As filed with the Securities and Exchange Commission on February 8, 2022
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
REGISTRATION STATEMENT
Under
The Securities Act of 1933
(Exact name of Registrant as specified in its charter)
| 3690 | 81-5055489 | |||
| (State or other jurisdiction of | (Primary Standard Industrial | (IRS Employer | ||
| incorporation or organization) | Classification Code Number) | Identification No.) |
980 North Federal Highway, Suite 304
Boca Raton, FL 32432
(407) 512-9102
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Mark W. Porter
Chief Executive Officer
980 North Federal Highway, Suite 304
Boca Raton, FL 32432
(407) 512-9102
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Please send copies of all communications to:
M. Ali Panjwani, Esq.
Pryor Cashman LLP
7 Times Square
New York, New York 10036
(212) 421-4100
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box: ☒
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | 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 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a) may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 8, 2022
High Wire Networks, Inc.
5,000,000 Shares of Common Stock
This prospectus relates to the sale or other disposition from time to time by the selling shareholder identified in this prospectus of up to 5,000,000 shares of common stock issuable upon the conversion of a senior secured convertible promissory note. All of the shares, when sold, will be sold by these selling shareholder. We are not selling any common stock under this prospectus and will not receive any of the proceeds from the sale or other disposition of shares by the selling shareholder. The selling shareholder may sell or otherwise dispose of the shares of common stock covered by this prospectus in a number of different ways. We provide more information about how the selling shareholder may sell or otherwise dispose of their shares of common stock in the section entitled “Plan of Distribution” on page 70. Discounts, concessions, commissions and similar selling expenses attributable to the sale of shares of common stock covered by this prospectus will be borne by the selling shareholder. We will pay the expenses incurred in registering the shares of common stock covered by this prospectus, including legal and accounting fees. We will not be paying any underwriting discounts or commissions in this offering.
Our common stock is quoted on the OTCQB market under the symbol “HWNI” On February 2, 2022, the last reported sale price for our common stock was $0.2104.
Investing in our common stock involves risks. See “Risk Factors” beginning on page 11.
We have not registered the sale of the shares under the securities laws of any state. Brokers or dealers effecting transactions in the shares of common stock offered hereby should confirm that the shares have been registered under the securities laws of the state or states in which sales of the shares occur as of the time of such sales, or that there is an available exemption from the registration requirements of the securities laws of such states.
We have not authorized anyone, including any salesperson or broker, to give oral or written information about this offering, High Wire Networks, Inc., or the shares of common stock offered hereby that is different from the information included in this prospectus. You should not assume that the information in this prospectus, or any supplement to this prospectus, is accurate at any date other than the date indicated on the cover page of this prospectus or any supplement to it.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
TABLE OF CONTENTS
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and may not contain all of the information that you should consider before investing in the shares. You are urged to read this prospectus in its entirety, including the information under “Risk Factors” and our financial statements and related notes included elsewhere in this Prospectus.
Our Company
Overview
High Wire Networks, Inc. (f/k/a Spectrum Global Solutions, Inc.) (“High Wire”) 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, Spectrum reincorporated in the province of British Columbia, Canada.
On April 25, 2017, High Wire entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, High Wire purchased 80.1% of the assets associated with InterCloud’s AW Solutions, Inc., AW Solutions Puerto Rico, LLC (“AWS PR”), and Tropical Communications, Inc. (“Tropical”) (collectively “AWS” or the “AWS Entities”) subsidiaries.
On November 15, 2017, High Wire changed its name to “High Wire Enterprises, Inc.” and reincorporated in the state of Nevada.
On February 6, 2018, High Wire entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Stock Purchase Agreement High Wire 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. and formed ADEX Canada LLC in September 2019 (collectively “ADEX” or the “ADEX Entities”). High Wire completed the acquisition on February 27, 2018.
On February 14, 2018, High Wire entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to High Wire of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by High Wire.
On May 18, 2018, High Wire 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 Mantra’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, High Wire entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and High Wire agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporation.
On September 30, 2020, High Wire sold its TNS subsidiary. On December 31, 2020, Spectrum sold its AWS subsidiary.
HWN, Inc., (d/b/a High Wire Network Solutions, Inc.) (“HWN”) was incorporated in Delaware on January 20, 2017. HWN is a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. HWN’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment.
On February 7, 2019, HWN and JTM Electrical Contractors, Inc. (“JTM”), an Illinois Corporation, entered into an operating agreement through which HWN owns 50% of JTM.
On June 16, 2021, HWN completed a merger with High Wire. The merger was accounted for as a reverse merger. At the time of the reverse merger, High Wire’s subsidiaries included the ADEX Entities, AWS PR and Tropical.
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The Company’s AWS PR and Tropical subsidiaries are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally.
On January 7, 2022, High Wire legally changed its name to High Wire Networks, Inc. For accounting purposes, HWN is the surviving entity and is referred to throughout as “HWN”, “High Wire”, or “the Company”.
We provide the following categories of offerings to our customers:
| ● | Technology Solutions: We provide a comprehensive technology platform and array of professional services and solutions to our clients that are applicable across multiple platforms and technologies to include, but are not limited to: Wi-Fi, Wi-Max and wide-area networks, fiber networks (ISP/OSP), DAS networks (iDAS/oDAS), small cell distributed networks, public safety networks and enterprise networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs), tower and network aggregators, utility entities, government and enterprise customers. Our services teams support the deployment of new networks and technologies, as well as expand, maintain and decommission existing networks. |
| ● | Construction Solutions: We are also a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. |
| ● | Security: High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
The Technology Solutions division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear Master Service Agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEM’s) and prime contractor/project management organization provides us a significant opportunity as a long-term leading and well respected industry leader in this marketplace.
Our Technology Solutions division is supported by its subsidiaries: the AWS Entities and the ADEX Entities. The AWS Entities provide a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers.
Our Operating Units
Our company is comprised of the following:
| ● | Technology Solutions: The Technology Solutions group is composed of the following: High Wire is a global provider of managed security, professional services delivered exclusively through a channel sales model. ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. |
| ● | High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
| ● | Construction Solutions: JTM is a national provider of commercial/industrial electrical solutions delivered exclusively through a channel sales model. AWS PR provides in-field design, computer aided design and drawing services (CADD). Tropical provides fiber and DAS deployments for facilities and outdoor environments. |
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| ● | The High Wire Entities: ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. ADEX seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration. 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. |
Our Industry
The pace of technology evolution continues to accelerate and shows no signs of slowing down. From Enterprise to Carriers and Service Providers, there is a continuous need to plan, install, manage, and protect networks from cybersecurity threats. As technology evolves, the demand for more robust networks, faster speeds, better experiences, and protection from the ever evolving cyber threat landscape continues to grow at a robust pace. This demand has been compounded by the global COVID-19 pandemic and the rapid transition to “work from home” for large swaths of the global workforce. Remote learning, remote video meetings, collaboration software, increased email volumes, all have transformed the way we share information, and created strain on the way business used to be done. Nearly two years later, the technology and telecom industry anticipates these trends to continue for many years to come, and a new hybrid workplace environment evolving.
Wireless infrastructure which has been in place since the 1980’s includes towers, buildings, telephone poles and other facilities to place critical antennas and associated electronics to support a wind range of wireless protocols including WiMax, LTE and now 5G technologies. These wireless trends combined with the wireline transition from copper to fiber, and its corresponding order of magnitude change in bandwidth, are occurring to satisfy the world’s ever-increasing demand for data, which are significant long term drivers of our business model and continued success. There has been a significant transition underway from 4G wireless technology to 5G wireless technology. According to Gartner, spending on 5G infrastructure slowed in 2020 due to the pandemic, and only slightly increased in 2021. Gartner also expects this important transition to accelerate by 39% in 2022. The transition to 5G will accelerate migration to the next generation standard that allows for higher capacity, lower latency, and the architecture required to support new applications. The roll-out of enhanced mobile broadband, small cell architectures, 5G services and billions of new Internet of Things (IoT) connected devices greatly increases the need to modernize networks to accommodate this new breed of connectivity. This long-term trend is a significant enduring opportunity for companies like ours. The transition from trial-based deployments of 5G to a full nationwide implementation is expected to continue beyond 2025. Necessary investments in supporting infrastructure such as fiber optic backhaul is expected by Deloitte Consulting LLP to require $130-$150 billion over the next 5-7 years to adequately support the consumer demand for broadband and wireless densification projects in the United States alone. It is mission-critical for these providers to deliver broadband capacity, reliably, securely and cost-effectively in a solution that supports the massive data consumption of emerging applications such as: augmented reality/virtual reality, video streaming, mobile advertising, IoT, self-driving cars, personalized health monitoring and much more.
With the rapid proliferation of device connectivity and the transition of the workforce to remote or hybrid, the demands on Enterprise networks and all traditional networks have shifted. Cyber security risks have proliferated right along with it. PurpleSec reports that cyber attacks were up 600% as a result of the pandemic and the change in network design and utilization. They also estimate a global cost of over $6 trillion annually in 2021 from ransomware alone. Cyber risk is now something that every business is forced to address around the globe. Closer to home, a patchwork of legislation has emerged in the United States with various states enacting different requirements for protection of sensitive data, networks, and adding duties to disclose. Congress has yet to enact federal laws mandating cyber security protections thus far, but there have been many discussions, task forces, and the Department of Defense has updated standards for private sector companies doing business with them.
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Global Cyber Security spending is expected to exceed $1.75 trillion from 2021 to 2025 according to Cybersecurity Ventures. Enterprises, Service Providers, Wireless Providers, and Managed Service Providers are all working at a feverish pace to keep up with emerging threats. There are over 1500 different “point” solutions on the market today. Most focused on a single part of the problem or “attack surface”. Traditional solutions require a lot of work to deploy, constant monitoring, and well-trained people to interpret the massive amounts of data they produce. This sets the stage for managed service solutions that meld best in breed tools together into a comprehensive solution, manage the solution 24x7x365, to detect and respond to threats.
All of these trends come together at the network level. As networks improve from the Carrier to the Enterprise, demand for building, managing, and protecting these networks will rise as a requisite portion of the predicted industry spend dollars. The contracts to perform these services, provide human capital for them, and protect them will last years.
Industry Trends and Opportunities
| ● | Cyber Security Managed Service |
| ● | Network buildout and deployment |
| ● | IOT creating deployment and cyber security opportunities |
| ● | Fiber backhaul network buildouts |
| ● | Future forward Cloud Area Networks |
| ● | Monetize existing technology intellectual property and develop the portfolio |
| ● | International growth, developing and emerging markets |
| ● | Monetize our existing telecom network (Secure Voice Corp) in new ways |
Competitors
We provide, managed and professional services to carriers, service provider, utilities and enterprise clients on a national and international basis. Demand for our services is strong and growing in all segments of the business. Our channel-oriented sales model provides for very rapid expansion within our clients as they win contracts, develop new programs, build out their own suite of services, or leverage our portfolio to expand their own under private label.
Managed Services is a very competitive market and as such, our strategy to work exclusively through distribution channels with existing customer bases and robust sales organizations that can provide rapid growth. Most of our competitors are not channel only, but rather serve customers directly as well as have a channel component. Many are also wed to their own software, which makes it challenging to pivot as threats change. Some of our significant competitors would be Arctic Wolf, Herjevic Group, SecureWorks, and numerous smaller competitors. This space is rapidly evolving and hiring and retaining talent can be challenging. The company that develops a competitive edge in recruitment and employee retention will have a significant advantage. In a crowded and evolving landscape, there will be a continued need to spend on marketing and sales to acquire partners and help them convert and acquire new customers. We believe that with the combination of businesses we have, we are able to differentiate our services and compete aggressively in this market.
Our current and potential larger competitors in the professional services sector include MasTec, Dycom Industries, Inc., Goodman Networks, Inc., and Black and Veatch. In some segments of our business, a significant portion of our services revenue is currently derived from MSAs and price is often an important factor in awarding such agreements. Accordingly, our competitors may underbid us if they elect to price their services aggressively to procure such business. Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price to our services, and we may not be able to maintain or enhance our competitive position based on thresholds for margin and profitability that has been established as benchmarks within our telecommunications division. The principal competitive factors for our professional services include; agility to respond, geographic presence, breadth of service offerings, technical skills “in-house” professional competencies and methodologies, price, quality of service, safety record, proven performance and industry reputation. We believe we compete favorably with our competitors on the basis of all of these factors.
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Our Competitive Strengths
We believe our market advantage is our positioning as a trusted authority in the space and the long-term relationships, Master Service Agreements (MSAs), industry leading provider of solutions and a reputation and track record of our ability to perform with agility, quality on a seamless and flawless manner for our clients is key in our success to date. High Wire’s ability to provide a wide range of services in a turn-key integrated solution is critical to our clients. Our highly experienced and professional team provide such services as: Managed Services, Cyber security services, Technology Professional Services, RF, civil, electrical, architectural engineering and design, structural engineering, analysis and design, value engineering, network engineering services, network planning, site acquisition, land use planning, feasibility/environmental studies, lease/contract negotiations, Build-To-Suit (BTS) services, audits functions, program planning, professional services, product development, construction and installation, technical services, warehouse and logistics, network decommissioning and maintenance.
We believe our additional strengths described below will enable us to continue to compete effectively and to take advantage of anticipated growth opportunities:
| ● | Service Provider Relationships: We have established relationships with leading wireless and wireline telecommunications providers, cable broadband MSOs, Original Equipment Manufacturers (OEMs), utility companies, Project Management Organizations (PMOs), enterprise clientele and others. |
| ● | Established expertise in Cyber Security and manage services with over 120 established MSP channel partners |
| ● | Established operational expertise and channel partnerships with the largest technology resellers and channel partners in the world |
Sample Customers
| ● | Commercial Operators (Carriers): AT&T, Verizon Communications, T-Mobile/Sprint, Frontier Communications, COX, Open Mobile, Claro, Summit Broadband |
| ● | Technology Resellers such as Presido, Tech Data/Synnex, Worldwide Technologies, NWN Carousel, Sirius, Myriad 360, and many more. |
| ● | Aggregators: Crown Castle, SBA Wireless, Global Tower Partners (GTP), American Tower, Vertical Bridge |
| ● | OEMs: Ericsson, Nokia, Samsung |
| ● | PMOs: MasTec Network Solutions, Ericsson |
| ● | Unified Communications Providers and Carriers: RingCentral, Lumen, Call One, Peerless, Frontier, Windstream |
| ● | Long-Term Master Service Agreements (MSA) and Contracts: We have MSA’s and agreements with service providers, OEMs, software manufacturers, technology resellers, managed services providers, value added distributors and other clients. Our relationships with our customers and existing master service agreements position us to continue to capture existing and emerging opportunities, both domestically and internationally. We believe the barriers are extremely high for new entrants to obtain master service agreements with service providers and OEMs unless there are established relationships, proven ability to execute, national coverage and licensing, spotless safety records and broad and deep insurance coverage. |
| ● | Global Professional Engineering Talents: Our extensive geographical reach and licensing that covers all US states and territories, all of the United Kingdom and Euro Zone, all Canadian Provinces, all of South and Central America, most of the Middle East and Africa, and select areas in the Caribbean and Pacific Rim coupled with our vast engineering experience and expertise supported by talented staff enables our customers to take advantage of our end-to-end solutions and one-stop full turn-key solutions. |
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| ● | Proven Ability to Recruit, Manage and Retain High-Quality Personnel. Our ability to recruit, manage and retain skilled labor is a critical advantage in an industry where a shortage of highly skilled and experience personal is limited. This is often a key factor in our customers selecting High Wire Networks over our competitors. We believe that our highly skilled professionals with professional certifications gives us a competitive edge over our competitors as we continue to expand and meet our national and international clients needs across their entire service footprints. |
| ● | Expansion of our recurring revenue streams through increased focus on managed services, cyber security services, and professional services programs that are multiple years in duration will increase client retention, grow margins, and make the business more predictable through uncertain economic cycles. |
| ● | Increased value creation through continued expansion of our intellectual property (IP) and potential acquisition of additional IP. |
| ● | Our sales organization has extensive expertise and deep industry relationships. Paired with an effective and efficient marketing message that drives new client acquisition, we believe they position us to compete very well. |
| ● | Our highly experienced management team has deep industry knowledge and brings extensive combined experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy. |
Key Aspects
| ● | Strong management team in place |
| ● | Competing in high growth markets |
| ● | Global operational capabilities |
| ● | Effective marketing and strong brand awareness in the industry |
| ● | Vast expertise in technology domains |
| ● | Top customers in the industry in every segment |
| ● | Diverse customer base of nearly 500 channel partners across three different sales channels |
| ● | Focused on high growth markets |
| ● | Multiple data centers/clouds and intellectual property portfolio |
Our Growth Strategy
| ● | Under our current management team we have developed a growth strategy based on a combination of organic growth and growth through operations. Our strategy is focused on building the business on high margin recurring revenue to drive long term sustainability. We have consolidated our sales and management team to leverage the strength of our clients and sell across the existing base. We will continue to focus on existing offerings while adding robust new capabilities. |
| ● | We will continue to grow and expand our award winning, channel only Overwatch Managed Cyber Security platform. This service leverages our extensive expertise to prevent, detect, and respond to cyber threats 24x7x365. These services are in high demand around the world, and our platform is cutting edge. |
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| ● | Grow Revenues and Market Share through Selective Acquisitions. We plan to continue to acquire private companies that enhance our earnings and offer complementary services plus expand our geographic reach and client base. We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths, and capture and retain market share. |
| ● | Aggressively Expand Our Organic Growth Initiatives around our Professional Services Business. Our customers have an extensive array of needs and business segments they serve. We will expand our offerings, skillsets, and geographic reach with our customers to support their clients. As we expand the breadth of our service offerings through both organic growth and selective acquisitions, we believe we have opportunities to expand revenues with our existing clients. |
| ● | Expand Our Relationships with New Service Partners. We plan to capture and expand new relationships. We believe that the business model for the expansion of these relationships, leveraging our core strengths, experience and broad array of service solutions, will support our business model for organic growth. |
| ● | Increase Operating Margins by Leveraging Operating Efficiencies. We believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our newly acquired businesses, we will be positioned to offer more integrated end-to-end solutions and increase operating margins. |
| ● | Expansion of Sales and Marketing. We believe that we can continue to expand our outside sales team, build an effective inside sales team, and provide additional momentum through marketing support and partner focused events. |
Our Services
We provide award winning managed cyber security solutions, managed services, and wholesale communications exclusively through our channel partners around the world. We leverage state of the art cyber security tools to deliver these services. We have built out extensive data center/cloud infrastructure enabling our partners to provide concierge level security services and extend their value proposition to their own clients with a high degree of certainty. Our U.S. based Security Operations Center (SOC) provides SOC as a Service (SOCaaS) to manage all of the tools 24x7x365.
We are a leading provider of professional services and infrastructure solutions to the Technology, Telecom, and Service Provider markets in both Carrier and Enterprise sectors. Our engineering, design, construction, installation, maintenance service offerings supported by our professional teams to support the build-out, maintenance, upgrade and operation of some of the most advanced fiber optic, Ethernet, copper, wireless, wireline, utility and enterprise networks. Our breadth of comprehensive services enables our customers to selectively augment existing services or to outsource entire projects or operational functions.
We offer a full array of operations, construction, project and program management professional required to facilitate the full turn-key completion of networks from the design and planning phase, engineer evaluation and sign off, regulatory, installation, commissioning and maintain various types of Wi-Fi and wide-area networks, DAS networks, and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers. Our services and teams support the deployment of new networks and technologies, expand and maintain existing networks, as well as decommissioning obsolete legacy networks. We also design, install and maintain hardware solutions for the leading OEMs that support voice, data and optical networks. Our consulting and professional solutions to the service-provider and enterprise market in support of all facets of telecommunications and next-generation networks, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services. Our global certified professional services organization offers consulting, design, engineering, integration, implementation and ongoing support of all solutions offered by our company. We believe our ability to respond rapidly is a differentiating factor for national and international-based customers needing a broad range of our services and solutions.
We seek to assist our customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions and Professional Staffing services. We actively maintain a Proprietary Candidate Database with profiles of more than 138,000 telecommunications professionals. The database contains domestic and international based telecommunications professionals of all levels. Our recruiters are able to search the database by any number of criteria including, but not limited to: technical skill sets, equipment types, technology experience, education, years of experience, past employment history, geographic location.
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Customers
On behalf of our clients, we provide services for most of the Fortune 1000 enterprises and the like, software and hardware OEMs, wireless and wireline service providers, cable broadband MSOs and telecommunications OEMs. Our current service provider and OEM customers include leading telecommunications companies, such as Ericsson, Inc., Verizon Communications, T-Mobile/Sprint Corporation and AT&T.
During the year ended December 31, 2020, our top four customers, Ericsson, Inc., Frontier Communications, CBM of America, Inc., and Sullivan & Powers, Inc. accounted for approximately 66% of our total revenues. During the year ended December 31, 2019, our top four customers, Ericsson, Inc., AT&T, SAC Wireless, and Frontier Communications accounted for approximately 82% of our total revenues.
A substantial portion of our revenue is derived from work performed under multi-year master service agreements and multi-year service contracts. We have entered into master service agreements, or MSAs, with numerous service providers and OEMs, and generally have multiple agreements with each of our customers. MSAs are generally the contracting vehicle with work awarded primarily through a competitive bidding process based on the depth of our service offerings, experience, price, geographic coverage and capacity. MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks, but do not require our customers to purchase a minimum amount of services. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers. Most of our MSAs may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether we are or are not in default. In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any prior notice but do allow for payment for services performed up to the point of hold or cancellation.
Suppliers and Vendors
We have supply agreements with major technology vendors and material supply houses. However, for a majority of the professional services we perform, our customers supply the necessary major equipment and materials. We expect to continue to further develop our relationships with our technology vendors and to broaden our scope of work with each of our partners. In many cases, our relationships with our partners have extended for over a decade, which we attribute to our commitment to excellence. It is our objective to selectively expand our partnerships moving forward in order to expand our service offerings.
Safety and Risk Management
We require our employees to participate in internal training and service programs from time to time relevant to their employment and to complete any training programs required by law. The telecommunications division has not had any OSHA recordable incidents, lost workdays or fatalities since inception which includes: 2006 through 2020. Our policy is to review accidents and claims from our operations, examine trends and implement changes in procedures to address safety issues. We have no Claims in our business related to: workers’ compensation claims, general liability and damage claims, or claims related to vehicle accidents, including personal injury and property damage. We insure against the risk of loss arising from our operations up to certain deductible limits in all of the states in which we operate. In addition, we retain risk of loss, up to certain limits, under our employee group health plan. We evaluate our insurance requirements on an ongoing basis to help ensure we maintain adequate levels of coverage internally and externally for our clients.
Our internal policy is to carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments. The estimated costs of claims are accrued as liabilities and include estimates for claims incurred but not reported. If we experience future insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.
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Employees
As of September 30, 2021, we had 297 full-time employees and 13 part-time employees, of whom 32 were in administration and corporate management, 6 were accounting personnel, 19 were sales personnel and 253 are engaged in professional engineering, operations, project managerial and technical roles.
We maintain a core of professional, technical and managerial personnel and add employees as deemed appropriate to address operational and scale requirement related to growth. Additionally, we will “flex” our work force through the use of temporary or agency staff and through subcontractors.
