|
64,257
|
|
|
$
|
1,042,254
|
|
Original issue discounts
|
|
$
|
35,000
|
|
|
$
|
20,000
|
|
Original debt discount against derivative liability
|
|
$
|
315,000
|
|
|
$
|
189,000
|
|
Common stock issued for conversion of Series A preferred stock
|
|
$
|
42,530
|
|
|
$
|
-
|
|
Addition to principal of convertible debenture due to defaults
|
|
$
|
132,758
|
|
|
$
|
-
|
|
Addition to principal of convertible debenture due to debt extension fee
|
|
$
|
47,731
|
|
|
$
|
-
|
|
Common stock issued upon conversion of WaveTech GmbH debt assumed by the Company
|
|
$
|
8,507,557
|
|
|
$
|
-
|
|
Issuance of common stock upon execution of convertible debenture agreements
|
|
$
|
103,000
|
|
|
$
|
-
|
|
Addition to derivative liability due to issuance of stock options
|
|
$
|
44,700
|
|
|
$
|
-
|
|
Net assets acquired in TNS acquisition
|
|
$
|
-
|
|
|
$
|
935,834
|
|
Convertible note issued in TNS acquisition
|
|
$
|
-
|
|
|
$
|
665,000
|
|
Third-party payment of third-party debt
|
|
$
|
-
|
|
|
$
|
150,000
|
|
(The
accompanying notes are an integral part of these unaudited consolidated financial statements)
SPECTRUM
GLOBAL SOLUTIONS, INC.
Notes
to the unaudited condensed consolidated financial statements
March
31, 2020
1.
|
Organization
and Going Concern
|
Spectrum
Global Solutions, Inc., (the “Company”) (f/k/a Mantra Venture Group Ltd.) was incorporated in the State of Nevada
on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases.
On December 8, 2008, the Company reincorporated in the province of British Columbia, Canada.
On
April 25, 2017, the Company entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”).
Pursuant to the terms of the Asset Purchase Agreement, the Company purchased 80.1% of the assets associated with InterCloud’s
AW Solutions, Inc., AW Solutions Puerto Rico, LLC, and Tropical Communications, Inc. (collectively “AWS” or the “AWS
Entities”) subsidiaries.
On
November 15, 2017, the Company changed its name to “Spectrum Global Solutions, Inc.” and reincorporated in the state
of Nevada.
On
February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery
to the Company of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by the
Company.
On
February 6, 2018, the Company entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”).
Pursuant to the terms of the Stock Purchase Agreement, the Company purchased all of the issued and outstanding capital stock and
membership interests of ADEX Corporation, ADEX Puerto Rico LLC, ADEX Towers, Inc. and ADEX Telecom, Inc. (collectively “ADEX”
or the “ADEX Entities”). The Company completed the acquisition on February 27, 2018.
On
May 18, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation,
Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives
Ltd. to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned
entities assumed all liabilities and obligations with respect to such entities.
On
January 4, 2019, the Company entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement,
InterCloud agreed to sell, and the Company agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”),
an Illinois corporation.
During
September 2019, the Company formed ADEX Canada, which is included in the ADEX Entities.
The
Company’s AWS Entities are professional, multi-service line, telecommunications infrastructure companies that provide outsourced
services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering
and installation services, staffing solutions and other services which include consulting to the telecommunications industry,
service providers and enterprise customers domestically and internationally. The Company’s TNS subsidiary is a Chicago-based
structured cabling and next-generation DAS design and installation firm that supports voice, data, video, security and multimedia
systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures.
These
consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize
its assets and discharge its liabilities in the normal course of business. The 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 March 31,
2020, the Company had an accumulated deficit of $34,144,137, and a working capital deficit of $4,534,404. 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.
2.
|
Significant
Accounting Policies
|
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 Form
10-K for the year ended December 31, 2019. 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.
Basis
of Presentation/Principles of Consolidation
These
consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted
in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, the AWS
Entities, the ADEX Entities, and TNS (from the date of acquisition, January 4, 2019). All of the subsidiaries are wholly-owned.
All
inter-company balances and transactions have been eliminated.
Reverse
Stock Split
On
April 14, 2020, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the
state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of the Company’s common
stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial
Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The
reverse stock split was previously approved by the board of directors and the majority of stockholders of the Company. The reverse
stock split was deemed effective at the open of business on April 21, 2020. As a result of the reverse stock split, every three
hundred (300) shares of outstanding common stock of the Company as of April 14, 2020 were converted into one (1) share of common
stock. Fractional shares resulting from the reverse stock split will be rounded up to the next whole number.
All
common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect
to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock
of the Company as a result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.00001
per share post-split.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability
of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation
allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent
there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash
and Cash Equivalents
The
Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records unbilled receivables for
services performed but not billed. Management reviews a customer’s credit history before extending credit. The Company maintains
an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes
are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period.
This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness,
current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate
made by management may also change. The allowance for doubtful accounts at March 31, 2020 and December 31, 2019 was $470,303 and
$504,785, respectively.
Property
and Equipment
Property
and equipment are stated at cost. The Company depreciates the cost of property and equipment over their estimated useful lives
at the following annual rates:
Automotive
|
3-5
years straight-line basis
|
Computer
equipment and software
|
3-7
years straight-line basis
|
Leasehold
improvements
|
5
years straight-line basis
|
Office
equipment and furniture
|
5
years straight-line basis
|
Research
equipment
|
5
years straight-line basis
|
Goodwill
Goodwill
was generated through the acquisition of AWS, ADEX and TNS as the total consideration paid exceeded the fair value of the net
assets acquired.
The
Company tests its goodwill for impairment at least annually on December 31st and whenever events or circumstances change that
indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment
has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows;
a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates.
Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s
consolidated financial results.
The
Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used
in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit
margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital
used to discount future cash flows to their present value. There were no impairment charges during the three months ended March
31, 2020 and 2019.
Intangible
Assets
At
March 31, 2020 and December 31, 2019, definite-lived intangible assets primarily consisted of tradenames and customer relationships
which are being amortized over their estimated useful lives ranging from 5-35 years.
The
Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized,
they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances
indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based
on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
For
long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted,
probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying
amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were
no impairment charges during the three months ended March 31, 2020 and 2019.
Long-lived
Assets
In
accordance with ASC 360, “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed
based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted
cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.
An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. There were no impairment
charges recorded during the three months ended March 31, 2020 and 2019.
Foreign
Currency Translation
Transactions
in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date.
Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. The resulting foreign exchange gains and losses are recognized in income.
The
Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the
temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical
rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the
same basis as the related asset. The resulting foreign exchange gains or losses are recognized in income.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income
Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and
for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted
tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance
to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The
Company conducts business, and files federal and state income, franchise or net worth, tax returns in Canada, the United States,
in various states within the United States and the Commonwealth of Puerto Rico. The Company determines it’s filing obligations
in a jurisdiction in accordance with existing statutory and case law. The Company may be subject to a reassessment of federal
and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment
in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010
to 2019. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S.
state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not
audited any of the Company’s, or its subsidiaries’, income tax returns for the open taxation years noted above.
Significant
management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded
against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently
has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which
should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
The
Company follows the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which
prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected
to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more
likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second
step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely
than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification
of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would
be recorded as a component of current income tax expense.
The
Company received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as
of March 31, 2020 and December 31, 2019 was $156,711 plus penalties and interest of $126,700 for a total obligation due of $283,411.
This tax assessment was included in accrued expenses at March 31, 2020 and December 31, 2019.
Revenue
Recognition
Adoption
of New Accounting Guidance on Revenue Recognition
The
Company recognizes revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract,
2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the
performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract
Types
The
Company’s contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts
relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts
are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached.
Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those
employees.
A
significant portion of the Company’s revenues come from customers with whom the Company has a master service agreement (“MSA”).
These MSA’s generally contain customer specific service requirements.
Performance
Obligations
A
performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account
in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized
as revenue when, or as, the performance obligation is satisfied. For the Company’s different revenue service types the performance
obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work
is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance
obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts
for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on
the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated
balance sheets.
Revenue
Service Types
The
following is a description of the Company’s revenue service types, which include professional services and construction:
|
●
|
Professional
services are services provided to the clients where the Company delivers distinct contractual deliverables and/or services.
Deliverables may include but are not be limited to: engineering drawings, designs, reports and specification. Services may
include, but are not be limited to: consulting or professional staffing to support our client’s objectives. Consulting
or professional staffing services may be provided remotely or on client premises and under their direction and supervision.
|
|
●
|
Construction
Services are services provided to the client where the Company may self-perform or subcontract services that require the physical
construction of infrastructure or installation of equipment and materials.
|
Disaggregation
of Revenues
The
Company disaggregates its revenue from contracts with customers by service type, contract type, contract duration, and timing
of transfer of goods or services. See the below tables:
Revenue by service type
|
|
Three months ended March 31,
2020
|
|
|
Three months ended March 31,
2019
|
|
Professional Services
|
|
$
|
5,367,311
|
|
|
$
|
5,935,226
|
|
Construction
|
|
|
1,763,169
|
|
|
|
5,400,506
|
|
Total
|
|
$
|
7,130,480
|
|
|
$
|
11,335,732
|
|
Revenue by contract duration
|
|
Three months ended March 31,
2020
|
|
|
Three months ended March 31,
2019
|
|
Short-term
|
|
$
|
28,305
|
|
|
$
|
65,430
|
|
Long-term
|
|
|
7,102,175
|
|
|
|
11,270,302
|
|
Total
|
|
$
|
7,130,480
|
|
|
$
|
11,335,732
|
|
Revenue by contract type
|
|
Three months ended March 31,
2020
|
|
|
Three months ended March 31,
2019
|
|
Unit-price
|
|
$
|
160,827
|
|
|
$
|
3,238,658
|
|
Fixed-price
|
|
|
1,602,342
|
|
|
|
2,161,848
|
|
Time-and-materials
|
|
|
5,367,311
|
|
|
|
5,935,226
|
|
Total
|
|
$
|
7,130,480
|
|
|
$
|
11,335,732
|
|
The
Company also disaggregates its revenue by operating segment and geographic location (refer to Note 16, Segment Disclosures, for
additional information).
Accounts
Receivable
Accounts
receivable include amounts from work completed in which the Company has billed. The amounts due are stated at their net estimated
realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables
that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience,
the age of outstanding receivables and collateral to the extent applicable.
Contract
Assets and Liabilities
Contract
assets include costs and services incurred on contracts with open performance obligations. These amounts are included in contract
assets on the consolidated balance sheets. At March 31, 2020 and December 31, 2019, contract assets totaled $237,862 and $461,681,
respectively.
Contract
liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets. At March 31, 2020
and December 31, 2019, contract liabilities totaled $705,396 and $704,544, respectively.
Cost
of Revenues
Cost
of revenues includes all direct costs of providing services under the Company’s contracts, including costs for direct labor
provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization),
direct materials, insurance claims and other direct costs.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Stock-based
Compensation
The
Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation”
(“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received
for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is more reliably measurable.
The
Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either
the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable,
using the measurement date guidelines enumerated in ASU 2018-07.
The
Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected
by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables
include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest
is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss
per Share
The Company computes loss per share in accordance with ASC 260,
“Earnings per Share” which requires presentation of both basic and diluted loss per share (“EPS”) on the
face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted
average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common
shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method.
In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased
from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
As of March 31, 2020 and December 31, 2019, respectively, the Company had 990,158 and 286,736 common stock equivalents outstanding.
Leases
The
Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient
that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such,
the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods
prior to adoption, the Company presented the disclosures which were required under ASC 840.
The
new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets
and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities
represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating
lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement
date. As the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate
based on the information available at commencement date in determining the present value of lease payments.
The
Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing
operating leases longer than twelve months as of January 1, 2019. The ROU assets were adjusted per ASC 842 transition guidance
for existing lease-related balances of accrued and prepaid rent, unamortized lease incentives provided by lessors, and restructuring
liabilities, Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded
in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other
operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease
payments are based occur.
