Quarterly Report (10-q)

Date : 11/19/2019 @ 9:14PM
Source : Edgar (US Regulatory)
Stock : Spectrum Global Solutions, Inc. (SGSI)
Quote : 0.031  -0.0015 (-4.62%) @ 8:18PM

Quarterly Report (10-q)

 

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

Or

 

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from             to               

 

Commission File Number 000-53461

 

SPECTRUM GLOBAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-0592672
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)
     
300 Crown Oak Centre Drive, Longwood, Florida   32750
(Address of principal executive offices)   (Zip Code)

 

407-512-9102

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ YES ☐ NO

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ YES ☒ NO

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS

 

Check whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. ☐ YES ☐ NO

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock   SGSI   OTCQB

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

58,136,841 common shares issued and outstanding as of November 19, 2019.

 

 

 

 

   

Table of Contents

 

PART I - FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 46
PART II - OTHER INFORMATION 47
Item 1. Legal Proceedings 47
Item 1A. Risk Factors 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3.  Defaults Upon Senior Securities 48
Item 4. Mine Safety Disclosures 48
Item 5. Other Information 48
Item 6. Exhibits 48
SIGNATURES 49

 

i

 

    

PART I – FINANCIAL INFORMATION

 

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.

  

1

 

     

SPECTRUM GLOBAL SOLUTIONS, INC.

 

  Page
  Number
   
Condensed consolidated balance sheets as of September 30, 2019 (unaudited) and December 31, 2018 3
   
Condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) 4
   
Condensed consolidated statements of stockholders’ deficit for the three and nine months ended September 30, 2019 and 2018 (unaudited) 5
   
Condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 (unaudited) 7
   
Notes to unaudited condensed consolidated financial statements 8

  

2

 

  

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated balance sheets

(Expressed in U.S. dollars)

 

    September 30,     December 31,  
    2019     2018  
    (Unaudited)        
ASSETS            
Current Assets:            
Cash   $ 262,678     $ 620,593  
Accounts receivable, net of allowances of $504,785 and $502,868, respectively     5,891,400       6,562,182  
Contract assets     241,069       1,861,895  
Escrow     1,325,895       -  
Prepaid expenses and deposits     53,764       22,682  
Total current assets     7,774,806       9,067,352  
                 
Property and equipment, net of accumulated depreciation of $1,048,292 and $1,020,959, respectively     98,986       61,257  
Goodwill     2,505,615       1,834,856  
Customer lists, net of accumulated amortization of $372,764 and $187,299, respectively     2,464,784       850,249  
Tradenames, net accumulated amortization of $194,146 and $118,810, respectively     1,311,459       1,086,795  
Operating lease right-of-use assets     209,767       -  
Other assets     25,637       29,887  
Total assets   $ 14,391,054     $ 12,930,396  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current Liabilities:                
Accounts payable and accrued liabilities   $ 4,720,310     $ 5,472,108  
Contract liabilities     247,766       -  
Loans payable, net of debt discount of $211,183 and $257,194, respectively     6,482,640       3,362,078  
Loans payable to related parties, net of debt discount of $0 and $458,306, respectively     701,258       4,372,549  
Convertible debentures, net of discount of $286,028 and $1,311,821, respectively     2,533,510       1,058,700  
Derivative liability     475,892       3,166,886  
Warrant liability     100,000       100,000  
Operating lease liabilities     214,283       -  
Total current liabilities     15,475,659       17,532,321  
                 
Commitments and Contingencies                
                 
Series A Preferred Stock; $0.00001 par value; 8,000,000 shares authorized; 899,427 issued and 859,427 and 899,427 outstanding as of September 30, 2019 and December 31, 2018, respectively     1,044,343       604,877  
Series B Preferred Stock; $3,500 stated value; 1,000 shares authorized; 1,000 issued and outstanding as of September 30, 2019 and December 31, 2018     484,530       484,530  
Total mezzanine equity     1,528,873       1,089,407  
                 
Stockholders’ Deficit:                
Common stock; $0.00001 par value; 750,000,000 shares authorized; 57,216,447 and 7,708,684 issued and 56,595,189 and 7,087,426 outstanding as of September 30, 2019 and December 31, 2018, respectively     572       77  
Additional paid-in capital     24,952,439       18,681,390  
Treasury stock, at cost     (277,436 )     (277,436 )
Common stock subscribed     74,742       74,742  
Accumulated deficit     (27,363,795 )     (24,170,105 )
Total stockholders’ deficit     (2,613,478 )     (5,691,332 )
                 
Total liabilities and stockholders’ deficit   $ 14,391,054     $ 12,930,396  

 

(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

3

 

  

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated statements of operations

(Expressed in U.S. dollars)

(Unaudited)

 

    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
                         
                         
Revenue   $ 7,505,937     $ 9,671,990     $ 27,159,071     $ 24,963,876  
                                 
Operating expenses:                                
Cost of revenues     6,160,847       8,067,227       22,150,257       21,223,736  
Depreciation and amortization     97,281       56,874       288,134       161,480  
General and administrative     1,217,116       1,248,441       3,196,782       3,409,804  
Salaries and wages     1,182,640       606,900       3,673,533       2,502,408  
Total operating expenses     8,657,884       9,979,442       29,308,706       27,297,428  
                                 
Loss from operations     (1,151,947 )     (307,452 )     (2,149,635 )     (2,333,552 )
                                 
Other (expenses) income:                                
(Loss) gain on settlement of debt     (196,674 )     202,000       285,613       776,375  
Amortization of discounts on convertible debentures and loans payable     (124,867 )     (516,500 )     (1,241,764 )     (2,057,744 )
Gain on change in fair value of derivatives     453,711       1,304,531       1,924,637       1,128,642  
Interest expense     (242,552 )     (268,094 )     (1,492,147 )     (776,537 )
Foreign exchange gain (loss)     (10,022 )     -       (10,022 )     -  
Gain on extinguishment of preferred stock liability     -       -       -       290,814  
Gain on disposal of subsidiaries     -       -       -       577,299  
Total other (expense) income     (120,404 )     721,937       (533,683 )     (61,151 )
                                 
Net (loss) income before income taxes     (1,272,351 )     414,485       (2,683,318 )     (2,394,703 )
                                 
Provision for income taxes     2,099       -       22,300       -  
                                 
Net (loss) income     (1,274,450 )     414,485       (2,705,618 )     (2,394,703 )
                                 
Less: net loss attributable to the non-controlling interest     -       -       -       53,429  
                                 
Net loss attributable to Spectrum Global Solutions, Inc.     (1,274,450 )     414,485       (2,705,618 )     (2,341,274 )
                                 
Less: deemed dividend - Series A preferred stock modification     (488,072 )     -       (488,072 )     (152,187 )
                                 
Net (loss) income attributable to common shareholders   $ (1,762,522 )   $ 414,485     $ (3,193,690 )   $ (2,493,461 )
                                 
Net (loss) income per share attributable to Spectrum Global Solutions, Inc. common shareholders:                                
Basic   $ (0.04 )   $ 0.27     $ (0.12 )   $ (1.44 )
Diluted   $ (0.04 )   $ 0.04     $ (0.12 )   $ (1.44 )
                                 
Weighted average common shares outstanding:                                
Basic     44,739,064       1,557,763       27,554,495       1,737,473  
Diluted     44,739,064       14,668,805       27,554,495       1,737,473  

 

(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

4

 

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated statements of stockholder’s deficit

(Expressed in U.S. dollars)

(Unaudited)

  

    Common stock     Additional paid-in     Common stock     Treasury     Accumulated        
    Shares     $     capital     subscribed     stock     deficit     Total  
                                           
Balances, January 1, 2019     7,708,684     $ 77     $ 18,681,390     $ 74,742     $ (277,436 )   $ (24,170,105 )   $ (5,691,332 )
                                                         
Issuance of common stock to RDW Capital, LLC     1,159,657       11       293,154       -       -       -       293,165  
Issuance of common stock to Silverback Capital     617,600       6       119,657       -       -       -       119,663  
Issuance of common stock to Virtual Capital     1,071,418       11       321,414       -       -       -       321,425  
Issuance of common stock to employees pursuant to the conversions of convertible debt     1,400,000       14       307,986       -       -       -       308,000  
Shares issued for services     2,869,231       29       471,314       -       -       -       471,343  
Net loss for the period     -       -       -       -       -       (1,332,587 )     (1,332,587 )
                                                         
Ending balance, March 31, 2019     14,826,590     $ 148     $ 20,194,915     $ 74,742     $ (277,436 )   $ (25,502,692 )   $ (5,510,323 )
                                                         
Issuance of common stock to RDW Capital, LLC     77,598       -       10,863       -       -       -       10,863  
Issuance of common stock to Silverback Capital     200,000       2       26,998       -       -       -       27,000  
Issuance of common stock to Virtual Capital     2,899,960       29       377,467       -       -       -       377,496  
Issuance of common stock to InterCloud     15,707,163       157       2,104,603       -       -       -       2,104,760  
Impact of Dominion Capital beneficial conversion feature     -       -       314,228       -       -       -       314,228  
Shares issued for services     -       -       272,895       -       -       -       272,895  
Cancellation of shares for services     (140,000 )     (1 )     1       -       -       -       -  
Net loss for the period     -       -       -       -       -       (98,581 )     (98,581 )
                                                         
Ending balance, June 30, 2019     33,571,311     $ 335     $ 23,301,970     $ 74,742     $ (277,436 )   $ (25,601,273 )   $ (2,501,662 )
                                                         
Issuance of common stock to Dominion Capital     597,047       6       24,297       -       -       -       24,303  
Issuance of common stock to M2B Funding     666,668       7       24,297       -       -       -       24,304  
Issuance of common stock to InterCloud     20,598,088       206       1,276,875       -       -       -       1,277,081  
Issuance of common stock to Silverback     950,000       10       41,421       -       -       -       41,431  
Issuance of common stock to MZ Group for services     833,333       8       37,492       -       -       -       37,500  
Shares issued for services     -       -       246,087       -       -       -       246,087  
Deemed dividend - Series A preferred stock modification     -       -       -       -       -       (488,072 )     (488,072 )
Net loss for the period     -       -       -       -       -       (1,274,450 )     (1,274,450 )
                                                         
Ending balance, September 30, 2019     57,216,447     $ 572     $ 24,952,439     $ 74,742     $ (277,436 )   $ (27,363,795 )   $ (2,613,478 )

 

5

 

  

    Common stock     Additional paid-in     Common stock     Treasury     Subscriptions     Accumulated     Non-controlling        
    Shares     $     capital     subscribed     stock     receivable     deficit     interest     Total  
Balances, January 1, 2018     2,115,136     $ 21     $ 15,909,612     $ 74,742     $ -     $ -     $ (22,322,725 )   $ (88,650 )   $ (6,427,000 )
                                                                         