Environmental Matters
A portion of the work related to the telecommunication division which is work associated with above ground and underground networks of our customers. As a result, we are potentially subject to material liabilities related to encountering underground objects that may cause the release of hazardous materials or substances. We are subject to federal, state and local environmental laws and regulations, including those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.
Regulation
Our operations are subject to various federal, state, local and international laws and regulations, including licensing, permitting and inspection requirements applicable to electricians and engineers; building codes; permitting and inspection requirements applicable to construction and installation projects; regulations relating to worker safety and environmental protection; telecommunication regulations affecting our wireless, wireline and fiber optic business; labor and employment laws; laws governing advertising, and laws governing our public business.
Our Corporate Information
Our principal offices are located at 980 N. Federal Highway, Suite 304, Boca Raton, Florida 33432. Our telephone number is (407) 512-9102.
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About This Offering
This prospectus relates to the resale by the selling shareholder identified in this prospectus of up to 5,000,000 shares of common stock, all of which are issuable upon the conversion of a senior secured convertible promissory note. All of the shares, when sold, will be sold by this selling shareholder. The shares offered by this prospectus may be sold in the open market at prevailing prices, through privately negotiated transactions or a combination of these methods. We will not receive any proceeds from the sale of the shares of common stock by the selling shareholder.
| Common Stock Offered | 5,000,000 shares | |
| Common Stock Outstanding at September 30, 2021 | 35,467,238 shares | |
| Use of Proceeds | We will not receive any of the proceeds from the sale of the shares by the selling shareholder. |
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RISK FACTORS
An investment in our in our common stock involves a high degree of risk. The risks described below include all material risks to our company or to investors in this offering that are known to our company. You should carefully consider such risks before participating in this offering. If any of the following risks actually occur, our business, financial condition and results of operations could be materially harmed. As a result, the trading price of our common stock could decline, and you might lose all or part of your investment. When determining whether to buy our common stock, you should also refer to the other information in this prospectus, including our financial statements and the related notes included elsewhere in this prospectus.
In addition to the other information in this prospectus, you should carefully consider the following factors in evaluating us and our business. This prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties, some of which are beyond our control. Should one or more of these risks and uncertainties materialize or should underlying assumptions prove incorrect, our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this prospectus, including the documents incorporated by reference.
There are risks associated with investing in companies such as ours who are primarily engaged in research and development. In addition to risks which could apply to any company or business, you should also consider the business we are in and the following:
Risks Related to Our Financial Results and Financing Plans
We have a history of losses and may continue to incur losses in the future.
We have a history of losses and may continue to incur losses in the future, which could negatively impact the trading value of our common stock. We incurred losses from operations of $1,467,635 and $924,311 for the nine months ended September 30, 2021 and 2020, respectively. In addition, we incurred a net loss attributable to common stockholders of $11,363,994 and $1,128,934 for the nine months ended September 30, 2021 and 2020, respectively. We may continue to incur operating and net losses in future periods. These losses may increase, and we may never achieve profitability for a variety of reasons, including increased competition, decreased growth in the unified communications industry and other factors described elsewhere in this “Risk Factors” section. If we cannot achieve sustained profitability, our stockholders may lose all or a portion of their investment in our company.
If we are unable to grow our revenue, we may never achieve or sustain profitability.
To become profitable, we must, among other things, continue increase our revenues. We had experienced significant growth in recent years, primarily due to our strategic acquisitions. However, in 2020, due to the COVID-19 pandemic, we saw a decline in revenues. Our total revenues increased from $12,394,889 in the nine months ended September 30, 2020 to $24,235,937 in the nine months ended September 30, 2021. In order to become profitable and maintain our profitability, we must, among other things, continue to increase our revenues. We may be unable to sustain our recent revenue growth, particularly if we are unable to develop and market our telecommunications, increase our sales to existing customers or develop new customers. However, even if our revenues continue to grow, they may not be sufficient to exceed increases in our operating expenses or to enable us to achieve or sustain profitability.
Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations.
As of September 30, 2021, we had total indebtedness of $10,154,473, consisting of $1,429,857 of convertible debentures, $5,034,389 of loans payable, $564,032 of loans and convertible loans payable to related parties, and $3,126,195 of factor financing. $6,743,644 of this debt is due within the twelve months ending September 30,2022. Our substantial indebtedness could have important consequences to our stockholders. For example, it could:
| ● | increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business; |
| ● | place us at a competitive disadvantage compared to our competitors that have less debt; |
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| ● | limit our ability to borrow additional funds, dispose of assets, pay dividends and make certain investments; and |
| ● | make us more vulnerable to a general economic downturn than a company that is less leveraged. |
A high level of indebtedness would increase the risk that we may default on our debt obligations. Our ability to meet our debt obligations and to reduce our level of indebtedness will depend on our future performance. General economic conditions and financial, business and other factors affect our operations and our future performance. Many of these factors are beyond our control. We may not be able to generate sufficient cash flows to pay the interest on our debt and future working capital, borrowings or equity financing may not be available to pay or refinance such debt. Factors that will affect our ability to raise cash through an offering of our capital stock or a refinancing of our debt include our ability to access the public equity and debt markets, financial market conditions, the value of our assets and our performance at the time we need capital.
Risks Relating To Our Business
Our inability to obtain additional capital may prevent us from completing our acquisition strategy and successfully operating our business; however, additional financings may subject our existing stockholders to substantial dilution.
We expect to finance our anticipated future strategic acquisitions through public or private equity offerings or debt financings. Additional funds may not be available when we need them on terms that are acceptable to us, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more strategic acquisitions or business plans. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution. In addition, debt financing, if available, may involve restrictive covenants. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time. Our access to the financial markets and the pricing and terms we receive in the financial markets could be adversely impacted by various factors, including changes in financial markets and interest rates.
Our future funding requirements will depend on many factors, including, but not limited to, the costs and timing of our future acquisitions.
A failure to successfully execute our strategy of acquiring other businesses to grow our company could adversely affect our business, financial condition, results of operations and prospects.
We intend to continue pursuing growth through the acquisition of companies or assets to expand our product offerings, project skill sets and capabilities, enlarge our geographic markets, and increase critical mass to enable us to bid on larger contracts. However, we may be unable to find suitable acquisition candidates or to complete acquisitions on favorable terms, if at all. Moreover, any completed acquisition may not result in the intended benefits. For example, while the historical financial and operating performance of an acquisition target are among the criteria we evaluate in determining which acquisition targets we will pursue, there can be no assurance that any business or assets we acquire will continue to perform in accordance with past practices or will achieve financial or operating results that are consistent with or exceed past results. Any such failure could adversely affect our business, financial condition or results of operations. In addition, any completed acquisition may not result in the intended benefits for other reasons and our acquisitions will involve a number of other risks, including:
| ● | We may have difficulty integrating the acquired companies; |
| ● | Our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; |
| ● | We may not realize the anticipated cost savings or other financial benefits we anticipated; |
| ● | We may have difficulty retaining or hiring key personnel, customers and suppliers to maintain expanded operations; |
| ● | Our internal resources may not be adequate to support our operations as we expand, particularly if we are awarded a significant number of contracts in a short time period; |
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| ● | We may have difficulty retaining and obtaining required regulatory approvals, licenses and permits; |
| ● | We may not be able to obtain additional equity or debt financing on terms acceptable to us or at all, and any such financing could result in dilution to our stockholders, impact our ability to service our debt within the scheduled repayment terms and include covenants or other restrictions that would impede our ability to manage our operations; |
| ● | We may have failed to, or be unable to, discover liabilities of the acquired companies during the course of performing our due diligence; and |
| ● | We may be required to record additional goodwill as a result of an acquisition, which will reduce our tangible net worth. |
Any of these risks could prevent us from executing our acquisition growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
Our engagements can require longer implementations and other professional services engagements.
Our implementations can involve a longer period of delivery of telecommunication and infrastructure services and technologies. In addition, existing customers for other professional services projects often retain us for those projects sometime beyond an initial implementation. A successful implementation or other professional services project requires a close working relationship between us, the customer and often third- party consultants and systems integrators who assist in the process. These factors may increase the costs associated with completion of any given project award/sale, increase the timeline risks of collection of amounts due during implementations or other professional services projects, and increase risks of delay of such projects. Delays in the completion of an implementation or any other professional services project may require that the revenues associated with such implementation or project be recognized over a longer period than originally anticipated, or may result in disputes with customers, third-party consultants or systems integrators regarding performance as originally anticipated. Such delays in the implementation may cause material fluctuations in our operating results. In addition, customers may defer implementation projects or portions of such projects and such deferrals could have a material adverse effect on our business and results of operations.
Our future success is substantially dependent on third-party relationships.
An element of our strategy is to establish and maintain alliances with other companies, such as suppliers of products and services for construction and maintenance. These relationships enhance our status in the marketplace, which generates new business opportunities and marketing channels and, in certain cases, additional revenue and profitability. To effectively generate revenue out of these relationships, each party must coordinate and support required hence the sales and marketing efforts of the other, often including making a sizable investment in such sales and marketing activity. Our inability to establish and maintain effective alliances with other companies could impact our success in the marketplace, which could materially and adversely impact our results of operations. In addition, as we cannot control the actions of these third-party alliances, if these companies suffer business downturns or fail to meet their objectives, we may experience a resulting diminished revenue and decline in results of operations.
If we do not accurately estimate the overall costs when we bid on a contract that is awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.
A portion of our revenues from our technology and professional services offerings are derived from fixed unit price contracts that require us to perform the contract for a fixed unit price irrespective of our actual costs. We bid for these contracts based on our estimates of overall costs, but cost overruns may cause us to incur losses. The costs incurred and any net profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
| ● | onsite conditions that differ from those assumed in the original bid and do not qualify for a job change order; |
| ● | delays in project starts or completion; |
| ● | contract modifications creating unanticipated costs not covered by change orders; |
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| ● | development of new technologies; |
| ● | availability and skill level of workers in the geographic location of a project; |
| ● | our suppliers’ or subcontractors’ failure to perform due to various reasons, including bankruptcy; |
| ● | fraud or theft committed by our employees or others; |
| ● | citations or fines issued by any governmental authority; |
| ● | delays caused by any government authority; |
| ● | difficulties in obtaining required governmental permits or approvals or performance bonds; |
| ● | labor and material cost greater than anticipated; |
| ● | changes in applicable laws and regulations; and |
| ● | claims or demands from third parties alleging damages arising from our work or from the project of which our work is a part. |
These factors may cause actual reduced profitability or losses on projects, which could adversely affect our business, financial condition, results of operations and prospects.
Our contracts may require us to perform extra or change order work, which can result in disputes and adversely affect our business, financial condition, results of operations and prospects.
Our contracts generally require us to perform extra or change order work as directed by the customer, even if the customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could adversely affect our reported working capital and results of operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
We derive a significant portion of our revenue from a few customers and the loss of one of these customers, or a reduction in their demand for our services, could adversely affect our business, financial condition, results of operations and prospects.
Our customer base on the telecommunication sector is highly concentrated. Due to the size and nature of our contracts, one or a few customers have represented a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. Our top four customers accounted for approximately 66% and 82% of our revenue in the years ended December 31, 2020 and 2019, respectively. Revenues under our contracts with significant customers may continue to vary from period to period depending on the timing or volume of work that those customers order or perform with in-house service organizations. A limited number of customers may continue to comprise a substantial portion of our revenue for the foreseeable future.
Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could adversely affect our business, financial condition, results of operations and prospects. We could lose business from a significant customer for a variety of reasons, including:
| ● | the consolidation, merger or acquisition of an existing customer, resulting in a change in procurement strategies employed by the surviving entity that could reduce the amount of work we receive; |
| ● | our performance on individual contracts or relationships with one or more significant customers could become impaired due to another reason, which may cause us to lose future business with such customers and, as a result, our ability to generate income would be adversely impacted; |
| ● | key customers could slow or stop spending on initiatives related to projects we are performing for them due to increased difficulty in the markets as a result of economic downturns or other reasons. |
Since many of our customer contracts allow our customers to terminate the contract without cause, our customers may terminate their contracts with us at will, which could impair our business, financial condition, results of operations and prospects.
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Our failure to adequately expand our direct sales force will impede our growth.
We will need to continue to expand and optimize our sales infrastructure in order to grow our customer base and our business. We plan to continue to expand our account management/sales force, both domestically and internationally. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. If we are unable to hire, develop and retain talented account management/sales personnel or if the personnel are unable to achieve desired productivity levels in a reasonable period of time, we may not be able to realize the intended benefits of this investment or increase our revenue.
If we are unable to attract and retain qualified executive officers and managers, we will be unable to operate efficiently, which could adversely affect our business, financial condition, results of operations and prospects.
We depend on the continued efforts and abilities of our management, as well as the senior management of our subsidiaries, to establish and maintain our customer relationships and identify strategic opportunities. The loss of any one of them could negatively affect our ability to execute our business strategy and adversely affect our business, financial condition, results of operations and prospects. Competition for managerial talent with significant industry experience is high and we may lose access to executive officers for a variety of reasons, including more attractive compensation packages offered by our competitors. Although we have entered into employment agreements with certain of our senior level management, we cannot guarantee that any of them or other key management personnel will remain employed by us for any length of time.
We derive a significant portion of our revenues from master service agreements that may be cancelled by customers on short notice, or which we may be unable to renew on favorable terms or at all.
During the years ended December 31, 2020 and 2019 we derived approximately 100% of our revenues from master service agreements and long-term contracts, none of which require our customers to purchase a minimum amount of services. The majority of these contracts may be cancelled by our customers upon minimal notice (typically 60 days), regardless of whether or not we are in default. In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any notice.
These agreements typically do not require our customers to assign a specific amount of work to us until a purchase order or statement of work is signed. Consequently, projected expenditures by customers are not assured until a definitive purchase order or statement of work is placed with us and the work is completed. Furthermore, our customers generally require competitive bidding of these contracts. As a result, we could be underbid by our competitors or be required to lower the prices charged under a contract being rebid. The loss of work obtained through master service agreements and long-term contracts or the reduced profitability of such work could adversely affect our business or results of operations.
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Unanticipated delays due to adverse weather conditions, global climate change and difficult work sites and environments may slow completion of our contracts, impair our customer relationships and adversely affect our business, financial condition, results of operations and prospects.
Because some of our work in the telecommunication sector is performed outdoors, our business is impacted by extended periods of inclement weather and is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur. Generally, inclement weather is more likely to occur during the winter season, which falls during our first and fourth fiscal quarters. Additionally, adverse weather conditions can result in project delays or cancellations, potentially causing us to incur additional unanticipated costs, reductions in revenues or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk that actual site conditions vary from those expected. Significant periods of bad weather typically reduce profitability of affected contracts, both in the current period and during the future life of affected contracts, which can negatively affect our results of operations in current and future periods until the affected contracts are completed.
Some of our projects involve challenging engineering, procurement and construction phases that may occur over extended time periods, sometimes up to several years. We may encounter difficulties in engineering, delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but which may impact our ability to complete a project within the original delivery schedule. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of these costs. Any such delays, cancellations, defects, errors or other failures to meet customer expectations could result in damage claims substantially in excess of revenue associated with a project. These factors could also negatively impact our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could adversely affect our business, financial condition, results of operations and prospects.
Our operations are subject to laws and regulations relating to workplace safety and worker health that, among other things, regulate employee exposure to hazardous substances. While immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, we may nonetheless unknowingly employ illegal immigrants. Violations of laws and regulations could subject us to substantial fines and penalties, cleanup costs, third- party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
Fines, judgments and other consequences resulting from our failure to comply with regulations or adverse outcomes in litigation proceedings could adversely affect our business, financial condition, results of operations and prospects.
From time to time, we may be involved in lawsuits and regulatory actions, including class action lawsuits that are brought or threatened against us in the ordinary course of business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, violations of the Fair Labor Standards Act and state wage and hour laws, employment discrimination, breach of contract, property damage, punitive damages, civil penalties, and consequential damages or other losses, or injunctive or declaratory relief. Any defects or errors, or failures to meet our customers’ expectations could result in large damage claims against us. Claimants may seek large damage awards and, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. Any failure to properly estimate or manage cost, or delay in the completion of projects, could subject us to penalties.
The ultimate resolution of these matters through settlement, mediation or court judgment could have a material impact on our financial condition, results of operations and cash flows. Regardless of the outcome of any litigation, these proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves. When appropriate, we establish reserves for litigation and claims that we believe to be adequate in light of current information, legal advice and professional indemnity insurance coverage, and we adjust such reserves from time to time according to developments. If our reserves are inadequate or insurance coverage proves to be inadequate or unavailable, our business, financial condition, results of operations and prospects may suffer.
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If we are required to reclassify independent contractors as employees, we may incur additional costs and taxes which could adversely affect our business, financial condition, results of operations and prospects.
We use a significant number of independent contractors in our operations for whom we do not pay or withhold any federal, state or provincial employment tax. There are a number of different tests used in determining whether an individual is an employee or an independent contractor and such tests generally take into account multiple factors. There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change, or at least challenge, the classification of our independent contractors. Although we believe we have properly classified our independent contractors, the U.S. Internal Revenue Service or other U.S. federal or state authorities or similar authorities of a foreign government may determine that we have misclassified our independent contractors for employment tax or other purposes and, as a result, seek additional taxes from us or attempt to impose fines and penalties. If we are required to pay employer taxes or pay backup withholding with respect to prior periods with respect to or on behalf of our independent contractors, our operating costs will increase, which could adversely impact our business, financial condition, results of operations and prospects.
Our dependence on subcontractors and suppliers could increase our cost and impair our ability to complete contracts on a timely basis or at all.
We rely on third-party subcontractors to perform some of the work on our contracts. We also rely on third-party suppliers to provide materials needed to perform our obligations under those contracts. We generally do not bid on contracts unless we have the necessary subcontractors and suppliers committed for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot engage subcontractors or suppliers, our ability to bid for contracts may be impaired. In addition, if a subcontractor or third-party supplier is unable to deliver its goods or services according to the negotiated terms for any reason, we may suffer delays and be required to purchase the services from another source at a higher price. We sometimes pay our subcontractors and suppliers before our customers pay us for the related services. If customers fail to pay us and we choose, or are required, to pay our subcontractors for work performed or pay our suppliers for goods received, we could suffer an adverse effect on our business, financial condition, results of operations and prospects.
Our insurance coverage may be inadequate to cover all significant risk exposures.
We will be exposed to liabilities that are unique to the services we provide. While we intend to maintain insurance for certain risks, the amount of our insurance coverage may not be adequate to cover all claims or liabilities, and we may be forced to bear substantial costs resulting from risks and uncertainties of our business. It is also not possible to obtain insurance to protect against all operational risks and liabilities. The failure to obtain adequate insurance coverage on terms favorable to us, or at all, could have a material adverse effect on our business, financial condition, results of operations and prospects.
A portion of our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
Our workers are subject to hazards associated with providing construction and related services on construction sites. For example, some of the work we perform is underground. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil containing pollutants that could result in a rupture and discharge of pollutants. In such a case, we may be liable for fines and damages. These operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. Even though we believe that the insurance coverage we maintain is in amounts and against the risks that we believe are consistent with industry practice, this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our business, financial condition, results of operations and prospects could be adversely affected.
The Occupational Safety and Health Act of 1970, as amended, or OSHA, establishes certain employer responsibilities, including the maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Health and Safety and Health Administration and various recordkeeping, disclosure and procedural requirements. While we have invested, and will continue to invest, substantial resources in occupational health and safety programs, serious accidents or violations of OSHA rules may subject us to substantial penalties, civil litigation or criminal prosecution, which could adversely affect our business, financial condition, results of operations and prospects. However, our record to date has had no incidents or losses and we are in full compliance with a 100% safety record.
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Errors in our contracting services may give rise to claims against us, increase our expenses, or harm our reputation.
Our contracting services are complex and our final work product may contain errors. We have not historically accrued reserves for potential claims as they have been immaterial. The costs associated with such claims, including any legal proceedings, could adversely affect our business, financial condition, results of operations and prospects.
The extent to which the coronavirus (“COVID-19”) outbreak and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Global health concerns relating to the coronavirus outbreak have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. Risks related to consumers and businesses lowering or changing spending, which impact domestic and international spend. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and may further impact our workforce and operations and the operations of our customers, suppliers and business partners. These measures may remain in place for a significant period of time and they are likely to continue to adversely affect our business, results of operations and financial condition.
The spread of the coronavirus has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.
The extent to which the coronavirus outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the coronavirus outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of the coronavirus and a global pandemic, and, as a result, the ultimate impact of the coronavirus outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations, and we will continue to monitor the coronavirus situation closely. As of March 2021, multiple variants of the COVID-19 virus are circulating globally that are highly transmissible, and there is uncertainty around vaccine effectiveness on the new strains of the virus. Uncertainty around vaccine distribution, supply and effectiveness will impact when the negative economic effects as a result of COVID-19 will abate or end and the timing of such recovery may affect our financial condition.
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Risks Related to Our Industry
Our industry is highly competitive, with a variety of larger companies with greater resources competing with us, and our failure to compete effectively could reduce the number of new contracts awarded to us or adversely affect our market share and harm our financial performance.
The contracts on which we bid are generally awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes based on other factors, such as shorter contract schedules, larger scale to complete projects or prior experience with the customer. Managed Services is a very competitive market and as such, our strategy to work exclusively through distribution channels with existing customer bases and robust sales organizations that can provide rapid growth. Most of our competitors are not channel only, but rather serve customers directly as well as have a channel component. Many are also wed to their own software, which makes it challenging to pivot as threats change. Some of our significant competitors would be Arctic Wolf, Herjevic Group, SecureWorks, and numerous smaller competitors. Our current and potential larger competitors in the professional services sector include MasTec, Dycom Industries, Inc., Goodman Networks, Inc., and Black and Veatch. In some segments of our business, price is often an important factor in determining which service provider is selected by our customers, especially on smaller, less complex projects. As a result, any organization with adequate financial resources and access to technical expertise may become a competitor. Smaller competitors are sometimes able to win bids for these projects based on price alone because of their lower costs and financial return requirements. Additionally, our competitors may develop the expertise, experience and resources to provide services that are equal or superior in price to our services, and we may not be able to maintain or enhance our competitive position.
Some of our competitors have already achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. A number of national companies in our industry are larger than we are and, if they so desire, could establish a presence in our markets and compete with us for contracts. As a result of this competition, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer. If we are unable to compete successfully in our markets, our business, financial condition, results of operations and prospects could be adversely affected.
Many of the industries we serve are subject to consolidation and rapid technological and regulatory change, and our inability or failure to adjust to our customers’ changing needs could reduce demand for our services.
We derive, and anticipate that we will continue to derive, a substantial portion of our revenue from customers in the telecommunications and utilities industries. The telecommunications and utilities industries are subject to rapid changes in technology and governmental regulation. Changes in technology may reduce the demand for the services we provide. For example, new or developing technologies could displace the wireline systems used for the transmission of voice, video and data, and improvements in existing technology may allow telecommunications providers to significantly improve their networks without physically upgrading them. Alternatively, our customers could perform more tasks themselves, which would cause our business to suffer. Additionally, the telecommunications and utilities industries have been characterized by a high level of consolidation that may result in the loss of one or more of our customers. Our failure to rapidly adopt and master new technologies as they are developed in any of the industries we serve or the consolidation of one or more of our significant customers could adversely affect our business, financial condition, results of operations and prospects.