Recent
Accounting Pronouncements
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and
does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact
on its financial position or result of operations.
Concentrations
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables.
The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
The
Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the three months
ended March 31, 2020, three customers accounted for 31%, 13% and 13%, respectively, of consolidated revenues for the period. In
addition, amounts due from these customers represented 42%, 3% and 10%, respectively, of trade accounts receivable as of March
31, 2020. For the three months ended March 31, 2019, four customers accounted for 30%, 18%, 10% and 10%, respectively, of consolidated
revenues for the period. In addition, amounts due from these customers represented 30%, 20%, 7% and 5%, respectively, of trade
accounts receivable as of March 31, 2019.
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 98% and 97% of consolidated revenues for the three months
ended March 31, 2020 and 2019, respectively. Revenues generated from customers in Puerto Rico accounted for approximately 2% and
3% of consolidated revenues for the three months ended March 31, 2020 and 2019, respectively.
Fair
Value Measurements
The
Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed
by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available
inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy
is defined as follows:
Level
1 – quoted prices for identical instruments in active markets;
Level
2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in
active markets; and
Level
3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
Financial
instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable
and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant
and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the three months
ended March 31, 2020 or the year ended December 31, 2019. 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.
The
Company’s financial assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2020 and
December 31, 2019 consisted of the following:
|
|
Total fair value at March 31,
2020
|
|
|
Quoted prices in active markets
(Level 1)
|
|
|
Quoted prices in active markets
(Level 2)
|
|
|
Quoted prices in active markets
(Level 3)
|
|
Derivative liability (1)
|
|
$
|
2,063,063
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,063,063
|
|
|
|
Total fair value at December 31,
2019
|
|
|
Quoted prices in active markets
(Level 1)
|
|
|
Quoted prices in active markets
(Level 2)
|
|
|
Quoted prices in active markets
(Level 3)
|
|
Derivative liability (1)
|
|
$
|
992,733
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
992,733
|
|
(1)
|
The
Company has estimated the fair value of these derivatives using the Monte-Carlo model and/or a Binomial Model.
|
Fair
value estimates are made at a specific point in time, based on relevant market information and information about the financial
statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Refer to Note 10, Derivative
Liabilities, for additional information.
Derivative
Liabilities
The
Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and
all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses
estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a
liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating
fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available.
When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities,
prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability
of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values
presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in
accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in
measuring financial instruments at fair value as discussed above. As of March 31, 2020 and December 31, 2019, the Company had
a derivative liability of $2,063,063 and $992,733, respectively.
Sequencing
Policy
Under
ASC 815-40-35, the Company has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity
to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient
authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated
on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation
of shares. Pursuant to ASC 815, issuance of securities to the Company’s employees or directors are not subject to the sequencing
policy.
Reclassifications
Certain
balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period
presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.
3.
|
Due From Related Party
|
As of March 31, 2020, the Company had a
due from related party balance of $5,207,585. This amount is the net of the amounts discussed below in the “Assumption of
WaveTech GmbH debt” and “Loan with WaveTech GmbH, 8% interest” sections of this note.
Assumption of WaveTech GmbH debt
In connection with the
share purchase agreement with WaveTech GmbH discussed in Note 15, Commitments and Contingencies, the Company assumed $7,531,309
of WaveTech GmbH debt. The amount included both principal and accrued interest. These note holders were issued new notes which
were convertible into shares of the Company’s common stock. On February 18, 2020, these notes were converted into 1,082,731
shares at a conversion price of $7.80 per share. The value of the conversion was determined using the principal and accrued interest
of the new notes at the time of conversion, which was $8,507,557. The Company did not record a gain or loss on the conversion as
WaveTech GmbH is considered a related party (refer to Note 6, Related Party Transactions, for additional detail). In the event
that the Company’s acquisition of WaveTech GmbH is terminated, this amount will be owed by WaveTech GmbH to the Company.
The amount owed would be offset by the amounts owed by the Company to WaveTech GmbH discussed in the “Loan with WaveTech
GmbH, 8% interest” section of this note. The share purchase agreement is not considered closed for accounting purposes because,
as of the date of this report, the Series C preferred stock shares have not been issued (refer to Note 15, Commitments and Contingencies,
for additional detail).
Loan with WaveTech GmbH, 8% interest
As of March 31, 2020,
the loan with WaveTech GmbH discussed in Note 6, Related Party Transactions, is being netted against the amounts discussed in the
“Assumption of WaveTech GmbH debt” section of this note. The balance as of December 31, 2019 was $3,000,000.
During the three months
ended March 31, 2020, the Company received an additional $299,972 from WaveTech GmbH.
As of March 31, 2020,
principal of $3,299,972 remains outstanding. The note is due on demand.
In the event that the Company’s acquisition of WaveTech
GmbH is terminated, the amount of this note would be used to offset amounts owed by WaveTech GmbH to the Company.
4.
|
Property and Equipment
|
Property
and equipment as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Computers and office equipment
|
|
$
|
349,271
|
|
|
$
|
349,271
|
|
Equipment
|
|
|
382,140
|
|
|
|
382,140
|
|
Research equipment
|
|
|
143,129
|
|
|
|
143,129
|
|
Software
|
|
|
227,563
|
|
|
|
227,563
|
|
Vehicles
|
|
|
94,356
|
|
|
|
94,356
|
|
Vehicles under capital lease
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
1,196,459
|
|
|
|
1,196,459
|
|
|
|
|
|
|
|
|
|
|
Less: impairment
|
|
|
(44,419
|
)
|
|
|
(44,419
|
)
|
Less: accumulated depreciation
|
|
|
(1,069,416
|
)
|
|
|
(1,058,973
|
)
|
|
|
|
|
|
|
|
|
|
Equipment, net
|
|
$
|
82,624
|
|
|
$
|
93,067
|
|
During
the three months ended March 31, 2020 and 2019, the Company recorded depreciation expense of $10,443 and $7,018, respectively.
Intangible
assets as of March 31, 2020 and December 31, 2019 consisted of the following:
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Impairment
|
|
|
Net carrying value at March 31,
2020
|
|
|
Net carrying value at December 31,
2019
|
|
Customer relationship and lists
|
|
$
|
2,930,829
|
|
|
$
|
504,181
|
|
|
$
|
-
|
|
|
$
|
2,426,648
|
|
|
$
|
2,490,024
|
|
Trade names
|
|
|
1,400,121
|
|
|
|
235,580
|
|
|
|
-
|
|
|
|
1,164,541
|
|
|
|
1,187,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
4,330,950
|
|
|
$
|
739,761
|
|
|
$
|
-
|
|
|
$
|
3,591,189
|
|
|
$
|
3,677,919
|
|
During
the three months ended March 31, 2020 and 2019, the Company recorded amortization expense of $86,730 and $86,934, respectively.
The
estimated future amortization expense for the next five years and thereafter is as follows:
Year ending December 31,
|
|
|
|
2020
|
|
$
|
260,191
|
|
2021
|
|
|
346,921
|
|
2022
|
|
|
346,921
|
|
2023
|
|
|
346,921
|
|
2024
|
|
|
346,921
|
|
Thereafter
|
|
|
1,943,314
|
|
Total
|
|
$
|
3,591,189
|
|
6.
|
Related Party Transactions
|
Unsecured
Amounts Due to InterCloud
As
of March 31, 2020 and December 31, 2019, the Company owed $50,577 to InterCloud, which is non-interest bearing, unsecured, and
due on demand and included in accounts payable and accrued liabilities.
InterCloud
Related Party Reclassification
During
May 2019, as a result of shares of common stock issued to InterCloud as a result of conversions of convertible debentures, the
Company determined that InterCloud is a related party. The effective date of the reclassification was January 1, 2018.
WaveTech
GmbH Related Party Reclassification
During November 2019, as a result of the Company acquiring 60%
of the outstanding shares of WaveTech GmbH (refer to Note 15, Commitments and Contingencies, for additional detail), the Company
determined that WaveTech GmbH is a related party. The effective date of the reclassification was January 1, 2019. The transaction
is not considered closed for accounting purposes because as of the date of this report the Series C preferred stock shares have
not been issued.
Loans
Payable to Related Parties
As
of March 31, 2020 and December 31, 2019, the Company had outstanding the following loans payable to related parties:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Promissory note issued to Roger Ponder, 10% interest, unsecured, due on demand
|
|
$
|
18,858
|
|
|
$
|
18,858
|
|
Promissory note issued to Keith Hayter, 10% interest, unsecured, due on demand
|
|
|
130,000
|
|
|
|
130,000
|
|
Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020
|
|
|
85,000
|
|
|
|
85,000
|
|
Promissory note issued to Keith Hayter, 8% interest, unsecured, due on demand
|
|
|
80,000
|
|
|
|
80,000
|
|
Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020
|
|
|
170,000
|
|
|
|
170,000
|
|
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
|
|
|
217,400
|
|
|
|
217,400
|
|
Loan with WaveTech GmbH, 8% interest, due on demand
|
|
|
-
|
*
|
|
|
3,000,000
|
|
Total
|
|
$
|
701,258
|
|
|
$
|
3,701,258
|
|
*
|
As of March 31, 2020, in connection with amounts owed to the Company from WaveTech GmbH, the loan with WaveTech GmbH is now being netted against amounts due from WaveTech GmbH (refer to Note 3, Due From Related Party, for additional detail).
|
Promissory
note issued to Roger Ponder, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019
On
November 30, 2017, the Company received $18,858 pursuant to a promissory note issued to the Chief Executive Officer of the Company.
The note issued is unsecured, was due on November 30, 2018 and bears interest at a rate of 10% per annum. On November 30, 2018,
the lender agreed to extend the maturity of the loan to November 30, 2019. The Company accounted for the modification in accordance
with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the
extension as a modification and no gain or loss was recognized.
The
note matured on November 30, 2019 and is now due on demand.
Promissory
note issued to Keith Hayter, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019
On
November 30, 2017, the Company received $130,000 pursuant to a promissory note issued to the President of the Company. The note
issued is unsecured, due on November 30, 2018 and bears interest at a rate of 10% per annum. On November 30, 2018, the lender
agreed to extend the maturity of the loan to November 30, 2019. The Company accounted for the modification in accordance with
ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension
as a modification and no gain or loss was recognized.
The
note matured on November 30, 2019 and is now due on demand.
Promissory
note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020
On
April 13, 2018, the Company received $85,000 pursuant to a promissory note issued to the President of the Company. The note issued
is unsecured, due on April 13, 2019 and bears interest at a rate of 8% per annum. At December 31, 2018, the amount of $85,000
was owed. On April 13, 2019, the note was amended to a maturity date of April 13, 2020 and an interest rate of 10%. The Company
accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with
ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.
The
note matured on April 13, 2020 and is now due on demand.
Promissory
note issued to Keith Hayter, 8% interest, unsecured, matured October 1, 2019
On
August 21, 2018, the Company received $80,000 pursuant to a promissory note issued to the President of the Company. The note issued
is unsecured, was due on August 20, 2019 and bears interest at a rate of 8% per annum. On August 20, 2019, the note was amended
to a maturity date of October 1, 2019 and an interest rate of 10%. The Company accounted for the modification in accordance with
ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension
as a modification and no gain or loss was recognized.
The
note matured on October 1, 2019 and is now due on demand.
Promissory
note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020
On
August 12, 2019, the Company received $170,000 pursuant to a promissory note issued to the President of the Company. The note
issued is unsecured, is due on August 11, 2020 and bears interest at a rate of 10% per annum.
Convertible
promissory note, InterCloud Systems, Inc, 8% interest, unsecured, matured April 27, 2018
On
April 27, 2017, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest
on the outstanding principal due under the unsecured note accrued at a rate of 8% per annum. All principal and accrued interest
under the unsecured note was due one year following the issue date of the unsecured note and was convertible into shares of common
stock at a conversion price equal to 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding
the date of conversion.