Issuance of common stock to RDW Capital, LLC     135,474       1       431,328       -       -       -       -       -       431,329  
Issuance of common stock to Dominion Capital LLC     52,800       1       95,039       -       -       -       -       -       95,040  
Warrant issued to acquire non-controlling interest     -       -       (125,744 )     -       -       -       -       (133,254 )     (258,998 )
Shares issued for services     -       -       312,561       -       -       -       -       -       312,561  
Net income (loss) for the period     -       -       -       -       -       -       134,269       (54,773 )     79,496  
                                                                         
Ending balance, March 31, 2018     2,303,410     $ 23     $ 16,622,796     $ 74,742     $ -     $ -     $ (22,188,456 )   $ (276,677 )   $ (5,767,572 )
                                                                         
Issuance of common stock to RDW Capital, LLC     65,692       1       97,503       -       -       -       -       -       97,504  
Shares issued upon conversion of preferred shares     144,842       1       225,886       -       -       -       -       -       225,887  
Shares issued upon conversion of common shares to preferred     (1,085,000 )     (11 )     (207,084 )             (277,436 )     -       -       -       (484,531 )
Shares issued for services     -       -       839,177       -       -       -       -       -       839,177  
Subscriptions receivable     -       -       -       -       -       (222,964 )     -       -       (222,964 )
Disposal of subsidiaries     -       -       -       -       -       -       -       275,333       275,333  
Deemed dividend - Series A preferred stock modification     -       -       -       -       -       -       (152,187 )     -       (152,187 )
Net (loss) income for the period     -       -       -       -       -       -       (2,890,028 )     1,344       (2,888,684 )
                                                                         
Ending balance, June 30, 2018     1,428,944     $ 14     $ 17,578,278     $ 74,742     $ (277,436 )   $ (222,964 )   $ (25,230,671 )   $ -     $ (8,078,037 )
                                                                         
Issuance of common stock to RDW Capital, LLC     78,048       1       91,704       -       -       -       -       -       91,705  
Issuance of common stock to Silverback Capital     30,000       -       19,500       -       -       -       -       -       19,500  
Shares issued upon conversion of preferred shares     50,286       1       (1 )     -       -       -       -       -       -  
Pryor Cashman warrant for services     -       -       276,428       -       -       -       -       -       276,428  
Shares issued for services     5,010,000       50       19,466       -       -       -       -       -       19,516  
Post stock-split adjustment     287       -       -       -       -       -       -       -       -  
Net income for the period     -       -       -       -       -       -       414,485       -       414,485  
                                                                         
Ending balance, September 30, 2018     6,597,565     $ 66     $ 17,985,375     $ 74,742     $ (277,436 )   $ (222,964 )   $ (24,816,186 )   $ -     $ (7,256,403 )

 

 

(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)

 

6

 

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated statements of cash flows

(Expressed in U.S. dollars)

(Unaudited)

 

    For the nine months ended  
    September 30,  
    2019     2018  
             
Cash flows from operating activities:            
Net loss   $ (2,705,618 )   $ (2,394,703 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Gain on change in fair value of derivative liability     (1,924,637 )     (1,128,642 )
Amortization of discounts on convertible debentures, loans payable, and loans payable to related parties     1,241,764       2,057,744  
Depreciation and amortization     288,134       161,480  
Amortization of operating right-of-use assets     106,833       -  
Shares issued for services     1,027,825       1,447,683  
Gain on settlement of debt     (285,613 )     (776,375 )
Foreign exchange loss (gain)     10,022       (4,721 )
Gain on disposal of subsidiaries     -       (577,299 )
Derivative warrants issued for services     -       68,536  
Gain on extinguishment of preferred stock liability     -       (290,814 )
Changes in operating assets and liabilities:                
Accounts receivable     735,948       (1,406,100 )
Prepaid expenses and deposits     599,728       24,808  
Accounts payable and accrued liabilities     (615,606 )     1,156,652  
Other assets     4,250       3,595  
Contract assets     1,620,826       -  
Operating lease liabilities     (55,058 )     -  
Contract liabilities     (725,267 )     -  
Due to related parties     -       (42,872 )
Net cash used in operating activities     (676,469 )     (1,701,028 )
                 
Cash flows from investing activities:                
Net cash paid upon acquisition     (941,593 )     (328 )
Purchase of equipment     (65,060 )     (15,415 )
Cash received upon acquisition of subsidiary     -       191,744  
Net cash (used in) provided by investing activities     (1,006,653 )     176,001  
                 
Cash flows from financing activities:                
Proceeds from loans payable     22,974,878       302,500  
Repayments of loans payable     (22,827,367 )     (1,723,000 )
Proceeds from loans payable to related parties     170,000       165,000  
Repayments of loans payable to related parties     (112,724 )     -  
Proceeds from convertible debentures     84,000       2,430,959  
Repayments of convertible debentures     (289,475 )     (131,579 )
Cash received to fund escrow account     1,325,895       -  
Proceeds from factoring agreement     -       1,034,294  
Repurchase of preferred shares     -       (280,960 )
Net cash provided by financing activities     1,325,207       1,797,214  
                 
Net (decrease) increase in cash     (357,915 )     272,187  
                 
Cash, beginning of period     620,593       28,893  
                 
Cash, end of period   $ 262,678     $ 301,080  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 322,889     $ 357,986  
Cash paid for income taxes   $ 106,974     $ -  
                 
Non-cash investing and financing activities:                
Common stock issued for conversion of loans payable   $ 4,880,886     $ 232,833  
Common stock issued for conversion of Series A preferred stock   $ 48,606     $ -  
Original issue discounts   $ 20,000     $ 751,630  
Original debt discount against derivative liability   $ 189,000     $ 3,365,959  
Net assets acquired in TNS acquisition   $ 1,645,000     $ -  
Convertible note issued in TNS acquisition   $ 665,000     $ -  
Third-party payment of third-party debt   $ 150,000     $ -  
Addition to principal of convertible debenture due to Barn 11 default   $ 119,342     $ -  
Addition to derivative liability due to Barn 11 default   $ 466,000     $ -  
Deemed dividend - Series A preferred stock modification   $ 488,072     $ 152,187  
Right-of-use operating lease assets obtained in exchange for operating lease liabilities   $ 316,599     $ -  
Convertible notes issued to settle contingent liability   $ -     $ 793,893  
Common stock issued to settle accounts payable and debt   $ -     $ 2,640  
Net assets acquired in ADEX acquisition   $ -     $ 4,332,577  
Goodwill from ADEX acquisition   $ -     $ 331,223  
Warrant issued for non-controlling interest   $ -     $ 133,256  
Series A preferred stock issued to settle loans payable and accrued interest   $ -     $ 406,560  
Preferred stock issued to settle derivative liabilities   $ -     $ 291,064  

 

(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements) 

 

7

 

  

SPECTRUM GLOBAL SOLUTIONS, INC.

Notes to the unaudited condensed consolidated financial statements

September 30, 2019

(Expressed in U.S. dollars)

 

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 continued its corporate jurisdiction out of the State of Nevada and into the province of British Columbia, Canada.

 

On April 25, 2017, the Company entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased 80.1% of the assets associated with InterCloud’s AW Solutions, Inc., AW Solutions Puerto Rico, LLC, and Tropical Communications, Inc. (collectively “AWS” or the “AWS Entities”) subsidiaries. After the acquisition of the AWS Entities, the Company provides professional, multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry.

 

On November 15, 2017, the Company changed its name to “Spectrum Global Solutions, Inc.”

 

On February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to the Company of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by the Company.

 

On February 6, 2018, the Company entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the 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. After the acquisition of the ADEX Entities, the Company provides professional, multi-service line, telecommunications infrastructure, outsource services and staffing solutions to the wireless and wireline industry.

 

On May 18, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation, Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives Ltd. to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned entities assumed all liabilities and obligations with respect to such entities.

 

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.

 

On November 14, 2019, the Company closed on its acquisition of WaveTech GmbH (refer to Note 17, Subsequent Events, for additional detail).

 

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The recently acquired AWS and ADEX businesses have also incurred losses and experienced negative cash flows from operations during their most recent fiscal years. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of September 30, 2019, the Company had an accumulated deficit of $27,363,795, and a working capital deficit of $7,700,853. 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.

 

8

 

 

Management requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be no certainty that these sources will provide the additional funds required for the next twelve months.

 

2. Significant Accounting Policies

 

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, 2018. 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 (from the date of acquisition, April 25, 2017), the ADEX Entities (from the date of acquisition, February 27, 2018), and TNS (from the date of acquisition, January 4, 2019). All of the subsidiaries are wholly-owned.

 

During the year ended December 31, 2018, the Company disposed of the following subsidiaries; Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc.

 

All inter-company balances and transactions have been eliminated.

 

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.

 

9

 

 

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 September 30, 2019 and December 31, 2018 was $504,785 and $502,868, 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 nine months ended September 30, 2019.

 

Intangible Assets

 

At September 30, 2019 and December 31, 2018, definite-lived intangible assets primarily consist of tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 3-20 years.

 

The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.

 

For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.

 

10

 

 

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 nine months ended September 30, 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 2018. 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.

 

11

 

 

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 September 30, 2019 was $156,711 plus penalties and interest of $119,401 for a total obligation due of $276,112. The amount due as of December 31, 2018 was $156,711 plus penalties and interest of $111,200 for a total obligation due of $267,911. This tax assessment is included in accrued expenses at September 30, 2019 and December 31, 2018.

 

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 services performed but not yet billed. These amounts are included in accounts receivable on the consolidated balance sheets. Contract liabilities include unbilled costs and are included in accrued expenses 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.

 

12

 

  

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 September 30,
2019
    Three months ended September 30,
2018
    Nine months ended September 30,
2019
    Nine months ended September 30,
2018
 
Professional Services   $ 4,493,906     $ 5,138,882     $ 17,687,718     $ 16,336,594  
Construction     3,012,031       4,533,108       9,471,353       8,627,282  
Total   $ 7,505,937     $ 9,671,990     $ 27,159,071     $ 24,963,876  

 

Revenue by contract duration   Three months ended September 30,
2019
    Three months ended September 30,
2018
    Nine months ended September 30,
2019
    Nine months ended September 30,
2018
 
Short-term   $ 57,747     $ 96,720     $ 232,185     $ 249,639  
Long-term     7,448,190       9,575,270       26,926,886       24,714,237  
Total   $ 7,505,937     $ 9,671,990     $ 27,159,071     $ 24,963,876  

 

Revenue by contract type   Three months ended September 30,
2019
    Three months ended September 30,
2018
    Nine months ended September 30,
2019
    Nine months ended September 30,
2018
 
Unit-price   $ 1,751,363     $ 1,683,925     $ 4,910,033     $ 4,516,596  
Fixed-price   $ 1,260,668     $ 2,849,183     $ 4,561,320     $ 4,110,686  
Time-and-materials     4,493,906       5,138,882       17,687,718       16,336,594  
Total   $ 7,505,937     $ 9,671,990     $ 27,159,071     $ 24,963,876  

 

The Company also disaggregates its revenue by operating segment and geographic location (refer to Note 15, Segment Disclosures, for additional information).