Further, many of our telecommunications customers are regulated by the Federal Communications Commission, or the FCC, and other international regulators. The FCC and other regulators may interpret the application of their regulations in a manner that is different than the way such regulations are currently interpreted and may impose additional regulations, either of which could reduce demand for our services and adversely affect our business and results of operations.
Economic downturns could cause capital expenditures in the industries we serve to decrease, which may adversely affect our business, financial condition, results of operations and prospects.
The demand for our services has been, and will likely continue to be, cyclical in nature and vulnerable to general downturns in the United States economy. The current election cycle may cause economic uncertainty. The wireless and wireline telecommunications industry are cyclical in nature and vulnerable to general downturns in the United States and international economies. Our customers are affected by economic changes that decrease the need for or the profitability of their services. This can result in a decrease in the demand for our services and potentially result in the delay or cancellation of projects by our customers. Slow-downs in real estate, fluctuations in commodity prices and decreased demand by end-customers for services could affect our customers and their capital expenditure plans. As a result, some of our customers may opt to defer or cancel pending projects. A downturn in overall economic conditions also affects the priorities placed on various projects funded by governmental entities and federal, state and local spending levels.
In general, economic uncertainty makes it difficult to estimate our customers’ requirements for our services. Our plan for growth depends on expanding our company both in the United States and internationally. If economic factors in any of the regions in which we plan to expand are not favorable to the growth and development of the telecommunications industries in those countries, we may not be able to carry out our growth strategy, which could adversely affect our business, financial condition, results of operations and prospects.
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Other Risks Relating to Our Company and Results of Operations
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our past telecommunications operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance.
Our operating results have fluctuated and could fluctuate in the future. Factors that may contribute to fluctuations include:
| ● | changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries we serve; |
| ● | our ability to effectively manage our working capital; |
| ● | our ability to satisfy consumer demands in a timely and cost-effective manner; |
| ● | pricing and availability of labor and materials; |
| ● | shifts in geographic concentration of customers, supplies and labor pools; and |
| ● | seasonal fluctuations in demand and our revenue. |
Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
To prepare financial statements in conformity with GAAP, management is required to make estimates and assumptions as of the date of the financial statements that affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include:
| ● | contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims; |
| ● | provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others; |
| ● | valuation of assets acquired and liabilities assumed in connection with business combinations; |
| ● | accruals for estimated liabilities, including litigation and insurance reserves; and |
| ● | goodwill and intangible asset impairment assessment. |
At the time the estimates and assumptions are made, we believe they are accurate based on the information available. However, our actual results could differ from, and could require adjustments to, those estimates.
We exercise judgment in determining our provision for taxes in the Canada, United States and Puerto Rico that are subject to tax authority audit review that could result in additional tax liability and potential penalties that would negatively affect our net income.
The amounts we record in intercompany transactions for services, licenses, funding and other items affects our potential tax liabilities. Our tax filings are subject to review or audit by the U.S. Internal Revenue Service and state, local and foreign taxing authorities. We exercise judgment in determining our worldwide provision for income and other taxes and, in the ordinary course of our business, there may be transactions and calculations where the ultimate tax determination is uncertain. Examinations of our tax returns could result in significant proposed adjustments and assessment of additional taxes that could adversely affect our tax provision and net income in the period or periods for which that determination is made.
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Risks Related to our Common Stock and this Offering
An active trading market for our common stock may not develop.
Our common stock has not been listed on any national securities exchange prior to this offering and has not been quoted on The OTC Bulletin Board or any of the marketplaces of OTC Link. We cannot predict the extent to which investor interest in us will lead to the development of an active public trading market or how liquid that public market may become.
Additionally, because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including making an individualized written suitability determination for the purchaser and receiving the purchaser’s written consent prior to the transaction. Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
Our stock price may be volatile, which could result in substantial losses to investors and litigation.
In addition to changes to market prices based on our results of operations and the factors discussed elsewhere in this “Risk Factors” section, the market price of and trading volume for our common stock may change for a variety of other reasons, not necessarily related to our actual operating performance. The capital markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, the average daily trading volume of the securities of small companies can be very low, which may contribute to future volatility. Factors that could cause the market price of our common stock to fluctuate significantly include:
| ● | the results of operating and financial performance and prospects of other companies in our industry; |
| ● | strategic actions by us or our competitors, such as acquisitions or restructurings; |
| ● | announcements of innovations, increased service capabilities, new or terminated customers or new, amended or terminated contracts by our competitors; |
| ● | the public’s reaction to our press releases, other public announcements, and filings with the Securities and Exchange Commission; |
| ● | lack of securities analyst coverage or speculation in the press or investment community about us or market opportunities in the telecommunications services and staffing industry; |
| ● | changes in government policies in the United States and, as our international business increases, in other foreign countries; |
| ● | changes in earnings estimates or recommendations by securities or research analysts who track our common stock or failure of our actual results of operations to meet those expectations; |
| ● | market and industry perception of our success, or lack thereof, in pursuing our growth strategy; |
| ● | changes in accounting standards, policies, guidance, interpretations or principles; |
| ● | any lawsuit involving us, our services or our products; |
| ● | arrival and departure of key personnel; |
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| ● | sales of common stock by us, our investors or members of our management team; and |
| ● | changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural or man-made disasters. |
Any of these factors, as well as broader market and industry factors, may result in large and sudden changes in the trading volume of our common stock and could seriously harm the market price of our common stock, regardless of our operating performance. This may prevent you from being able to sell your shares at or above the price you paid for your shares of our common stock, if at all. In addition, following periods of volatility in the market price of a company’s securities, stockholders often institute securities class action litigation against that company. Our involvement in any class action suit or other legal proceeding could divert our senior management’s attention and could adversely affect our business, financial condition, results of operations and prospects.
The sale or availability for sale of substantial amounts of our common stock could adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock, or the perception that these sales could occur, could adversely affect the market price of our common stock and could impair our future ability to raise capital through common stock offerings. As of September 30, 2021, we had 35,467,238 shares of common stock issued and 35,465,167 shares outstanding, of which 429,168 shares were restricted securities pursuant to Rule 144 promulgated by the SEC. The sale of these shares into the open market may adversely affect the market price of our common stock.
In addition, at September 30, 2021, we also had outstanding $1,893,884 aggregate principal and $155,412 accrued interest of convertible loans payable to related parties and convertible notes that were convertible into 22,657,098 shares of common stock on that date. However, we cannot currently determine the total number of shares of our common stock that may be issued upon the conversion or repayment of our convertible notes because the total number of shares and the conversion prices or the prices at which we can issue our common stock to pay down the principal of and interest on our convertible notes depend on a number of factors, including the prices and nature of any equity securities we may issue in the future and the market prices of our common stock in the periods leading up to any particular amortization payment date on which we elect to make amortization payments on our convertible notes in shares of our common stock. As of September 30, 2021, there were also outstanding warrants to purchase an aggregate of 2,880 shares of our common stock at a weighted-average exercise price of $68.79 per share and outstanding stock options to purchase 10,614,351 shares of our common stock at a weighted average exercise price of $0.287 per share, all of which warrants and stock options were exercisable as of such date. The conversion of a significant principal amount of our outstanding convertible debt securities into shares of our common stock, our repayment of a significant amount of principal, interest or other amounts payable under such debt securities in shares of our common stock or the exercise of outstanding warrants at prices below the market price of our common stock could adversely affect the market price of our common stock. The market price of our common stock also may be adversely affected by our issuance of shares of our capital stock or convertible securities in connection with future acquisitions, or in connection with other financing efforts.
If we do not meet the listing standards of a national securities exchange our investors’ ability to make transactions in our securities will be limited and we will be subject us to additional trading restrictions.
Our securities currently are traded over-the-counter on the OTC QB market and are not qualified to be listed on a national securities exchange, such as NASDAQ. Accordingly, we face significant material adverse consequences, including:
| ● | a limited availability of market quotations for our securities; |
| ● | reduced liquidity with respect to our securities; |
| ● | our shares of common stock are currently classified as “penny stock” which requires brokers trading in our shares of common stock to adhere to more stringent rules, resulting in a reduced level of trading activity in the secondary trading market for our shares of common stock; |
| ● | a limited amount of news and analyst coverage for our company; and |
| ● | a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Since our common stock is traded on the OTC Pink, our common stock is a covered security. Although the states are preempted from regulating the sale of our securities, the federal statute allows the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer traded over-the-counter, our common stock would not be a covered security and we would be subject to regulation in each state in which we offer our securities.
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Our shares of common stock are subject to penny stock regulations. Because our common stock is a penny stock, holders of our common stock may find it difficult or may be unable to sell their shares.
The SEC has adopted rules that regulate broker/dealer practices in connection with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with bid and offer quotations for the penny stock, the compensation of the broker/dealer, and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules, the broker/dealer must make a special written determination that a penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in any secondary market for a stock that becomes subject to the penny stock rules, and accordingly, holders of our common stock may find it difficult or may be unable to sell their shares.
We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock.
We have never paid cash dividends and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any earnings to finance our operations and growth. As a result, any short-term return on your investment will depend on the market price of our common stock, and only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. The decision whether to pay dividends will be made by our board of directors in light of conditions then existing, including, but not limited to, factors such as our financial condition, results of operations, capital requirements, business conditions, and covenants under any applicable contractual arrangements. Investors seeking cash dividends should not invest in our common stock.
If equity research analysts do not publish research or reports about our business, or if they issue unfavorable commentary or downgrade our common stock, the market price of our common stock will likely decline.
The trading market for our common stock will rely in part on the research and reports that equity research analysts, over whom we have no control, publish about us and our business. We may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the market price for our common stock could decline. In the event we obtain securities or industry analyst coverage, the market price of our common stock could decline if one or more equity analysts downgrade our common stock or if those analysts issue unfavorable commentary, even if it is inaccurate, or cease publishing reports about us or our business.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” and elsewhere in this prospectus constitute forward-looking statements. These statements involve risks known to us, significant uncertainties, and other factors which may cause our 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 those forward-looking statements.
You can identify forward-looking statements by the use of the words “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “proposed,” or “continue” or the negative of those terms. These statements are only predictions. In evaluating these statements, you should specifically consider various factors, including the risks outlined above. These factors may cause our actual results to differ materially from any forward-looking statement.
Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our common stock by the selling shareholder.
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Market for Common Stock
Our common stock is not traded on any exchange. There is no trading activity in our securities and there can be no assurance that a regular trading market for our common stock will ever be developed.
Holders
As of September 30, 2021, there were 319 holders of record of our common stock.
Dividend Policy
We have never paid or declared any dividend on our common stock and we do not anticipate paying cash dividends in the foreseeable future.
Securities authorized for issuance under equity compensation plans
As of September 30, 2021, there are 333,333 shares authorized under the Equity Incentive plan.
Options granted in the future under the Incentive Plan are within the discretion of our board of directors. The following table summarizes the number of shares of our common stock authorized for issuance under our equity compensation plans.
| Plan Category |
(a) Number of Securities to be Issued Upon Exercise of Outstanding Options |
(b) Weighted- Average Exercise of Outstanding Options |
(c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation securities in column (a)) |
|||||||||
| Equity compensation plans approved by security holders | 333,333 | $ | 0.58 | - | ||||||||
| Equity compensation plans not approved by security holders | 8,375,366 | $ | 0.2643 | - | ||||||||
| Total | 8,708,699 | $ | 0.2764 | - | ||||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” included elsewhere in this report.
Basis of Presentation
Our consolidated financial statements are stated in United States dollars ($) and are prepared in accordance with United States generally accepted accounting principles. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this prospectus.
Unless otherwise specified, all dollar amounts are expressed in United States dollars. All references to “$” 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 HWN, Inc., a Nevada corporation, and its consolidated subsidiaries.
The information that appears on our websites at www.HighWireNetworks.com and www.HighWireGlobalSolutions.com is not part of this report.
Description of Business
Business Overview
Telecommunications
Telecommunications providers, technology and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring. As a result, we believe there is significant opportunity to expand both our United States and international telecommunications solutions services and staffing services capabilities. As we continue to expand our presence in the marketplace, we will target those customers going through new network deployments and wireless service upgrades.
We expect to continue to increase our gross margins by leveraging our single-source end-to-end network to efficiently provide a full spectrum of end-to-end next-generation network solutions and staffing services to our customers. We believe our solutions and services offerings can alleviate some of the inefficiencies typically present in our industry, which result, in part, from the highly-fragmented nature of the telecommunications industry, limited access to skilled labor and the difficulty industry participants have in managing multiple specialty-service providers to address their needs. As a result, we believe we can provide superior service to our customers and eliminate certain redundancies and costs for them. We believe our ability to address a wide range of end-to-end solutions, network infrastructure and project-staffing service needs of our telecommunications industry clients is a key competitive advantage. Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, and installation and integration services) allows customers to turn to a single source for those specific specialty services, as well as to entrust us with the execution of entire turn-key solutions.
We have become a multi-faceted company with an international presence. We believe this platform will allow us to leverage our corporate and other fixed costs and capture gross margin benefits. Our platform is highly scalable. We typically hire workers to staff projects on a project-by-project basis and our other operating expenses are primarily fixed. Accordingly, we are generally able to deploy personnel to infrastructure projects in the United States and beyond without incremental increases in operating costs, allowing us to achieve greater margins. We believe this business model enables us to staff our business efficiently to meet changes in demand.
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Finally, given the worldwide popularity of telecommunications and wireless products and services, we will selectively pursue international expansion, which we believe represents a compelling opportunity for additional long-term growth.
Our planned expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our operations management systems, financial and management controls and information systems and to hire, train and retain skilled telecommunications personnel. The timing and amount of investments in our expansion could affect the comparability of our results of operations in future periods.
Our planned acquisitions will be timed with additions to our management team of skilled professionals with deep industry knowledge and a strong track record of execution. Our senior management team brings an average of over 30 years of individual experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.
High Wire was incorporated in 2007 and functioned as a development stage company with limited activities through 2017.
HWN, Inc. incorporated in Delaware on January 20, 2017. Our principal offices are located at 980 N. Federal Highway, Suite 304, Boca Raton, Florida 33432. Our telephone number is (407) 512-9102. We are a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. Our Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment.
On February 7, 2019, High Wire and JTM Electrical Contractors, Inc. (“JTM”), an Illinois Corporation, entered into an operating agreement through which High Wire owns 50% of JTM.
On June 16, 2021, HWN completed a merger with High Wire. The merger was accounted for as a reverse merger. At the time of the reverse merger, High Wire’s subsidiaries included ADEX Corporation, ADEX Puerto Rico LLC, and ADEX Telecom, Inc., (collectively “ADEX”), AW Solutions Puerto Rico, LLC (“AWS PR”), and Tropical Communications, Inc. (“Tropical”).
We provide the following categories of offerings to our customers:
| ● | Technology Solutions: We provide a comprehensive technology platform and array of professional services and solutions to our clients that are applicable across multiple platforms and technologies to include but not limited to: Wi-Fi, Wi-Max and wide-area networks, fiber networks (ISP/OSP), DAS networks (iDAS/oDAS), small cell distributed networks, public safety networks and enterprise networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs), tower and network aggregators, utility entities, government and enterprise customers. Our services teams support the deployment of new networks and technologies, as well as expand, maintain and decommission existing networks. |
| ● | Construction Solutions: We are also a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. |
| ● | Security: High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
The Technology Solutions division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear Master Service Agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEM’s) and prime contractor/project management organization provides us a significant opportunity as a long term leading and well respected industry leader in this marketplace.
Our Technology Solutions division is supported by its subsidiaries: AW Solutions Puerto Rico, LLC and Tropical Communications, Inc. (collectively known as “AWS” or the “AWS Entities”) and ADEX CORP, ADEX Puerto Rico LLC, and ADEX Canada (collectively known as “ADEX” or the “ADEX Entities”). The AWS Entities provide a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers.
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Our Operating Units
Our company is comprised of the following:
| ● | Technology Solutions: The Technology Solutions group is composed of the following: High Wire is a global provider of managed security, professional services delivered exclusively through a channel sales model. ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. |
| ● | High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
| ● | Construction Solutions: JTM is a national provider of commercial/industrial electrical solutions delivered exclusively through a channel sales model. AWS PR provides in-field design, computer aided design and drawing services (CADD). Tropical provides fiber and DAS deployments for facilities and outdoor environments. |
| ● | Staffing: ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. ADEX seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration. The AWS Entities are professional, multi-service line, telecommunications infrastructure company 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. |
Impact of the COVID-19 Pandemic
The extent to which the coronavirus (“COVID-19”) outbreak and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Global health concerns relating to the COVID-19 outbreak have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. Risks related to consumers and businesses lowering or changing spending, which impact domestic and international spend. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and may further impact our workforce and operations and the operations of its customers, suppliers and business partners. These measures may remain in place for a significant period of time and they are likely to continue to adversely affect our business, results of operations and financial condition.
The spread of COVID-19 has caused us to modify our company’s business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.
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The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a global pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. However, the effects could have a material impact on our results of operations, and we will continue to monitor the COVID-19 situation closely. As of November 2021, multiple variants of the COVID-19 virus are circulating globally that are highly transmissible, and there is uncertainty around vaccine effectiveness on the new strains of the virus. Uncertainty around vaccine distribution, supply and effectiveness will impact when the negative economic effects as a result of COVID-19 will abate or end and the timing of such recovery may affect our financial condition.
Factors Affecting Our Performance
Changes in Demand for Data Capacity and Reliability.
The telecommunications industry has undergone and continues to undergo significant changes due to advances in technology, increased competition as telephone and cable companies converge, the growing consumer demand for enhanced and bundled services and increased governmental broadband stimulus funding. As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services.
The proliferation of smart phones and other wireless data devices has driven demand for mobile broadband. This demand and other advances in technology have prompted wireless carriers to upgrade their networks. Wireless carriers are actively increasing spending on their networks to respond to the explosion in wireless data traffic, upgrade network technologies to improve performance and efficiency and consolidate disparate technology platforms. These customer initiatives present long-term opportunities for us for the wireless services we provide. Further, the demand for mobile broadband has increased bandwidth requirements on the wired networks of our customers. As the demand for mobile broadband grows, the amount of cellular traffic that must be “backhauled” over customers’ fiber and coaxial networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites. These trends are increasing the demand for the types of services we provide.
Our Ability to Recruit, Manage and Retain High-Quality IT and Telecommunications Personnel.
The shortage of skilled labor in the telecommunications industry and the difficulties in recruiting and retaining skilled personnel can frequently limit the ability of specialty contractors to bid for and complete certain contracts. We believe our access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.
Our Ability to Expand Internationally
We believe international expansion represents a compelling opportunity for additional growth over the long-term because of the worldwide need for telecommunications infrastructure. We plan to expand our global presence either by expanding our current operations or by acquiring subsidiaries with international platforms.
Our Ability to Expand and Diversify Our Customer Base.
Our customers for specialty contracting services consist of leading telephone, wireless, cable television, utility and other companies. Historically, our revenue has been significantly concentrated in a small number of customers. Although we still operate at a net loss, we have acquired additional subsidiaries and diversified our customer base and revenue streams.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our historical consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported therein and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to recognition of revenue for costs, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, income taxes, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense, contingent consideration and accruals for contingencies, including legal matters. These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and as a result, actual results could differ materially from these estimates.
We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve making significant judgments and estimates that are used in the preparation of our historical consolidated financial statements. The impact of these policies affects our reported and expected financial results and are discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We have discussed the development, selection and application of our critical accounting policies with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosure relating to our critical accounting policies in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also important to understanding our historical consolidated financial statements. The notes to our consolidated financial statements in this report contain additional information related to our accounting policies, including the critical accounting policies described herein, and should be read in conjunction with this discussion.
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management.
Liquidity
Management believes that there is substantial doubt about our ability to continue as a going concern. Management believes that our available cash balance as of the date of this filing will not be sufficient to fund our anticipated level of operations for at least the next 12 months. Our ability to continue operations depends on our ability to sustain and grow revenue and results of operations as well as our ability to access capital markets when necessary to accomplish our strategic objectives. For the year ended December 31, 2020 we were unable to achieve positive cash flow from operations. Management expects to finance future cash needs from the results of operations and, depending on the results of operations, we may need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever.
During the years ended December 31, 2020 and 2019, we suffered recurring losses from operations. At December 31, 2020 and 2019, we had a stockholders’ deficit of $10,112,640 and $5,439,836, respectively. At December 31, 2020, we had a working capital deficit of $6,115,451, as compared to a working capital deficit of $9,790,032 at December 31, 2019.
On, or prior to March 31, 2022, we have obligations relating to the payment of indebtedness on loans payable and convertible debentures of $357,876 and $1,581,763, respectively. We anticipate meeting our cash obligations on indebtedness that is payable on or prior to March 31, 2022 from results of operations and from the proceeds of additional indebtedness or equity raises. If we are not successful in obtaining additional financing when required, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our remaining debt obligations as they become due, although there can be no assurance that we will be able to do so.
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Our future capital requirements for operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of operations. Management has taken several actions to ensure that we will have sufficient liquidity to meet our obligations, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. Additionally, if our actual revenues are less than forecasted, we anticipate implementing headcount reductions to a level that more appropriately matches then-current revenue and expense levels. We are evaluating other measures to further improve our liquidity, including the sale of certain operating assets or businesses, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common shares. Management believes that these actions will enable us to meet our liquidity requirements through March 31, 2022. There is no assurance that we will be successful in any capital-raising efforts that we may undertake to fund operations over the next 12 months.
To execute our business plan, service existing indebtedness and implement its business strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders’ ownership and could also result in a decrease in the market price of our common stock. The terms of any securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. We also may be required to recognize non-cash expenses in connection with certain securities we issues, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in our current form.
Basis of Presentation/Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of our company and our subsidiaries, the ADEX Entities, AWS PR, and Tropical. All subsidiaries are wholly-owned. During the year ended December 31, 2020, we sold our AWS and TNS subsidiaries. The operations of AWS and TNS (from the date of acquisition, January 4, 2019) have been included as discontinued operations in the accompanying financial statements. All inter-company balances and transactions have been eliminated.
Reverse Stock Split
On April 14, 2020, we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of our common stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The reverse stock split was previously approved by our board of directors and the majority of our stockholders. The reverse stock split was deemed effective at the open of business on April 21, 2020. As a result of the reverse stock split, every three hundred (300) shares of outstanding common stock of our company as of April 14, 2020 were converted into one (1) share of common stock. Fractional shares resulting from the reverse stock split were rounded up to the next whole number.
All common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock of our company as a result of the reverse stock split. The par value of our common stock was unchanged at $0.00001 per share post-split.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
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Cash and Cash Equivalents
We consider all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We record unbilled receivables for services performed but not billed. Management reviews a customer’s credit history before extending credit. We maintain an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts at December 31, 2020 and 2019 was $38,881 and $440,486, respectively.
Property and Equipment
Property and equipment are stated at cost. We depreciate the cost of property and equipment over their estimated useful lives at the following annual rates:
| Automotive | 3-5 years straight-line basis |
| Computer equipment and software | 3-7 years straight-line basis |
| Leasehold improvements | 5 years straight-line basis |
| Office equipment and furniture | 5 years straight-line basis |
Goodwill
Goodwill was initially generated through the acquisitions of the AWS Entities in 2017, the ADEX Entities in 2018, and TNS in 2019, as the total consideration paid exceeded the fair value of the net assets acquired.