The
embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $1,174,000 resulted in a discount to the note payable of $943,299. On December
15, 2017, February 14, 2018, February 21, 2018, June 7, 2018, January 24, 2019, and March 15, 2019 the holder of the convertible
promissory note entered into agreement to sell and assign a total of $105,000, $105,000, $105,000, $39,375, $100,000 and $100,000
of the outstanding principal, respectively to a third party. The Company approved and was bound by the assignment and sale agreement.
As a result of the assignment, the conversion price for the total of $354,375 of notes assigned was equal to the lesser 70% of
the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $2,400.00.
The Company accounted for this assignment in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance
with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative
to its fair value on the assignment date.
On
May 6, 2019, the remaining principal balance of $1,445,625 was converted into shares of the Company’s common stock through
an automatic forced conversion.
Convertible
promissory note, InterCloud Systems, Inc, 1% interest, unsecured, matures August 16, 2019
On
February 16, 2018, the Company issued InterCloud a convertible note with a principal amount of $793,894 to settle a contingent
liability of $793,894 owed to InterCloud as a result of the acquisition of AWS. The note was originally due on August 16, 2019
and bore interest at 1% per annum. The note was convertible into common shares of the Company at a conversion price equal to the
80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion.
The
embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”
(refer to Note 10, Derivative Liabilities, for additional information on embedded conversion features). The initial fair value
of the conversion feature of $348,000 resulted in a discount to the note payable of $348,000.
On
August 16, 2019, the remaining principal balance of $793,894 was converted into shares of the Company’s common stock through
an automatic forced conversion.
Convertible
promissory note, InterCloud Systems, Inc, 6% interest, unsecured, matured March 27, 2019
On
February 27, 2018, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest
on the outstanding principal due under the ADEX note accrued at a rate of 6% per annum. All principal and accrued interest under
the ADEX note was due one year following the issue date of the ADEX note and was convertible into shares of common stock at a
conversion price equal to of the lowest volume-weighted average price during the 15 trading days immediately preceding the date
of conversion, but in no event ever lower than $300 (the “Floor”), unless the note was in default, at which time the
Floor would have terminated.
The
embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $2,455,000 resulted in a discount to the note payable of $639,000.
On
September 26, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $75,000
of the outstanding principal to a third party. The Company approved and was bound by the assignment and sale agreement. As a result
of the assignment, the assigned note bore interest at 5% and the conversion price for the $75,000 of notes assigned was equal
to the lesser 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion
and $2,400.00. On December 3, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a
total of $50,000 of the outstanding principal to a third party. The Company accounted for the assignments in accordance with ASC
470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment
as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date.
During
the year ended December 31, 2019, the Company repaid $55,124 of principal outstanding.
During
the year ended December 31, 2019, the principal amount was reduced by $295,000 as a result of a working capital adjustment.
On
May 6, 2019, the remaining principal balance of $1,452,299 was converted into shares of the Company’s common stock through
an automatic forced conversion.
Promissory
note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
In
connection with the acquisition of ADEX from InterCloud, $500,000 of the purchase price was retained by the Company to satisfy
any outstanding liabilities of ADEX incurred prior to the closing date.
During
the year ended December 31, 2019, the Company repaid $57,600 of this amount.
As
of March 31, 2020, principal of $217,400 remains outstanding.
Loan
with WaveTech GmbH., 8% interest
On
July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German corporation (refer to Note 15,
Commitments and Contingencies, for additional detail). In connection with the share purchase agreement, the Company was to receive
$3,000,000 in cash at or before consummation of the transactions described in the agreement. The Company received $1,325,895 which
was placed into escrow to satisfy the amounts outstanding to WaveTech Global, Inc (refer to Note 7, Loans Payable, for additional
detail). The Company received an additional $1,664,083 during July 2019 to satisfy the $3,000,000 of cash per the share purchase
agreement. The remaining $10,022 was recorded as a foreign exchange loss in the consolidated statement of operations for the year
ended December 31, 2019. The loan bears interest at a rate of 8% per annum.
On
November 14, 2019, the Company acquired 60% of the outstanding shares of WaveTech GmbH (refer to Note 15, Commitments and Contingencies,
for additional detail). As a result, the $1,325,895 in escrow was returned to the Company. As of December 31, 2019, principal
of $3,000,000 was outstanding.
As of March 31, 2020,
in connection with amounts owed to the Company from WaveTech GmbH, the loan with WaveTech GmbH is now being netted against amounts
due from WaveTech GmbH (refer to Note 3, Due From Related Party, for additional detail).
As
of March 31, 2020 and December 31, 2019, the Company had outstanding the following loans payable:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand
|
|
$
|
41,361
|
|
|
$
|
41,361
|
|
Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand
|
|
|
7,760
|
|
|
|
7,760
|
|
Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand
|
|
|
2,636
|
|
|
|
2,636
|
|
Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand
|
|
|
15,000
|
|
|
|
15,000
|
|
Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand
|
|
|
7,500
|
|
|
|
7,500
|
|
Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand
|
|
|
50,000
|
|
|
|
50,000
|
|
Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand
|
|
|
12,000
|
|
|
|
12,000
|
|
Promissory note issued to Pawn Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $11,260 and $31,365
|
|
|
60,459
|
|
|
|
94,928
|
|
Promissory note issued to RDM Capital Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $28,149 and $79,087
|
|
|
151,146
|
|
|
|
237,319
|
|
Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020, net of debt discount of $149,180
|
|
|
-
|
|
|
|
2,973,458
|
|
Promissory note issued to C6 Capital, non-interest bearing, matures April 15, 2020, net of debt discount of $20,272
|
|
|
-
|
|
|
|
136,424
|
|
Total
|
|
$
|
347,862
|
|
|
$
|
3,578,386
|
|
Promissory
note issued to J. Thacker, non-interest bearing, unsecured and due on demand
The
Company owed $41,361 ($53,300 Canadian dollars) to a non-related party as of March 31, 2020 and December 31, 2019. This promissory
note is non-interest bearing, unsecured, and due on demand.
Promissory
note issued to S. Kahn, non-interest bearing, unsecured and due on demand
The
Company owed $7,760 ($10,000 Canadian dollars) to a non-related party as of March 31, 2020 and December 31, 2019. This promissory
note is non-interest bearing, unsecured, and due on demand.
Promissory
note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand
The
Company owed $2,636 ($3,400 Canadian dollars) to a non-related party as of March 31, 2020 and December 31, 2019. This promissory
note is non-interest bearing, unsecured, and due on demand.
Promissory
note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand
The
Company owed $15,000 to a non-related party as of March 31, 2020 and December 31, 2019. This promissory note is non-interest bearing,
unsecured, and due on demand.
Promissory
note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand
The
Company owed $7,500 to a non-related party as of March 31, 2020 and December 31, 2019. This promissory note is non-interest bearing,
unsecured, and due on demand.
Subscription
amount due to T. Warkentin non-interest bearing, unsecured and due on demand
In
March 2012, the Company received $50,000 for the subscription of 167 shares of the Company’s common stock. During the year
ended May 31, 2013, the Company and the subscriber agreed that the shares would not be issued and that the subscription would
be returned. The subscription has been reclassified as a non-interest bearing demand loan until the funds are refunded to the
subscriber. The Company owed $50,000 as of March 31, 2020 and December 31, 2019.
Promissory
note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand
On
April 12, 2017, received $12,000 pursuant to a promissory note. The note issued is unsecured, due on demand and bears interest
at a rate of 10% per annum. The Company owed $12,000 as of March 31, 2020 and December 31, 2019.
Loan
with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020
On
October 10, 2018, the Company’s wholly-owned subsidiary, ADEX (the “Borrower”), entered into a Loan and Security
Agreement (the “Loan and Security Agreement”) with Heritage Bank of Commerce (the “Lender”). Under the
Loan and Security Agreement, the Borrower may borrow an aggregate outstanding amount not to exceed the lesser of up to (i) $5,000,000
or (ii) the Borrowing Base (as defined in the Loan and Security Agreement) through one or more advances through October 10, 2020
(the “Maturity Date”), subject to the Lender’s satisfactory annual review of the Borrower which is currently
ongoing. On the Maturity Date, all advances must be repaid. The Lender may, in its sole discretion and upon the Borrower’s
request, make advances to the Borrower after the Maturity Date subject to the terms and conditions under the Loan and Security
Agreement. Part of the proceeds of the initial credit extension of the Loan and Security Agreement were used to pay off borrowings
owed to Prestige Capital Corporation described in Note 8, Convertible Debentures.
Interest
is payable under the Loan and Security Agreement at a per annum rate equal to the Prime Rate (as defined in the Loan and Security
Agreement) plus 2%. The Borrower’s obligations under the Loan and Security Agreement are secured by all assets of the Company.
In addition, the Company issued a warrant (the “Warrant”) to the Lender to purchase an amount of shares of the Company’s
common stock equal to $150,000 divided by the Warrant Price (as defined in the Warrant) at a price per share equal to 125% of
the prior day’s closing price.
The
Loan and Security Agreement provides that upon the occurrence of an event of default, among other things, all outstanding amounts
under the Loan and Security Agreement or any portion thereof becomes immediately due and payable. Events of default under the
Loan and Security Agreement include, among other items, the Borrower’s failure to comply with certain affirmative and negative
covenants relating to the Company, its securities and its financial condition.
In
connection with the financing, on October 10, 2018, the Company also issued a warrant to purchase 380 shares of the Company’s
common stock at $375.00 per share for three years. The fair value of the warrants of $87,410 and $190,000 of debt issuance costs
resulted in a discount to the note payable of $277,410. At December 31, 2018, the Company owed $3,483,015 pursuant to this agreement
and will record accretion equal to the debt discount of $257,194 over the remaining term of the note.
During
the year ended December 31, 2019, the Company received an aggregate of $26,772,037 and repaid an aggregate of $27,132,642, for
a net repaid amount of $360,605. At December 31, 2019, the Company owed $3,122,638 pursuant to this agreement and was to record
accretion equal to the debt discount of $149,180 over the remaining term of the note.
During the three months ended March 31, 2020, the Company received
an aggregate of $6,167,328 and repaid an aggregate of $3,142,796.
On February 11, 2020, pursuant to an assignment and consent
agreement, Heritage sold, transferred and assigned to Bay View Funding all of Heritage’s right, title, and interest in the
loan and security agreement (refer to Note 9, Factor Financing, for additional detail). As a result of the assignment, the Company
recorded a loss on settlement of debt of $149,180 related to the remaining accretion of debt discount in the unaudited condensed
consolidated statement of operations for the three months ended March 31, 2020.
Loan
with Libertas Funding LLC
On
January 4, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing
Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Libertas Funding
LLC, a Connecticut limited liability company (“Libertas”). Under the Financing Agreement, the Financing Parties sold
to Libertas future receivables in an aggregate amount equal to $1,460,000 for a purchase price of $1,000,000.
Pursuant
to the terms of the Financing Agreement, the Company agreed to pay Libertas $31,602 each week based upon an anticipated 20% of
its future receivables until such time as $1,460,000 had been paid, a period Libertas and the Financing Parties estimated to be
approximately eleven months. In the event that the Financing Agreement was paid off earlier than eleven months, there was to be
a discount to the sum owed. The Financing Agreement also contained customary affirmative and negative covenants, representations
and warranties, and default and termination provisions. The Company used the proceeds of the Financing Agreement for the acquisition
of TNS.
On
February 1, 2019, the Company fully repaid the Financing Agreement. As a result, the amount owed at December 31, 2019 was $0.
Loan
with WaveTech Global, Inc., matured April 28, 2019
On
February 4, 2019, the Company entered into a share purchase agreement with WaveTech Global. This agreement included a promissory
note in the principal amount of $1,325,895, which matured on April 28, 2019. On July 9, 2019, the share purchase agreement was
terminated. As a result, the Company placed the amount due to WaveTech Global into escrow using cash received from the WaveTech
GmbH share purchase agreement (refer to Note 15, Commitments and Contingencies for additional detail). In connection with the
WaveTech GmbH transaction dated November 14, 2019, the escrow amount was returned to the Company.
Loan
with C6 Capital
On
August 16, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing
Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with C6 Capital.