 

Accounts Receivable

 

Accounts receivable include amounts from work completed in which the Company has billed. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.

 

Contract Assets and Liabilities

 

Contract assets include unbilled amounts for services performed but not yet billed. These amounts are included in contract assets on the consolidated balance sheets. The Company records unbilled receivables for services performed but not billed. At September 30, 2019 and December 31, 2018, unbilled receivables totaled $241,069 and $1,861,895, respectively.

 

Contract liabilities include unbilled costs and are included in accrued expenses on the consolidated balance sheets.

 

Cost of Revenues

 

Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.

 

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.

  

13

 

 

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 September 30, 2019 and 2018, respectively, the Company had 63,373,688 and 13,111,043 common stock equivalents outstanding.

 

Comprehensive Loss

 

ASC 220, “Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As of September 30, 2019 and 2018, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the consolidated financial statements.

 

Leases

 

The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) electing the practical expedient that allows the Company not to restate its comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption. For the comparative periods prior to adoption, the Company presented the disclosures which were required under ASC 840.

 

The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent the Company’s right to use underlying assets for the lease terms and lease liabilities represent the Company’s obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

 

The Company recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months as of January 1, 2019. The ROU assets were adjusted per ASC 842 transition guidance for existing lease-related balances of accrued and prepaid rent, unamortized lease incentives provided by lessors, and restructuring liabilities, Operating lease cost is recognized as a single lease cost on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Variable lease payments for common area maintenance, property taxes and other operating expenses are recognized as expense in the period when the changes in facts and circumstances on which the variable lease payments are based occur.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which, among other things, requires an entity to recognize a right-of-use asset and a lease liability on the balance sheet for substantially all leases, including operating leases. Expanded disclosures with additional qualitative and quantitative information are also required. ASU 2016-02 and its amendments are effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption was permitted.

 

14

 

 

The Company adopted ASU 2016-02 and its amendments and applied the transition provisions as of January 1, 2019, which included recognizing a cumulative-effect adjustment through opening retained earnings as of that date. Prior year amounts were not recast under this transition approach and, therefore, prior year amounts are excluded from the leased properties footnote. The Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to carryforward its historical assessments of: (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company elected a policy of not recording leases on its condensed consolidated balance sheets when the leases have a term of 12 months or less and the Company is not reasonably certain to elect an option to purchase the leased asset. The Company recognizes payments on these leases within selling, administrative and other expenses on a straight-line basis over the lease term. The standard did not materially impact consolidated net income or liquidity.

 

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

 

In June 2018, the FASB issued ASU 2018-07, Compensation – “Stock Compensation (Topic 718): Improvements to Nonemployee Share-based Payment Accounting”, which addresses aspects of the accounting for nonemployee share-based payment transactions. This pronouncement is effective for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The Company early adopted ASU 2018-07 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables. The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.

 

The Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the nine months ended September 30, 2019, four customers accounted for 25%, 18%, 12% and 11%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 38%, 15%, 7% and 3%, respectively, of trade accounts receivable as of September 30, 2019. For the nine months ended September 30, 2018, four customers accounted for 22%, 19%, 16% and 13%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 12%, 12%, 25% and 14%, respectively, of trade accounts receivable as of September 30, 2018.

 

The Company’s customers are primarily located within the domestic United States of America and Puerto Rico. Revenues generated within the domestic United States of America accounted for approximately 96% and 93% of consolidated revenues for the nine month periods ended September 30, 2019 and 2018, respectively. Revenues generated from customers in Puerto Rico accounted for approximately 4% and 7% of consolidated revenues for the nine month periods ended September 30, 2019 and 2018, respectively.

 

Fair Value Measurements

 

The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:

 

Level 1 – quoted prices for identical instruments in active markets;

 

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Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

 

Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the nine months ended September 30, 2019 or the year ended December 31, 2018. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

Our financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2019 and December 31, 2018, consisted of the following:

 

    Total fair value at September 30, 2019     Quoted prices in active markets for identical assets
(Level 1)
    Significant other observable inputs
(Level 2)
    Significant unobservable inputs
(Level 3)
 
Derivative liability (1)   $ 475,892     $         -     $         -     $ 475,892  

 

    Total fair value at December 31, 2018     Quoted prices in active markets for identical assets
(Level 1)
    Significant other observable inputs
(Level 2)
    Significant unobservable inputs
(Level 3)
 
Derivative liability (1)   $ 3,166,886     $         -     $         -     $ 3,166,886  

  

(1) The Company has estimated the fair value of these derivatives using the Monte-Carlo model and/or a Binomial Model.

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Refer to Note 9, Derivative Liabilities, for additional information.

 

Derivative Liabilities

 

The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of September 30, 2019 and December 31, 2018, the Company had a $475,892 and $3,166,886 derivative liability, 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.

 

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Reclassifications

 

Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.

 

3. Acquisition of TNS, Inc.

 

On January 4, 2019, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with InterCloud Systems, Inc., a Delaware corporation (“InterCloud”). Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and the Company agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc., an Illinois corporation (“TNS”). The Company closed and completed the acquisition on January 4, 2019.

 

The purchase price paid by the Company for the includes $980,000 in cash, paid at closing, and the issuance to InterCloud of a convertible promissory note in the aggregate principal amount of $620,000 (the “Note”).

 

The Company has performed a preliminary valuation analysis of the fair market value of TNS’ assets and liabilities. The provisional fair value of the purchase consideration issued to the sellers of TNS was allocated to the net tangible assets acquired. We accounted for the acquisition of TNS as the purchase of a business under GAAP under the acquisition method of accounting, the assets and liabilities acquired were recorded as of the acquisition date, at their respective fair values and consolidated with those of our company. The excess of the aggregate fair value of the net tangible assets has been allocated to an intangible asset, value of customer accounts and the remainder to goodwill. The purchase price allocation was based, in part, on management’s knowledge of TNS’ business and is preliminary. Once we complete our analysis to finalize the purchase price allocation, which includes finalizing the valuation report from a third-party appraiser and a review of potential intangible assets, it is reasonably possible that, there could be significant changes to the preliminary values below.

 

The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:

 

Provisional purchase consideration      
$620,000 convertible note   $ 665,000  
Cash     980,000  
         
Total purchase price   $ 1,645,000  
         
Preliminary allocation of purchase price        
Cash   $ 38,407  
Accounts receivable, net     65,166  
Prepaid expenses     630,810  
Customer lists*     1,800,000  
Tradenames*     300,000  
Goodwill*     670,759  
Accounts payable     (275,331 )
Accrued expenses     (611,778 )
Contract liabilities     (973,033 )
         
Net assets acquired   $ 1,645,000  

 

* The Company is reviewing for potential identifiable intangible assets, which may potentially change the value allocated to intangible assets.

 

The following table summarizes the Company’s consolidated results of operations for the nine months ended September 30, 2019 and the three and nine months ended September 30, 2018, as well as unaudited pro forma consolidated results of operations as though the acquisition had occurred on January 1, 2018:

 

    Nine months ended
September 30,
2019
    Three months ended
September 30,
2018
    Nine months ended
September 30,
2018
 
    As Reported     Pro Forma     As Reported     Pro Forma     As Reported     Pro Forma  
                                     
Net sales   $ 27,159,071     $ 27,159,071     $ 9,671,990     $ 10,439,718     $ 24,963,876     $ 30,238,512  
Net (loss) income attributable to common shareholders     (1,762,522 )     (1,770,076 )     414,485       444,055       (2,493,461 )     (1,486,743 )
                                                 
(Loss) earnings per common share, basic:     (0.06 )     (0.06 )     0.27       0.29       (1.44 )     (0.86 )
(Loss) earnings per common share, diluted:     (0.06 )     (0.06 )     0.04       0.04       (1.44 )     (0.86 )

 

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4. Property and Equipment

 

Property and equipment as of September 30, 2019 and December 31, 2018 consisted of the following:

 

    September 30,     December 31,  
    2019     2018  
Computers and office equipment   $ 344,509     $ 329,937  
Equipment     382,140       382,140  
Research equipment     143,129       143,129  
Software     227,563       177,073  
Vehicles     94,356       94,356  
Vehicles under capital lease     -       -  
Total     1,191,697       1,126,635  
                 
Less: impairment     (44,419 )     (44,419 )
Less: accumulated depreciation     (1,048,292 )     (1,020,959 )
                 
Equipment, net   $ 98,986     $ 61,257  

 

During the three months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $10,348 and $4,940, respectively.

 

During the nine months ended September 30, 2019 and 2018, the Company recorded depreciation expense of $27,333 and $14,174, respectively.

 

5. Intangible Assets

 

Intangible assets as of September 30, 2019 and December 31, 2018 consisted of the following:

 

    Cost     Accumulated Amortization     Impairment     Net carrying value at September 30, 2019     Net carrying value at December 31, 2018  
Customer relationship and lists   $ 2,837,548     $ 372,764     $       -     $ 2,464,784     $ 850,249  
Trade names     1,505,605       194,146       -       1,311,459       1,086,795  
                                         
Total intangible assets   $ 4,343,153     $ 566,910     $ -     $ 3,776,243     $ 1,937,044  

 

During the three months ended September 30, 2019 and 2018, the Company recorded amortization expense of $86,933 and $51,934, respectively.

 

During the nine months ended September 30, 2019 and 2018, the Company recorded amortization expense of $260,802 and $147,306, respectively.

 

The estimated future amortization expense for the next five years and thereafter is as follows:

   

Year ending December 31,      
2019   $ 86,586  
2020     347,387  
2021     347,387  
2022     347,387  
2023     347,387  
Thereafter     2,300,109  
Total   $ 3,776,243  

 

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6. Related Party Transactions

 

Unsecured Amounts Due to InterCloud

 

As of September 30, 2019 and December 31, 2018, the Company owed $50,577 and $51,889, respectively, to InterCloud, which is non-interest bearing, unsecured, and due on demand and included in accounts payable and accrued liabilities.

 

Exchange of Shares of Common Stock for Series B Preferred Stock

 

On April 23, 2018, each of Roger Ponder, the Company’s Chief Executive Officer, and Keith Hayter, the Company’s President, exchanged certain shares of common stock of the Company held by each of them for shares of the newly designated Series B preferred stock. Mr. Ponder exchanged 542,500 shares of common stock for an aggregate of 500 shares of Series B preferred stock, and Mr. Hayter exchanged 542,500 shares of common stock for an aggregate of 500 shares of Series B preferred stock. The Company recorded the fair value of the Series B preferred stock of $484,530 as mezzanine equity and reduced common shares and additional paid in capital an equal amount (refer to Note 11, Preferred Stock, for additional information).