We perform our annual impairment test on December 31st at the reporting unit level, which is consistent with our operating segments. Our reportable segment is infrastructure and professional services. Infrastructure and professional services comprised of the ADEX Entities, AWS PR, and Tropical. These reporting units are aggregated to form one (1) operating segment and one (1) reportable segment for financial reporting. These reporting units are three (3) reportable segments for the evaluation of goodwill for impairment. As our business evolves and the acquired entities continue to be integrated, our operating segments may change. This may require us to reassess how goodwill at our reporting units are evaluated for impairment.
We perform the impairment testing at least annually or at other times if we believe that it is more likely than not that there may be an impairment to the carrying value of our goodwill. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and our consolidated financial results. If it is more likely than not that goodwill impairment exists, the second step of the goodwill impairment test should be performed to measure the amount of impairment loss, if any.
We consider the results of an income approach and a market approach in determining the fair value of the reportable units. We evaluated the forecasted revenue using a discounted cash flow model for each of the reporting units. We also noted no unusual cost factors that would impact operations based on the nature of the working capital requirements of the components comprising the reportable units. Current operating results, including any losses, are evaluated by us in the assessment of goodwill. The estimates and assumptions used in assessing the fair value of the reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties. Key assumptions used in the income approach in evaluating goodwill are forecasts for each of the reporting unit revenue growth rates along with forecasted discounted free cash flows for each reporting unit, aggregated into each reporting segment. For the market approach, we used the guideline public company method, under which the fair value of a business is estimated by comparing the subject company to similar companies with publicly-traded ownership interests. From these “guideline” companies, valuation multiples are derived and then applied to the appropriate operating statistics of the subject company to arrive at indications of value.
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While we use available information to prepare estimates and to perform impairment evaluations, actual results could differ significantly from these estimates or related projections, resulting in impairment related to recorded goodwill balances. Additionally, adverse conditions in the economy and future volatility in the equity and credit markets could impact the valuation of our reporting units. We can provide no assurances that, if such conditions occur, they will not trigger impairments of goodwill and other intangible assets in future periods.
Events that could cause the risk for impairment to increase are the loss of a major customer or group of customers, the loss of key personnel and changes to current legislation that may impact our industry or its customers’ industries. There were no impairment charges during the year ended December 31, 2019.
During the year ended December 31, 2020, we sold our TNS and AWS subsidiaries. In connection with the sales, the Company tested its goodwill for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year ended December 31, 2020.
Intangible Assets
At December 31, 2020 and 2019, definite-lived intangible assets primarily consist of tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 5-35 years.
We periodically evaluate the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. We have no intangibles with indefinite lives.
For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were no impairment charges during the year ended December 31, 2019.
During the year ended December 31, 2020, we sold our TNS and AWS subsidiaries. In connection with the sales, the Company tested its intangible assets for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year ended December 31, 2020.
Long-lived Assets
In accordance with ASC 360, “Property, Plant and Equipment”, we test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Foreign Currency Translation
Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income.
Our integrated foreign subsidiaries are financially or operationally dependent on our company. We use the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting exchange gains or losses are recognized in income.
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Income Taxes
We account for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
We conduct business, and file federal and state income, franchise or net worth, tax returns in Canada, the United States, in various states within the United States and the Commonwealth of Puerto Rico. We determine our filing obligations in a jurisdiction in accordance with existing statutory and case law. We may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010 to 2020. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of our company’s, or our subsidiaries’, income tax returns for the open taxation years noted above.
Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against our deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. We currently have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
We follow the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.
We received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as of December 31, 2020 was $156,711 plus penalties and interest of $129,967 for a total obligation due of $286,678. The amount due as of December 31, 2019 was $156,711 plus penalties and interest of $126,700 for a total obligation due of $283,411. This tax assessment is included in accrued expenses at December 31, 2020 and 2019. During June 2021, the Company was notified that the Puerto Rico government would settle the outstanding debt for $11,105, which we paid during July 2021.
Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
We recognize revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract Types
Our contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of our revenues come from customers with whom we have a master service agreement (“MSA”). These MSA’s generally contain customer specific service requirements.
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Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For our different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets.
Revenue Service Types
The following is a description of our revenue service types, which include professional services and construction:
| ● | Professional services are services provided to the clients where we deliver distinct contractual deliverables and/or services. Deliverables may include but are not limited to: engineering drawings, designs, reports and specification. Services may include, but are not limited to: consulting or professional staffing to support our client’s objectives. Consulting or professional staffing services may be provided remotely or on client premises and under their direction and supervision. |
| ● | Construction Services are services provided to the client where we may self-perform or subcontract services that require the physical construction of infrastructure or installation of equipment and materials. |
Disaggregation of Revenues
We disaggregate our revenue from contracts with customers by service type, contract type, contract duration, and timing of transfer of goods or services.
We also disaggregate our revenue by operating segment and geographic location.
Accounts Receivable
Accounts receivable include amounts from work completed in which we have billed. The amounts due are stated at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.
Contract Assets and Liabilities
Contract assets include unbilled amounts for costs and services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. At December 31, 2020 and 2019, contract assets totaled $167,649 and $293,209, respectively.
Contract liabilities include payment received for incomplete performance obligations and are included in contract liabilities on the consolidated balance sheets. At December 31, 2020 and 2019, contract liabilities totaled $287,775 and $355,988, respectively.
Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
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Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
We record stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
We account for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.
We use the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by our stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss Per Share
We compute loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted loss per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of December 31, 2020 and 2019, respectively, we had 53,429,108 and 286,736 common stock equivalents outstanding.
Leases
We adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) on January 1, 2019.
The new leasing standard requires recognition of leases on the consolidated balance sheets as right-of-use (“ROU”) assets and lease liabilities. ROU assets represent our right to use underlying assets for the lease terms and lease liabilities represent our obligation to make lease payments arising from the leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value and future minimum lease payments over the lease term at commencement date. As our leases do not provide an implicit rate, we uses our estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. A number of our lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
We recognized lease liabilities, with corresponding ROU assets, based on the present value of unpaid lease payments for existing operating leases longer than twelve months. 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. We have elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
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Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. We adopted this standard on January 1, 2020. The adoption of this standard did not materially impact our consolidated financial statements and related disclosures.
We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or result of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject our company to concentrations of credit risk consist principally of cash and accounts receivables. We maintain our cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
We provide credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the year ended December 31, 2020, three customers accounted for 31%, 21%, and 10%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 34%, 20%, and 3%, respectively, of trade accounts receivable as of December 31, 2020. For the year ended December 31, 2019, four customers accounted for 37%, 19%, 14%, and 12%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 57%, 2%, 1%, and 9%, respectively, of trade accounts receivable as of December 31, 2019.
Our customers are primarily located within the domestic United States of America, Puerto Rico, and Canada. Revenues generated within the domestic United States of America accounted for approximately 93% of consolidated revenues for the year ended December 31, 2020. Revenues generated from customers in Puerto Rico and Canada accounted for approximately 7% of consolidated revenues for the year ended December 31, 2020. Revenues generated within the domestic United States of America accounted for approximately 94% of consolidated revenues for the year ended December 31, 2019. Revenues generated from customers in Puerto Rico and Canada accounted for approximately 6% of consolidated revenues for the year ended December 31, 2019.
Fair Value Measurements
We measure and disclose the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended December 31, 2020 and 2019. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
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Our financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2020 and 2019, consisted of the following:
| Total fair value at December 31, 2020 |
Quoted prices in active markets (Level 1) |
Quoted prices in active markets (Level 2) |
Quoted prices in active markets (Level 3) |
|||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 3,390,504 | $ | - | $ | - | $ | 3,390,504 | ||||||||
| Total fair value at December 31, 2019 |
Quoted prices in active markets (Level 1) |
Quoted prices in active markets (Level 2) |
Quoted prices in active markets (Level 3) |
|||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | 992,733 | $ | - | $ | - | $ | 992,733 | ||||||||
| (1) | We have estimated the fair value of these derivatives using the Monte-Carlo model. |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Derivative Liabilities
We account for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. We use estimates of fair value to value our derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, our policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. We categorize our fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2020 and 2019, we had a derivative liability of $3,390,504 and $992,733, respectively.
Sequencing Policy
Under ASC 815-40-35, we have adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to our inability to demonstrate we have sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to our employees or directors are not subject to the sequencing policy.
Reclassifications
Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.
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Results of Operations for the Three-Month Periods Ended September 30, 2021 and 2020
Our operating results for the three-month periods ended September 30, 2021 and 2020 are summarized as follows:
| Three Months Ended | ||||||||||||
| September 30, 2021 |
September 30, 2020 |
Difference | ||||||||||
| Revenue | $ | 11,368,033 | $ | 3,650,379 | $ | 7,717,654 | ||||||
| Operating expenses | 12,502,397 | 4,251,971 | 8,250,426 | |||||||||
| Other expense | (8,064,316 | ) | (28,449 | ) | (8,035,867 | ) | ||||||
| Noncontrolling interest | (114,149 | ) | 19,408 | (133,557 | ) | |||||||
| Net loss attributable to HWN, Inc. common stockholders | (9,312,829 | ) | (610,633 | ) | (8,702,196 | ) | ||||||
Revenues
Our revenue increased from $3,650,379 for the three months ended September 30, 2020 to $11,368,033 for the three months ended September 30, 2021. The increase is primarily related to increases in our electrical contracting division along with the addition of the High Wire entities, which accounted for $5,470,390 in revenue for the three months ended September 30, 2021. We expect revenue to continue to increase with the addition of the High Wire entities.
Additionally, our operations, as well as the operations of many of our customers, were impacted by the ongoing COVID-19 pandemic, which negatively impacted our revenues in 2020. We anticipate that as the COVID-19 restrictions are removed, revenues should begin to increase.
A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers. Master Service Agreements (MSAs) generally contain customer-specified service requirements, such as discreet pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally three to four months in duration. The percentage of revenue from long-term contracts varies between periods depending on the mix of work performed under our contracts.
Operating Expenses
During the three months ended September 30, 2021, our operating expenses were $12,502,397, compared to operating expenses of $4,251,971 for the same period of 2020. The increase of $8,250,426 is primarily related to a $6,161,416 increase in cost of revenues as a result of the increase in sales discussed above, combined with a $1,766,367 increase in general and administrative expenses.
Other Expense
During the three months ended September 30, 2021, we had other expense of $8,064,316, compared to other expense of $28,449 for the same period of 2020. The increase of $8,035,867 is primarily related to increases in loss on change in fair value of derivatives and loss on settlement of debt of $7,717,510 and $1,151,355, respectively, which was partially offset by forgiveness of Paycheck Protection Program loans of $873,734 and management fee income of $303,147.
Net Loss
For the three months ended September 30, 2021, we incurred a net loss attributable to HWN, Inc. common shareholders of $9,312,829, compared to a net loss attributable to HWN, Inc. common shareholders of $610,633 for the same period in 2020.
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Results of Operations for the Nine-Month Periods Ended September 30, 2021 and 2020
Our operating results for the nine-month periods ended September 30, 2021 and 2020 are summarized as follows:
| Nine Months Ended | ||||||||||||
| September 30, 2021 |
September 30, 2020 |
Difference | ||||||||||
| Revenue | $ | 24,235,937 | $ | 12,394,889 | $ | 11,841,048 | ||||||
| Operating expenses | 25,703,572 | 13,319,200 | 12,384,372 | |||||||||
| Other expense | (8,986,975 | ) | (96,177 | ) | (8,890,798 | ) | ||||||
| Noncontrolling interest | (909,384 | ) | (108,446 | ) | (800,938 | ) | ||||||
| Net loss attributable to HWN, Inc. common stockholders | (11,363,994 | ) | (1,128,934 | ) | (10,235,060 | ) | ||||||
Revenues
Our revenue increased from $12,394,889 for the nine months ended September 30, 2020 to $24,235,937 for the nine months ended September 30, 2021. The increase is primarily related to increases in our electrical contracting division along with the addition of the High Wire entities, which accounted for $6,463,170 in revenue from the date of acquisition through September 30, 2021. We expect our revenue to continue to increase with the addition of the High Wire entities going forward.
Additionally, our operations, as well as the operations of many of our customers, were impacted by the ongoing COVID-19 pandemic, which negatively impacted our revenues in 2020. We anticipate that as the COVID-19 restrictions are removed, revenues should begin to increase.
A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers. Master Service Agreements (MSAs) generally contain customer-specified service requirements, such as discreet pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally three to four months in duration. The percentage of revenue from long-term contracts varies between periods depending on the mix of work performed under our contracts.
Operating Expenses
During the nine months ended September 30, 2021, our operating expenses were $25,703,572, compared to operating expenses of $13,319,200 for the same period of 2020. The increase of $12,384,372 is primarily related to a $9,086,095 increase in cost of revenues as a result of the increase in sales discussed above, combined with a $2,194,162 increase in general and administrative expenses.
Other Expense
During the nine months ended September 30, 2021, we had other expense of $8,986,975, compared to other expense of $96,177 for the same period of 2020. The increase of $8,890,798 is primarily related to increases in loss on change in fair value of derivatives and loss on settlement of debt of $9,293,825 and $1,278,998, respectively, which was partially offset by forgiveness of Paycheck Protection Program loans of $1,124,534 and management fee income of $511,815.
Net Loss
For the nine months ended September 30, 2021, we incurred a net loss attributable to HWN, Inc. common shareholders of $11,363,994, compared to a net loss attributable to HWN, Inc. common shareholders of $1,128,934 for the same period in 2020.
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Liquidity and Capital Resources
As of September 30, 2021, our total current assets were $10,840,167 and our total current liabilities were $28,185,654, resulting in a working capital deficit of $17,345,487, compared to working capital of $876,029 as of December 31, 2020.
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, | ||||||||
| (dollars amounts in thousands) | 2021 | 2020 | ||||||
| Net cash used in operating activities | $ | (3,436,147 | ) | $ | (178,157 | ) | ||
| Net cash used in investing activities | 2,089,415 | (105,319 | ) | |||||
| Net cash provided by financing activities | 3.174.973 | 326,624 | ||||||
| Change in cash | $ | 1,828,241 | $ | 43,148 | ||||
For the nine months ended September 30, 2021, cash increased $1,828,241, compared to an increase in cash of $43,148 for the same period of 2020. The primary cash inflows during the nine months ended September 30, 2021 were $3,174,973 of proceeds from debt in excess of repayments of debt and cash acquired in the reverse merger with High Wire of $2,155,707. The net loss of $10,454,610 was partially offset by the loss on change in fair value of derivative liability of $9,293,825. During the nine-month period ended September 30, 2020, we received $1,124,200 of CARES Act loans.
As of September 30, 2021, we had cash of $2,264,689 compared to $436,448 as of December 31, 2020.
Results of Operations for the Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following summary of our results of operations should be read in conjunction with our financial statements for the years ended December 31, 2020 and 2019.
Our operating results for the years ended December 31, 2020 and 2019 are summarized as follows:
| Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
|||||||
| Statement of Operations Data: | ||||||||
| Revenues | $ | 18,677,444 | $ | 25,496,071 | ||||
| Operating expenses | 22,982,226 | 28,986,092 | ||||||
| Loss from continuing operations before taxes | (4,304,782 | ) | (3,490,021 | ) | ||||
| Total other expense | (6,086,715 | ) | (1,266,278 | ) | ||||
| Provision for income taxes | 1,908 | 204,231 | ||||||
| Loss on discontinued operations, net of tax | (7,316,891 | ) | (873,728 | ) | ||||
| Net loss attributable to common stockholders | (17,710,296 | ) | (6,322,330 | ) | ||||
| Net loss per share, basic and diluted | (3.92 | ) | (52.98 | ) | ||||
| Weighted average common shares outstanding, basic and diluted | 4,521,290 | 119,344 | ||||||
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Our significant balances sheet accounts as of December 31, 2020 and December 31, 2019 are summarized as follows:
| December 31, 2020 |
December 31, 2019 |
|||||||
| Balance Sheet Data: | ||||||||
| Cash | $ | 580,800 | $ | 375,141 | ||||
| Accounts receivable, net | 2,481,124 | 3,860,623 | ||||||
| Total current assets | 3,242,598 | 6,297,881 | ||||||
| Goodwill and intangible assets, net | 953,791 | 1,004,767 | ||||||
| Total assets | 4,327,392 | 12,168,819 | ||||||
| Total current liabilities | 9,358,049 | 16,087,913 | ||||||
| Total long-term liabilities | 3,860,050 | 28,324 | ||||||
| Mezzanine equity | 1,221,933 | 1,492,418 | ||||||
| Stockholders’ deficit | $ | (10,112,640 | ) | $ | (5,439,836 | ) | ||
Revenue
Our revenue decreased from $25,496,071 for the year ended December 31, 2019 to $18,677,444 for the year ended December 31, 2020. The decrease is primarily related to a $7,641,749 decrease in sales for our ADEX subsidiary. ADEX’s three largest customers in 2019 combined for revenues of $17,822,102. These customers accounted for revenues of $10,269,128 in 2020. This decrease was partially offset by an increase for one ADEX customer of $1,539,167, with sales of $1,923,203 in 2020 compared to sales of $384,036 is 2019. We also saw the addition of new customers in 2020 that did not have revenue in 2019.
Additionally, our operations, as well as the operations of many of our customers, were impacted by the ongoing COVID-19 pandemic, which negatively impacted our revenues for 2020. We anticipate that as the COVID-19 restrictions are removed, revenues should begin to increase.
A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers. Master Service Agreements (MSAs) generally contain customer-specified service requirements, such as discreet pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally three to four months in duration. The percentage of revenue from long-term contracts varies between periods depending on the mix of work performed under our contracts.
Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools and equipment. Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of revenues.
Our cost of revenues decreased from $22,193,114 for the year ended December 31, 2019 to $15,403,987 for the year ended December 31, 2020. The decrease was primarily related to the decrease in revenues discussed above.
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General and Administrative Costs
General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries’ management personnel and administrative overhead. These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense and other costs that are not directly related to performance of our services under customer contracts. Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency. We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenues will decrease if we succeed in increasing revenues.
General and administrative costs were $3,266,994 for the year ended December 31, 2020 compared to $3,172,708 for the year ended December 31, 2019. The increase in general and administrative expenses was primarily due to an increase in general and administrative costs for our ADEX subsidiary of $538,861, including factoring fees of $323,919 related to our factor financing, which is new for 2020.
We anticipate replacing the factor financing with traditional financing in 2022. Additionally, if the High Wire transaction as proposed closes, we anticipate higher general and administrative costs in 2021 and beyond. We expect general and administrative costs as a percentage of revenue to be lower than in 2020.
Salaries and Wages Expenses
Salaries and wages were $4,256,997 for the year ended December 31, 2020 compared to $3,567,574 for the year ended December 31, 2019. The increase during the year ended December 31, 2020 was primarily due to stock compensation expense, which increased from $622,739 to $1,897,423 in 2020 compared to $1,274,694 in 2019. Stock compensation increased due to a decision in 2020 to fully vest all unvested RSUs.
Net Income (Loss)
Our net loss attributable to common stockholders increased from $6,322,330 for the year ended December 31, 2019 to $17,710,296 for the year ended December 31, 2020. As of December 31, 2020, our stockholders’ deficit was $10,112,640.
Accounts Receivable
We had accounts receivable, net of allowance for doubtful accounts at December 31, 2020 and 2019 of $2,481,124 and $3,860,623, respectively. The decrease in accounts receivable was a result of decreased revenues in the final quarter of 2020 compared to the same period of 2019.
Capital expenditures
We had capital expenditures of $7,760 and $7,759 for the years ended December 31, 2020 and 2019, respectively. We expect to fund capital expenditures for the 12 months ended December 31, 2021 out of our working capital.
Income Taxes
As of December 31, 2020, we had federal net operating loss carryforwards (“NOL’s”) of $24,474,264 that will be available to reduce future taxable income, if any. These NOL’s begin to expire in 2027.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss, capital loss and credit carryforwards if we were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating losses capital losses and credits prior to full utilization.
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We have not completed a study to assess whether ownership change has occurred as a result of our acquisition of AWS and related issuance of shares. However, as a result of the issuance of common shares in 2017, we believe an ownership change under Sec. 382 may have occurred. As a result of this ownership change, certain of our net operating loss, capital loss and credit carryforwards will expire prior to full utilization. Additionally, further share issuances such as the shares issuances to InterCloud Systems, Inc. and other convertible debt transactions may result in additional ownership changes.
We perform an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. Our recent operating results and projections of future income weigh heavily in our overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because we had sustained cumulative losses since the commencement of operations.
Our continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2020, there was no accrued interest and penalties related to uncertain tax positions.
We are subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to our net operating loss carryforwards all years remain open to examination by the major domestic taxing jurisdictions to which we are subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years are still subject to adjustment.
Liquidity and Financial Condition
As of December 31, 2020, our total current assets were $3,242,598 and our total current liabilities were $9,358,049, resulting in a working capital deficit of $6,115,451 compared to working capital deficit of $9,790,032 as of December 31, 2019.
We have suffered recurring losses from operations. The continuation of our company is dependent upon us attaining and maintaining profitable operations and raising additional capital as needed. In this regard we have historically raised additional capital through equity offerings and loan transactions.
Cash Flows
| Year Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| Net cash used in operating activities | $ | (454,814 | ) | $ | (2,275,364 | ) | ||
| Net cash used in investing activities | $ | (986,155 | ) | $ | (1,011,415 | ) | ||
| Net cash provided by financing activities | $ | 1,646,628 | $ | 3,076,721 | ||||
| Change in cash | $ | 205,659 | $ | (210,058 | ) | |||
The increase in cash that we experienced during the year ended December 31, 2020 as compared to the decrease in cash during the year ended December 31, 2019 was primarily a result of a decrease in cash used in operating activities in 2020 compared to 2019. This was partially offset by a decrease is cash provided by financing activities in 2020 compared to 2019. We have not been able to reach the break-even point since our inception and have had to rely on raising capital. We anticipate generating increased revenues over the next year. Over the next 12 months, we anticipate raising additional funds, and we plan to primarily concentrate on our telecommunications business and associated projects along with our anticipated merger with High Wire.
In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders’ loans. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to preserve our liquidity.
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Indebtedness
As of December 31, 2020, the outstanding balances of convertible loans payable to related parties, loans payable, convertible debentures and factor financing were $577,925, $3,452,506, $1,002,463 and $1,914,611, respectively, net of debt discounts of $0, $38,874 and $301,957, respectively.
The total outstanding principal balance per the loan agreements and factor financing due to our debt holders was $7,488,336 at December 31, 2020. We are currently in discussions with certain of our creditors to restructure some of these loan agreements to reduce the principal balance and extend maturity dates. However, there can be no assurance that we will be successful in reducing the principal balance or extending the maturity dates of any of our outstanding notes.