Under the Financing Agreement, the Financing Parties sold to C6 Capital future receivables in an aggregate amount equal to $337,500
for a purchase price of $250,000. The Company received cash of $242,500 and recorded a debt discount of $95,000.
Pursuant
to the terms of the Financing Agreement, the Company agreed to pay C6 Capital $10,045 each week based upon an anticipated 20%
of its future receivables until such time as $337,500 had been paid, a period C6 Capital and the Financing Parties estimated to
be approximately eight months. In the event that the Financing Agreement was paid off earlier than eight months, there was to
be a discount to the sum owed. The Financing Agreement also contained customary affirmative and negative covenants, representations
and warranties, and default and termination provisions.
During
the year ended December 31, 2019, the Company paid $180,804 of the original balance under the agreement. During the three months
ended March 31, 2020, the Company paid $156,696 of the original balance under the agreement. As a result, the amount owed at March
31, 2020 was $0. The Company recorded a loss on settlement of debt of $1,490 to the unaudited condensed consolidated statement
of operations for the three months ended March 31, 2020.
Loan
with Pawn Funding
On
December 10, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing
Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Pawn Funding.
Under the Financing Agreement, the Financing Parties sold to Pawn Funding future receivables in an aggregate amount equal to $135,000
for a purchase price of $100,000. The Company received cash of $97,000 and recorded a debt discount of $38,000.
Pursuant
to the terms of the Financing Agreement, the Company agreed to pay Pawn Funding $4,219 each week based upon an anticipated 15%
of its future receivables until such time as $135,000 has been paid, a period Pawn Funding and the Financing Parties estimate
to be approximately eight months. In the event that the Financing Agreement is paid off earlier than eight months, there is to
be a discount to the sum owed. The Financing Agreement also contains customary affirmative and negative covenants, representations
and warranties, and default and termination provisions.
During
the year ended December 31, 2019, the Company paid $8,437 of the original balance under the agreement. During the three months
ended March 31, 2020, the Company paid $54,844 of the original balance under the agreement.
At
March 31, 2020, the Company owed $71,719 pursuant to this agreement and will record accretion equal to the debt discount of $11,260
over the remaining term of the note.
Loan
with RDM Capital Funding
On
December 10, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing
Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with RDM Capital
Funding. Under the Financing Agreement, the Financing Parties sold to RDM Capital Funding future receivables in an aggregate amount
equal to $337,500 for a purchase price of $250,000. The Company received cash of $242,500 and recorded a debt discount of $95,000.
Pursuant
to the terms of the Financing Agreement, the Company agreed to pay RDM Capital Funding $10,574 each week based upon an anticipated
3% of its future receivables until such time as $337,500 had been paid, a period RDM Capital Funding and the Financing Parties
estimated to be approximately eight months. In the event that the Financing Agreement was paid off earlier than eight months,
there was to be a discount to the sum owed. The Financing Agreement also contained customary affirmative and negative covenants,
representations and warranties, and default and termination provisions.
During
the year ended December 31, 2019, the Company paid $21,094 of the original balance under the agreement. During the three months
ended March 31, 2020, the Company paid $137,111 of the original balance under the agreement. At March 31, 2020, the Company owed
$179,295 pursuant to this agreement and was to record accretion equal to the debt discount of $28,149 over the remaining term
of the note.
During
the period of April 1, 2020 through May 8, 2020, the Company repaid the balance in full. The final payment included the discount
described above, which amounted to $62,652 (refer to Note 17, Subsequent Events, for additional detail).
8.
|
Convertible Debentures
|
As
of March 31, 2020 and December 31, 2019, the Company had outstanding the following convertible debentures:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Convertible promissory note, Barn 11, 18% interest, unsecured, matured June 1, 2019
|
|
$
|
594,362
|
|
|
$
|
594,362
|
|
Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020, net of debt discount of $50,443 and 105,752
|
|
|
1,512,458
|
|
|
|
1,461,265
|
|
Convertible promissory note, Michael Roeske, 24% interest, unsecured, due on demand, net of debt discount of $0 and $3,512
|
|
|
145,000
|
|
|
|
112,488
|
|
Convertible promissory note, Joel Raven, 24% interest, unsecured, due on demand, net of debt discount of $0 and $8,658
|
|
|
455,000
|
|
|
|
355,342
|
|
Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures August 2, 2020, net of debt discount of $13,891 and $24,819
|
|
|
86,109
|
|
|
|
98,181
|
|
Convertible promissory note, SCS, LLC, 24% interest, unsecured, matured March 30, 2020, due on demand, net of debt discount of $0 and $13,005
|
|
|
63,788
|
|
|
|
38,025
|
|
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020, net of debt discount of $75,861 and $113,674
|
|
|
72,139
|
|
|
|
34,326
|
|
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021, net of debt discount of $40,750 and $53,051
|
|
|
27,750
|
|
|
|
15,449
|
|
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021, net of debt discount of $35,417 and $45,125
|
|
|
22,583
|
|
|
|
12,875
|
|
Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures October 24 2020, net of debt discount of $16,778 and $23,986
|
|
|
106,222
|
|
|
|
99,014
|
|
Convertible promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matures November 21, 2020, net of debt discount of $46,898 and $58,648
|
|
|
28,102
|
|
|
|
16,352
|
|
Convertible promissory note, CCAG Investments, LLC, 8% interest, secured, matures June 30, 2020, net of debt discount of $110,654
|
|
|
64,346
|
|
|
|
-
|
|
Convertible promissory note, FJ Vulis and Associates, LLC, 8% interest, secured, matures June 30, 2020, net of debt discount of $110,654
|
|
|
64,346
|
|
|
|
-
|
|
Total
|
|
|
3,242,205
|
|
|
|
2,837,679
|
|
|
|
|
|
|
|
|
|
|
Less: Long-term portion of convertible debentures, net of debt discount
|
|
|
-
|
|
|
|
(28,324
|
)
|
|
|
|
|
|
|
|
|
|
Convertible debentures, current portion, net of debt discount
|
|
$
|
3,242,205
|
|
|
$
|
2,809,355
|
|
Convertible
promissory note, Barn 11, 18% interest, unsecured, matured June 1, 2019
On
February 21, 2018, the Company issued a convertible note with a principal amount of $500,000 and a warrant with a term of three
years to purchase up to 417 shares of common stock of the Company at an exercise price of $480.00 per share to Barn 11. The exercise
price of the warrant was to reduce to 85% of the closing price of the Company’s common stock if the closing price of the
Company’s common stock was less than $480.00 on July 31, 2018. The note was due on January 15, 2019, and in February 2019,
the maturity date was extended to June 1, 2019, and bears interest at 6% per annum. The note is convertible into common shares
of the Company at a conversion price equal to the lower of 80% of the lowest volume-weighted average price during the 5 trading
days immediately preceding the date of conversion and $300.00 (the “Floor”), unless the note is in default, at which
time the Floor terminates.
The
embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation
under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $571,079 and the warrant
of $158,772 resulted in a discount to the note payable of $500,000 and an initial derivative expense of $229,851.
On
June 1, 2019, the Company was in default on the note. As a result of the default, a 15% premium was added to the balance owed,
including all accrued interest. Subsequent to the default, the new principal balance of the note is $619,362, with interest now
accruing at 18% per annum. Additionally, $466,000 was added to the derivative liability balance in connection with the default.
During
the year ended December 31, 2019, the Company paid $25,000 of principal. The Company owed $594,362 as of March 31, 2020.
Convertible
promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020
On April 17, 2019, Dominion Capital exchanged two notes into
a new note (the “Exchange Note”) with a principal amount of $1,571,134. Interest accrues on the new note at 12% per
annum. All principal and accrued interest under the Exchange Note is due on October 17, 2020 and is convertible into shares of
the Company’s common stock. The conversion price in effect on the date such conversion is effected shall be equal to (i)
initially, $30.00 or (ii) on or after the date of the closing of the next public or private offering of equity or equity-linked
securities of the Company in which the Company receives gross proceeds in an amount greater than $100,000, one hundred and five
percent (105%) of the price of the common stock issuable in the offering. While during the first six months that the Exchange Note
is outstanding, only interest payments are due to the holder, beginning in October 2019, and on each monthly anniversary thereafter
until maturity, amortization payments are due for principal and interest due under the Exchange Note. The Exchange Note includes
customary events of default, including non-payment of the principal or accrued interest due on the Exchange Note. Upon an event
of default, all obligations under the Exchange Note will become immediately due and payable. The Holder was granted a right to
participate in future financing transactions of the Company while the Exchange Note remains outstanding.
As
a result of the beneficial conversion feature associated with the Dominion notes, $314,228 was added to additional paid-in capital
during the year ended December 31, 2019. In connection with the exchange, the Company recorded a loss on settlement of debt of
$904,469 on the consolidated statement of operations for the year ended December 31, 2019.
The
Company was to begin making principal payments in equal installments beginning on October 1, 2019. On October 22, 2019, the Company
reached an agreement with Dominion Capital to postpone the principal payments. In exchange for the extension, the Company will
pay to Dominion Capital an extension fee equal to 14% of the postponed payments. As a result of this agreement, the Company added
$47,731 of principal to note during the year ended December 31, 2019 and the three months ended March 31, 2020.
During
the year ended December 31, 2019 and the three months ended March 31, 2020, the Company paid $51,848 of principal. The Company
owed $1,562,901 as of March 31, 2020 and will record accretion equal to the debt discount of $50,443 over the remaining term of
the note.
Convertible
promissory note issued in connection with the acquisition of TNS, Inc.
On
January 4, 2019, as part of the acquisition described in Note 3, Acquisition of TNS, Inc., the Company issued to InterCloud a
convertible promissory note in the aggregate principal amount of $620,000 (the “Note”). The interest on the outstanding
principal due under the Note accrued at a rate of 6% per annum. All principal and accrued interest under the Note was due January
30, 2020, and was convertible, at any time at InterCloud’s election, into shares of common stock of the Company at a conversion
price equal to the greater of 75% of the lowest volume-weighted average price during the 10 trading days immediately preceding
the date of conversion and $30.00.
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $189,000 resulted in a discount to the note payable of $144,000.
On
January 28, 2019, the holder of the convertible promissory note entered into agreement to sell and assign a total of $620,000
of the $620,000 outstanding principal to two third parties, with $186,000 and $434,000 of principal assigned to each party (refer
to the “Convertible promissory note, Michael Roeske, 6% interest, unsecured, matures, January 30, 2020” and “Convertible
promissory note, Joel Raven, 6% interest, unsecured, matures January 30, 2020” sections of this note for further detail).
The Company approved and is bound by the assignment and sale agreement.
Convertible
promissory note, Michael Roeske, 6% interest, unsecured, matures, January 30, 2020
On
January 28, 2019, InterCloud assigned $186,000 of the note issued in connection with the acquisition of TNS to Michael Roeske.
The note accrues interest at a rate of 6% per annum and had a maturity date of January 30, 2020.
During
the year ended December 31, 2019, Mr. Roeske converted $70,000 of principal of the note into shares of the Company’s common
stock.
The
note matured on January 30, 2020 and is in default. As a result of the default, the note balance was increased by 25% of outstanding
principal, resulting in additional principal of $29,000. The interest also increased from 6% per annum to 24% per annum.
At
March 31, 2020, the Company owed $145,000 pursuant to this agreement.
Convertible
promissory note, Joel Raven, 6% interest, unsecured, matures January 30, 2020
On
January 28, 2019, InterCloud assigned $434,000 of the note issued in connection with the acquisition of TNS to Joel Raven. The
note accrues interest at a rate of 6% per annum and had a maturity date of January 30, 2020.
During
the year ended December 31, 2019, Mr. Raven converted $70,000 of principal of the note into shares of the Company’s common
stock
The
note matured on January 30, 2020 and is in default. As a result of the default, the note balance was increased by 25% of outstanding
principal, resulting in additional principal of $91,000. The interest also increased from 6% per annum to 24% per annum.
At
March 31, 2020, the Company owed $455,000 pursuant to this agreement.