 

InterCloud Related Party Reclassification

 

During the three months ended June 30, 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. 

  

Loans Payable to Related Parties

 

As of September 30, 2019 and December 31, 2018, the Company had outstanding the following loans payable to related parties:

 

    September 30,     December 31,  
    2019     2018  
Promissory note issued to Roger Ponder, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019   $ 18,858     $ 18,858  
Promissory note issued to Keith Hayter, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019     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, matured on October 1, 2019, due on demand     80,000       80,000  
Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020     170,000       -  
Convertible promissory note, InterCloud Systems, Inc., 8% interest, unsecured, matured April 27, 2018     -       1,645,625  
Convertible promissory note, InterCloud Systems, Inc., 1% interest, unsecured, matures August 16, 2019, net of debt discount of $0 and $171,557     -       622,392  
Convertible promissory note, InterCloud Systems, Inc., 6% interest, unsecured, matured March 27, 2019, net of debt discount of $0 and $286,749     -       1,515,674  
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand     217,400       275,000  
Total   $ 701,258     $ 4,372,549  

 

Promissory note issued to Roger Ponder, 10% interest, unsecured, matured on November 30, 2018 and extended to November 30, 2019

 

On November 30, 2017, the Company received $18,858 pursuant to a promissory note issued to the Chief Executive Officer of the Company. The note issued was 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.

 

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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.

  

Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, matures April 13, 2020

 

On April 13, 2018, the Company received $85,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, due on April 13, 2019 and bears interest at a rate of 8% per annum. At December 31, 2018, the amount of $85,000 was owed. On April 13, 2019, the note was amended to a maturity date of April 13, 2020 and an interest rate of 10%. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.

 

Promissory note issued to Keith Hayter, 8% interest, unsecured, matured October 1, 2019

 

On August 21, 2018, the Company received $80,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, was due on August 20, 2019 and bears interest at a rate of 8% per annum. On August 20, 2019, the note was amended to a maturity date of October 1, 2019 and an interest rate of 10%. The Company accounted for the modification in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the extension as a modification and no gain or loss was recognized.

 

The note matured on October 1, 2019 and is now due on demand.

 

Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020

 

On August 12, 2019, the Company received $170,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, is due on August 11, 2020 and bears interest at a rate of 10% per annum.

 

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 accrues at a rate of 8% per annum. All principal and accrued interest under the Unsecured Note is due one year following the issue date of the Unsecured Note and is convertible into shares of common stock at a conversion price equal to 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $1,174,000 resulted in a discount to the note payable of $943,299. 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 is 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 is now equal to the lesser 70% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $8. The Company accounted for this assignment in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date. Refer to Note 8, Convertible Debentures, for additional information on the assignments.

 

On May 6, 2019, the remaining principal balance of $1,445,625 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information).

 

20

 

 

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 is due on August 16, 2019 and bears interest at 1% per annum. The note is convertible into common shares of the Company at a conversion price equal to the 80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging” (refer to Note 9, Derivative Liabilities, for additional information on embedded conversion features). The initial fair value of the conversion feature of $348,000 resulted in a discount to the note payable of $348,000.

 

On August 16, 2019, the remaining principal balance of $793,894 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information). As a result of the conversion, the Company recorded a loss on settlement of debt of $178,663 to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

Convertible promissory note, InterCloud Systems, Inc, 6% interest, unsecured, matured March 27, 2019

 

On February 27, 2018, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest on the outstanding principal due under the ADEX Note accrues at a rate of 6% per annum. All principal and accrued interest under the ADEX Note is due one year following the issue date of the ADEX Note and is convertible into shares of common stock at a conversion price equal to of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion, but in no event ever lower than $1 (the “Floor”), unless the note is in default, at which time the Floor terminates.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $2,455,000 resulted in a discount to the note payable of $639,000.

 

On September 26, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $75,000 of the outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement. As a result of the assignment, the assigned note bears interest at 5% and the conversion price for the $75,000 of notes assigned is now equal to the lesser 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $8. On December 3, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $50,000 of the outstanding principal to a third party. The Company accounted for the assignments in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date. Refer to Note 8, Convertible Debentures, for additional information on the assignments.

 

During the nine months ended September 30, 2019, the Company repaid $55,124 of principal outstanding.

 

During the nine months ended September 30, 2019, the principal amount was reduced by $295,000 as a result of a working capital adjustment.

 

On May 6, 2019, the remaining principal balance of $1,452,299 was converted into shares of the Company’s common stock through an automatic forced conversion (refer to Note 10, Common Stock, for additional information).

 

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.

 

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During the year ended December 31, 2018, the Company repaid $225,000 of this amount. During the nine months ended September 30, 2019, the Company repaid $57,600 of this amount.

 

7. Loans Payable

 

As of September 30, 2019 and December 31, 2018, the Company had outstanding the following loans payable:

 

    September 30,     December 31,  
    2019     2018  
Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand   $ 41,361     $ 41,361  
Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand     7,760       7,760  
Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand     2,636       2,636  
Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand     15,000       15,000  
Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand     7,500       7,500  
Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand     50,000       50,000  
Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand     12,000       12,000  
Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020, net of debt discount of $149,180 and $257,194     3,121,109       3,225,821  
Loan with WaveTech GmbH, non-interest bearing, matures March 31, 2020     3,000,000       -  
Promissory note issued to C6 Capital, non-interest bearing, matures April 15, 2020, net of debt discount of $62,003     225,274       -  
Total   $ 6,482,640     $ 3,362,078  

 

Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand

 

The Company owed $41,361 ($53,300 Canadian dollars) to a non-related party as of September 30, 2019 and December 31, 2018. This promissory note is non-interest bearing, unsecured, and due on demand.

 

Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand

 

The Company owed $7,760 ($10,000 Canadian dollars) to a non-related party as of September 30, 2019 and December 31, 2018. This promissory note is non-interest bearing, unsecured, and due on demand.

 

Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand

 

The Company owed $2,636 ($3,400 Canadian dollars) to a non-related party as of September 30, 2019 and December 31, 2018. This promissory note is non-interest bearing, unsecured, and due on demand.

 

Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand

 

The Company owed $15,000 to a non-related party as of September 30, 2019 and December 31, 2018. 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 September 30, 2019 and December 31, 2018. This promissory note is non-interest bearing, unsecured, and due on demand.

 

Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand

 

In March 2012, the Company received $50,000 for the subscription of 10,000,000 shares of the Company’s common stock. During the year ended May 31, 2013, the Company and the subscriber agreed that the shares would not be issued and that the subscription would be returned. The subscription has been reclassified as a non-interest bearing demand loan until the funds are refunded to the subscriber. The Company owed $50,000 as of September 30, 2019 and December 31, 2018.

 

Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand

 

On April 12, 2017, received $12,000 pursuant to a promissory note. The note issued is unsecured, due on demand and bears interest at a rate of 10% per annum. The Company owed $12,000 as of September 30, 2019 and December 31, 2018.

 

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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 113,953 shares of the Company’s common stock at $1.25 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 nine months ended September 30, 2019,  the Company received an aggregate of $21,111,888 and repaid an aggregate of $21,324,842, for a net repaid amount of $212,954. At September 30, 2019, the Company owed $3,270,289 pursuant to this agreement and will record accretion equal to the debt discount of $149,180 over the remaining term of the note.

 

Loan with Libertas Funding LLC

 

On January 4, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Libertas Funding LLC, a Connecticut limited liability company (“Libertas”). Under the Financing Agreement, the Financing Parties sold to Libertas future receivables in an aggregate amount equal to $1,460,000 for a purchase price of $1,000,000.

 

Pursuant to the terms of the Financing Agreement, the Company agreed to pay Libertas $31,602 each week based upon an anticipated 20% of its future receivables until such time as $1,460,000 had been paid, a period Libertas and the Financing Parties estimated to be approximately eleven months. In the event that the Financing Agreement was paid off earlier than eleven months, there was to be a discount to the sum owed. The Financing Agreement also contained customary affirmative and negative covenants, representations and warranties, and default and termination provisions. The Company used the proceeds of the Financing Agreement for the acquisition of TNS, as discussed in Note 3, Acquisition of TNS, Inc.

 

On February 1, 2019, the Company fully repaid the Financing Agreement. As a result, the amount owed at June 30, 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 has placed the amount due to WaveTech Global into escrow using cash received from the WaveTech GmbH share purchase agreement (refer to note 14, Commitments and Contingencies for additional detail). This amount is shown in escrow on the balance sheet as of September 30, 2019.

 

During November 2019, in connection with the closing of the Company’s acquisition of WaveTech GmbH, the amount in escrow was returned to the Company (refer to Note 17, Subsequent Events, for additional detail).

 

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Loan with WaveTech GmbH., matures March 31, 2020

 

On July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German Corporation (refer to Note 14, Commitments and Contingencies, for additional detail). In connection with the share purchase agreement, the Company was to receive $3,000,000 in cash at or before consummation of the transactions described in the agreement. The Company received $1,325,895 which was placed into escrow to satisfy the amounts outstanding to WaveTech Global, Inc. The Company received an additional $1,664,083 during the three months ended September 30, 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 unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

On November 14, 2019, the Company closed on its acquisition of WaveTech GmbH (refer to Note 17, Subsequent Events, for additional detail).

 

Loan with C6 Capital

 

On August 16, 2019, the Company, together with its subsidiaries, AWS, ADEX, and TNS (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with C6 Capital. Under the Financing Agreement, the Financing Parties sold to C6 Capital future receivables in an aggregate amount equal to $337,500 for a purchase price of $250,000. The Company received cash of $242,500 and recorded a debt discount of $95,000.

 

Pursuant to the terms of the Financing Agreement, the Company agreed to pay C6 Capital $10,045 each week based upon an anticipated 20% of its future receivables until such time as $337,500 has been paid, a period C6 Capital and the Financing Parties estimate to be approximately eight months. In the event that the Financing Agreement is paid off earlier than eight months, there is to be a discount to the sum owed. The Financing Agreement also contains customary affirmative and negative covenants, representations and warranties, and default and termination provisions.

 

During the nine months ended September 30, 2019, the Company paid $50,223 of the original balance under the agreement.

 

At September 30, 2019, the Company owed $287,277 pursuant to this agreement and will record accretion equal to the debt discount of $62,003 over the remaining term of the note.