Loans Payable to Related Parties
At December 31, 2020 and 2019, we had outstanding the following loans payable to related parties:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 31, 2022 | $ | 554,031 | $ | - | ||||
| Convertible promissory note issued to Roger Ponder, 10% interest, unsecured, matures August 31, 2022 | 23,894 | - | ||||||
| Promissory note issued to Roger Ponder, 10% interest, unsecured, due on demand | - | 18,858 | ||||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, due on demand | - | 130,000 | ||||||
| Promissory note issued to Keith Hayter, 10% and 8% interest, unsecured, due on demand | - | 85,000 | ||||||
| Promissory note issued to Keith Hayter, 8% interest, unsecured, due on demand | - | 80,000 | ||||||
| Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020 | - | 170,000 | ||||||
| Loan with WaveTech GmbH, 8% interest, due on demand | - | 3,000,000 | ||||||
| Total | $ | 577,925 | $ | 3,483,858 | ||||
Additional information on our loans payable to related parties is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
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Loans Payable
As of December 31, 2020 and 2019, loans payable consisted of the following:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand | $ | 41,361 | $ | 41,361 | ||||
| Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand | 7,760 | 7,760 | ||||||
| Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand | 2,636 | 2,636 | ||||||
| Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand | 15,000 | 15,000 | ||||||
| Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand | 7,500 | 7,500 | ||||||
| Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand | 50,000 | 50,000 | ||||||
| Promissory note issued to Old Main Capital LLC, 10% interest, unsecured and due on demand | 12,000 | 12,000 | ||||||
| Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand | 217,400 | 217,400 | ||||||
| Future receivables financing agreement with Pawn Funding, non-interest bearing, matures April 16, 2021, net of debt discount of $1,072 and $31,365 | 18,334 | 94,928 | ||||||
| Future receivables financing agreement with Cedar Advance Funding, non-interest bearing, matures April 27, 2021, net of debt discount of $37,807 | 160,390 | - | ||||||
| CARES Act Loans | 2,920,125 | - | ||||||
| Future receivables financing agreement with RDM Capital Funding, non-interest bearing, matures July 24, 2020, net of debt discount of $79,087 | - | 237,319 | ||||||
| Loan with Heritage Bank of Commerce, interest rate of prime plus 2%, secured by all assets of the Company, matures October 20, 2020, net of debt discount of $149,180 | - | 2,973,458 | ||||||
| Future receivables financing agreement with C6 Capital, non-interest bearing, matures April 15, 2020, net of debt discount of $20,272 | - | 136,424 | ||||||
| Total | $ | 3,452,506 | $ | 3,795,786 | ||||
| Less: Long-term portion of loans payable | (2,920,125 | ) | - | |||||
| Loans payable, current portion, net of debt discount | $ | 532,381 | $ | 3,795,786 | ||||
Additional information on our loans payable is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
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Convertible Debentures
At December 31, 2020 and 2019, we had outstanding the following convertible debentures:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible promissory note, Barn 11, 18% interest, unsecured, matured June 1, 2019 | $ | 594,362 | $ | 594,362 | ||||
| Convertible promissory note, SCS, LLC, 24% interest, unsecured, matured March 30, 2020, due on demand, net of debt discount of $0 and $13,005 | 51,788 | 38,025 | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures October 24 2020, net of debt discount of $0 and $23,986 | 54,500 | 99,014 | ||||||
| Convertible promissory note, Crown Bridge Partners, LLC, 10% interest, unsecured, matured November 21, 2020, net of debt discount of $0 and $58,648 | 39,328 | 16,352 | ||||||
| Convertible promissory note, Efrat Investments LLC, 10% interest, secured, matures October 5, 2021, net of debt discount of $132,000 | - | - | ||||||
| Convertible promissory note, SCS, LLC, 12% interest, secured, matures December 30, 2021 | 257,442 | - | ||||||
| Convertible promissory note, SCS, LLC, 10% interest, secured, matures December 31, 2021, net of debt discount of $169,957 | 5,043 | - | ||||||
| Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020, net of debt discount of $0 and 105,752 | - | 1,461,265 | ||||||
| Convertible promissory note, Michael Roeske, 24% interest, unsecured, due on demand, net of debt discount of $0 and $3,512 | - | 112,488 | ||||||
| Convertible promissory note, Joel Raven, 24% interest, unsecured, due on demand, net of debt discount of $0 and $8,658 | - | 355,342 | ||||||
| Convertible promissory note, GS Capital Partners, LLC, 8% interest, secured. matures August 2, 2020, net of debt discount of $24,819 | - | 98,181 | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures September 17, 2020, net of debt discount of $113,674 | - | 34,326 | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures January 22, 2021, net of debt discount of $53,051 | - | 15,449 | ||||||
| Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021, net of debt discount of $45,125 | - | 12,875 | ||||||
| Total | 1,002,463 | 2,837,679 | ||||||
| Less: Long-term portion of convertible debentures, net of debt discount | - | (28,324 | ) | |||||
| Convertible debentures, current portion, net of debt discount | $ | 1,002,463 | $ | 2,809,355 | ||||
Off-Balance Sheet Arrangements
As of September 30, 2021, we have no off-balance sheet arrangements.
Inflation
The effect of inflation on our revenue and operating results has not been significant.
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BUSINESS
Overview
High Wire Global Solutions, Inc. (f/k/a Mantra Venture Group Ltd.) (“High Wire”) 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, Spectrum reincorporated in the province of British Columbia, Canada.
On April 25, 2017, High Wire entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, High Wire purchased 80.1% of the assets associated with InterCloud’s AW Solutions, Inc., AW Solutions Puerto Rico, LLC (“AWS PR”), and Tropical Communications, Inc. (“Tropical”) (collectively “AWS” or the “AWS Entities”) subsidiaries.
On November 15, 2017, High Wire changed its name to “High Wire Enterprises, Inc.” and reincorporated in the state of Nevada.
On February 6, 2018, High Wire entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Stock Purchase Agreement High Wire 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. and formed ADEX Canada LLC in September 2019 (collectively “ADEX” or the “ADEX Entities”). High Wire completed the acquisition on February 27, 2018.
On February 14, 2018, High Wire entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to High Wire of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by High Wire.
On May 18, 2018, High Wire 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 Mantra’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, High Wire entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and High Wire agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporation.
On September 30, 2020, High Wire sold its TNS subsidiary. On December 31, 2020, High Wire sold its AWS subsidiary.
HWN, Inc., (d/b/a High Wire Network Solutions, Inc.) (“HWN”) was incorporated in Delaware on January 20, 2017. HWN is a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. HWN’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment.
On February 7, 2019, HWN and JTM Electrical Contractors, Inc. (“JTM”), an Illinois Corporation, entered into an operating agreement through which High Wire owns 50% of JTM.
On June 16, 2021, HWN completed a merger with High Wire. The merger was accounted for as a reverse merger. At the time of the reverse merger, High Wire’s subsidiaries included the ADEX Entities, AWS PR and Tropical.
On January 7, 2022, High Wire legally changed its name to High Wire Networks, Inc. For accounting purposes, HWN is the surviving entity and is referred to throughout as “HWN”, “High Wire”, or “the Company”.
The Company’s AWS PR and Tropical subsidiaries are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally.
Our principal offices are located at 980 N. Federal Highway, Suite 304, Boca Raton, Florida 33432. Our telephone number is (407) 512-9102.
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We provide the following categories of offerings to our customers:
| ● | Technology Solutions: We provide a comprehensive technology platform and array of professional services and solutions to our clients that are applicable across multiple platforms and technologies to include but not limited to: Wi-Fi, Wi-Max and wide-area networks, fiber networks (ISP/OSP), DAS networks (iDAS/oDAS), small cell distributed networks, public safety networks and enterprise networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs), tower and network aggregators, utility entities, government and enterprise customers. Our services teams support the deployment of new networks and technologies, as well as expand, maintain and decommission existing networks. |
| ● | Construction Solutions: We are also a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. |
| ● | Security: High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
The Technology Solutions division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear Master Service Agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEM’s) and prime contractor/project management organization provides us a significant opportunity as a long-term leading and well respected industry leader in this marketplace.
Our Technology Solutions division is supported by its subsidiaries: the AWS Entities and the ADEX Entities. The AWS Entities provide a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers.
Our Operating Units
Our company is comprised of the following:
| ● | Technology Solutions: The Technology Solutions group is composed of the following: High Wire is a global provider of managed security, professional services delivered exclusively through a channel sales model. ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. |
| ● | High Wire’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment. |
| ● | Construction Solutions: JTM is a national provider of commercial/industrial electrical solutions delivered exclusively through a channel sales model. AWS PR provides in-field design, computer aided design and drawing services (CADD). Tropical provides fiber and DAS deployments for facilities and outdoor environments. |
| ● | Staffing: ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications and technology industry, service providers and enterprise customers domestically and internationally. ADEX seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include consulting and professional staffing services to service providers as well as enterprise customers, network implementation, network installation, network upgrades, rebuilds, design, engineering and integration wireless network support, wireless network integration, wireless and wireline equipment installation and commissioning, wireless site development and construction management, network engineering, project management, disaster recovery design engineering and integration. The AWS Entities are professional, multi-service line, telecommunications infrastructure company 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. |
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Our Industry
The pace of technology evolution continues to accelerate and shows no signs of slowing down. From Enterprise to Carriers and Service Providers, there is a continuous need to plan, install, manage, and protect networks from cybersecurity threats. As technology evolves, the demand for more robust networks, faster speeds, better experiences, and protection from the ever evolving cyber threat landscape continues to grow at a robust pace. This demand has been compounded by the global COVID-19 pandemic and the rapid transition to “work from home” for large swaths of the global workforce. Remote learning, remote video meetings, collaboration software, increased email volumes, all have transformed the way we share information, and created strain on the way business used to be done. Nearly two years later, the technology and telecom industry anticipates these trends to continue for many years to come, and a new hybrid workplace environment evolving.
Wireless infrastructure which has been in place since the 1980’s includes towers, buildings, telephone poles and other facilities to place critical antennas and associated electronics to support a wind range of wireless protocols including WiMax, LTE and now 5G technologies. These wireless trends combined with the wireline transition from copper to fiber, and its corresponding order of magnitude change in bandwidth, are occurring to satisfy the world’s ever-increasing demand for data, which are significant long term drivers of our business model and continued success. There has been a significant transition underway from 4G wireless technology to 5G wireless technology. According to Gartner, spending on 5G infrastructure slowed in 2020 due to the pandemic, and only slightly increased in 2021. Gartner also expects this important transition to accelerate by 39% in 2022. The transition to 5G will accelerate migration to the next generation standard that allows for higher capacity, lower latency, and the architecture required to support new applications. The roll-out of enhanced mobile broadband, small cell architectures, 5G services and billions of new Internet of Things (IoT) connected devices greatly increases the need to modernize networks to accommodate this new breed of connectivity. This long-term trend is a significant enduring opportunity for companies like ours. The transition from trial-based deployments of 5G to a full nationwide implementation is expected to continue beyond 2025. Necessary investments in supporting infrastructure such as fiber optic backhaul is expected by Deloitte Consulting LLP to require $130-$150 billion over the next 5-7 years to adequately support the consumer demand for broadband and wireless densification projects in the United States alone. It is mission-critical for these providers to deliver broadband capacity, reliably, securely and cost-effectively in a solution that supports the massive data consumption of emerging applications such as: augmented reality/virtual reality, video streaming, mobile advertising, IoT, self-driving cars, personalized health monitoring and much more.
With the rapid proliferation of device connectivity and the transition of the workforce to remote or hybrid, the demands on Enterprise networks and all traditional networks have shifted. Cyber security risks have proliferated right along with it. PurpleSec reports that cyber attacks were up 600% as a result of the pandemic and the change in network design and utilization. They also estimate a global cost of over $6 trillion annually in 2021 from ransomware alone. Cyber risk is now something that every business is forced to address around the globe. Closer to home, a patchwork of legislation has emerged in the United States with various states enacting different requirements for protection of sensitive data, networks, and adding duties to disclose. Congress has yet to enact federal laws mandating cyber security protections thus far, but there have been many discussions, task forces, and the Department of Defense has updated standards for private sector companies doing business with them.
Global Cyber Security spending is expected to exceed $1.75 trillion USD from 2021 to 2025 according to Cybersecurity Ventures. Enterprises, Service Providers, Wireless Providers, and Managed Service Providers are all working at a feverish pace to keep up with emerging threats. There are over 1500 different “point” solutions on the market today. Most focused on a single part of the problem or “attack surface”. Traditional solutions require a lot of work to deploy, constant monitoring, and well-trained people to interpret the massive amounts of data they produce. This sets the stage for managed service solutions that meld best in breed tools together into a comprehensive solution, manage the solution 24x7x365, to detect and respond to threats.
All of these trends come together at the network level. As networks improve from the Carrier to the Enterprise, demand for building, managing, and protecting these networks will rise as a requisite portion of the predicted industry spend dollars. The contracts to perform these services, provide human capital for them, and protect them will last years.
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Industry Trends and Opportunities
| ● | Cyber Security Managed Service |
| ● | Network buildout and deployment |
| ● | IOT creating deployment and cyber security opportunities |
| ● | Fiber backhaul network buildouts |
| ● | Future forward Cloud Area Networks |
| ● | Monetize existing technology, intellectual property and develop the portfolio |
| ● | International growth, developing and emerging markets |
| ● | Monetize our existing telecom network (Secure Voice Corp) in new ways |
Competitors
We provide, managed and professional services to carriers, service provider, utilities and enterprise clients on a national and international basis. Demand for our services is strong and growing in all segments of the business. Our channel-oriented sales model provides for very rapid expansion within our clients as they win contracts, develop new programs, build out their own suite of services, or leverage our portfolio to expand their own under private label.
Managed Services is a very competitive market and as such, our strategy to work exclusively through distribution channels with existing customer bases and robust sales organizations that can provide rapid growth. Most of our competitors are not channel only, but rather serve customers directly as well as have a channel component. Many are also wed to their own software, which makes it challenging to pivot as threats change. Some of our significant competitors would be Arctic Wolf, Herjevic Group, SecureWorks, and numerous smaller competitors. This space is rapidly evolving and hiring and retaining talent can be challenging. The company that develops a competitive edge in recruitment and employee retention will have a significant advantage. In a crowded and evolving landscape, there will be a continued need to spend on marketing and sales to acquire partners and help them convert and acquire new customers. We believe that with the combination of businesses we have, we are able to differentiate our services and compete aggressively in this market.
Our current and potential larger competitors in the professional services sector include MasTec, Dycom Industries, Inc., Goodman Networks, Inc., and Black and Veatch. In some segments of our business, a significant portion of our services revenue is currently derived from MSAs and price is often an important factor in awarding such agreements. Accordingly, our competitors may underbid us if they elect to price their services aggressively to procure such business. Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price to our services, and we may not be able to maintain or enhance our competitive position based on thresholds for margin and profitability that has been established as benchmarks within our telecommunications division. The principal competitive factors for our professional services include; agility to respond, geographic presence, breadth of service offerings, technical skills “in-house” professional competencies and methodologies, price, quality of service, safety record, proven performance and industry reputation. We believe we compete favorably with our competitors on the basis of all of these factors.
Our Competitive Strengths
We believe our market advantage is our positioning as a trusted authority in the space and the long-term relationships, Master Service Agreements (MSAs), industry leading provider of solutions and a reputation and track record of our ability to perform with agility, quality on a seamless and flawless manner for our clients is key in our success to date. High Wire’s ability to provide a wide range of services in a turn-key integrated solution is critical to our clients. Our highly experienced and professional team provide such services as: Managed Services, Cyber security services, Technology Professional Services, RF, civil, electrical, architectural engineering and design, structural engineering, analysis and design, value engineering, network engineering services, network planning, site acquisition, land use planning, feasibility/environmental studies, lease/contract negotiations, Build-To-Suit (BTS) services, audits functions, program planning, professional services, product development, construction and installation, technical services, warehouse and logistics, network decommissioning and maintenance.
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We believe our additional strengths described below will enable us to continue to compete effectively and to take advantage of anticipated growth opportunities:
| ● | Service Provider Relationships: We have established relationships with leading wireless and wireline telecommunications providers, cable broadband MSOs, Original Equipment Manufacturers (OEMs), utility companies, Project Management Organizations (PMOs), enterprise clientele and others. |
| ● | Established expertise in Cyber Security and manage services with over 120 established MSP channel partners. |
| ● | Established operational expertise and channel partnerships with the largest technology resellers and channel partners in the world. |
Sample Customers
| ● | Commercial Operators (Carriers): AT&T, Verizon Communications, T-Mobile/Sprint, Frontier Communications, COX, Open Mobile, Claro, Summit Broadband |
| ● | Technology Resellers such as Presido, Tech Data/Synnex, Worldwide Technologies, NWN Carousel, Sirius, Myriad 360, and many more. |
| ● | Aggregators: Crown Castle, SBA Wireless, Global Tower Partners (GTP), American Tower, Vertical Bridge |
| ● | OEMs: Ericsson, Nokia, Samsung |
| ● | PMOs: MasTec Network Solutions, Ericsson |
| ● | Unified Communications Providers and Carriers: RingCentral, Lumen, Call One, Peerless, Frontier, Windstream |
| ● | Long-Term Master Service Agreements (MSA) and Contracts: We have MSA’s and agreements with service providers, OEMs, software manufacturers, technology resellers, managed services providers, value added distributors and other clients. Our relationships with our customers and existing master service agreements position us to continue to capture existing and emerging opportunities, both domestically and internationally. We believe the barriers are extremely high for new entrants to obtain master service agreements with service providers and OEMs unless there are established relationships, proven ability to execute, national coverage and licensing, spotless safety records and broad and deep insurance coverage. |
| ● | Global Professional Engineering Talents: Our extensive geographical reach and licensing that covers all US states and territories, all of the United Kingdom and Euro Zone, all Canadian Provinces, all of South and Central America, most of the Middle East and Africa, and select areas in the Caribbean and Pacific Rim coupled with our vast engineering experience and expertise supported by talented staff enables our customers to take advantage of our end-to-end solutions and one-stop full turn-key solutions. |
| ● | Proven Ability to Recruit, Manage and Retain High-Quality Personnel. Our ability to recruit, manage and retain skilled labor is a critical advantage in an industry where a shortage of highly skilled and experience personal is limited. This is often a key factor in our customers selecting High Wire Networks over our competitors. We believe that our highly skilled professionals with professional certifications gives us a competitive edge over our competitors as we continue to expand and meet our national and international clients needs across their entire service footprints. |
| ● | Expansion of our recurring revenue streams through increased focus on managed services, cyber security services and professional services programs that are multiple years in duration will increase client retention, grow margins, and make the business more predictable through uncertain economic cycles. |
| ● | Increased value creation through continued expansion of our intellectual property (IP) and potential acquisition of additional IP. |
| ● | Our sales organization has extensive expertise and deep industry relationships. Paired with an effective and efficient marketing message that drives new client acquisition, we believe they position us to compete very well. |
| ● | Our highly experienced management team has deep industry knowledge and brings extensive experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy. |
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Key Aspects
| ● | Strong management team in place |
| ● | Competing in high growth markets |
| ● | Global operational capabilities |
| ● | Effective marketing and strong brand awareness in the industry |
| ● | Vast expertise in technology domains |
| ● | Top customers in the industry in every segment |
| ● | Diverse customer base of nearly 500 channel partners across three different sales channels |
| ● | Focused on high growth markets |
| ● | Multiple data centers/clouds and intellectual property portfolio |
| ● | Strong management team in place |
| ● | Competing in high growth markets |
| ● | Global operational capabilities |
| ● | Effective marketing and strong brand awareness in the industry |
| ● | Vast expertise in technology domains |
| ● | Top customers in the industry in every segment |
| ● | Diverse customer base of nearly 500 channel partners across three different sales channels |
| ● | Focused on high growth markets |
| ● | Multiple data centers/clouds and intellectual property portfolio |
Our Growth Strategy
| ● | Under our current management team we have developed a growth strategy based on a combination of organic growth and growth through operations. Our strategy is focused on building the business on high margin recurring revenue to drive long term sustainability. We have consolidated our sales and management team to leverage the strength of our clients and sell across the existing base. We will continue to focus on existing offerings while adding robust new capabilities. |
| ● | We will continue to grow and expand our award winning, channel only Overwatch Managed Cyber Security platform. This service leverages our extensive expertise to prevent, detect, and respond to cyber threats 24x7x365. These services are in high demand around the world, and our platform is cutting edge. |
| ● | Grow Revenues and Market Share through Selective Acquisitions. We plan to continue to acquire private companies that enhance our earnings and offer complementary services plus expand our geographic reach and client base. We believe such acquisitions will help us to accelerate our revenue growth, leverage our existing strengths, and capture and retain market share. |
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| ● | Aggressively Expand Our Organic Growth Initiatives around our Professional Services Business. Our customers have an extensive array of needs and business segments they serve. We will expand our offerings, skillsets, and geographic reach with our customers to support their clients. As we expand the breadth of our service offerings through both organic growth and selective acquisitions, we believe we have opportunities to expand revenues with our existing clients. |
| ● | Expand Our Relationships with New Service Partners. We plan to capture and expand new relationships. We believe that the business model for the expansion of these relationships, leveraging our core strengths, experience and broad array of service solutions, will support our business model for organic growth. |
| ● | Increase Operating Margins by Leveraging Operating Efficiencies. We believe that by centralizing administrative functions, consolidating insurance coverage and eliminating redundancies across our newly acquired businesses, we will be positioned to offer more integrated end-to-end solutions and increase operating margins. |
| ● | Expansion of Sales and Marketing. We believe that we can continue to expand our outside sales team, build an effective inside sales team, and provide additional momentum through marketing support and partner focused events. |
Our Services
We provide award winning managed cyber security solutions, managed services, and wholesale communications exclusively through our channel partners around the world. We leverage state of the art cyber security tools to deliver these services. We have built out extensive data center/cloud infrastructure enabling our partners to provide concierge level security services and extend their value proposition to their own clients with a high degree of certainty. Our U.S. based Security Operations Center (SOC) provides SOC as a Service (SOCaaS) to manage all of the tools 24x7x365.
We are a leading provider of professional services and infrastructure solutions to the Technology, Telecom, and Service Provider markets in both Carrier and Enterprise sectors. Our engineering, design, construction, installation, maintenance service offerings supported by our professional teams to support the build-out, maintenance, upgrade and operation of some of the most advanced fiber optic, Ethernet, copper, wireless, wireline, utility and enterprise networks. Our breadth of comprehensive services enables our customers to selectively augment existing services or to outsource entire projects or operational functions.
We offer a full array of operations, construction, project and program management professional required to facilitate the full turn-key completion of networks from the design and planning phase, engineer evaluation and sign off, regulatory, installation, commissioning and maintain various types of Wi-Fi and wide-area networks, DAS networks, and small cell distribution networks for incumbent local exchange carriers (ILECs), telecommunications original equipment manufacturers (OEMs), cable broadband multiple system operators (MSOs) and enterprise customers. Our services and teams support the deployment of new networks and technologies, expand and maintain existing networks, as well as decommissioning obsolete legacy networks. We also design, install and maintain hardware solutions for the leading OEMs that support voice, data and optical networks. Our consulting and professional solutions to the service-provider and enterprise market in support of all facets of telecommunications and next-generation networks, including project management, network implementation, network installation, network upgrades, rebuilds, maintenance and consulting services. Our global certified professional services organization offers consulting, design, engineering, integration, implementation and ongoing support of all solutions offered by our company. We believe our ability to respond rapidly is a differentiating factor for national and international-based customers needing a broad range of our services and solutions.
We seek to assist our customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions and Professional Staffing services. We actively maintain a Proprietary Candidate Database with profiles of more than 138,000 telecommunications professionals. The database contains domestic and international based telecommunications professionals of all levels. Our recruiters are able to search the database by any number of criteria including, but not limited to: technical skill sets, equipment types, technology experience, education, years of experience, past employment history, geographic location.