Convertible
promissory note, GS Capital Partners, LLC, 8% interest, secured, matures August 2, 2020
On
August 2, 2019, the Company entered into and closed on a Securities Purchase Agreement with GS Capital Partners, LLC, pursuant
to which the Company issued to GS Capital Partners, LLC a senior secured convertible promissory note in the aggregate principal
amount of $123,000 for an aggregate purchase price of $112,000.
The
interest on the outstanding principal due under the secured note accrued at a rate of 8% per annum. All principal and accrued
but unpaid interest under the secured note was originally due on August 2, 2020. The secured note was convertible into shares
of the Company’s common stock at 71% of the average of the three lowest VWAPs in the 12 trading days prior to and including
the conversion date. The conversion price had a floor of $3.00 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $28,000 resulted in an additional discount
to the note payable of $28,000, for a total debt discount of $39,000.
During
the three months ended March 31, 2020, the holder of the note converted $23,000 of principal and $1,026 of accrued interest into
shares of the Company’s common stock (refer to Note 11, Common Stock, for additional information). As a result of these
conversions, the Company recorded a loss on settlement of debt of $40,232 to the unaudited condensed consolidated statement of
operations for the three months ended March 31, 2020.
At
March 31, 2020, the Company owed $100,000 pursuant to this agreement and was to record accretion equal to the debt discount of
$13,891 over the remaining term of the note.
On
April 30, 2020, the holder of the note converted the remaining $100,000 of principal and $5,742 of accrued interest into shares
of the Company’s common stock (refer to Note 17, Subsequent Events, for additional detail).
Convertible
promissory note, GS Capital Partners, LLC, 8% interest, unsecured, matures October 24, 2020
On
October 24, 2019, the Company entered into and closed on a Securities Purchase Agreement with GS Capital Partners, LLC, pursuant
to which the Company issued to GS Capital Partners, LLC a convertible promissory note in the aggregate principal amount of $123,000
for an aggregate purchase price of $112,000.
The
interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid
interest under the note is due on October 24, 2020. The note is convertible into shares of the Company’s common stock at
71% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date. The conversion
price has a floor of $3.00 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $20,000 resulted in an additional discount
to the note payable of $20,000, for a total debt discount of $31,000.
At
March 31, 2020, the Company owed $123,000 pursuant to this agreement and will record accretion equal to the debt discount of $16,778
over the remaining term of the note.
Convertible
promissory note, SCS, LLC, 8% interest, unsecured, matured March 30, 2020
On
September 1, 2019, the Company entered into and closed on a Securities Purchase Agreement with SCS, LLC, pursuant to which
the Company issued to SCS, LLC an unsecured convertible promissory note in the aggregate principal amount of $51,030 in exchange
for rent.
The
interest on the outstanding principal due under the unsecured note accrues at a rate of 8% per annum. All principal and accrued
but unpaid interest under the secured note and has a maturity date of March 30, 2020. The secured note is convertible into shares
of the Company’s common stock at 75% of the lowest average VWAP in the 15 trading days prior to the conversion date.
The conversion price has a floor of $1.50 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $29,000 resulted in a discount to the
note payable of $29,000.
The
note matured on March 30, 2020 and is in default. As a result of the default, the note balance was increased by 25% of outstanding
principal, resulting in additional principal of $12,758. The interest also increased from 8% per annum to 24% per annum.
At
March 31, 2020, the Company owed $63,788 pursuant to this agreement.
On
June 19, 2020, the holder of the note began converting principal and accrued interest into shares of the Company’s common
stock (refer to Note 17, Subsequent Events, for additional detail).
Convertible
promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020
On
September 17, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power
Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal
amount of $148,000 for an aggregate purchase price of $135,000. The Company received the cash on October 1, 2019.
The
interest on the outstanding principal due under the note accrued at a rate of 8% per annum. All principal and accrued but unpaid
interest under the note was originally due on September 17, 2020. The note was convertible into shares of the Company’s
common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date.
The conversion price had a floor of $1.50 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $159,000 resulted in an additional
discount to the note payable of $135,000, for a total debt discount of $148,000. The remaining $24,000 of the initial fair value
of the conversion feature was recorded as initial derivative expense on the consolidated statement of operations for the year
ended December 31, 2019.
At
March 31, 2020, the Company owed $148,000 pursuant to this agreement and was to record accretion equal to the debt discount of
$75,861 over the remaining term of the note.
On
April 1 2020, the holder of the note began converting principal into shares of the Company’s common stock. Between that
date and June 9, 2020, the holder of the note converted the full principal amount of the note along with the accrued interest
(refer to Note 17, Subsequent Events, for additional detail).
Convertible
promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021
On
October 22, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power
Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal
amount of $68,500 for an aggregate purchase price of $60,000.
The
interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid
interest under the note is due on January 22, 2021. The note is convertible into shares of the Company’s common stock at
70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date. The conversion
price has a floor of $1.50 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $56,000 resulted in an additional discount
to the note payable of $56,000, for a total debt discount of $64,500.
At
March 31, 2020, the Company owed $68,500 pursuant to this agreement and will record accretion equal to the debt discount of $40,751
over the remaining term of the note.
On
June 9, 2020, the holder of the note began converting principal into shares of the Company’s common stock (refer to Note
17, Subsequent Events, for additional detail).
Convertible
promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021
On
November 27, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power
Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal
amount of $58,000 for an aggregate purchase price of $50,000.
The
interest on the outstanding principal due under the note accrues at a rate of 8% per annum. All principal and accrued but unpaid
interest under the note is due on February 26, 2021. The note is convertible into shares of the Company’s common stock at
70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date. The conversion
price has a floor of $1.50 per share.
The
embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15
“Derivatives and Hedging”. The initial fair value of the conversion feature of $43,000 resulted in an additional discount
to the note payable of $43,000, for a total debt discount of $51,000.
At
March 31, 2020, the Company owed $58,000 pursuant to this agreement and will record accretion equal to the debt discount of $35,417
over the remaining term of the note.
Convertible
promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matures November 21, 2020
On
November 12, 2019, the Company entered into and closed on a Securities Purchase Agreement with Crown Bridge Partners, LLC, pursuant
to which the Company issued to Crown Bridge Partners, LLC a convertible promissory note in the aggregate principal amount of $225,000
for an aggregate purchase price of $202,500. The Company received the first tranche of $75,000 on November 21, 2019 for an aggregate
purchase price of $65,500. The Company also issued a warrant equal to the face amount of the note with a term of three years to
purchase 2,500 shares of common stock at an exercise price of $30.00 per share.
The
interest on the outstanding principal due under the first tranche of the note accrues at a rate of 10% per annum. All principal
and accrued but unpaid interest under the first tranche of the note is due on November 21, 2020. The first tranche of the note
is convertible into shares of the Company’s common stock at 60% of the average of the three lowest VWAPs in the 20 trading
days prior to and including the conversion date.
The
embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation
under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion option feature of $138,000 and
warrant feature of $20,138 resulted in an additional discount to the note payable of $65,500, for a total debt discount of $75,000.
The remaining $92,638 of the initial fair value of the conversion feature was recorded as initial derivative expense on the consolidated
statement of operations for the year ended December 31, 2019.
At
March 31, 2020, the Company owed $75,000 pursuant to this agreement and will record accretion equal to the debt discount of $46,898
over the remaining term of the note.
Convertible
promissory note, CCAG Investments, LLC, 20% interest, secured, matures June 30, 2020
On
February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with CCAG Investments, LLC, pursuant
to which the Company issued to CCAG Investments, LLC a secured convertible redeemable note in the aggregate principal amount of
$175,000 for an aggregate purchase price of $157,500, resulting in an original issue discount of $17,500. The Company also issued
a warrant equal to 50% of the face amount of the note with a term of three years to purchase 9,723 shares of common stock at an
initial exercise price of $9.00 per share.
The
interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid
under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common
stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In
connection with the issuance of the note, the Company also issued to CCAG Investments, LLC 9,755 shares of common stock (refer
to Note 11, Common Stock, for additional detail).
The
embedded conversion option and warrants issued qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives
and Hedging”. The initial fair value of the conversion feature and warrants issued was $42,000 and $64,000, resulting in
an additional discount to the note payable of $106,000. The shares issued with the note were valued at $51,500, for a total debt
discount of $175,000.
The
Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal
if paid greater than 90 days after issuance.
On
May 6, 2020, the Company repaid 120% of the principal balance (refer to Note 17, Subsequent Events, for additional detail).
Convertible
promissory note, FJ Vulis and Associates LLC, 20% interest, secured, matures June 30, 2020
On
February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with FJ Vulis and Associates, LLC, pursuant
to which the Company issued to FJ Vulis and Associates, LLC a secured convertible redeemable note in the aggregate principal amount
of $175,000 for an aggregate purchase price of $157,500, resulting in an original issue discount of $17,500. The Company also
issued a warrant equal to 50% of the face amount of the note with a term of three years to purchase 9,723 shares of common stock
at an initial exercise price of $9.00 per share.
The
interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid
under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common
stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In
connection with the issuance of the note, the Company also issued to FJ Vulis and Associates, LLC 9,755 shares of common stock
(refer to Note 11, Common Stock, for additional detail).
The
embedded conversion option and warrants issued qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives
and Hedging”. The initial fair value of the conversion feature and warrants issued was $42,000 and $64,000, resulting in
an additional discount to the note payable of $106,000. The shares issued with the note were valued at $51,500, for a total debt
discount of $175,000.
The
Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal
if paid greater than 90 days after issuance.
On
May 6, 2020, the Company repaid 120% of the principal balance (refer to Note 17, Subsequent Events, for additional detail).
On February 11, 2020, pursuant
to an assignment and consent agreement, Bay View Funding was sold, transferred and assigned all of Heritage’s right, title,
and interest in the loan and security agreement with the Company’s wholly-owned subsidiary, ADEX, discussed in Note 7, Loans
Payable. In connection with the agreement, the Company received $3,024,532 from Bay View Funding. This money was used to pay off
the amounts owed to Heritage at the time of the assignment and consent agreement. The initial term of the factoring agreement is
twelve months from the initial funding date.
Under
the factoring agreement, the Company’s ADEX subsidiary may borrow up to the lesser of $5,000,000 or an amount equal to the
sum of all undisputed purchased receivables multiplied by the advance percentage, less any funds in reserve. ADEX will pay to
Bay View Funding a factoring fee upon purchase of receivables by Bay View Funding equal to 0.75% of the gross face value of the
purchased receivable for the first 30 day period from the date said purchased receivable is first purchased by Bay View Funding,
and a factoring fee of 0.35% per 15 days thereafter until the date said purchased receivable is paid in full or otherwise repurchased
by ADEX or otherwise written off by Bay View Funding within the write off period. ADEX will also pay a finance fee to Bay View
Funding on the outstanding advances under the agreement at a floating rate per annum equal to the Prime Rate plus 3%. The finance
rate will increase or decrease monthly, on the first day of each month, by the amount of any increase or decrease in the Prime
Rate, but at no time will the finance fee be less than 7.75%.
During the three months ended March 31, 2020, the Company received
an aggregate of $4,685,390 and repaid an aggregate of $1,841,858. The Company owed $2,844,381 under the agreement as of March 31,
2020.
10.
|
Derivative Liabilities
|
The
embedded conversion options of the convertible debentures described in Note 8, Convertible Debentures, contain conversion features
that qualify for embedded derivative classification. The fair value of the liability is re-measured at the end of every reporting
period and the change in fair value is reported in the statement of operations as a gain or loss on change in fair value of derivatives.