 

8. Convertible Debentures

 

As of September 30, 2019 and December 31, 2018, the Company had outstanding the following convertible debentures:

 

    September 30,     December 31,  
    2019     2018  
Convertible promissory note, Barn 11, 6% interest, unsecured, matured June 1, 2019, net of debt discount of $0 and $55,000   $ 594,374     $ 445,000  
Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020, net of debt discount of $179,543 and $0     1,391,591       -  
Convertible promissory note, Michael Roeske, 6% interest, unsecured, matures, January 30, 2020, net of debt discount of $13,342 and $0     102,658       -  
Convertible promissory note, Joel Raven, 6% interest, unsecured, matures January 30, 2020, net of debt discount of $33,364 and $0     330,636       -  
Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures August 2, 2020, net of debt discount of $33,888     89,112       -  
Convertible promissory note, SCS, LLC, 8% interest, unsecured, matures March 30, 2020, net of debt discount of $25,891     25,139       -  
Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019, net of debt discount of $0 and $1,009,630     -       240,370  
Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019, net of debt discount of $0 and $172,570     -       123,176  
Convertible promissory note, Silverback, 8% interest, unsecured, matures December 4, 2019, net of debt discount of $0 and $24,140     -       3,367  
Convertible promissory note, RDW Capital, February 21, 2018 assignment     -       50,000  
Convertible promissory note, RDW Capital, June 7, 2018 assignment     -       39,375  
Convertible promissory note, Silverback Capital, December 3, 2018 assignment     -       50,000  
Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $9,087     -       69,860  
Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019, net of debt discount of $0 and $41,395     -       37,552  
Total   $ 2,533,510     $ 1,058,700  

  

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Convertible promissory note, Barn 11, 6% interest, unsecured, matured June 1, 2019

 

On February 21, 2018, the Company issued a convertible note with a principal amount of $500,000 and a warrant with a term of three years to purchase up to 125,000 shares of common stock of the Company at an exercise price of $1.60 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 $1.60 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 $1 (the “Floor”), unless the note is in default, at which time the Floor terminates.

 

The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $571,079 and the warrant of $158,772 resulted in a discount to the note payable of $500,000 and an initial derivative expense of $229,851.

   

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 three months ended September 30, 2019, the Company paid $25,000 of principal. The Company owed $594,362 as of September 30, 2019.

 

Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019

 

On April 23, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the lender a senior secured convertible promissory note in the aggregate principal amount of $1,578,947 for an aggregate purchase price of $1,500,000.

 

The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued interest under the secured note was originally due on October 23, 2019 and was convertible into shares of the Company’s common stock at a fixed conversion price of $1.00. While during the first three months that the secured note is outstanding, only interest payments were due to the lender, beginning in month four, and on each monthly anniversary thereafter until maturity, amortization payments were due for principal and interest due under the secured note. The secured note included customary events of default, including non-payment of the principal or accrued interest due on the secured note. Upon an event of default, all obligations under the secured note would become immediately due and payable.

 

If the Company issued any common stock or common stock equivalents at an effective price per share less than $1 then the conversion price of the note would be reduced to the lower price. As long as the note was not in default the Company could repay the note at 110% of the outstanding principal amount. If the Company defaulted upon the note it would accrue interest at 18% per annum.

 

In connection with the Purchase Agreement, the Company entered into a security agreement, dated as of April 23, 2018, with the Lender (the “Security Agreement”) and an intellectual property security agreement, dated as of April 23, 2018, with the Lender pursuant to which the Company granted a security interest in substantially all of the assets of the Company, but for those assets over which Prestige Capital Corporation holds a lien, to secure the Company’s obligations under the secured note. In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Lender pursuant to the Secured Note.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $3,325,000 resulted in a discount to the note payable of $1,500,000 and an initial derivative expense of $1,825,000.

 

On April 17, 2019, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020” section of this note for additional detail).

 

Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019

 

On May 18, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $295,746 for an aggregate purchase price of $280,959.

 

The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was originally due on May 18, 2019. The secured note was convertible into shares of the Company’s common stock at a fixed conversion price of $1 per share. Interest was payable monthly on the 18th of each month. While interest payments were to be made in cash during the first six months that the secured note was outstanding, beginning in month seven, and on each monthly anniversary thereafter until maturity, the Company had the option to pay interest payments in stock, subject to certain equity conditions being satisfied. Any payment of interest or principal scheduled after December 1, 2018 that was made in cash would be subject to a 5% prepayment premium. Any other prepayment is subject to a 10% premium. The secured note included customary events of default, including non-payment of the principal or accrued interest due on the secured note and cross default to other notes owing to the investor. Upon an event of default, all obligations under the secured note and other notes owing to the investor would become immediately due and payable. In connection with the issuance of the secured note, the Company issued the investor 496,101 shares of Series A Preferred Stock with a fair value of $193,509 which was expensed. The investor was granted a right to participate in future financing transactions of the Company while the secured note remains outstanding.

  

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If the Company issued any common stock or common stock equivalents at an effective price per share less than $1 then the conversion price of the note would be reduced to the lower price. As long as the note is not in default the Company could repay the note at 110% of the outstanding principal amount. If the Company defaulted upon the note it would accrue interest at 18% per annum.

 

In connection with the Securities Purchase Agreement, the Company entered into an amendment to the existing Security Agreement described in Note 10(o). Pursuant to the amendment, the Company agreed that obligations under the secured note and related documents will be secured pursuant to the existing security interest in substantially all of the assets of the Company securing other notes issued to the Investor (except for those assets over which Prestige Capital Corporation holds a lien). In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Investor pursuant to the Secured Note and have granted a similar security interest over substantially their assets.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $468,000 resulted in a discount to the note payable of $280,959 and an initial derivative expense of $187,041.

 

On April 17, 2019, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020” section of this note for additional detail).

 

Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020

 

On April 17, 2019, Dominion Capital exchanged the notes described in the “Convertible promissory note, Dominion Capital, 18% interest, secured, matures October 23, 2019” and “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures May 18, 2019” sections above into a new note (the “Exchange Note”) with a principal amount of $1,571,134. Interest accrues on the new note at 12% per annum. All principal and accrued interest under the Exchange Note is due on October 17, 2020 and is convertible into shares of the Company’s common stock. The conversion price in effect on the date such conversion is effected shall be equal to (i) initially, $0.10 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 nine months ended September 30, 2019. In connection with the exchange, the Company recorded a loss on settlement of debt of $904,469 on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2019.

 

At September 30, 2019, the Company owed $1,571,134 pursuant to this agreement and will record accretion equal to the debt discount of $179,543 over the remaining term of the note.

  

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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.

 

Convertible promissory note, Silverback, 8% interest, unsecured, matures December 4, 2019

 

On December 4, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $27,500 for an aggregate purchase price of $25,000.

 

The interest on the outstanding principal due under the secured note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note is due on December 4, 2019. The secured note is convertible into shares of the Company’s at 65% of lowest trading price for the fifteen trading days prior to the conversion date.

 

The Company may repay the note at 150% of the outstanding principal amount. If the Company defaults upon the note it bears interest at 18% per annum.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $30,000 resulted in a discount to the note payable of $25,000 and an initial derivative expense of $5,000.

 

During the nine months ended September 30, 2019, Silverback converted $27,500 of principal into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information). As a result of these conversions, the balance of the note was $0 as of September 30, 2019.

 

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 $0.10.

 

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 has a maturity date of January 30, 2020.

 

During the nine months ended September 30, 2019, Mr. Roeske converted $70,000 of principal of the note into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

  

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At September 30, 2019, the Company owed $116,000 pursuant to this agreement and will record accretion equal to the debt discount of $13,342 over the remaining term of the note.

 

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 has a maturity date of January 30, 2020.

 

During the nine months ended September 30, 2019, Mr. Raven converted $70,000 of principal of the note into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

 

At September 30, 2019, the Company owed $364,000 pursuant to this agreement and will record accretion equal to the debt discount of $33,364 over the remaining term of the note.

 

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 accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note is due on August 2, 2020. The secured 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 $0.01 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.

 

At September 30, 2019, the Company owed $123,000 pursuant to this agreement and will record accretion equal to the debt discount of $33,888 over the remaining term of the note.

 

Convertible promissory note, SCS, LLC, 8% interest, unsecured, matures 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 is due on 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 $0.005 per share.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $29,000 resulted in a discount to the note payable of $29,000.

 

At September 30, 2019, the Company owed $51,030 pursuant to this agreement and will record accretion equal to the debt discount of $25,891 over the remaining term of the note.

 

Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019

 

On July 3, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $78,947 for an aggregate purchase price of $75,000.

  

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The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was due on March 15, 2019. The secured note was convertible into shares of the Company’s common stock at the greater of $0.80 or 75% of the lowest VWAP in the 10 trading days prior to conversion.

 

The Company was allowed to repay the note at 115% of the outstanding principal amount. If the Company defaulted upon the note it would have accrued interest at 18% per annum.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $23,000 resulted in a discount to the note payable of $23,000.

 

During the nine months ended September 30, 2019, the Company repaid the note in full and recognized a loss on settlement of debt of $2,300 in the unaudited condensed consolidated statement of operations.

 

Convertible promissory note, M2B Funding, 12% interest, unsecured, matures March 15, 2019

 

On July 31, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the investor a senior secured convertible promissory note in the aggregate principal amount of $78,947 for an aggregate purchase price of $75,000.

 

The interest on the outstanding principal due under the secured note accrued at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note was due on March 15, 2019. The secured note was convertible into shares of the Company’s common stock at the greater of $1 or 75% of the lowest VWAP in the 10 trading days prior to conversion.

 

The Company was allowed to repay the note at 115% of the outstanding principal amount. If the Company defaulted upon the note it would have accrued interest at 18% per annum.

 

The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $103,000 resulted in a discount to the note payable of $75,000 and an initial derivative expense of $28,000.

 

During the nine months ended September 30, 2019, the Company repaid the note in full and recognized a loss on settlement of debt of $90,000 in the unaudited condensed consolidated statement of operations.

 

Assignments of Convertible Related Party Debt to RDW Capital LLC

 

On February 21, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $105,000 of the outstanding principal to a third party. During the year ended December 31, 2018, $55,000 of the note was converted. During the six months ended June 30, 2019, the remaining $50,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

   

On June 7, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $39,375 of the outstanding principal to a third party. During the nine months ended September 30, 2019, the full $39,375 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

  

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Assignments of Convertible Related Party Debt to Silverback

 

On September 26, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreement to sell and assign a total of $75,000 of the outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement. As a result of the assignment, the assigned note bore interest at 5% and the conversion price for the $75,000 of notes assigned was equal to the lesser 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $8. During the year ended December 31, 2018, the full $75,000 was converted into shares of the Company’s common stock.

 

On December 3, 2018, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $50,000 of the outstanding principal to a third party. During the nine months ended September 30, 2019, the full $50,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

 

Assignments of Convertible Related Party Debt to Virtual Capital

 

On January 24, 2019 and March 15, 2019, the holder of the convertible promissory note described in Note 6, Related Party Transactions, entered into agreements to sell and assign a total of $200,000 of the outstanding principal to a third party. During the nine months ended September 30, 2019, the full $200,000 was converted into shares of the Company’s common stock (refer to Note 10, Common Stock, for additional information).