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Customers
On behalf of our client, we provide services for most of the Fortune 1000 enterprises and the like, software and hardware OEMs, wireless and wireline service providers, cable broadband MSOs and telecommunications OEMs. Our current service provider and OEM customers include leading telecommunications companies, such as Ericsson, Inc., Verizon Communications, T-Mobile/Sprint Corporation and AT&T.
During the year ended December 31, 2020, our top four customers, Ericsson, Inc., Frontier Communications, CBM of America, Inc., and Sullivan & Powers, Inc. accounted for approximately 66% of our total revenues. During the year ended December 31, 2019, our top four customers, Ericsson, Inc., AT&T, SAC Wireless, and Frontier Communications accounted for approximately 82% of our total revenues.
A substantial portion of our revenue is derived from work performed under multi-year master service agreements and multi-year service contracts. We have entered into master service agreements, or MSAs, with numerous service providers and OEMs, and generally have multiple agreements with each of our customers. MSAs are generally the contracting vehicle with work awarded primarily through a competitive bidding process based on the depth of our service offerings, experience, price, geographic coverage and capacity. MSAs generally contain customer-specified service requirements, such as discrete pricing for individual tasks, but do not require our customers to purchase a minimum amount of services. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer’s own employees and use other service providers. Most of our MSAs may be cancelled by our customers upon minimum notice (typically 60 days), regardless of whether we are or are not in default. In addition, many of these contracts permit cancellation of particular purchase orders or statements of work without any prior notice but do allow for payment for services performed up to the point of hold or cancellation.
Suppliers and Vendors
We have supply agreements with major technology vendors and material supply houses. However, for a majority of the professional services we perform, our customers supply the necessary major equipment and materials. We expect to continue to further develop our relationships with our technology vendors and to broaden our scope of work with each of our partners. In many cases, our relationships with our partners have extended for over a decade, which we attribute to our commitment to excellence. It is our objective to selectively expand our partnerships moving forward in order to expand our service offerings.
Safety and Risk Management
We require our employees to participate in internal training and service programs from time to time relevant to their employment and to complete any training programs required by law. The telecommunications division has not had any OSHA recordable incidents, lost workdays or fatalities since inception which includes: 2006 through 2020. Our policy is to review accidents and claims from our operations, examine trends and implement changes in procedures to address safety issues. We have no Claims in our business related to: workers’ compensation claims, general liability and damage claims, or claims related to vehicle accidents, including personal injury and property damage. We insure against the risk of loss arising from our operations up to certain deductible limits in all of the states in which we operate. In addition, we retain risk of loss, up to certain limits, under our employee group health plan. We evaluate our insurance requirements on an ongoing basis to help ensure we maintain adequate levels of coverage internally and externally for our clients.
Our internal policy is to carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments. The estimated costs of claims are accrued as liabilities and include estimates for claims incurred but not reported. If we experience future insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.
Employees
As of September 30, 2021, we had 297 full-time employees and 13 part-time employees, of whom 32 were in administration and corporate management, 6 were accounting personnel, 19 were sales personnel and 253 are engaged in professional engineering, operations, project managerial and technical roles.
We maintain a core of professional, technical and managerial personnel and add employees as deemed appropriate to address operational and scale requirement related to growth. Additionally, we will “flex” our work force through the use of temporary or agency staff and through subcontractors.
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Environmental Matters
A portion of the work related to the telecommunication division which is work associated with above ground and underground networks of our customers. As a result, we are potentially subject to material liabilities related to encountering underground objects that may cause the release of hazardous materials or substances. We are subject to federal, state and local environmental laws and regulations, including those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.
Regulation
Our operations are subject to various federal, state, local and international laws and regulations, including licensing, permitting and inspection requirements applicable to electricians and engineers; building codes; permitting and inspection requirements applicable to construction and installation projects; regulations relating to worker safety and environmental protection; telecommunication regulations affecting our wireless, wireline and fiber optic business; labor and employment laws; laws governing advertising, and laws governing our public business.
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MANAGEMENT
Management and Board of Directors
Our current members of the Board of Directors and executive officers are listed below.
| Name | Age | Company Title | ||
| Mark W. Porter | 48 | Chief Executive Officer, Director | ||
| Peter H. Kruse | 58 | Director | ||
| Stephen W. LaMarche | 58 | Director | ||
| Daniel J. Sullivan | 63 | Chief Financial Officer |
All directors serve for one year and until their successors are elected and qualified. All officers serve at the pleasure of the Board of Directors. There are no family relationships among any of our officers and directors.
Information concerning our executive officers and directors is set forth below.
Mark W. Porter, Chief Executive Officer, Director
Mr. Porter was appointed our Chief Executive Officer on March 1, 2021. Since January 2001, Mr. Porter has been President and Chief Executive Officer of HWN, Inc. (“High Wire Networks”). With over two decades of technology industry experience, Mr. Porter is a channel veteran with extensive experience in pioneering new and more innovative ways to deliver professional and managed services.
Daniel J. Sullivan, Chief Financial Officer
On April 28, 2021, the Board appointed Daniel J. Sullivan to serve as our Chief Financial Officer. Since 2003, Mr. Sullivan had been the President of PCN Enterprises, Inc., which provides accounting related consulting services to public companies.
Peter H. Kruse, Director
On September 27, 2021, Peter H. Kruse was appointed to the Board of Directors. Since 2016, Mr. Kruse has been President of P410 Group LLC, which provides coaching to companies to implement a practical business operating system to align, simplify and focus entrepreneurial businesses to achieve strong results.
Stephen W. LaMarche, Director
On August 9, 2021, Stephen W. LaMarche was appointed to the Board of Directors. Since 2019, Mr. LaMarche has been providing consulting services to the managed technology and professional services space where he has extensive experience leading sales & marketing, product and service innovation, finance and operational management. From 2016 to 2018, Mr. LaMarche served as Vice President of Product Management at TPx Communications.
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Executive Compensation
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer, the two highest paid executive officers and up to two other highest paid individuals whose total annual salary and bonus exceeded $100,000 for the years ended December 31, 2020 and 2019.
Compensation Table
| Changes in | |||||||||||||||||||||||||||||||||||
| Pension Value and | |||||||||||||||||||||||||||||||||||
| Non-Equity | Non-Qualified | ||||||||||||||||||||||||||||||||||
| Incentive | Deferred | All | |||||||||||||||||||||||||||||||||
| Stock | Option | Plan | Compensation | Other | |||||||||||||||||||||||||||||||
| Name and Principal | Fiscal | Salary | Bonus | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ($) | ||||||||||||||||||||||||||
| Mark W. Porter | 2021 | 201,539 | — | 729,292 | 86,147 | — | — | 27,000 | (a) | 1,043,978 | |||||||||||||||||||||||||
| Chief Executive Officer | 2020 | 116,827 | — | — | — | — | — | 18,000 | (a) | 134,827 | |||||||||||||||||||||||||
| Daniel J. Sullivan | 2021 | 205,000 | — | — | 119,073 | — | — | — | 324,073 | ||||||||||||||||||||||||||
| Chief Financial Officer | 2020 | 115,000 | — | — | — | — | — | — | 115,000 | ||||||||||||||||||||||||||
| Roger M. Ponder | 2021 | 36,923 | — | — | 186,423 | — | — | — | 223,346 | ||||||||||||||||||||||||||
| Former Chief Executive Officer | 2020 | 164,526 | — | — | — | — | — | — | 164,526 | ||||||||||||||||||||||||||
| Keith W. Hayter | 2021 | 34,615 | — | — | 202,096 | — | — | — | 236,711 | ||||||||||||||||||||||||||
| Former President | 2020 | 137,904 | — | — | — | — | — | — | 137,904 | ||||||||||||||||||||||||||
| (a) | This amount represents a car allowance. |
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Outstanding Equity Awards at Fiscal Year-End
The following table shows the outstanding equity awards held by the named executive officers and directors as of December 31, 2021.
| Equity compensation plans not approved by shareholders | Equity compensation plans approved by shareholders | |||||||||||||||||||||
| Name and Principal | Number of securities underlying unexercised options exercisable | Number of securities underlying unexercised options exercisable | Number of securities underlying unexercised options exercisable | Number of securities underlying unexercised options exercisable | Option exercise price | Option expiration | ||||||||||||||||
| Position | (#) | (#) | (#) | (#) | ($) | date | ||||||||||||||||
| Current Officers: | ||||||||||||||||||||||
| Mark W. Porter | ||||||||||||||||||||||
| First Award | — | 3,318,584 | — | — | $ | 0.2500 | June 16, 2026 | |||||||||||||||
| Second Award | — | — | 218,892 | 93,811 | $ | 0.2545 | August 18,2026 | |||||||||||||||
| Daniel J. Sullivan | ||||||||||||||||||||||
| First Award | — | 77,587 | — | — | $ | 0.5800 | February 21, 2026 | |||||||||||||||
| Second Award | — | — | 302,554 | 129,666 | $ | 0.2545 | August 18,2026 | |||||||||||||||
| Current Directors: | ||||||||||||||||||||||
| Peter H. Kruse | — | — | — | 96,712 | $ | 0.2545 | August 18, 2026 | |||||||||||||||
| Stephen W. LaMarche | — | — | — | 100,603 | $ | 0.2485 | August 11, 2026 | |||||||||||||||
| Former Officers: | ||||||||||||||||||||||
| Roger Ponder | — | — | — | 323,863 | $ | 0.5800 | February 22, 2026 | |||||||||||||||
| Keith Hayter | — | — | — | 482,393 | $ | 0.5800 | February 22, 2026 | |||||||||||||||
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Employment Contracts and Termination of Employment and Change-In-Control Arrangements
Mark W. Porter Employment Agreement
On March 31, 2021, we entered into an employment agreement (the “Employment Agreement”) with Mark W. Porter, our Chief Executive Officer, pursuant to which Mr. Porter will serve as our Chief Executive Officer for an initial term of five (5) years with automatic two (2) year renewals unless terminated by us or Mr. Porter. Pursuant to the Employment Agreement, Mr. Porter will receive an annual base salary of $375,000, plus an annual cash bonus based on our achievement of certain performance targets made at the discretion of our Board of Directors. If all performance targets are achieved, Mr. Porter’s annual cash bonus shall not be less than five percent (5%) of our EBITDA for the applicable year.
Board of Directors Compensation
Directors who are employees of our company or of any of our subsidiaries receive no additional compensation for serving on our Board of Directors or any of its committees. All directors who are not employees of our company or of any of our subsidiaries are compensated at the rate of $25,000 per year in stock compensation and are paid $1,500 for each board meeting attended and are reimbursed for their expenses incurred in attending Board and committee meetings.
| Name and Principal | Fiscal | Fees Earned or Paid in Cash | Stock Awards | Option Awards | Non- Equity Incentive Plan Compensation | Non-Qualified Deferred Compensation Earnings | All Other Compensation | Total | |||||||||||||||||||||||
| Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||||
| Stephen W. LaMarche (1) | 2021 | 1,500 | - | 25,871 | - | - | 75,000 | (a) | 102,371 | ||||||||||||||||||||||
| Director | 2020 | - | - | - | - | - | - | - | |||||||||||||||||||||||
| Peter H. Kruse (2) | 2021 | - | - | 25,997 | - | - | 22,500 | (b) | 48,497 | ||||||||||||||||||||||
| Director | 2020 | - | - | - | - | - | 18,000 | (b) | 18,000 | ||||||||||||||||||||||
| (1) | Stephen W. LaMarche was appointed as a Director on August 9,2021 |
| (2) | Peter J Kruse was appointed as a Director on September 27,2021 |
| (a) | Represents consulting fees paid during 2021. |
| (b) | Represents consulting fees paid during 2021 and 2020. |
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PRINCIPAL STOCKHOLDERS
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of January 31, 2022, the names, addresses and number of shares of our common stock beneficially owned by all persons known to us to be beneficial owners of more than 5% of the outstanding shares of our common stock, and the names and number of shares beneficially owned by all of our directors and all of our executive officers and directors as a group (except as indicated, each beneficial owner listed exercises sole voting power and sole dispositive power over the shares beneficially owned). As of January 31, 2022, we had a total of 47,410,935 shares of common stock outstanding.
| Name of Beneficial Owner |
Number of shares and Nature of Beneficial Ownership(1) |
Percent of Common Stock Outstanding(2) |
||||||
| Mark W. Porter (3) | 12,221,486 | 20.5 | % | |||||
| Daniel J. Sullivan (4) | 661,798 | 1.4 | % | |||||
| Peter H. Kruse | 96,712 | * | ||||||
| Stephen W. LaMarche | 100,603 | * | ||||||
| All directors and executive officers as a group (four persons) | 13,080,599 | 21.6 | % | |||||
| Keith Hayter (5) | 7,646,626 | 13.9 | % | |||||
| Roger Ponder (6) | 7,142,466 | 13.1 | % | |||||
| Cobra Equities SPV LLC (7) | 20,422,985 | 30.1 | % | |||||
| * | Less than 1% |
| (1) | A person is considered to beneficially own any shares: (i) over which such person, directly or indirectly, exercises sole or shared voting or investment power, or (ii) of which such person has the right to acquire beneficial ownership at any time within 60 days (such as through exercise of stock options or warrants). Unless otherwise indicated, voting and investment power relating to the shares shown in the table for our directors and executive officers is exercised solely by the beneficial owner or shared by the owner and the owner’s spouse or children. Includes 3,412,395 common shares issuable upon the exercise of vested stock options and 8,190,909 common shares issuable upon the conversion of Series D Preferred Stock and 170,259 common shares issuable upon the exercise of vested stock options and 272,727 common shares issuable upon the conversion of Series E Preferred Stock. |
| (2) | Shares of our common stock issuable upon the conversion of our convertible preferred stock are deemed outstanding for purposes of computing the percentage shown above. In addition, for purposes of this table, a person or group of persons is deemed to have “beneficial ownership” of any shares of common stock that such person has the right to acquire within 60 days after the date of this prospectus. For purposes of computing the percentage of outstanding shares of our common stock held by each person or group of persons named above, any shares that such person or persons has the right to acquire within 60 days after the date of this prospectus is deemed to be outstanding, but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. The inclusion herein of any shares listed as beneficially owned does not constitute an admission of beneficial ownership. |
| (3) | Represents 96,712 common shares issuable upon the exercise of vested stock options. |
| (4) | Represents 100,703 common shares issuable upon the exercise of vested stock options. |
| (5) | Represents 7,166,807 common shares issuable upon the conversion of convertible debentures. The address of Mr. Hayter is 501 Bluff Oak Court, Apopka, FL 32712. |
| (6) | Includes 455,348 common shares issuable upon the conversion of convertible debentures and 86,363,636 common shares issuable upon the conversion of Series D Preferred Stock. The address of Mr. Ponder is 134 Varsity Circle, Altamonte Springs, FL 32714. |
| (7) | Includes 5,659,155 common shares issuable upon the conversion of convertible debentures and 86,363,636 common shares issuable upon the conversion of Series D Preferred Stock. The address of Cobra Equities SPV LLC is 7050 Aloma Ave. Winter Park, FL 32792. |
From time to time, the number of our shares held in the “street name” accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares of our common stock outstanding.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other than compensation arrangements for our named executive officers and directors, we describe below each transaction or series of similar transactions, since January 1, 2020, to which we were a party or will be a party, in which:
| ● | the amounts involved exceeded or will exceed $120,000; and |
| ● | any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest. |
See “Executive Compensation” for a description of certain arrangements with our executive officers and directors.
Exchange of Shares of Common Stock for Series B Preferred Stock
On June 16, 2021, in connection with the reverse merger with HWN, Inc., Mark Porter exchanged 350 shares of HWN’s Series D Preferred Stock for 1,000 shares of HWN’s Series B Preferred Stock from Roger Ponder and Keith Hayter.
Loans Payable to Related Parties
Roger Ponder Related Party Reclassification
During September 2021, as a result of shares of, as a result of his resignation as a director and the potential shares to be issued about conversion of his debt and Series D preferred stock, the Company determined that Roger Ponder was no longer a related party. The effective date of the reclassification was June 16, 2021.
Convertible promissory note, Keith Hayter, 10% interest, unsecured, matures August 31, 2022
On June 15, 2021, in connection with the reverse merger with HWN, HWN assumed High Wire’s convertible promissory note issued to Keith Hayter. The note was originally issued on August 31, 2020 in the principal amount of $554,031. Interest accrues at 10% per annum. All principal and accrued but unpaid interest under the note is due on August 31, 2022. The note is convertible into shares of the Company’s common stock at a fixed conversion price of $0.06 per share, subject to adjustment based on the terms of the note. The embedded conversion option does not qualify for derivative accounting. As a result of the conversion price being fixed at $0.06, the note has a conversion premium of $1,359,761, and the fair value of the note is $378,000.
Promissory note, Mark Porter, 9% interest, unsecured, matures December 15, 2021
On June 1, 2021, the Company issued a $100,000 promissory note to the Chief Executive Officer of the Company in connection with the reverse merger between High Wire and HWN. The note is due on December 15, 2021 and bears interest at a rate of 9% per annum. This note is still outstanding as of January 30, 2022.
Convertible promissory note, Roger Ponder, 10% interest, unsecured, matures August 31, 2022
On August 31, 2020, Roger Ponder exchanged one note into a new convertible promissory note with a principal amount of $23,894. Interest accrues on the new note at 10% per annum. All principal and accrued but unpaid interest under the note is due on August 31, 2022. The note is convertible into shares of the Company’s common stock at 80% of the lowest trading price in the 5 trading days prior to the conversion date. The conversion price has a floor of $0.01 per share. On January 14, 2021, the Company entered into an agreement with the holder whereby the conversion price was updated to $0.06 per share, subject to adjustment based on the terms of the note.
Convertible promissory note, Keith Hayter, 10% interest, unsecured, matures August 31, 2022
On August 31, 2020, Keith Hayter exchanged four notes into a new convertible promissory note with a principal amount of $554,031. Interest accrues on the new note at 10% per annum. All principal and accrued but unpaid interest under the note is due on August 31, 2022. The note is convertible into shares of the Company’s common stock at 80% of the lowest trading price in the 5 trading days prior to the conversion date. The conversion price has a floor of $0.01 per share. On January 14, 2021, the Company entered into an agreement with the holder whereby the conversion price was updated to $0.06 per share, subject to adjustment based on the terms of the note (refer to Note 19, Subsequent Events, for additional detail).
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DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 1,000,000,000 shares of common stock, par value $0.00001 per share, and 20,000,000 shares of preferred stock, par value $0.00001 per share, of which 8,000,000 shares are designated as Series A Preferred Stock, 1,000 shares are designated as Series B Preferred Stock, 1,590 shares are designated as Series D Preferred Stock and 650 shares are designated as Series E Preferred Stock. As September 30, 2021, 35,467,238 shares of common stock were issued and outstanding, 300,000 shares of Series A were issued and outstanding, 1,000 shares of Series B Preferred Stock were issued and outstanding 690 shares of Series D Preferred Stock and 0 shares of Series E Preferred Stock were issued and outstanding. In addition, at such date, 2,880 shares of common stock were reserved for issuance upon the exercise of outstanding common stock purchase warrants.
Common Stock
Voting, Dividend and Other Rights – Each outstanding share of common stock entitles the holder to one vote on all matters presented to the shareholders for a vote. Holders of shares of common stock have no cumulative voting, preemptive, subscription or conversion rights. All shares of common stock to be issued pursuant to this registration statement will be duly authorized, fully paid and non-assessable. Our Board of Directors determines if and when distributions may be paid out of legally available funds to the holders. To date, we have not declared any dividends with respect to our common stock. Our declaration of any cash dividends in the future will depend on our Board of Directors’ determination as to whether, in light of our earnings, financial position, cash requirements and other relevant factors existing at the time, it appears advisable to do so. We do not anticipate paying cash dividends on the common stock in the foreseeable future.
Rights Upon Liquidation – Upon liquidation, subject to the right of any holders of the preferred stock to receive preferential distributions, each outstanding share of common stock may participate pro rata in the assets remaining after payment of, or adequate provision for, all our known debts and liabilities.
Majority Voting – The holders of a majority of the outstanding shares of common stock constitute a quorum at any meeting of the shareholders. A plurality of the votes cast at a meeting of shareholders elects our directors. The common stock does not have cumulative voting rights. Therefore, the holders of a majority of the outstanding shares of common stock can elect all of our directors. In general, a majority of the votes cast at a meeting of shareholders must authorize shareholder actions other than the election of directors. Most amendments to our certificate of incorporation require the vote of the holders of a majority of all outstanding voting shares.
Series A Preferred Stock
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 a fixed conversion price of $0.0975, subject to adjustment for any subdivision or combination of the Company’s outstanding shares of common stock. The conversion price has a floor of $0.01 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.
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Series B Preferred Stock
Issue Price - The stated price for the Series B preferred stock shares shall be $3,500 per share.
Redemption - The Series B preferred stock shares are not redeemable.
Dividends - The holders of the Series B preferred stock shares shall not be entitled to receive any dividends.
Preference of Liquidation - The Corporation’s Series A preferred stock (the “Senior Preferred Stock”) shall have a liquidation preference senior to the Series B preferred stock. Upon any fundamental transaction, liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the shares of the Series B preferred stock shares shall be entitled, after any distribution or payment is made upon any shares of capital stock of the Company having a liquidation preference senior to the Series B preferred stock shares, including the Senior Preferred Stock, but before any distribution or payment is made upon any shares of common stock or other capital stock of the Company having a liquidation preference junior to the Series B preferred stock shares, to be paid in cash the sum of $3,500 per share. If upon such liquidation, dissolution or winding up, the assets to be distributed among the Series B preferred stock holders and all other shares of capital stock of the Company having the same liquidation preference as the Series B preferred stock shall be insufficient to permit payment to said holders of such amounts, then all of the assets of the Company then remaining shall be distributed ratably among the Series B preferred stock holders and such other capital stock of the Company having the same liquidation preference as the Series B preferred stock, if any. Upon any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, after provision is made for Series B preferred stock holders and all other shares of capital stock of the Company having the same liquidation preference as the Series B preferred stock, if any, then-outstanding as provided above, the holders of common stock and other capital stock of the Company having a liquidation preference junior to the Series B preferred stock shall be entitled to receive ratably all remaining assets of the Company to be distributed.
Voting - The holders of shares of Series B preferred stock shall be voted together with the shares of common stock such that the aggregate voting power of the Series B preferred stock is equal to 51% of the total voting power of the Company.
Conversion - There are no conversion rights.
Series D Preferred Stock
Issue Price - The stated price for the Series D preferred stock shares shall be $10,000 per share.
Redemption - The Series D preferred stock shares are not redeemable.
Dividends - The holders of the Series D preferred stock shares shall not be entitled to receive any dividends.
Preference of Liquidation - Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall (i) first be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to $10,000 for each share of Series D before any distribution or payment shall be made to the holders of any other securities of the Corporation and (ii) then be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Series D 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. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each Holder.
Voting - Except as otherwise provided in the agreement or as required by law, the Series D shall be voted together with the shares of common stock, par value $0.00001 per share of the Corporation (“Common Stock”), and any other series of preferred stock then outstanding that have voting rights, and except as provided in Section 7, not as a separate class, at any annual or special meeting of stockholders of the Corporation, 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 D is equal to the voting power of the shares of Common Stock that each such share of Series D would be convertible into pursuant to Section 6 if the Series D Conversion Date was the date of the vote. The Series D shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation and may act by written consent in the same manner as the holders of Common Stock of the Corporation.