Derivative liabilities also include the fair value of the Company’s share purchase warrants and stock options discussed
in Note 13, Share Purchase Warrants and Stock Options. As of March 31, 2020, the derivative liability balance of $2,063,062 was
comprised of $1,225,000 of derivatives related to the Company’s convertible debentures, and $838,062 of derivatives related
to the Company’s share purchase warrants and stock options. As of December 31, 2019, the derivative liability balance of
$992,733 was comprised of $801,000 of derivatives related to the Company’s convertible debentures, and $191,732 of derivatives
related to the Company’s share purchase warrants and stock options.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the three
months ended March 31, 2020 and the year ended December 31, 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Balance at the beginning of the period
|
|
$
|
992,733
|
|
|
$
|
3,166,886
|
|
Change in fair value of embedded conversion option
|
|
|
813,630
|
|
|
|
(1,843,935
|
)
|
Fair value of debt derivatives at issuance
|
|
|
84,000
|
|
|
|
-
|
|
Fair value of warrant derivatives at issuance
|
|
|
128,000
|
|
|
|
-
|
|
Fair value of option derivatives at issuance
|
|
|
44,700
|
|
|
|
-
|
|
Conversion of derivative liability
|
|
|
-
|
|
|
|
(1,281,888
|
)
|
Original discount limited to proceeds of notes
|
|
|
|
|
|
|
376,500
|
|
Repayment of convertible note
|
|
|
-
|
|
|
|
(164,468
|
)
|
Derivative issued as part of acquisition
|
|
|
-
|
|
|
|
189,000
|
|
Fair value of derivative liabilities in excess of notes proceeds received
|
|
|
-
|
|
|
|
116,638
|
|
Addition to derivative due to default penalty
|
|
|
-
|
|
|
|
466,000
|
|
Impact of note extinguishment
|
|
|
-
|
|
|
|
(32,000
|
)
|
Balance at the end of the period
|
|
$
|
2,063,063
|
|
|
$
|
992,733
|
|
The
Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values
were determined by using Monte-Carlo model or a Binomial Model based on various assumptions.
Significant
changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these
are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows
the assumptions used in the calculations:
|
|
|
Expected
volatility
|
|
Risk-free
interest rate
|
|
Expected
dividend yield
|
|
|
Expected life
(in years)
|
At December 31, 2019
|
|
|
230 - 304%
|
|
1.55 - 1.75%
|
|
|
0
|
%
|
|
0.25 - 1.16
|
At March 31, 2020
|
|
|
193 - 361%
|
|
0.04 - 1.75%
|
|
|
0
|
%
|
|
0.08 - 2.85
|
Authorized
Shares
On
November 15, 2017, the Company revised its authorized share capital to increase the number of authorized common shares from 275,000,000
common shares with a par value of $0.00001, to 750,000,000 common shares with a par value of $0.00001. The reverse stock split
discussed in Note 2, Significant Accounting Policies, did not change the number of authorized shares of the Company’s common
stock.
Treasury
Stock
The
Company holds 2,071 common shares in treasury at a cost of $277,436.
Issuance
of Shares Pursuant to Conversion of Series A Preferred Stock
On
January 7, 2020, the Company issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series
A preferred stock with a stated value of $1 per share.
On
February 11, 2020, the Company issued 2,778 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of
Series A preferred stock with a stated value of $1 per share.
Issuance
of Shares Pursuant to the Execution of New Convertible Debentures
On
February 7, 2020, the Company issued 9,755 shares of common stock to CCAG Investments, LLC upon the execution of a new convertible
note described in Note 8, Convertible Debentures.
On
February 7, 2020, the Company issued 9,755 shares of common stock to FJ Vulis and Associates, LLC upon the execution of a new
convertible note described in Note 8, Convertible Debentures.
Issuance
of Shares Pursuant to GS Capital Partners, LLC Convertible Debentures
On
February 12, 2020, the Company issued 1,647 shares of common stock to GS Capital Partners, LLC upon the conversion of $8,000 of
principal and $323 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
March 13, 2020, the Company issued 11,212 shares of common stock to GS Capital Partners, LLC upon the conversion of $15,000 of
principal and $703 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Issuance
of Shares Pursuant to WaveTech GmbH Post-Closing Notes
On
February 18, 2020, the Company issued 1,082,731 shares of common stock to holders of WaveTech GmbH post-closing notes upon the
conversion of $8,507,557 of principal and accrued interest pursuant to the post-closing notes described in Note 3, Due From Related
Party.
Series
A
On
November 15, 2017, the Company created one series of the 20,000,000 preferred shares it is authorized to issue, consisting of
8,000,000 shares, to be designated as Series A preferred stock.
On
October 29, 2018, the Company made the first amendment to the Certificate of Designation of its Series A convertible preferred
stock. This amendment updated the conversion price to be equal to the greater of 75% of the lowest VWAP during the ten trading
day period immediately preceding the date a conversion notice is delivered or $120.00, subject to adjustment for any subdivision
or combination of the Company’s outstanding shares of common stock.
On
August 16, 2019, the Company made the second amendment to the Certificate of Designation of its Series A convertible preferred
stock. As a result of this amendment, the Company recorded a deemed dividend of $488,072 for the year ended December 31, 2019
in accordance with ASC 260-10-599-2. Subsequent to the second amendment, the principal terms of the Series A preferred stock shares
were as follows:
Voting
rights – The Series A preferred stock shares do not have voting rights.
Dividend
rights – The holders of the Series A preferred stock shares shall not be entitled to receive any dividends. No
dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital
stock ranking junior, as to dividends, to the Series A preferred stock shares during any fiscal year of the Company until there
shall have been paid or declared and set apart during that fiscal year for the holders of the Series A preferred stock shares
a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the Series A preferred
stock times (ii) the amount per share of the dividend to be paid on the common stock.
Conversion
rights – The holders of the Series A preferred stock shares have the right to convert each Series A preferred stock
share and all accrued and unpaid dividends thereon shall be convertible at the option of the holder thereof, at any time after
the issuance of such share into fully paid and nonassessable shares of common stock of the Company. The number of shares of common
stock into which each share of the Series A preferred stock shares may be converted shall be determined by dividing the sum of
the stated value of the Series A preferred stock shares ($1.00 per share) being converted and any accrued and unpaid dividends
by the conversion price in effect at the time of the conversion. The Series A preferred stock shares may be converted at an initial
conversion price of the lower of 80% of the lowest VWAP during the five trading day period immediately preceding the date a conversion
notice is delivered or $15.00, subject to adjustment for any subdivision or combination of the Company’s outstanding shares
of common stock. The conversion price has a floor of $9.00 per share.
Liquidation
rights – Upon the occurrence of any liquidation, each holder of Series A preferred stock shares then outstanding
shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment
shall be made in respect of the common stock, or other series of preferred stock then in existence that is outstanding and junior
to the Series A preferred stock shares upon liquidation, an amount per share of Series A preferred stock shares equal to the amount
that would be receivable if the Series A preferred stock shares had been converted into common stock immediately prior to such
liquidation distribution, plus, accrued and unpaid dividends.
In
accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series A preferred
stock shares as temporary equity or “mezzanine.”
Holders
of Series A preferred stock shares began converting into shares of common stock during May 2018 (refer to Note 11, Common Stock,
for additional detail).
On
April 8, 2020, the Company made the third amendment to the Certificate of Designation of its Series A preferred stock, which lowered
the fixed conversion price and the conversion price floor to $3.00 per share (refer to Note 17, Subsequent Events, for additional
detail).
On June 18, 2020, the Company made the fourth amendment to the
Certificate of Designation of its Series A preferred stock, which lowered the fixed conversion price to $0.20 per share and the
conversion price floor to $0.01 per share (refer to Note 17, Subsequent Events, for additional detail).
Series
B
On
April 16, 2018, the Company designated 1,000 shares of Series B preferred stock of the Company with a stated value of $3,500 per
share. The Series B preferred stock is neither redeemable nor convertible into common stock. The principal terms of the Series
B preferred stock shares are as follows:
Issue
Price - The stated price for the Series B preferred stock shares shall be $3,500 per share.
Redemption
- The Series B preferred stock shares are not redeemable.
Dividends
- The holders of the Series B preferred stock shares shall not be entitled to receive any dividends.
Preference
of Liquidation - The Corporation’s Series A preferred stock (the “Senior Preferred Stock) shall have a liquidation
preference senior to the Series B preferred stock. Upon any fundamental transaction, liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, the holders of the shares of the Series B preferred stock shares shall be entitled,
after any distribution or payment is made upon any shares of capital stock of the Company having a liquidation preference senior
to the Series B preferred stock shares, including the Senior Preferred Stock, but before any distribution or payment is made upon
any shares of common stock or other capital stock of the Company having a liquidation preference junior to the Series B preferred
stock shares, to be paid in cash the sum of $3,500 per share. If upon such liquidation, dissolution or winding up, the assets
to be distributed among the Series B preferred stock holders and all other shares of capital stock of the Company having the same
liquidation preference as the Series B preferred stock shall be insufficient to permit payment to said holders of such amounts,
then all of the assets of the Company then remaining shall be distributed ratably among the Series B preferred stock holders and
such other capital stock of the Company having the same liquidation preference as the Series B preferred stock, if any. Upon any
liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after provision is made for Series B
preferred stock holders and all other shares of capital stock of the Company having the same liquidation preference as the Series
B preferred stock, if any, then-outstanding as provided above, the holders of common stock and other capital stock of the Company
having a liquidation preference junior to the Series B preferred stock shall be entitled to receive ratably all remaining assets
of the Company to be distributed.
Voting
- The holders of shares of Series B preferred stock shall be voted together with the shares of common stock such that
the aggregate voting power of the Series B preferred stock is equal to 51% of the total voting power of the Company.
Conversion
- There are no conversion rights.
In
accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series B preferred
stock shares as temporary equity or “mezzanine.”
Series
C
On
November 14, 2019, the Company designated 9,000,000 shares of Series C preferred stock of the Company with a stated value of $0.00001
per share. The principal terms of the Series C preferred stock shares are as follows:
Issue
Price - The stated price for the Series C preferred stock shall be $0.00001 per share.
Redemption
- The Series C preferred stock shares are not redeemable.
Dividends
- The holders of the Series C preferred stock shares shall not be entitled to receive any dividends.
Preference
of Liquidation - Upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary (a
“liquidation”), the Series C preferred stock shall (i) first be entitled to receive out of the assets, whether capital
or surplus, of the Company an amount equal to $0.00001 for each share of Series C preferred stock before any distribution or payment
shall be made to the holders of any junior securities and (ii) then be entitled to receive out of the assets, whether capital
or surplus, of the Company the same amount that a holder of common stock would receive if the Series C preferred stock were fully
converted (disregarding for such purposes any conversion limitations hereunder) to common stock which amounts shall be paid pari
passu with all holders of common stock.
Voting
- Except as otherwise provided herein or as required by law, the Series C preferred stock shall be voted together with
the shares of common stock, par value $0.00001 per share of the Company and any other series of preferred stock then outstanding,
and not as a separate class, at any annual or special meeting of stockholders of the Company, with respect to any question or
matter upon which the holders of common stock have the right to vote, such that the voting power of each share of Series C preferred
stock is equal to the voting power of the shares of common stock that each such share of Series C preferred stock is convertible
into pursuant hereto. The Series C preferred stock shall be entitled to notice of any stockholders’ meeting in accordance
with the bylaws of the Company, and may act by written consent in the same manner as the holders of common stock of the Company.
Conversion
- on the second business day following the earlier of (i) the reverse split of the Company’s common stock, (ii)
the listing of the Company on a national securities exchange and (iii) the six-month anniversary of the closing date (as defined
below) (the “Series C Conversion Date”), without any further action, all outstanding shares of Series C shall automatically
convert into an aggregate number of shares of the Company’s common stock equal to the greater of (i) $90,000,000 (the “Aggregate
Value”)/Strike Price (as defined below), or (ii) the Aggregate Value/$9.75 (as adjusted for any reverse stock split or similar
adjustment that may occur prior to the Series C Conversion Date). Provided, however, if a Triggering Event (as defined below)
occurs, the Aggregate Value shall be reduced by the amount of any Losses (as defined below).
For
purposes hereof, a “Triggering Event” shall include any liability arising from a breach of the representations or
warranties of WaveTech GmbH (as defined below) contained in the share purchase agreement dated July 15, 2019 and all amendments
thereto (as amended, the “SPA”), by and between the Company and WaveTech GmbH, a corporation organized under the laws
of the Republic of Germany. “Closing Date” shall have the meaning ascribed to the term in the SPA. “Strike Price”
shall mean the closing price per share of the Company’s common stock on the trading day immediately preceding the Series
C Conversion Date.