 

9. Derivative Liabilities

 

The embedded conversion options of the convertible debentures described in Note 8, Convertible Debentures, contain conversion features that qualify for embedded derivative classification. The fair value of the liability is re-measured at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on change in fair value of derivatives.

 

Upon the issuance of the convertible debentures described in Note 8, Convertible Debentures, the Company concluded that it only has sufficient shares to satisfy the conversion of some but not all of the outstanding convertible notes, warrants and options. The Company elected to reclassify contracts from equity with the earliest inception date first. As a result, none of the Company’s previously outstanding convertible instruments qualified for derivative reclassification, however, any convertible securities issued after the election qualified for derivative classification. The Company reassesses the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities as of September 30, 2019 and December 31, 2018:

 

    September 30,     December 31,  
    2019     2018  
Balance at the beginning of the period   $ 3,166,886     $ 4,749,712  
Original discount limited to proceeds of notes     246,000       2,839,369  
Conversion of derivative liability     (1,281,889 )     (678,142 )
Repayment of convertible note     (196,468 )     (310,041 )
Change in fair value of embedded conversion option     (1,924,637 )     (6,049,473 )
Addition to derivative due to default penalty     466,000       -  
Derivative issued as part of acquisition     -       302,800  
Fair value of derivative liabilities in excess of notes proceeds received     -       2,274,892  
Derivative warrants issued for services and to acquire non-controlling interest     -       328,833  
Derivative liability settled through the issuance of preferred stock     -       (291,064 )
Balance at the end of the period   $ 475,892     $ 3,166,886  

 

The Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined by using Monte-Carlo model or a Binomial Model based on various assumptions.

 

Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:

 

    Expected volatility   Risk-free interest rate   Expected dividend yield     Expected life
(in years)
At December 31, 2018   172 - 381%   2.45 - 2.63%     0 %    0.04 - 2.78
At September 30, 2019   265 - 355%   1.63 - 1.88%     0 %    0.25 - 2.03

  

10. Common Stock

 

Authorized Shares

 

On November 15, 2017, the Company revised its authorized share capital to increase the number of authorized common shares from 275,000,000 common shares with a par value of $0.00001, to 750,000,000 common shares with a par value of $0.00001.

  

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Treasury Stock

 

The Company holds 621,258 common shares in treasury at a cost of $277,436.

 

Issuance of Shares Pursuant to RDW Capital LLC Convertible Debentures

 

On January 14, 2019, the Company issued 110,742 shares of common stock to RDW Capital LLC upon the conversion of $10,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On February 7, 2019, the Company issued 172,414 shares of common stock to RDW Capital LLC upon the conversion of $12,500 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On February 12, 2019, the Company issued 300,000 shares of common stock to RDW Capital LLC upon the conversion of $21,750 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On March 7, 2019, the Company issued 576,501 shares of common stock to RDW Capital LLC upon the conversion of $39,375 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On May 21, 2019, the Company issued 77,598 shares of common stock to RDW Capital LLC upon the conversion of $5,750 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

Issuance of Shares Pursuant to Silverback Capital Convertible Debentures

 

On January 14, 2019, the Company issued 100,000 shares of common stock to Silverback Capital upon the conversion of $9,746 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On January 28, 2019, the Company issued 200,000 shares of common stock to Silverback Capital upon the conversion of $15,552 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On February 11, 2019, the Company issued 317,600 shares of common stock to Silverback Capital upon the conversion of $24,697 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On May 17, 2019, the Company issued 200,000 shares of common stock to Silverback Capital upon the conversion of $13,000 of principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On July 2, 2019, the Company issued 300,000 shares of common stock to Silverback Capital upon the conversion of $8,500 of principal and $290 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On August 29, 2019, the Company issued 650,000 shares of common stock to Silverback Capital upon the conversion of $6,000 of principal and $338 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.

  

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Issuance of Shares Pursuant to Virtual Capital Convertible Debentures

 

On February 7, 2019, the Company issued 1,071,418 shares of common stock to Virtual Capital upon the conversion of $75,000 of principal and $7,499 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On April 1, 2019, the Company issued 1,400,000 shares of common stock to Virtual Capital upon the conversion of $70,000 of principal and $6,930 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

On April 25, 2019, the Company issued 1,499,960 shares of common stock to Virtual Capital upon the conversion of $55,000 of principal and $19,998 of accrued interest pursuant to the convertible debenture described in Note 8, Convertible Debentures.

 

Issuance of Shares Pursuant to InterCloud Convertible Debentures

 

On May 6, 2019, the Company issued 15,707,163 shares of common stock to InterCloud upon the conversion of $2,897,924 of principal pursuant to the convertible debentures described in Note 6, Related Party Transactions.

 

On August 16, 2019, the Company issued 20,598,088 shares of common stock to InterCloud upon the conversion of $793,894 of principal and $12,063 of accrued interest pursuant to the convertible debentures described in Note 6, Related Party Transactions.

 

Issuance of Shares Pursuant to Employee Convertible Debentures

 

On February 14, 2019, the Company issued 1,400,000 shares of common stock to employees of the Company upon the conversion of $140,000 principal pursuant to the convertible debenture described in Note 8, Convertible Debentures.

  

Issuance of Shares Pursuant to Conversion of Series A Preferred Stock

 

On August 26, 2019, the Company issued 263,713 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On August 30, 2019, the Company issued 333,334 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On September 18, 2019, the Company issued 333,334 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On September 27, 2019, the Company issued 333,334 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

Issuance of Shares for Services

 

On February 1, 2019, the Company issued 2,869,231 shares of common stock to employees and directors of the Company in exchange for services for the Company.

 

On July 18, 2019, the Company issued 833,333 shares of common stock to MZ Group in exchange for services for the Company.

 

Cancellation of Shares for Services

 

On April 12, 2019, the Company cancelled 90,000 shares of common stock issued to former employees for services.

 

On May 22, 2019, the Company cancelled 30,000 shares of common stock issued to former employees for services.

 

On June 18, 2019, the Company cancelled 20,000 shares of common stock issued to former employees for services.

 

11. Preferred Stock

 

Series A

 

On November 15, 2017, the Company created one series of the 20,000,000 preferred shares it is authorized to issue, consisting of 8,000,000 shares, to be designated as Series A preferred stock.

  

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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 $0.40, 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 three and nine months ended September 30, 2019 in accordance with ASC 260-10-599-2. Subsequent to the second amendment, the principal terms of the Series A preferred stock shares are 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 $0.05, subject to adjustment for any subdivision or combination of the Company’s outstanding shares of common stock. The conversion price has a floor of $0.03 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 the three months ended September 30, 2019 (refer to Note 10, Common Stock, 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.

  

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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 in connection with the closing of the Company’s acquisition of WaveTech GmbH (refer to Note 17, Subsequent Events, for additional detail).

 

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12. Share Purchase Warrants

 

The following table summarizes the activity of share purchase warrants for the nine months ended September 30, 2019:

  

    Number of
warrants
    Weighted
average
exercise price
 
Balance at December 31, 2018     1,715,177     $ 2.14  
Issued     284,717       1.20  
Expired     (60,000 )     0.32  
Balance at March 31, 2019     1,939,894     $ 1.96  
                 
Issued     731,938       1.20  
Expired     (20,375 )     74.00  
Balance at June 30, 2019     2,651,457     $ 1.27  
                 
Issued     938,806       1.20  
Expired     (200,000 )     0.0001  
Balance at September 30, 2019     3,390,263     $ 1.32  

 

As of September 30, 2019, the following share purchase warrants were outstanding:

 

Number of warrants     Exercise price     Issuance Date   Expiry date
  137,500       5.10     4/28/2017   4/28/2020
  250,000       1.00     6/27/2017   6/27/2020
  2,263,808 *     1.20     2/14/2018   2/13/2021
  125,000       1.60     2/21/2018   2/21/2021
  500,000       1.00     5/17/2018   5/17/2020
  113,955       1.08     10/10/2018   10/10/2021
  3,390,263                  

 

* This warrant is convertible into 4% of the number of common shares of the Company outstanding. At September 30, 2019, it is 4% of the 56,595,189 shares outstanding as of that date.

  

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13. Leases

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which introduced a lessee model that requires the majority of leases to be recognized on the balance sheet. On January 1, 2019, the Company adopted the ASU using the modified retrospective transition approach and elected the transition option to recognize the adjustment in the period of adoption rather than in the earliest period presented. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of additional net lease assets and lease liabilities of approximately $269,341 and $269,341 respectively, as of January 1, 2019. During the nine months ended September 30, 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 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 September 30, 2019:

 

    September 30,  
    2019  
Operating lease assets   $ 209,767  
         
Operating lease liabilities:        
Current operating lease liabilities     214,283  
Total operating lease liabilities   $ 214,283  

  

Expense related to leases is recorded on a straight-line basis over the lease term, including rent holidays. During the three and nine months ended September 30, 2019, the Company recognized operating lease expense of $61,122 and $167,644, respectively. Operating lease costs are included within selling, administrative and other expenses on the condensed consolidated statements of income and comprehensive income. During the three and nine months ended September 30, 2019, short-term lease costs were $55,413 and $198,703, respectively.

 

Cash paid for amounts included in the measurement of operating lease liabilities were $57,909 and $163,127, respectively, for the three and nine months ended September 30, 2019, and this amount is included in operating activities in the condensed consolidated statements of cash flows. During the three and nine months ended September 30, 2019, the Company reduced its operating lease liabilities by $35,027 and $102,316, respectively, for cash paid.

 

The operating lease liabilities as of September 30, 2019 reflect a weighted average discount rate of between 48% and 58%. Lease payments over the next five years and thereafter are as follows:

 

Year ending December 31,      
2019   $ 66,222  
2020     122,001  
2021     95,914  
2022     86,681  
2023     21,330  
Thereafter     -  
Total lease payments     392,148  
Less: imputed interest     (177,865 )
Total   $ 214,283  

 

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14. Commitments and Contingencies

 

Leases

 

The Company leases certain of its properties under leases that expire on various dates through 2023. Some of these agreements include escalation clauses and provide for renewal options ranging from one to five years. Leases with an initial term of 12 months or less and immaterial leases are not recorded on the balance sheet.

 

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. The Company will also receive $3,000,000 in cash at or before consummation of the transactions contemplated by the share purchase agreement (the “Transactions”). Upon consummation of the Transactions, the current WaveTech GmbH shareholders will beneficially own a majority of the outstanding shares of the Company.

 

The consummation of the Transactions is also subject to the satisfaction or waiver (if permitted by law) of certain closing conditions, including, among other things, (i) the accuracy of the representations and warranties of the parties in all material respects and (ii) the performance of and compliance with the covenants of the parties in all material respects.

 

The parties are required to use commercially reasonable efforts to cause to be taken and to do or cause to be done all actions and things as are necessary under the terms of the share purchase agreement or under applicable law, in order to consummate the Transactions. The parties are also required to, among other things, cooperate in all respects with each other in connection with any filing or submission to any governmental authority in connection with the Transactions.