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Conversion - Beginning ninety (90) days from the date of issuance, all or a portion of the Series D may be converted into Common Stock at the greater of the Fixed Price and the Average Price (as defined below). To determine the number of shares of Common Stock issuable upon any such conversion, the product of the number of shares of Series D being converted multiplied by the stated value of each share, would be divided by the conversion price set forth in the preceding sentence. The business day immediately preceding the listing of the Common Stock on a national securities exchange (the “Automatic Series D Conversion Date”), without any further action, all remaining outstanding shares of Series D shall automatically convert into an aggregate number of shares of Common Stock equal to $15,900,000 (minus the value at the time of conversion, as determined above, of any Series D that has already been converted) divided by the Average Price (as defined below). “Fixed Price” shall be defined as the closing price of the Common Stock on the trading day immediately preceding the date of issuance of the Series D. “Average Price” shall mean the average closing price of the Common Stock for the ten trading days immediately preceding, but not including, the conversion date.
Vote to Change the Terms of or Issuance of Series D - The affirmative vote at a meeting duly called for such purpose, or written consent without a meeting, of the holders of not less than fifty-one (51%) of the then outstanding shares of Series D shall be required for any change to the Certificate of Designation, Preferences, Rights and Other Rights of the Series D.
Series E Preferred Stock
Issue Price - The stated price for the Series E preferred stock shares shall be $10,000 per share.
Redemption - The Series E preferred stock shares are not redeemable.
Dividends - The holders of the Series E preferred stock shares shall not be entitled to receive any dividends.
Preference of Liquidation - Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall (i) first be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to $10,000 for each share of Series E before any distribution or payment shall be made to the holders of any other securities of the Corporation and (ii) then be entitled to receive out of the assets, whether capital or surplus, of the Corporation the same amount that a holder of Common Stock would receive if the Series E 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. The Corporation shall mail written notice of any such Liquidation, not less than 45 days prior to the payment date stated therein, to each Holder.
Voting - Except as otherwise provided in the agreement or as required by law, the Series E shall be voted together with the shares of common stock, par value $0.00001 per share of the Corporation (“Common Stock”), and any other series of preferred stock then outstanding that have voting rights, and except as provided in Section 7, not as a separate class, at any annual or special meeting of stockholders of the Corporation, 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 E is equal to the voting power of the shares of Common Stock that each such share of Series E would be convertible into pursuant to Section 6 if the Series E Conversion Date was the date of the vote. The Series E shall be entitled to notice of any stockholders’ meeting in accordance with the Bylaws of the Corporation and may act by written consent in the same manner as the holders of Common Stock of the Corporation.
Conversion - Beginning ninety (90) days from the date of issuance, all or a portion of the Series E may be converted into Common Stock at the greater of the Fixed Price and the Average Price (as defined below). To determine the number of shares of Common Stock issuable upon any such conversion, the product of the number of shares of Series E being converted multiplied by the stated value of each share, would be divided by the conversion price set forth in the preceding sentence. On the business day immediately preceding the listing of the Common Stock on a national securities exchange (the “Automatic Series E Conversion Date”), without any further action, all remaining outstanding shares of Series D shall automatically convert into an aggregate number of shares of Common Stock equal to $6,900,000 (minus the value at the time of conversion, as determined above, of any Series D that has already been converted) divided by the Average Price (as defined below). “Fixed Price” shall be defined as the closing price of the Common Stock on the trading day immediately preceding the date of issuance of the Series E. “Average Price” shall mean the average closing price of the Common Stock for the ten trading days immediately preceding, but not including, the conversion date.
Vote to Change the Terms of or Issuance of Series D - The affirmative vote at a meeting duly called for such purpose, or written consent without a meeting, of the holders of not less than fifty-one (51%) of the then outstanding shares of Series D shall be required for any change to the Certificate of Designation, Preferences, Rights and Other Rights of the Series D.
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Stock Options
As of September 30, 2021, the following stock options were outstanding:
| Number of stock options | Exercise price | Issuance Date | Expiry date | Remaining Life | ||||||||||||
| 5,000 | 9.00 | 11/25/2019 | 11/25/2021 | 0.15 | ||||||||||||
| 323,763 | 0.58 | 2/23/2021 | 2/23/2026 | 4.40 | ||||||||||||
| 482,393 | 0.58 | 2/23/2021 | 2/23/2026 | 4.40 | ||||||||||||
| 77,587 | 0.58 | 2/23/2021 | 2/23/2026 | 4.40 | ||||||||||||
| 77,587 | 0.58 | 2/23/2021 | 2/23/2026 | 4.40 | ||||||||||||
| 3,318,584 | 0.25 | 6/16/2021 | 6/16/2026 | 4.70 | ||||||||||||
| 100,603 | 0.25 | 8/11/2021 | 8/11/2026 | 4.87 | ||||||||||||
| 6,228,834 | 0.25 | 8/18/2021 | 8/18/2026 | 4.88 | ||||||||||||
| 10,614,351 | ||||||||||||||||
Warrants
As of September 30, 2021, the following share purchase warrants were outstanding:
| Number of warrants | Exercise price | Issuance Date | Expiry date | Remaining life | ||||||||||||
| 380 | 324.00 | 10/10/2018 | 10/10/2021 | 0.03 | ||||||||||||
| 2,500 | 30.00 | 11/21/2019 | 11/21/2022 | 1.14 | ||||||||||||
| 2,880 | ||||||||||||||||
Anti-takeover Effects of Nevada Law
Certain provisions of Nevada law and our Articles of Incorporation and Bylaws could make more difficult the acquisition of us by means of a tender offer or otherwise, and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of us.
Nevada Law
The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the NRS prohibit a Nevada corporation with at least 200 stockholders (at least 100 of whom are stockholders of record and residents of the State of Nevada) from engaging in various “combination” transactions with any interested stockholder for a period of two years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status; or after the expiration of the two-year period, unless:
| ● | The combination or the transaction by which the person first became an interested stockholder is approved by the board of directors of the corporation before the person first became an interested stockholder, or |
| ● | The combination is approved by the board of directors of the corporation and, at or after that time, the combination is approved at an annual or special meeting of the stockholders of the corporation, and not by written consent, by the affirmative vote of the holders of stock representing at least 60 percent of the outstanding voting power of the corporation not beneficially owned by the interested stockholder or the affiliates or associates of the interested stockholder. |
In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within three years, did own) ten percent (10%) or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.
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A “combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer, or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having: (a) an aggregate market value equal to five percent (5%) or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to five percent (5%) or more of the aggregate market value of all outstanding shares of the corporation, or (c) ten percent (10%) or more of the earning power or net income of the corporation.
The business combination statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire the Company even though such a transaction may offer the Company’s stockholders the opportunity to sell their stock at a price above the prevailing market price.
Board of Directors Vacancies
Our bylaws authorize our board of directors to fill vacant directorships. In addition, the number of directors constituting our board of directors may be set only by resolution of the majority of the incumbent directors.
Meeting of Stockholders
Our bylaws provide that special meetings of our stockholders may be called by the board of directors.
Authorized but Unissued Shares
Our authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval and may be utilized for a variety of corporate purposes, including future public and private offerings to raise additional capital, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Transfer Agent and Registrar
The registrar and transfer agent for our common stock is, EQ Shareowner, located at 1100 Centre Point Curve, Mendota Heights, MN 55120.
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SELLING Shareholder
The following table sets forth information with respect to the maximum number of shares of common stock beneficially owned by the selling shareholder named below and as adjusted to give effect to the sale of the shares offered hereby. The shares beneficially owned have been determined in accordance with rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. The information in the table below is current as of January 31, 2022. All information contained in the table below is based upon information provided to us by the selling shareholder and we have not independently verified this information. The selling shareholder is not making any representation that any shares covered by the prospectus will be offered for sale. The selling shareholder may from time to time offer and sell pursuant to this prospectus any or all of the common stock being registered.
As explained below under “Plan of Distribution,” we have agreed with the selling shareholder to bear certain expenses (other than broker discounts and commissions, if any) in connection with the registration statement, which includes this prospectus.
|
Shares of Common Stock Beneficially Owned Prior to Offering(1) |
Shares Being Offered | Shares of Common Stock Beneficially Owned After Offering(2) | Percentage of Common Stock Beneficially Owned After Offering(1) | |||||||||||||
| Dominion Capital LLC(3) | 8,076,923 | 5,000,000 | 2,365,805 | 4.99 | % | |||||||||||
| # | The number of shares of common stock underlying the convertible note that may be acquired by the selling shareholder upon conversion of the convertible note, as the case may be, is limited to ensure that, following such conversion or exercise, the total number of shares of common stock then beneficially owned by the selling shareholder and its affiliates and other persons whose beneficial ownership of common stock would be aggregated with the selling shareholder’s for purposes of Section 13(d) of the Securities Exchange Act of 1934, does not exceed 4.99% of the total number of our issued and outstanding shares of common stock. |
| (1) | This table is based upon information supplied by principal stockholders and in Schedules 13D and 13G filed with the Securities and Exchange Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws, where applicable, we believe the stockholder named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. The number and percentage of shares beneficially owned are based on an aggregate of 47,410,935 shares of our common stock outstanding as of January 31, 2022, and are determined under rules promulgated by the Securities and Exchange Commission. This information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days through the exercise of any stock option or other right. |
| (2) | Because the selling shareholder identified in this table may sell some, all or none of the shares owned by it that are registered under this registration statement, and because, to our knowledge, there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares registered hereunder, no estimate can be given as to the number of shares available for resale hereby that will be held by the selling shareholder at the time of this registration statement. Therefore, unless otherwise noted, we have assumed for purposes of this table that the selling shareholder will sell all of the shares beneficially owned by it as of January 31, 2022. |
| (3) | Consists of 8,076,923 shares of common stock underlying Series A Preferred Stock and a convertible note of the Company in favor of the holder, all of which may be issued within 60 days of the date of this Prospectus through the conversion of the Series A Preferred Stock and convertible note in accordance with the terms thereof. Mikhail Gurevich is an executive officer and has voting and dispositive power over these shares. Mr. Gurevich disclaims beneficial ownership except as to the extent of his pecuniary interests therein. The business address for this holder is 256 West 38th Street, 15th Floor, New York, NY 10018. |
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PLAN OF DISTRIBUTION
The selling shareholder and any of its pledgees, donees, assignees and successors-in-interest may, from time to time, sell any or all of its shares of common stock being offered under this prospectus on any stock exchange, market or trading facility on which our common stock is traded or in private transactions. These sales may be at fixed or negotiated prices. The selling shareholder may use any one or more of the following methods when disposing of the shares of common stock:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| ● | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resales by the broker-dealer for its account; | |
| ● | an exchange distribution in accordance with the rules of the applicable exchange; | |
| ● | privately negotiated transactions; | |
| ● | to cover short sales made after the date that the registration statement of which this prospectus is a part is declared effective by the SEC; | |
| ● | broker-dealers may agree with the selling shareholder to sell a specified number of such shares at a stipulated price per share; | |
| ● | a combination of any of these methods of sale; and | |
| ● | any other method permitted pursuant to applicable law. |
The shares of common stock may also be sold under Rule 144 under the Securities Act, or any other exemption from registration under the Securities Act, if available for the selling shareholder, rather than under this prospectus. The selling shareholder has the sole and absolute discretion not to accept any purchase offer or make any sale of shares of common stock if it deems the purchase price to be unsatisfactory at any particular time.
The selling shareholder may pledge its shares of common stock to its brokers under the margin provisions of customer agreements. If the selling shareholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling shareholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, which commissions as to a particular broker or dealer may be in excess of customary commissions to the extent permitted by applicable law.
If sales of shares of common stock offered under this prospectus are made to broker-dealers as principals, we would be required to file a post-effective amendment to the registration statement of which this prospectus is a part. In the post-effective amendment, we would be required to disclose the names of any participating broker-dealers and the compensation arrangements relating to such sales.
The selling shareholder and any broker-dealers or agents that are involved in selling the shares of common stock offered under this prospectus may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. Commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Any broker-dealers or agents that are deemed to be underwriters may not sell common shares offered under this prospectus unless and until we set forth the names of the underwriters and the material details of their underwriting arrangements in a supplement to this prospectus or, if required, in a replacement prospectus included in a post-effective amendment to the registration statement of which this prospectus is a part.
70
The selling shareholder and any other persons participating in the sale or distribution of the shares of common stock offered under this prospectus will be subject to applicable provisions of the Exchange Act, and the rules and regulations under that act, including Regulation M. These provisions may restrict activities of, and limit the timing of purchases and sales of any of the shares of common stock by, the selling shareholder or any other person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and other activities with respect to those securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares of common stock.
If any of the shares of common stock offered for sale pursuant to this prospectus are transferred other than pursuant to a sale under this prospectus, then subsequent holders could not use this prospectus until a post-effective amendment or prospectus supplement is filed, naming such holders. We offer no assurance as to whether the Selling Stockholder will sell all or any portion of the shares offered under this prospectus.
The shares of common stock will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the shares of common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
71
LEGAL MATTERS
The legality of the issuance of the shares offered in this prospectus will be passed upon for us by Flangas Law Group, Las Vegas, Nevada.
EXPERTS
The financial statements of our company have been audited by Sadler, Gibb & Associates, LLC, independent registered public accountants, as stated in its report appearing herein and elsewhere in this prospectus, and have been so included in reliance upon the report of this firm given upon their authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-1 (including exhibits) under the Securities Act, with respect to the shares to be sold in this offering. This prospectus does not contain all the information set forth in the registration statement. For further information with respect to our company and the common stock offered in this prospectus, reference is made to the registration statement, including the exhibits filed thereto, and the financial statements and notes filed as a part thereof. With respect to each such document filed with the SEC as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved.
We file quarterly and annual reports, proxy statements and other information with the SEC. You may read and copy any document that we file at the public reference facilities of the SEC in Washington, D.C. The SEC maintains a website that contains reports, proxy and other information statements about issuers, including us, that file electronically with the SEC. The address of the website is http://www.sec.gov.
72
HIGH WIRE NETWORKS, INC.
Table of Contents
F-1
HWN, INC. f/k/a Spectrum Global Solutions, Inc.
Condensed consolidated balance sheets
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| (Unaudited) | (Unaudited) | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ |
||||||||
| Contract assets | - | |||||||
| Prepaid expenses and deposits | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ |
||||||||
| Goodwill | ||||||||
| Intangible assets, net of accumulated amortization of $ |
- | |||||||
| Operating lease right-of-use assets | ||||||||
| Other assets | - | |||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Contract liabilities | ||||||||
| Loans payable to related parties | - | |||||||
| Loans payable, current portion | ||||||||
| Convertible debentures, current portion, net of net debt discount/premium of $ |
- | |||||||
| Factor financing | - | |||||||
| Derivative liabilities, current portion | - | |||||||
| Operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Loans payable, net of current portion | ||||||||
| Convertible debentures, net of current portion, net of debt discount of $127,716 and $98,176, respectively | - | |||||||
| Derivative liabilities, net of current portion | - | |||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Series A preferred stock; $ |
- | |||||||
| Series B preferred stock; $ |
||||||||
| Series D preferred stock; $ |
||||||||
| Total mezzanine equity | - | |||||||
| Stockholders’ Deficit: | ||||||||
| Common stock; $ |
||||||||
| Additional paid-in capital | - | |||||||
| (Accumulated deficit)/retained earnings | ( |
) | ||||||
| Total HWN, Inc. stockholders’ equity | ||||||||
| Noncontrolling interest | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-2
HWN, INC. f/k/a Spectrum Global Solutions, Inc.
Condensed consolidated statements of operations
(Unaudited)
| For the three months ended |
For the nine months ended |
|||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other (expenses) income: | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Loss on settlement of debt | ( |
) | ( |
) | ||||||||||||
| Amortization of discounts on convertible debentures | ( |
) | ( |
) | ||||||||||||
| Amortization of premiums on convertible debentures and loans payable to related parties | ||||||||||||||||
| Loss on change in fair value of derivatives | ( |
) | ( |
) | ||||||||||||
| Exchange (loss) gain | ( |
) | ||||||||||||||
| Gain on settlement of warrants | ( |
) | ( |
) | ||||||||||||
| Management fee income | ||||||||||||||||
| Gain on PPP loan forgiveness | ||||||||||||||||
| Other income | ||||||||||||||||
| Total other expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net loss before income taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss before noncontrolling interest | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Less: Net income attributable to noncontrolling interest | ( |
) | ( |
) | ( |
) | ||||||||||
| Net loss attributable to HWN, Inc. common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per share attributable to HWN, Inc. common shareholders, basic and diluted: | $ | ( |
) | $ | ( |
) | ||||||||||
| Weighted average common shares outstanding, basic and diluted | ||||||||||||||||
(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-3
HWN, INC. f/k/a Spectrum Global Solutions, Inc.
Condensed consolidated statements of stockholder’s equity
(Unaudited)
| For the nine months ended September 30, 2021 | ||||||||||||||||||||||||
| Common stock | Additional paid-in |
(Accumulated deficit)/retained | Noncontrolling | |||||||||||||||||||||
| Shares | $ | capital | earnings | interest | Total | |||||||||||||||||||
| Balances, December 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net loss for the period | - | - | ( |
) | ||||||||||||||||||||
| Ending balance, March 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of shares for reverse merger | ||||||||||||||||||||||||
| Stock compensation in connection with reverse merger | - | - | ||||||||||||||||||||||
| Fair value of convertible debt issued to HWN shareholders | - | - | ( |
) | ( |
) | ||||||||||||||||||
| Issuance of common stock to Cobra Equities upon conversion of a convertible debenture | ||||||||||||||||||||||||
| Issuance of common stock to Efrat Investments upon conversion of a convertible debenture | ||||||||||||||||||||||||
| Issuance of common stock to Dominion upon conversion of Series A preferred stock | ||||||||||||||||||||||||
| Issuance of common stock to Pawn Funding upon exercise of warrants | ||||||||||||||||||||||||
| Net loss for the period | - | - | ( |
) | ( |
) | ||||||||||||||||||
| Ending balance, June 30, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Issuance of common stock to Cobra Equities upon conversion of convertible debentures | ||||||||||||||||||||||||
| Issuance of common stock to Dominion upon conversion of Series A preferred stock | ||||||||||||||||||||||||
| Issuance of common stock to a related party upon conversion of a convertible debenture | ||||||||||||||||||||||||
| Issuance of common stock to Efrat Investments upon exercise of warrants | ||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||
| Net loss for the period | - | - | - | ( |
) | ( |
) | |||||||||||||||||
| Ending balance, September 30, 2021 | $ | $ | $ | ( |
) | $ | $ | |||||||||||||||||
F-4
| For the nine months ended September 30, 2020 | ||||||||||||||||||||||||
| Common stock | Additional paid-in |
Retained | Noncontrolling | |||||||||||||||||||||
| Shares | $ | capital | earnings | interest | Total | |||||||||||||||||||
| Balances, December 31, 2019 | - | $ | - | $ | - | $ | $ | $ | ||||||||||||||||
| Distributions to shareholders | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||||||
| Net loss for the period | - | - | - | |||||||||||||||||||||
| Ending balance, March 31, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Net loss for the period | - | - | - | ( |
) | ( |
) | |||||||||||||||||
| Ending balance, June 30, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
| Distributions to shareholders | - | - | ( |
) | ( |
) | ( |
) | ||||||||||||||||
| Net loss for the period | - | - | - | ( |
) | ( |
) | ( |
) | |||||||||||||||
| Ending balance, September 30, 2020 | $ | $ | $ | $ | $ | |||||||||||||||||||
(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-5
HWN, INC. f/k/a Spectrum Global Solutions, Inc.
Condensed consolidated statements of cash flows
(Unaudited)
| For the nine months ended |
||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on change in fair value of derivative liability | ||||||||
| Amortization of discounts on convertible debentures | ||||||||
| Amortization of premiums on convertible debentures and loans payable to related parties | ( |
) | ||||||
| Depreciation and amortization | ||||||||
| Amortization of operating right-of-use assets | ||||||||
| Amortization of operating right-of-use liabilities | ( |
) | ( |
) | ||||
| Stock compensation | ||||||||
| Loss on settlement of debt | ||||||||
| Gain of forgiveness of Cares Act loan | ( |
) | ||||||
| Gain on settlement of warrants | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Contract assets | ( |
) | ||||||
| Prepaid expenses and deposits | ( |
) | ||||||
| Other assets | ( |
) | ||||||
| Accounts payable and accrued liabilities | ( |
) | ( |
) | ||||
| Contract liabilities | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Cash acquired in reverse acquisition | ||||||||
| Purchase of equipment | ( |
) | ( |
) | ||||
| Net cash provided by/(used in) investing activities | ( |
) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayments of loans payable | ( |
) | ( |
) | ||||
| Distributions to shareholders | ( |
) | ||||||
| Proceeds from Cares Act loans | ||||||||
| Repayments of convertible debentures | ( |
) | ||||||
| Release of restricted cash | ||||||||
| Proceeds from factor financing | ||||||||
| Repayments of factor financing | ( |
) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for conversion of convertible debentures | $ | $ | ||||||
| Common stock issued for conversion of Series A preferred stock | $ | $ | ||||||
| Common stock issued upon cashless exercise of warrants | $ | $ | ||||||
| Common stock issued for conversion of warrants | $ | $ | ||||||
| Related party note issued | $ | $ | ||||||
| Convertible debentures issued | $ | $ | ||||||
(The accompanying notes are an integral part of these unaudited condensed consolidated financial statements)
F-6
HWN, INC./f/k/a Spectrum Global Solutions, Inc.
Notes to the unaudited condensed consolidated financial statements
September 30, 2021
| 1. | Organization |
Spectrum Global Solutions, Inc., (“Spectrum”) (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, Spectrum reincorporated in the province of British Columbia, Canada.
On April 25, 2017, Spectrum entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, Spectrum purchased
On November 15, 2017, Spectrum changed its name to “Spectrum Global Solutions, Inc.” and reincorporated in the state of Nevada.
On February 14, 2018, Spectrum entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to Spectrum of the remaining
On February 6, 2018, Spectrum entered into and closed on a Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Stock Purchase Agreement Spectrum 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. and formed ADEX Canada LLC in September 2019 (collectively “ADEX” or the “ADEX Entities”). Spectrum completed the acquisition on February 27, 2018.
On May 18, 2018, Spectrum 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 Mantra’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, Spectrum entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and Spectrum agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporation.
On September 30, 2020, Spectrum sold its TNS subsidiary.
On December 31, 2020, Spectrum sold its AWS subsidiary.
HWN, Inc., (d/b/a High Wire Network Solutions, Inc.) (“High Wire” or the “Company”) was incorporated in Delaware on January 20, 2017. The Company is a global provider of managed security, professional services and commercial/industrial electrical solutions delivered exclusively through a channel sales model. The Company’s Overwatch managed security platform-as-a-service offers organizations end-to-end protection for networks, data, endpoints and users via multiyear recurring revenue contracts in this fast-growing technology segment.