On
April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement with WaveTech GmbH. As a result of
the amendment, certain terms of the Company’s Series C preferred stock were changed (refer to Note 17, Subsequent Events,
for additional detail).
As
of the date of this report, the Series C shares have not been issued. The Company expects to issue these shares during the third quarter
of 2020 (refer to Note 15, Commitments and Contingencies, for additional detail).
13.
|
Share Purchase
Warrants and Stock Options
|
From time to time, the Company issues share purchase warrants
and stock options, which are classified as liabilities. The total fair value of the Company’s share purchase warrants and
stock options was $838,062 and $191,732 as of March 31, 2020 and December 31, 2019, respectively. This amount is included in derivative
liabilities on the consolidated balance sheets. The valuation methodology, including the assumptions used in the valuation, are
discussed in Note 10, Derivative Liabilities. The weighted-average remaining life on the share purchase warrants as of March 31,
2020 and December 31, 2019 was 1.6 years and 1.3 years, respectively. The stock options outstanding at March 31, 2020 and December
31, 2019 were not subject to any vesting terms.
The
following table summarizes the activity of share purchase warrants for the three months ended March 31, 2020:
|
|
Number of warrants
|
|
|
Weighted average exercise price
|
|
Balance at December 31, 2019
|
|
|
14,075
|
|
|
$
|
331.46
|
|
Issued
|
|
|
64,134
|
|
|
|
253.57
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2020
|
|
|
78,209
|
|
|
$
|
267.59
|
|
As
of March 31, 2020, the following share purchase warrants were outstanding:
Number of warrants
|
|
|
Exercise price
|
|
|
Issuance Date
|
|
Expiry date
|
459
|
|
|
|
1,530.00
|
|
|
28-04-2017
|
|
28-04-2020
|
834
|
|
|
|
300.00
|
|
|
27-06-2017
|
|
27-06-2020
|
52,506
|
*
|
|
|
360.00
|
|
|
14-02-2018
|
|
13-02-2021
|
417
|
|
|
|
480.00
|
|
|
21-02-2018
|
|
21-02-2021
|
1,667
|
|
|
|
300.00
|
|
|
17-05-2018
|
|
17-05-2020
|
380
|
|
|
|
324.00
|
|
|
10-10-2018
|
|
10-10-2021
|
2,500
|
|
|
|
30.00
|
|
|
21-11-2019
|
|
21-11-2022
|
9,723
|
|
|
|
9.00
|
|
|
07-02-2020
|
|
07-02-2023
|
9,723
|
|
|
|
9.00
|
|
|
07-02-2020
|
|
07-02-2023
|
78,209
|
|
|
|
|
|
|
|
|
|
|
*
|
This warrant is
convertible into 4% of the number of common shares of the Company outstanding. At March 31, 2020, it is 4% of the 1,312,634
shares outstanding as of that date.
|
The
following table summarizes the activity of stock options for the three months ended March 31, 2020:
|
|
Number of stock options
|
|
|
Weighted average exercise price
|
|
Balance at December 31, 2019
|
|
|
5,000
|
|
|
$
|
9.00
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Balance at March 31, 2020
|
|
|
5,000
|
|
|
$
|
9.00
|
|
As
of March 31, 2020, the following stock options were outstanding:
Number of stock options
|
|
|
Exercise price
|
|
|
Issuance Date
|
|
Expiry date
|
|
5,000
|
|
|
|
9.00
|
|
|
11/25/2019
|
|
11/25/2021
|
In
February 2016, the FASB issued ASU No. 2016-02, Leases, which introduced a lessee model that requires the majority of leases
to be recognized on the balance sheet. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition
approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period
presented. The Company elected the package of practical expedients permitted under the transition guidance within the new standard,
which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted
in the recording of additional net lease assets and lease liabilities of $269,341 as of January 1, 2019. During the year ended
December 31, 2019, non-cash right of use assets recorded in exchange for non-cash operating lease liabilities was $316,600. The
Company leases certain office space and equipment. Leases with an initial term of 12 months or less are not recorded on the balance
sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.
The
depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term. The Company’s
leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount
rate when measuring operating lease liabilities. The Company used the incremental borrowing rates as of January 1, 2019 for operating
leases that commenced prior to that date.
The
following table sets forth the operating lease right of use (“ROU”) assets and liabilities as of March 31, 2020:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease assets
|
|
$
|
136,211
|
|
|
$
|
168,384
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
|
141,688
|
|
|
|
173,351
|
|
Total operating lease liabilities
|
|
$
|
141,688
|
|
|
$
|
173,351
|
|
Expense
related to leases is recorded on a straight-line basis over the lease term, including rent holidays. During the three months ended
March 31, 2020 and 2019, the Company recognized operating lease expense of $52,308 and $48,175, respectively. Operating lease
costs are included within selling, administrative and other expenses on the consolidated statements of operations. During the
three months ended March 31, 2020, short-term lease costs were $50,073 and $78,035, respectively.
Cash
paid for amounts included in the measurement of operating lease liabilities was $51,799 and $47,309 for the three months
ended March 31, 2020 and 2019, respectively, and this amount is included in operating activities in the consolidated statements
of cash flows. During the three months ended March 31, 2020 and 2019, respectively, the Company reduced its operating lease liabilities
by $31,662 and $36,150 for cash paid.
The operating lease liabilities as of March 31, 2020 reflect
a weighted average discount rate of 58%. The weighted average remaining term of the leases is 2.75 years. Remaining lease payments
as of March 31, 2020 are as follows:
Year ending December 31,
|
|
|
|
2020
|
|
$
|
70,203
|
|
2021
|
|
|
95,914
|
|
2022
|
|
|
86,681
|
|
2023
|
|
|
21,330
|
|
Total lease payments
|
|
|
274,128
|
|
Less: imputed interest
|
|
|
(132,440
|
)
|
Total
|
|
$
|
141,688
|
|
|
|
|
|
|
15.
|
Commitments and
Contingencies
|
Leases
The
Company leases certain of its properties under leases that expire on various dates through 2023. Some of these agreements include
escalation clauses and provide for renewal options ranging from one to five years. Leases with an initial term of 12 months or
less and immaterial leases are not recorded on the balance sheet (refer to Note 14, Leases, for amounts expensed during the three
months ended March 31, 2020 and 2019).
WaveTech
GmbH Share Purchase Agreement
On
July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German corporation.
The
merger of WaveTech GmbH into the Company shall be effected through a sale and exchange of shares and cash. Pursuant to the share
purchase agreement, in exchange for shares of common stock of the Company, the Company will acquire all right, title and interest
in all of the issued and outstanding shares of stock of WaveTech GmbH in exchange for the issuance of the Company’s Series
C preferred stock as well as the assumption by the Company of $8,507,557 of WaveTech GmbH debt (refer to Note 3, Due From Related
Party, for additional detail). The Company was to receive $3,000,000 in cash at or before consummation of the transactions contemplated
by the share purchase agreement (the “Transactions”). Upon consummation of the Transactions, the current WaveTech
GmbH shareholders will beneficially own a majority of the outstanding shares of the Company.
The
consummation of the Transactions is also subject to the satisfaction or waiver (if permitted by law) of certain closing conditions,
including, among other things, (i) the accuracy of the representations and warranties of the parties in all material respects
and (ii) the performance of and compliance with the covenants of the parties in all material respects.
The
parties are required to use commercially reasonable efforts to cause to be taken and to do or cause to be done all actions and
things as are necessary under the terms of the share purchase agreement or under applicable law, in order to consummate the Transactions.
The parties are also required to, among other things, cooperate in all respects with each other in connection with any filing
or submission to any governmental authority in connection with the Transactions.
The
share purchase agreement also contains certain termination rights for both the Company and WaveTech GmbH, including that the Company
or WaveTech GmbH may terminate the share purchase agreement if WaveTech GmbH has not obtained executed assignment agreements from
its shareholders holding an aggregate of (i) fifty one percent (51%) of the issued and outstanding shares of WaveTech GmbH by
the date that is ninety (90) days following the date of the share purchase agreement and (ii) ninety percent (90%) of the issued
and outstanding shares of WaveTech GmbH by March 31, 2020. As of the date of this report, the executed assignment agreements had
not been obtained and neither party had chosen to terminate the deal.
On
November 14, 2019, the Company entered into Amendment Number 1 of the share purchase agreement and acquired approximately 60%
of the outstanding shares of WaveTech GmbH. In connection with the Company acquiring these shares, the Company’s board appointed
Dag Valand to be a director of the Company and appointed Silas Poel to be the Company’s Chief Operating Officer and director.
Mr. Valand is the CEO and co-founder of WaveTech GmbH and Mr. Poel is the Chief Operating Officer of WaveTech GmbH. Additionally,
on February 19, 2020, the Company’s board appointed Brynjar Meling to be a director of the Company. Mr. Meling previously
served as a director of WaveTech GmbH.
The Company determined that the acquisition had not been completed
for accounting purposes as of the three months ended March 31, 2020 because the Series C preferred stock shares have not yet been
issued.
As of December 31, 2019, the Company had received $2,989,978
in cash from WaveTech GmbH. Additionally, the Company recorded a foreign exchange loss of $10,022 in the consolidated statement
of operations for the year ended December 31, 2019. During the three months ended March 31, 2020, the Company received an additional
$299,972 in cash from WaveTech GmbH. This $3,299,972 is included in due from related party as of March 31, 2020 (refer to Note
3, Due From Related Party, for additional detail). Additionally, as of the date of this report, the Series C preferred stock shares
have not been issued.
On
April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement (refer to Note 17, Subsequent Events,
for additional detail).
Between the period of April 1, 2020 through June 25, 2020, the
Company obtained additional executed assignment agreements from shareholders holding an aggregate of 30% of the issued and outstanding
shares of WaveTech GmbH (refer to Note 17, Subsequent Events, for additional detail). As a result, as of the date of this report,
the Company has obtained executed assignment agreements from shareholders holding an aggregate of 90% of the issued and outstanding
shares of WaveTech GmbH.
Oasis
Capital, LLC Equity Purchase Agreement and Registration Rights Agreement
On
August 29, 2019, the Company entered into an equity purchase agreement and registration rights agreement with Oasis Capital, LLC,
a Puerto Rico limited liability Company. Under the terms of the equity purchase agreement, Oasis Capital agreed to purchase from
the Company up to $2,500,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1 (the
“Registration Statement”) filed with the SEC and subject to certain limitations and conditions set forth in the equity
purchase agreement.
Following
effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the equity purchase
agreement, the Company shall have the discretion to deliver put notices to Oasis Capital and Oasis Capital will be obligated to
purchase shares of the Company’s common stock, par value $0.00001 per share based on the investment amount specified in
each put notice. The maximum amount that the Company shall be entitled to put to Oasis Capital in each put notice shall not exceed
the lesser of $250,000 or two hundred percent (200%) of the average daily trading volume of the Company’s common stock during
the ten (10) trading days preceding the put. Pursuant to the equity purchase agreement, Oasis Capital and its affiliates will
not be permitted to purchase and the Company may not put shares of the Company’s common stock to Oasis Capital that would
result in Oasis Capital’s beneficial ownership of the Company’s outstanding common stock exceeding 9.99%. The price
of each put share shall be equal to eighty five percent (85%) of the market price (as defined in the equity purchase agreement).
Puts may be delivered by the Company to Oasis Capital until the earlier of (i) the date on which Oasis Capital has purchased an
aggregate of $2,500,000 worth of common stock under the terms of the equity purchase agreement, (ii) August 29, 2022, or (iii)
written notice of termination delivered by the Company to Oasis Capital, subject to certain equity conditions set forth in the
equity purchase agreement.
As
of the date of this report, the Company has not received the funds described in the equity purchase agreement and has not filed
the Registration Statement with the SEC.
During
the three months ended March 31, 2020 and 2019, the Company had two operating segments including:
|
●
|
AWS/ADEX/TNS, which
is comprised of the AWS Entities, the ADEX Entities, and TNS.
|
|
●
|
Spectrum Global
Solutions (SGS), which consists of the rest of the Company’s operations.
|
Factors
used to identify the Company’s reportable segments include the organizational structure of the Company and the financial
information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources
and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative
criteria. The Company operates the SGS reporting segment in one geographical area (the United States) and the AWS/ADEX/TNS operating
segment in two geographical areas (the United States and Puerto Rico).