 

The share purchase agreement also contains certain termination rights for both the Company and WaveTech GmbH, including that the Company or WaveTech GmbH may terminate the share purchase agreement if WaveTech GmbH has not obtained executed assignment agreements from its shareholders holding an aggregate of (i) fifty one percent (51%) of the issued and outstanding shares of WaveTech GmbH by the date that is ninety (90) days following the date of the share purchase agreement and (ii) ninety percent (90%) of the issued and outstanding shares of WaveTech GmbH by March 31, 2020. At October 13, 2019, the executed assignment agreements had not been obtained. As of the date of this report, neither party had chosen to terminate the deal.

 

Upon consummation of the Transactions, the Company’s board of directors will expand to include two new board members from WaveTech GmbH.

 

As of the date of this report, the Company has received $2,989,978 in cash from WaveTech GmbH. Of that amount, $1,325,895 is in escrow to satisfy the amounts outstanding to WaveTech Global for the loan payable discussed in Note 7, Loans Payable. Additionally, the Company recorded a foreign exchange loss of $10,022 in the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2019.

 

On November 14, 2019, the Company closed on its acquisition of WaveTech GmbH (refer to Note 17, Subsequent Events, for additional detail).

 

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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.

 

15. Segment Disclosures

 

During the nine months ended September 30, 2019, the Company had two operating segments including:

 

  AWS/ADEX/TNS, which is comprised of the AWS Entities, the ADEX Entities, and TNS.

 

  Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations.

 

During the nine months ended September 30, 2018, the Company had two operating segments including:

 

  AWS/ADEX, which was comprised of the AWS Entities and the ADEX Entities.

 

  Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations.

 

Factors used to identify the Company’s reportable segments include the organizational structure of the Company and the financial information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative criteria. The Company operates the SGS reporting segment in one geographical area (the United States) and the AWS/ADEX/TNS operating segment in two geographical areas (the United States and Puerto Rico).

 

Financial statement information by operating segment for the three and nine months ended September 30, 2019 is presented below:

  

    Three Months Ended September 30, 2019     Nine Months Ended September 30, 2019  
    Spectrum Global     AWS/ADEX/TNS     Total     Spectrum Global     AWS/ADEX/TNS     Total  
                                     
Net sales   $      -     $ 7,505,937     $ 7,505,937     $      -     $ 27,159,071     $ 27,159,071  
Operating (loss) income     (1,260,709 )     108,762       (1,151,947 )     (2,979,974 )     830,339       (2,149,635 )
Interest expense     126,969       115,583       242,552       1,224,353       267,794       1,492,147  
Depreciation and amortization     -       97,281       97,281       -       288,134       288,134  
Total assets as of September 30, 2019     1,350,584       13,040,470       14,391,054       1,350,584       13,040,470       14,391,054  

 

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Geographic information for the three and nine months ended and as of September 30, 2019 is presented below:

 

    Revenues        
    Three Months Ended September 30,
2019
    Nine Months Ended September 30,
2019
    Long-lived Assets as of September 30,
2019
 
                   
Puerto Rico   $ 383,246     $ 1,094,475     $ 10,128  
United States     7,122,691       26,064,596       6,606,120  
Consolidated total     7,505,937       27,159,071       6,616,248  

 

Financial statement information by operating segment for the three and nine months ended September 30, 2018 is presented below:

 

    Three Months Ended
September 30,
2018
    Nine Months Ended
September 30,
2018
 
    Spectrum Global     AWS/ADEX     Total     Spectrum Global     AWS/ADEX     Total  
                                     
Net sales   $ -     $ 9,671,990     $ 9,671,990     $ -     $ 24,963,876     $ 24,963,876  
Operating (loss) income     (688,561 )     381,109       (307,452 )     (2,873,265 )     539,713       (2,333,552 )
Interest expense     117,361       150,733       268,094       404,073       372,464       776,537  
Depreciation and amortization     -       56,874       56,874       -       161,480       161,480  
Total assets as of December 31, 2018     99,835       12,830,561       12,930,396       99,835       12,830,561       12,930,396  

 

Geographic information for the nine months ended September 30, 2018 and as of December 31, 2018 is presented below:

 

    Revenues        
    Three Months
Ended
September 30,
2018
    Nine Months
Ended
September 30,
2018
    Long-lived Assets as of December 31,
2018
 
                   
Puerto Rico   $ 641,416     $ 1,653,878     $ 3,657  
United States     9,030,574       23,309,998       3,859,387  
Consolidated total     9,671,990       24,963,876       3,863,044  

 

16. Net (Loss) Income Per Share

 

The following table shows the calculation of basic and diluted net (loss) income per share for the three and nine months ended September 30, 2019 and 2018:

 

    For the three months ended     For the nine months ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
                         
Numerator:                        
Net (loss) income attributable to common shareholders     (1,762,522 )     414,485       (3,193,690 )     (2,493,461 )
Convertible note interest     -       147,789       -       -  
Adjusted diluted net (loss) income attributable to common shareholders     (1,762,522 )     562,274       (3,193,690 )     (2,493,461 )
                                 
Denominator                                
Weighted average shares outstanding used in computer net loss (income) per share                                
Basic     44,739,064       1,557,763       27,554,495       1,737,473  
Effect of dilutive stock options and convertible notes payable     -       12,707,716       -       -  
Effect of preferred shares     -       403,326       -       -  
Diluted     44,739,064       14,668,805       27,554,495       1,737,473  
                                 
Basic   $ (0.04 )   $ 0.27     $ (0.12 )   $ (1.44 )
Diluted   $ (0.04 )   $ 0.04     $ (0.12 )   $ (1.44 )

   

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17. Subsequent Events

 

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., pursuant to which the Company issued to Power Up Lending Group Ltd. 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 secured note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note is due on January 22, 2021. 180 days following the issuance of the note, the note is convertible into shares of the Company’s common stock at the greater of $0.005 per share and 70% of the average of the three lowest trading prices in the 15 trading days prior to the conversion date.

 

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 secured note accrues at a rate of 8% per annum. All principal and accrued but unpaid interest under the secured note is due on October 24, 2020. The secured 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 conversion date. The conversion price has a floor of $0.01 per share.

 

Issuance of Shares Pursuant to Conversion of Series A Preferred Stock

 

On October 15, 2019, the Company issued 333,334 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On October 21, 2019, the Company issued 333,334 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

  

On October 24, 2019, the Company issued 333,334 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

  

Issuance of Shares Pursuant to Silverback Capital Convertible Debentures

 

On October 21, 2019, the Company issued 541,650 shares of common stock to Silverback Capital upon the conversion of $627 of accrued interest pursuant to a convertible debenture.

  

Acquisition of WaveTech GmbH

 

On November 14, 2019, the Company closed on its acquisition of WaveTech GmbH per the share purchase agreement discussed in Note 14, Commitments and Contingencies. The closing of the transaction involved the merger of WaveTech GmbH into the Company through a sale and exchange of shares and cash. Pursuant to the share purchase agreement, in exchange for shares of Series C Preferred Stock of the Company (refer to the “Series C Preferred Stock” section of this note for additional detail), at closing the Company acquired sixty percent (60%) of the issued and outstanding shares of WaveTech GmbH. In connection with the closing of the acquisition, $1,325,000 of the amount in escrow as of September 30, 2019 was returned to the Company. The share purchase agreement also contains certain termination rights for both the Company and WaveTech GmbH in the event the Company has not acquired ninety percent (90%) of the issued and outstanding shares of WaveTech GmbH by March 31, 2020.

 

Effective immediately upon the closing of the acquisition, the Board of Directors of the Company appointed Silas Poel as the Chief Operating Officer of the Company. The Board of Directors also agreed to add Silas Poel and Dag Viland as directors.

 

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Series C Preferred Stock

 

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/$0.0325 (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.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plan”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our unaudited consolidated financial statements are stated in United States dollars ($) and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this quarterly report.

 

In this quarterly report, unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to “$” refer to United States dollars and all references to “common stock” refer to the common shares in our capital stock.

 

Unless specifically set forth to the contrary, when used in this report the terms “we”, “our”, the “Company” and similar terms refer to Spectrum Global Solutions, Inc., a Nevada corporation, and its consolidated subsidiaries.

 

The information that appears on our website at www.SpectrumGlobalSolutions.com is not part of this report.

 

Description of Business

 

On February 5, 2018, we completed our corporate jurisdiction continuation from the jurisdiction of the Province of British Columbia to the jurisdiction of the State of Nevada in accordance with the Articles of Conversion and the Articles of Incorporation filed with the Nevada Secretary of State. Our principal offices are located at 300 Crown Oak Centre, Longwood, Florida 32750. Our telephone number is (407) 512-9102. On January 2, 2018, we changed our fiscal year end to December 31.

 

We are a leading provider of services and solutions in the telecommunications industry to top tier communication carriers, service providers, utilities and Fortune 1000 enterprises. The telecommunications sector provides services and solutions throughout the United States, Guam, Canada and the Caribbean.

  

42

 

 

Our telecommunications services are supported by our subsidiaries: AW Solutions, Inc., AW Solutions Puerto Rico, LLC, and Tropical Communications, Inc. (collectively “AWS” or the “AWS Entities”), ADEX Corporation, ADEX Puerto Rico LLC, ADEX Towers, Inc. and ADEX Telecom, Inc. (acquired February 27, 2018) and ADEX Canada, formed in September 2019 (collectively “ADEX” or the “ADEX Entities”), and TNS, Inc. (acquired January 4, 2019) (“TNS”). The AWS Entities provide a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers. The telecommunication division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear master service agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEMs) and prime contractor/project management organization provides us a significant opportunity as a long term leading and well respected industry leader in this marketplace. ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers. ADEX’s managed solutions diversifies the ability to service customers domestically and internationally throughout the project lifecycle. ADEX customers include many leading wireless and wireline telecommunications providers, cable broadband multiple-system operators (“MSOs”) and OEMs. On a weekly basis, the Company deploys hundreds of telecommunication professionals in support of its customers. The Company believes that its global footprint of support is a differentiating factor for national and international-based customers needing a broad range of technical expertise for management of their legacy and next generation networks. The Company seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration. TNS is a Chicago-based structured cabling and next-generation DAS design and installation firm that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures. TNS extends our geographic reach to the Midwest area and our client reach to end-users, such as multinational corporations, universities, school districts and other large organizations and enterprise clientele that have significant ongoing next generation network needs. TNS works both in the U.S. and internationally.

  

We provide a comprehensive array of professional services and solutions to our clients that are applicable across multiple platforms and technologies to include but not limited to: Wi-Fi , Wi-Max and wide-area networks, fiber networks, DAS networks (iDAS/oDAS), small cell distributed networks, public safety networks and enterprise networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs), tower and network aggregators, utility entities and enterprise customers. Our services teams support the deployment of new networks and technologies, as well as expand and maintain existing networks.