Financial
statement information by operating segment for the three months ended March 31, 2020 is presented below:
|
|
Three Months Ended March 31, 2020
|
|
|
|
Spectrum Global
|
|
|
AWS/ADEX/
TNS
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
7,130,480
|
|
|
$
|
7,130,480
|
|
Operating loss
|
|
|
(745,562
|
)
|
|
|
(915,990
|
)
|
|
|
(1,661,552
|
)
|
Interest expense
|
|
|
341,226
|
|
|
|
74,921
|
|
|
|
416,147
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
97,173
|
|
|
|
97,173
|
|
Total assets as of March 31, 2020
|
|
|
5,194,959
|
|
|
|
11,113,716
|
|
|
|
16,308,675
|
|
Geographic
information as of and for the three months ended March 31, 2020 is presented below:
|
|
Revenues For The Three Months Ended March 31,
2020
|
|
|
Long-lived Assets as of March 31,
2020
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
$
|
170,512
|
|
|
$
|
9,268
|
|
United States
|
|
|
6,959,968
|
|
|
|
5,802,767
|
|
Consolidated total
|
|
|
7,130,480
|
|
|
|
5,812,035
|
|
Financial
statement information by operating segment for the three months ended March 31, 2019 and as of December 31, 2019 is presented
below:
|
|
Three Months Ended March 31, 2019
|
|
|
|
Spectrum Global
|
|
|
AWS/ADEX
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
11,335,732
|
|
|
$
|
11,335,732
|
|
Operating (loss) income
|
|
|
(954,965
|
)
|
|
|
969,666
|
|
|
|
14,701
|
|
Interest expense
|
|
|
399,555
|
|
|
|
71,857
|
|
|
|
471,412
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
93,952
|
|
|
|
93,952
|
|
Total assets as of December 31, 2019
|
|
|
11,783
|
|
|
|
12,157,035
|
|
|
|
12,168,818
|
|
Geographic
information for the three months ended March 31, 2019 and as of December 31, 2019 is presented below:
|
|
Revenues For The Three Months Ended March 31,
2019
|
|
|
Long-lived Assets as of December 31,
2019
|
|
|
|
|
|
|
|
|
Puerto Rico
|
|
$
|
310,478
|
|
|
$
|
9,698
|
|
United States
|
|
|
11,025,254
|
|
|
|
5,861,240
|
|
Consolidated total
|
|
|
11,335,732
|
|
|
|
5,870,938
|
|
COVID-19
Beginning
in early 2020, there has been an outbreak of coronavirus (“COVID-19”), initially in China and which has spread globally.
The full extent of the outbreak, related business and travel restrictions and changes to behavior intended to reduce its spread
are evolving. Therefore, the full extent to which COVID-19 may impact Company’s results of operations, liquidity or financial
position is uncertain. Management continues to monitor the impact that the COVID-19 pandemic is having on the Company and the
economies in which the Company operates.
On
April 21, April 27, 2020, and May 12, 2020, our AWS, ADEX, and AWS PR subsidiaries received $672,400, $2,682,125, and $78,000,
respectively (the “PPP Funds”). AWS entered into a loan agreement with Iberia Bank, ADEX entered into a loan agreement
with Heritage Bank of Commerce, and AWS PR entered into a loan agreement with Banco Popular de Puerto Rico. These loan agreements
were pursuant to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the
economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average
monthly payroll costs. The amount borrowed under the CARES Act is eligible to be forgiven provided that (a) the Company uses the
PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including
benefits), rent, mortgage interest, and utility costs. The amount of loan forgiveness will be reduced if, among other reasons,
the Company does not maintain staffing or payroll levels. Principal and interest payments on any unforgiven portion of the PPP
Funds (the “PPP Loan”) will be deferred for six months and will accrue interest at a fixed annual rate of 1.0% and
carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan.
Issuance
of Shares Pursuant to Power Up Lending Group LTD. Convertible Debentures
On
April 1, 2020, the Company issued 5,715 shares of common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of
principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
April 13, 2020, the Company issued 9,196 shares of common stock to Power Up Lending Group LTD. upon the conversion of $16,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
April 16, 2020, the Company issued 8,621 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
April 16, 2020, the Company issued 8,621 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
April 20, 2020, the Company issued 12,122 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
April 30, 2020, the Company issued 58,434 shares of common stock to Power Up Lending Group LTD. upon the conversion of $15,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
May 12, 2020, the Company issued 38,956 shares of common stock to Power Up Lending Group LTD. upon the conversion of $10,000 of
principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
May 13, 2020, the Company issued 77,912 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of
principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
May 20, 2020, the Company issued 113,379 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
June 9, 2020, the Company issued 62,359 shares of common stock to Power Up Lending Group LTD. upon the conversion of $5,000 of
principal and $5,520 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
June 9, 2020, the Company issued 71,132 shares of common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of
principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
June 12, 2020, the Company issued 118,554 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On
June 16, 2020, the Company issued 118,554 shares of common stock to Power Up Lending Group LTD. upon the conversion of $20,000
of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.
On June 26, 2020, the Company issued 118,777 shares of common
stock to Power Up Lending Group LTD. upon the conversion of $16,500 of principal and $2,540 of accrued interest pursuant to the
convertible debenture described in Note 8, Convertible Debentures.
Dominion
Capital Modification
On
April 2, 2020, in connection with the convertible debenture outstanding to Dominion Capital, the Company paid a $20,000 modification
fee in order to avoid an event of default under the note and receive payment forbearance for a period of 30 days.
Issuance
of Shares Pursuant to Conversion of Series A Preferred Stock
On
April 9, 2020, the Company issued 8,334 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of Series
A preferred stock with a stated value of $1 per share.
On
April 29, 2020, the Company issued 8,334 shares of common stock to Dominion Capital upon the conversion of 25,000 shares of Series
A preferred stock with a stated value of $1 per share.
On June 22, 2020, the
Company issued 85,000 shares of common stock to M2B Funding upon the conversion of 17,000 shares of Series A preferred stock with
a stated value of $1 per share.
On June 25, 2020, the
Company issued 75,000 shares of common stock to Dominion Capital upon the conversion of 15,000 shares of Series A preferred stock
with a stated value of $1 per share.
Amendments to the Certificate of Designation of the Company’s Series A Preferred Stock
On
April 8, 2020, the Company made the third amendment to the Certificate of Designation of its Series A preferred stock which lowered
the fixed conversion price and the conversion price floor to $3.00 per share.
On June 18, 2020, the Company made the fourth amendment to the
Certificate of Designation of its Series A preferred stock, which lowered the fixed conversion price to $0.20 per share and the
conversion price floor to $0.01 per share.
Reverse
Stock Split
On
April 14, 2020, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the
state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of the Company’s common
stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial
Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The
reverse stock split was previously approved by the board of directors and the majority of stockholders of the Company. The reverse
stock split was deemed effective at the open of business on April 21, 2020. As a result of the reverse stock split, every three
hundred (300) shares of outstanding common stock of the Company as of April 14, 2020 were converted into one (1) share of common
stock. Fractional shares resulting from the reverse stock split will be rounded up to the next whole number.
All
common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect
to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock
of the Company as a result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.00001
per share post-split.
Amendment
Number 2 of the Share Purchase Agreement with WaveTech GmbH
On
April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement with WaveTech GmbH. Amendment Number
2 replaced the conversion terms of the Series C preferred stock included with Amendment Number 1 with the following:
Conversion.
On the second business day following the earlier of (i) the later of (A) April 30, 2020, or such later date as may be determined
by the Board, and (B) a reverse split of the common stock. (ii) the listing of the Company on a national securities exchange and
(iii) the six-month anniversary of the issuance of shares of Series C to such holder (such earliest date. the “Series C
Conversion Date”), without any further action, all outstanding shares of Series C shall automatically convert into an aggregate
number of shares of common stock equal to $90,000,000 (the “Aggregate Value”)/Strike Price (as defined below). Provided,
however, if a Triggering Event (as defined below) occurs, the Aggregate Value shall be reduced by the amount of any losses (as
defined below). “Strike Price” shall mean the closing price per share of the Company’s common stock on the trading
day immediately preceding the Series C Conversion Date.
For
purposes hereof, a “Triggering Event” shall include any liability arising from a breach by WaveTech GmbH, a corporation
organized under the laws of the Republic of Germany, of any of its representations or warranties contained in that certain Share
Purchase Agreement (the “SPA”), by and between the Corporation and WaveTech GmbH. “Losses” shall have
the meaning set forth in the SPA.
Additionally,
Amendment Number 2 adjusted the amount of common stock issued on the Series C Conversion Date as follows:
If
on the earlier of (a) the tenth (l0th) business day prior to the listing of the Company on a national securities exchange (“Uplisting”),
or (b) December 15, 2020, the aggregate value of the shares of common stock issued upon conversion of the Series C (the “Conversion
Shares”) is less than 95% of the aggregate value of the Conversion Shares on the Series C Conversion Date (such difference
in value, the “First Value Differential”), then the Company shall make a pro-rata issuance of additional shares of
common stock to each holder in an aggregate amount equal to the First Value Differential (such additional shares, the “First
True-Up Shares”). In the event (i) an Uplisting does not occur until sometime in 2021, and (ii) on such date in 2021 as
the Board may determine, but in no event later than the tenth (10th) business day prior to the Uplisting (the “Second True-Up
Date”), the aggregate value of the Conversion Shares as of the Second True-Up Date is less than 95% of the aggregate value
of the Conversion Shares as of December 15, 2020 (such difference in value, the “Second Value Differential”), the
Company shall, at the Board’s discretion, make a pro-rata issuance of additional shares of common stock to each holder in
an aggregate amount equal to the Second Value Differential (such additional shares, the “Second True-Up Shares”).
To the extent any shares of Series C are issued after the Series C Conversion Date, then the holder(s) of such shares shall receive
the same number of Conversion Shares such holder(s) would have received had they held the Series C on the Series C Conversion
Date.
Issuance
of Shares Pursuant to GS Capital Partners, LLC Convertible Debentures
On
April 30, 2020, the Company issued 302,121 shares of common stock to GS Capital Partners, LLC upon the conversion of $100,000
of principal and $5,742 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.
Repayment
of CCAG Investments, LLC Convertible Promissory Note
On
May 6, 2020, the Company repaid 120% of the principal balance owed to CCAG Investments, LLC. The total payment was $218,534, which
included accrued interest of $8,534.
Repayment
of FJ Vulis and Associates, LLC Convertible Promissory Note
On
May 6, 2020, the Company repaid 120% of the principal balance owed to FJ Vulis and Associates, LLC. The total payment was $218,247,
which included accrued interest of $8,247.
Payments
to RDM Capital Funding
During
the period of April 1, 2020 through May 8, 2020, the Company repaid the balance in full. Total cash payments during this period
were $116,643, with a discount of $62,652 as a result of the Company paying the note off in under eight months from issuance.
Issuance
of Shares Pursuant to SCS, LLC Convertible Debentures
On June 19, 2020, the Company issued 23,555 shares of common
stock to SCS, LLC upon the conversion of $4,000 of principal and $240 of accrued interest pursuant to the convertible debenture
described in Note 8, Convertible Debentures.
Update on WaveTech GmbH transaction
Between the period of
April 1, 2020 through June 25, 2020, the Company obtained additional executed assignment agreements from shareholders holding an
aggregate of 30% of the issued and outstanding shares of WaveTech GmbH. As a result, as of the date of this report, the Company
has obtained executed assignment agreements from shareholders holding an aggregate of 90% of the issued and outstanding shares
of WaveTech GmbH.
Both parties have mutually agreed that the Series C preferred
stock shares will be issued subsequent to June 30, 2020, likely during the third quarter of 2020. Once the Series C preferred stock
shares are issued, the transaction will be considered closed for accounting purposes.