 

On November 14, 2019, we closed on our acquisition of WaveTech GmbH, which positions our company as a leading end-to-end technology platform company that provides software, services, and solutions that dramatically increase the availability and cost efficiency of global communication solutions and supporting next generation networks. The expansion of our combined business units provides array of solutions and services which address data-center, wireless, and wireline-based networks across the globe.

 

Our Operating Units

 

Our company is comprised of the following:

 

  The AWS Entities. The AWS Entities are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The AWS Entities services include network systems design, site acquisition services, asset audits, architectural and engineering services, program management, construction management and inspection, construction, installation, maintenance and other technical services. The AWS Entities provide in-field design, computer aided design and drawing services (CADD), fiber and DAS deployments for facilities and outdoor environments.

 

  The ADEX Entities. The ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally. The Company seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration.

 

  TNS. TNS is a Chicago-based structured cabling and next-generation DAS design and installation firm that supports voice, data, video, security and multimedia systems within commercial office buildings, multi-building campus environments, high-rise buildings, data centers and other structures. TNS extends our geographic reach to the Midwest area and our client reach to end-users, such as multinational corporations, universities, school districts and other large organizations and enterprise clientele that have significant ongoing next generation network needs. TNS works both in the U.S. and internationally.

  

  WaveTech GmbH. WaveTech GmbH is a German global technology company focused on next generation energy management and extension, data analytics and monitoring services extending the useful life of battery systems, which is currently working with a Fortune 1000 client base.

 

43

 

 

Results of Operations for the Three Month Periods Ended September 30, 2019 and 2018

 

Revenues

 

Our operating results for the three month periods ended September 30, 2019 and 2018 are summarized as follows:

 

    Three Months Ended        
    September 30,
2019
    September 30,
2018
    Difference  
                   
Revenue   $ 7,505,937     $ 9,671,990     $ (2,166,053 )
Operating expenses     8,657,884       9,979,442       (1,321,558 )
Other (expense) income     (120,404 )     721,937       (842,341 )
Provision for income taxes     (2,099 )     -       (2,099 )
Net (loss) income     (1,274,450 )     414,485       (1,688,935 )

  

Revenue generated during the three months ended September 30, 2019 was $7,505,937, compared to $9,671,990 during the same period ended of 2018. This decrease of $2,166,053 is primarily related to a decrease in sales by AWS due to decreased sales from a major customer. The decrease was partially offset by sales from TNS, which was acquired on January 4, 2019.

 

Expenses

 

During the three months ended September 30, 2019, our operating expenses were $8,657,884, compared to operating expenses of $9,979,442 for the same period of 2018. The decrease is primarily related to a $1,906,380 decrease in cost of revenues as a result of a decrease in sales as discussed above. This was partially offset by an increase in salaries and wages of $575,740 due to the acquisition of TNS.

 

Other (Expense) Income

 

For the three months ended September 30, 2019, we had other expense of $120,404 compared to other income of $721,937 the same period in 2018. The increase in other expense was primarily due to a decrease in gain on change in fair value of derivatives of $850,820 and a loss on settlement of debt of $196,674 compared to a gain of $202,000 in the prior period. This increase was partially offset by a decrease in amortization of discounts on convertible debentures and loans payable of $391,633.

 

Net (Loss) Income

 

For the three months ended September 30, 2019, we incurred a net loss of $1,274,450, compared to a net income of $414,485 for the same period in 2018.

 

Results of Operations for the Nine Month Periods Ended September 30, 2019 and 2018

 

Revenues

 

Our operating results for the nine month periods ended September 30, 2019 and 2018 are summarized as follows:

 

    Nine Months Ended        
    September 30, 2019     September 30, 2018     Difference  
                   
Revenue   $ 27,159,071     $ 24,963,876     $ 2,195,195  
Operating expenses     29,308,706       27,297,428       2,011,278  
Other expense     (533,683 )     (61,151 )     (472,532 )
Provision for income taxes     (22,300 )     -       (22,300 )
Net loss     (2,705,618 )     (2,394,703 )     (310,915 )

  

Revenue generated during the nine months ended September 30, 2019 was $27,159,071, compared to $24,963,876 during the same period of 2018. This increase was primarily due to the January 4, 2019 acquisition of TNS. Additionally, ADEX, which was acquired on February 28, 2018, had a full nine months of operations during the nine months ended September 30, 2019. The increase was partially offset by a decrease in sales for AWS.

  

44

 

 

Expenses

 

During the nine months ended September 30, 2019, our operating expenses were $29,308,706, compared to operating expenses of $27,297,428 for the same period of 2018. The increase is primarily related to a $926,521 increase in cost of revenues as a result of the increase in sales discussed above. Additionally, salaries and wages increased $1,171,125 due to the acquisitions of ADEX and TNS.

 

Other Expense

 

For the nine months ended September 30, 2019, we had other expenses of $533,683 compared to other expenses of $61,151 the same period in 2018. The increase in other expense was primarily related to a decrease in gain on settlement of debt of $503,514, an increase in interest expense of $715,610, a decrease in gain on extinguishment of preferred stock liability of $290,814, and a decrease in gain on disposal of subsidiaries of $577,299. This decrease was partially offset by a decrease in amortization of discounts on convertible debentures and loans payable of $815,980 and an increase in gain on change in fair value of derivatives of $795,995.

 

Net Loss

 

For the nine months ended September 30, 2019, we incurred a net loss of $2,705,618, compared to a net loss of $2,394,703 for the same period in 2018.

 

Liquidity and Capital Resources

 

As of September 30, 2019, our total current assets were $7,774,806 and our total current liabilities were $15,475,659, resulting in a working capital deficit of $7,700,853, compared to a working capital deficit of $8,464,969 as of December 31, 2018.

 

We suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed. In this regard, we have historically raised additional capital through equity offerings and loan transactions.

 

Cash Flows

 

    Nine months ended  
    September 30,  
  2019     2018  
                 
Net cash used in operating activities   $ (676,469 )   $ (1,701,028 )
Net cash (used in) provided by investing activities   $ (1,006,653 )   $ 176,001  
Net cash provided by financing activities   $ 1,325,207     $ 1,797,214  
Change in cash   $ (357,915 )   $ 272,187  

 

The decrease in cash that we experienced in the nine months ended September 30, 2019, compared to the increase during the nine months ended September 30, 2018, is primarily due to the acquisition of TNS and increased funding requirements for ongoing operating activities. During the nine months ended September 30, 2019, net cash paid upon acquisition was $941,593. We expect that our cash position will increase, due to operating profits in the telecommunication division. Over the coming months and year, subject to raising additional funds, we plan to primarily concentrate on our telecommunications business and associated projects.

 

In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders loans. There is no assurance that we will be successful in completing any further private placement financing. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts we spend on our business activities and administrative expenses in order to be within the amount of capital resources that are available to us.

 

As of September 30, 2019, we had cash of $262,678 compared to $620,593 as of December 31, 2018.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Inflation

 

The effect of inflation on our revenue and operating results has not been significant.

  

45

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

Our management, with the participation of our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on management’s evaluation, our Chief Executive Officer concluded that, as a result of the material weaknesses described below, as of December 31, 2018, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

 

  a) Due to our small size, we do not have a proper segregation of duties in certain areas of our financial reporting process. The areas where we have a lack of segregation of duties include cash receipts and disbursements, approval of purchases and approval of accounts payable invoices for payment. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; and
     
  b) We do not have any formally adopted internal controls surrounding its cash and financial reporting procedures.

 

We are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters. In addition, as funds are available, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $300,000 per annum. As our operations are relatively small we expect that both our technical and accounting expertise will be improved, however our overall financial requirements will only increase. We continue to have net cash losses each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. We currently engage an outside accounting firm to assist us in the preparation of our consolidated financial statements this past year and will plan to evaluate our internal capabilities as we integrate the business segments to address the sufficient number of internal accounting personnel to achieve compliance. As necessary, we will engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.

 

Due to the fact that our internal accounting staff is currently small, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

 

Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

46

 

  

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

We are party to litigation currently pending in the Federal District Court for the Southern District of New York, captioned as WaveTech Global, Inc. v. Spectrum Global Solutions, Inc., 19-cv-06485, which arises from a contemplated merger transaction that did not close. The litigation still is in its early stages. Specifically, we filed a motion to dismiss (and a motion for sanctions), and in response, the Court found that Plaintiffs’ complaint failed to adequately allege facts establishing that the Court has subject jurisdiction. The Court accordingly dismissed Plaintiffs’ Complaint without prejudice, Plaintiffs then re-filed their Amended Complaint, and most recently, we filed a motion to dismiss that Amended Complaint in full. Briefing on that motion is not yet complete. More generally, we intend to vigorously assert our claims and defenses as the litigation proceeds. 

 

With the exception of the pending litigation discussed above, we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

 

As a “smaller reporting company,” we are not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Since the beginning of the three month period ended September 30, 2019, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in an annual report on Form 10-K, in a quarterly report on Form 10-Q or in a current report on Form 8-K, or are listed below.

 

On July 2, 2019, we issued 300,000 shares of our common stock to Silverback Capital upon the conversion of $8,500 of principal and $290 of accrued interest pursuant to a convertible debenture.

 

On July 18, 2019, we issued 833,333 shares of our common stock to MZ Group in exchange for services for our company.

 

On August 16, 2019, we issued 20,598,088 shares of our common stock to InterCloud upon the conversion of $793,894 of principal and $12,063 of interest pursuant to a convertible debentures.

 

On August 26, 2019, we issued 263,713 shares of our common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On August 29, 2019, we issued 650,000 shares of our common stock to Silverback Capital upon the conversion of $6,000 of principal and $338 of accrued interest pursuant to a convertible debenture.

 

On August 30, 2019, we issued 333,334 shares of our common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On September 18, 2019, we issued 333,334 shares of our common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.

 

On September 27, 2019, we issued 333,334 shares of our 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.

 

The above issuances of our securities were not registered under the Securities Act and the Company relied on an exemption from registration provided by rule 506 of Regulation D promulgated under the Securities Act for such issuances.

  

47

 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits 

   

Exhibit #   Exhibit Description
31.1   Certification of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certifications of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101 SCH   XBRL Taxonomy Extension Schema Document
     
101 CAL   XBRL Taxonomy Calculation Linkbase Document
     
101 LAB   XBRL Taxonomy Labels Linkbase Document
     
101 PRE   XBRL Taxonomy Presentation Linkbase Document
     
101 DEF   XBRL Taxonomy Extension Definition Linkbase Document

 

48

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  SPECTRUM GLOBAL SOLUTIONS, INC.
     
Date: November 19, 2019 By: /s/ Roger M. Ponder
    Roger M. Ponder
    Chief Executive Officer and Principal Financial Officer

 

   

49

 

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