High Wire and JTM Electrical Contractors, Inc. (“JTM”), an Illinois Corporation, entered into an operating agreement through which High Wire owns
On June 16, 2021, the Company completed a merger with Spectrum. The merger was accounted for as a reverse merger (refer to Note 3, Reverse Merger, for additional detail). At the time of the reverse merger, Spectrum’s subsidiaries included ADEX Corporation, ADEX Puerto Rico LLC, ADEX Canada, ADEX Towers, Inc. and ADEX Telecom, Inc. (collectively “ADEX” or the “ADEX Entities”), AW Solutions Puerto Rico, LLC (“AWS PR”), and Tropical Communications, Inc. (“Tropical”).
F-7
On September 2, 2021, Spectrum legally changed its name to HWN. For accounting purposes, HWN is the surviving entity and is referred to throughout as “HWN”, “High Wire”, or “the Company”.
The Company’s AWS PR and Tropical subsidiaries are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally.
| 2. | Significant Accounting Policies |
Condensed Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated 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 JTM, as well as Spectrum and its subsidiaries, the ADEX Entities, AWS PR, and Tropical. All subsidiaries are wholly-owned, with the exception of JTM, which is
All inter-company balances and transactions have been eliminated.
Reverse Merger
On January 27, 2021, Spectrum Global Solutions, Inc. HW Merger Sub, Inc., HWN, Inc. and the stockholders of HWN, Inc. (the “Stockholders”) entered into an Agreement and Plan of Merger (the “Agreement”) whereby the Stockholders agreed to sell to the Company all of the capital stock of HWN, Inc. On June 16, 2021, the transaction contemplated by the Agreement closed, and HWN, Inc. became a wholly-owned subsidiary of Spectrum Global Solutions, Inc. As previously disclosed, as part of the consideration for the transaction, Spectrum Global Solutions, Inc. issued shares of a newly established Series D Preferred Stock.
The merger has been accounted for as a reverse merger in accordance with US GAAP. This determination was primarily based on High Wire’s business comprising the ongoing operations of the Company following the Merger, High Wire’s senior management comprising the senior management of the Company and High Wire’s stockholders having a majority of the voting power of the Company. For accounting purposes, Spectrum is considered the “acquired” company and High Wire is considered the “acquirer.” Accordingly, for accounting purposes, the Merger is treated as the equivalent of High Wire issuing stock for the net assets of Spectrum, accompanied by a recapitalization. The net assets of Spectrum have been remeasured at fair value and applied against the purchase price resulting in goodwill or other intangible assets recorded. The consolidated assets, liabilities and results of operations prior to the Closing Date of the merger are those of High Wire, and Spectrum’s assets, liabilities and results of operations are consolidated with High Wire beginning on the Closing Date. The shares and corresponding capital amounts and earnings per share available to common stockholders, pre-merger, have been retroactively restated as shares reflecting the exchange ratio in the merger. The historical financial information and operating results of Spectrum prior to the merger have not been separately presented in these condensed consolidated financial statements.
F-8
Impact of the COVID-19 Pandemic
The extent to which the coronavirus (“COVID-19”) outbreak and measures taken in response thereto impact the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Global health concerns relating to the COVID-19 outbreak have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. Risks related to consumers and businesses lowering or changing spending, which impact domestic and international spend. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and may further impact the Company’s workforce and operations and the operations of its customers, suppliers and business partners. These measures may remain in place for a significant period of time and they are likely to continue to adversely affect the Company’s business, results of operations and financial condition.
The spread of COVID-19 has caused the Company to modify its business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and the Company may take further actions as may be required by government authorities or that the Company determines are in the best interests of its employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.
The extent to which the COVID-19 outbreak impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, the Company may continue to experience materially adverse impacts to its business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a global pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. The Company does not yet know the full extent of the impacts on its business, its operations or the global economy as a whole. However, the effects could have a material impact on the Company’s results of operations, and the Company will continue to monitor the COVID-19 situation closely. As of November 2021, multiple variants of the COVID-19 virus are circulating globally that are highly transmissible, and there is uncertainty around vaccine effectiveness on the new strains of the virus. Uncertainty around vaccine distribution, supply and effectiveness will impact when the negative economic effects as a result of COVID-19 will abate or end and the timing of such recovery may affect the Company’s financial condition.
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.
F-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, 2021 and December 31, 2020 was $
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:
| Computers and office equipment | |
| Vehicles | |
| Leasehold improvements | |
| Software | |
| Machinery and equipment |
Goodwill
Goodwill was initially generated through the acquisition of JTM in 2019, and the reverse merger with Spectrum in 2021, as the total consideration paid exceeded the fair value of the net assets acquired.
The Company tests its goodwill for impairment at least annually on December 31st and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.
The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during the three and nine months ended September 30, 2021 and 2020.
Intangible Assets
At September 30, 2021 and December 31, 2020, definite-lived intangible assets consist of tradenames and customer relationships which are being amortized over their estimated useful lives of
The Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were no impairment charges during the three and nine months ended September 30, 2021 and 2020.
F-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 three and nine months ended September 30, 2021 and 2020.
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 2020. 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.
F-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.
AWS PR received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as of June 30, 2021 was $
Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
The Company recognizes revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract Types
The Company’s contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of the Company’s revenues come from customers with whom the Company has a master service agreement (“MSA”). These MSA’s generally contain customer specific service requirements.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For the Company’s different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets.
Revenue Service Types
The following is a description of the Company’s revenue service types, which include professional services and construction:
| ● | Professional services are services provided to the clients where the Company delivers distinct contractual deliverables and/or services. Deliverables may include but are not limited to: engineering drawings, designs, reports and specification. Services may include, but are not 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. |
F-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, 2021 |
Three months ended September 30, 2020 |
Nine months ended September 30, 2021 |
Nine months ended September 30, 2020 |
||||||||||||
| Professional Services | $ | $ | $ | $ | ||||||||||||
| Construction | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Revenue by contract duration | Three months ended September 30, 2021 |
Three months ended September 30, 2020 |
Nine months ended September 30, 2021 |
Nine months ended September 30, 2020 |
||||||||||||
| Short-term | $ | $ | $ | $ | ||||||||||||
| Long-term | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Revenue by contract type | Three months ended September 30, 2021 |
Three months ended September 30, 2020 |
Nine months ended September 30, 2021 |
Nine months ended September 30, 2020 |
||||||||||||
| Fixed-price | $ | $ | $ | $ | ||||||||||||
| Time-and-materials | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
The Company also disaggregates its revenue by operating segment and geographic location (refer to Note 16, Segment Disclosures, for additional information).
Accounts Receivable
Accounts receivable include amounts from work completed in which the Company has billed. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.
F-13
Contract Assets and Liabilities
Contract assets include costs and services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. At September 30, 2021 and December 31, 2020, contract assets totaled $
Contract liabilities include payment received for incomplete performance obligations and are included in contract liabilities on the consolidated balance sheets. At September 30, 2021 and December 31, 2020, contract liabilities totaled $
Cost of Revenues
Cost of revenues includes all direct costs of providing services under the Company’s contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss per Share
The Company computes (loss) per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted (loss) per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of September 30, 2021 and December 31, 2020, respectively, the Company had
F-14
Leases
The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) on January 1, 2019.
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. A number of the Company’s lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
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. The Company has elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
Going Concern Assessment
Management assesses going concern uncertainty in the Company’s consolidated financial statements to determine whether there is sufficient cash on hand and working capital, including available borrowings on loans, to operate for a period of at least one year from the date the unaudited consolidated financial statements are issued or available to be issued, which is referred to as the “look-forward period”, as defined in GAAP. As part of this assessment, based on conditions that are known and reasonably knowable to management, management will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, its ability to delay or curtail expenditures or programs and its ability to raise additional capital, if necessary, among other factors. Based on this assessment, as necessary or applicable, management makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent it deems probable those implementations can be achieved and management has the proper authority to execute them within the look-forward period.
The Company has generated losses since its inception and has relied on cash on hand, sales of securities, external bank lines of credit, and issuance of third-party and related party debt to support cash flow from operations. For the nine months ended September 30, 2021, the Company had an operating loss of $
Management has prepared estimates of operations for the remainder of fiscal year 2021 and for 2022 and believes that sufficient funds will be generated from operations to fund its operations and to service its debt obligations for one year from the date of the filing of the unaudited consolidated financial statements in the Company’s Quarterly Report on Form 10-Q, which indicate improved operations and the Company’s ability to continue operations as a going concern.
The impact of COVID-19 on the Company’s business has been considered in these assumptions; however, it is too early to know the full impact of COVID-19 or its timing on a return to more normal operations. Further, the recently enacted CARES Act provides for economic assistance loans through the SBA. As of September 30, 2021, ADEX had $
The accompanying unaudited consolidated financial statements have been prepared on a going concern basis under which the Company is expected to be able to realize its assets and satisfy its liabilities in the normal course of business.
Management believes that based on relevant conditions and events that are known and reasonably knowable that its forecasts for one year from the date of the filing of the unaudited consolidated financial statements in the Company’s Quarterly Report on Form 10-Q indicate improved operations and the Company’s ability to continue operations as a going concern. The Company has contingency plans to reduce or defer expenses and cash outlays should operations not improve in the look forward period.
F-15
Recent Accounting Pronouncements
ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). In August 2020, the FASB issued ASU 2020-06, which simplifies the accounting for convertible debt and convertible preferred stock by removing the requirements to separately present certain conversion features in equity. In addition, the amendments also simplify the guidance in ASC Subtopic 815-40, Derivatives and Hedging: Contracts in Entity’s Own Equity, by removing certain criteria that must be satisfied in order to classify a contract as equity, which is expected to decrease the number of freestanding instruments and embedded derivatives accounted for as assets or liabilities. Finally, the amendments revise the guidance on calculating earnings per share, requiring use of the if-converted method for all convertible instruments and rescinding an entity’s ability to rebut the presumption of share settlement for instruments that may be settled in cash or other assets. The amendments are effective for public companies for fiscal years beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The guidance must be adopted as of the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.
Any other new accounting pronouncements recently issued, but not yet effective, have been reviewed and determined to be not applicable or were related to technical amendments or codification. As a result, the adoption of such new accounting pronouncements, when effective, is not expected to have a material effect on the Company’s financial position or results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables. The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk. As of September 30, 2021, ADEX and JTM had cash balances in excess of provided insurance of $
The Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the nine months ended September 30, 2021, three customers accounted for
The Company’s customers are primarily located within the domestic United States of America, Puerto Rico, and Canada. Revenues generated within the domestic United States of America accounted for approximately
Fair Value Measurements
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
F-16
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, 2021 or the year ended December 31, 2020. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
The Company’s financial assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2021 and December 31, 2020 consisted of the following:
| Total fair value at September 30, 2021 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
|||||||||||||
| Derivative liability (1) | $ | $ | $ | $ | ||||||||||||
| Total fair value at December 31, 2020 |
Quoted prices in active markets (Level 1) |
Quoted prices in active markets (Level 2) |
Quoted prices in active markets (Level 3) |
|||||||||||||
| Derivative liability (1) | $ | $ | $ | $ | ||||||||||||
| (1) | The Company has estimated the fair value of these derivatives using the Monte-Carlo model. |
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Refer to Note 10, Derivative Liabilities, for additional information.
Derivative Liabilities
The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of September 30, 2021 and December 31, 2020, the Company had a derivative liability of $
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.
F-17
| 3. | Reverse Merger |
As noted in Note 2, on June 16, 2021, the Company consummated a reverse merger in which HWN, Inc. became a legal subsidiary of Spectrum Global Solutions, Inc., but HWN, Inc. was deemed to be the accounting acquirer.
The purpose of the acquisition was to continue to increase revenue.
The acquisition was accounted for under the acquisition method of accounting which requires the consideration given, assets acquired, and liabilities assumed to be measured at fair value. In measuring the consideration transferred, since this was a reverse merger between a public company (as the legal acquirer) and a private company (as the accounting acquirer), the fair value of the legal acquirer’s public stock generally was more reliably determinable than the fair value of the accounting acquirer’s private stock. As such, the determination and measurement of the consideration transferred was based on the fair value of the legal acquirer’s stock rather than the fair value of the accounting acquirer’s stock. Further, since this was a reverse merger for accounting purposes, the consideration transferred includes the equity-based instruments retained by the legacy shareholders of Spectrum Global Solutions, Inc.
The fair value of the assets acquired, liabilities assumed and consideration transferred denoted below are provisional in nature and based on the management’s best estimates using information that it has obtained as of the reporting date. The Company is awaiting additional valuation information and expects to finalize the purchase price allocation before the end of the fiscal year.
The fair value of the consideration transferred (provisional), liabilities assumed (provisional) are as follows:
| Provisional | ||||
| Purchase consideration | Fair Value | |||
| Common stock | $ | |||
| Convertible debt | ||||
| Derivative liabilities | ||||
| Loans payable | ||||
| Loans payable, related parties | ||||
| Lease liabilities | ||||
| Fair value of stock options | ||||
| Fair value of warrants | ||||
| Fair value of Series A Preferred | ||||
| Fair value of Series D Preferred | ||||
| Total provisional purchase price | $ | |||
The fair value of the net assets acquired (provisional) are as follows:
| Allocation of purchase consideration | ||||
| Working capital | $ | |||
| Other assets | ||||
| Contract assets | ||||
| Provisional goodwill | ||||
| Customer lists | ||||
| Tradenames | ||||
| Total provisional enterprise value | ||||
The preliminary allocation of consideration to the assets acquired and liabilities assumed at their estimated acquisition date fair values are considered preliminary and may change within the permissible measurement period, not to exceed one year.
F-18
The following shows pro forma results for the nine month periods ended September 30, 2021 and 2020 and the three month period ended September 30, 2020, as if the transaction had occurred on January 1, 2020.
| Nine months ended September 30, 2021 |
Three months ended September 30, 2020 |
Nine months ended September 30, 2020 |
||||||||||||||||||||||
| As Reported |
Pro Forma | As Reported |
Pro Forma | As Reported |
Pro Forma | |||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net loss attributable to HWN, Inc. common shareholders | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Loss per common share, basic and diluted: | ( |
) | ( |
) | ||||||||||||||||||||
| 4. | Property and Equipment |
Property and equipment as of September 30, 2021 and December 31, 2020 consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Computers and office equipment | $ | $ | ||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Software | ||||||||
| Machinery and equipment | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Equipment, net | $ | $ | ||||||
During the nine months ended September 30, 2021 and 2020, the Company recorded depreciation expense of $
| 5. | Intangible Assets |
Intangible assets as of September 30, 2021 and December 31, 2020 consisted of the following:
| Cost | Accumulated Amortization |
Impairment | Net carrying value at September 30, 2021 |
Net carrying value at December 31, 2020 |
||||||||||||||||
| Customer relationship and lists | $ | $ | ( |
) | $ | $ | $ | |||||||||||||
| Trade names | ( |
) | ||||||||||||||||||
| Total intangible assets | $ | $ | ( |
) | $ | $ | $ | |||||||||||||
During the nine months ended September 30, 2021 and 2020, the Company recorded amortization expense of $
F-19
The estimated future amortization expense for the next five years and thereafter is as follows:
| Year ending December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
| 6. | Related Party Transactions |
Exchange of Shares of Common Stock for Series B Preferred Stock
On June 16, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company’s Chief Executive Officer, Mark Porter, exchanged
Loans Payable to Related Parties
As of September 30, 2021 and December 31, 2020, the Company had outstanding the following loans payable to related parties:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible promissory note issued to Keith Hayter, |
$ | $ | ||||||
| Promissory note issued to Mark Porter, |
||||||||
| Total | $ | $ | ||||||
The Company’s loans payable to related parties have an effective interest rate range of
Roger Ponder Related Party Reclassification
During September 2021, as a result of shares of, as a result of his resignation as a director and the potential shares to be issued about conversion of his debt and Series D preferred stock, the Company determined that Roger Ponder was no longer a related party. The effective date of the reclassification was June 16, 2021.
Convertible promissory note, Keith Hayter,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s convertible promissory note issued to Keith Hayter. The note was originally issued on August 31, 2020 in the principal amount of $
During the period of June 16, 2021 through September 30, 2021, the holder of the note converted $
As of September 30, 2021, the Company owed $
F-20
Promissory note, Mark Porter,
On June 1, 2021, the Company issued a $
As of September 30, 2021, the Company owed $
| 7. | Loans Payable |
As of September 30, 2021 and December 31, 2020, the Company had outstanding the following loans payable:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Promissory note issued to the Mark Munro 1996 Charitable Remainder UniTrust, |
$ | * | $ | |||||
| Promissory note issued to Cornerstone National Bank & Trust, |
||||||||
| Bank of America auto loan, matures on |
||||||||
| CARES Act Loans | ||||||||
| Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand | ||||||||
| Ailco equipment financing | ||||||||
| Total | $ | $ | ||||||
| Less: Long-term portion of loans payable | ( |
) | ( |
) | ||||
| Loans payable, current portion, net of debt discount | $ | $ | ||||||
| * | During the nine months ended September 30, 2021, this note was assigned to the Mark Munro 1996 Charitable Remainder UniTrust by Jeffrey Gardner and James Marsh. |
Promissory note issued to Jeffrey Gardner and James Marsh,
On February 17, 2019, the Company issued a promissory note to Jeffrey Gardner and James Marsh with an original principal amount of $
On January 1, 2021, this note was assigned by Jeffrey Gardner and James Marsh to the Mark Munro 1996 Charitable Remainder UniTrust.
During the nine months ended September 30, 2021, the Company did not make any cash payments for principal. During the year ended December 31, 2020, the Company made cash payments for principal of $
As of September 30, 2021, the Company owed $
Auto loan with Bank of America,
On September 23, 2019, the Company entered into an auto loan with Bank of America. The total amount financed was $
During the nine months ended September 30, 2021, the Company made cash payments of $
As of September 30, 2021, the Company owed $
F-21
Promissory note issued to Cornerstone National Bank & Trust,
On October 21, 2019, the Company issued a promissory note to Cornerstone National Bank & Trust with an original principal amount of $
During the nine months ended September 30, 2021, the Company made cash payments for principal of $
As of September 30, 2021, the Company owed $
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s promissory note issued to InterCloud Systems, Inc. The note was originally issued on February 27, 2018 in the principal amount of $
As of September 30, 2021, the Company owed $
CARES Act Loans
On April 8, 2020 and March 31, 2021, High Wire received $
These loan agreements were pursuant to the CARES Act. The CARES Act was established in order to enable small businesses to pay employees during the economic slowdown caused by COVID-19 by providing forgivable loans to qualifying businesses for up to 2.5 times their average monthly payroll costs. The amount borrowed under the CARES Act is eligible to be forgiven provided that (a) the Company uses the PPP Funds during the eight week period after receipt thereof, and (b) the PPP Funds are only used to cover payroll costs (including benefits), rent, mortgage interest, and utility costs. The amount of loan forgiveness will be reduced if, among other reasons, the Company does not maintain staffing or payroll levels. Principal and interest payments on any unforgiven portion of the PPP Funds will be deferred for six months and will accrue interest at a fixed annual rate of 1.0% and carry a two year maturity date. There is no prepayment penalty on the CARES Act Loan.
On November 4, 2020, High Wire received approval for forgiveness of its $873,400 CARES Act Loan.
On March 30, 2021, JTM received approval for forgiveness of its $250,800 CARES Act Loan. As a result, the Company recorded a gain on PPP loan forgiveness to the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2021.
On August 6, 2021, High Wire received approval for forgiveness of its $873,465 CARES Act Loan. As a result, the Company recorded a gain on PPP loan forgiveness to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
As of September 30, 2021 and December 31, 2020, the aggregate balance of these loans was $2,160,000 and $250,800, respectively, and is included in loans payable on the unaudited condensed consolidated balance sheets.
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| 8. | Convertible Debentures |
As of September 30, 2021 and December 31, 2020, the Company had outstanding the following convertible debentures:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible promissory note, Cobra Equities SPV, LLC, |
$ | $ | ||||||
| Convertible promissory note, SCS Capital Partners, LLC, |
||||||||
| Convertible promissory note, SCS Capital Partners, LLC, |
||||||||
| Convertible promissory note, IQ Financial Inc., Tranche 1, |
||||||||
| Convertible promissory note, IQ Financial Inc., Tranche 2, |
||||||||
| Convertible promissory note, Jeffrey Gardner, |
||||||||
| Convertible promissory note, James Marsh, |
||||||||
| Convertible promissory note issued to Roger Ponder, |
* | |||||||
| Total | ||||||||
| Less: Long-term portion of convertible debentures, net of debt discount | ( |
) | ||||||
| Convertible debentures, current portion, net of net debt discount/premium | $ | $ | ||||||
| * | During September 2021, as a result of shares of, as a result of his resignation as a director and the potential shares to be issued about conversion of his debt and Series D preferred stock, the Company determined that Roger Ponder was no longer a related party. The effective date of the reclassification was June 16, 2021. |
The Company’s convertible debentures have an effective interest rate range of
Convertible promissory note, Cobra Equities SPV, LLC,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a convertible promissory note issued to Cobra Equities SPV, LLC. The note had been previously assigned to Cobra Equities SPV, LLC by another lender. The amount outstanding as of June 15, 2021 was $
Interest accrues on the note at 18% per annum. The note is convertible into shares of the Company’s common stock at a conversion price equal to 60% of the lowest VWAP for the 10 consecutive trading days immediately preceding the conversion.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
During the period of June 16, 2021 through September 30, 2021, the holder of the note converted $206,000 of principal and $3,620 of accrued interest into shares of the Company’s common stock (refer to Note 11, Common Stock, for additional detail). As a result of these conversions, the Company recorded a loss on settlement of debt of $80,559 and $268,770, respectively, to the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2021.
The Company owed $
F-23
Convertible promissory note, SCS Capital Partners, LLC,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a convertible promissory note issued to SCS, LLC. The note had been previously assigned to SCS, LLC by another lender. The amount outstanding as of June 15, 2021 was $
The interest on the outstanding principal due under the note accrues at a rate of
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
During the nine months ended September 30, 2021, SCS, LLC assigned an aggregate of $
At September 30, 2021, the Company owed $
Convertible promissory note, SCS Capital Partners, LLC,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a convertible promissory note issued to SCS, LLC. The amount outstanding as of June 15, 2021 was $
The note was originally issued on December 29, 2020 in the principal amount of $
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
During the nine months ended September 30, 2021, the Company made cash payments for principal of $
At September 30, 2021, the Company owed $
Convertible promissory note, IQ Financial Inc.,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a convertible promissory note issued to IQ Financial Inc. The amount outstanding for Tranche 1 as of June 15, 2021 was $
The note was originally issued on January 27, 2021 in the aggregate principal amount of $
F-24
Convertible promissory note, IQ Financial Inc. Tranche 1,
On January 28, 2021, Spectrum received the first tranche of the note discussed in the “Convertible promissory note, IQ Financial Inc.,
The interest on the outstanding principal due under the secured note accrues at a rate of
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
At September 30, 2021, the Company owed $
Convertible promissory note, IQ Financial Inc. Tranche 2,
On March 1, 2021, Spectrum received the second tranche of the note discussed in the “Convertible promissory note, IQ Financial Inc.,
The interest on the outstanding principal due under the secured note accrues at a rate of 9% per annum. All principal and accrued but unpaid interest under the secured note is due on January 1, 2023. The holder may begin converting the note into shares of the Company’s common stock six months after issuance when it is Rule 144 eligible. The conversion price is fixed at $0.05 per share.
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
During the three months ended September 30, 2021, $
At September 30, 2021, the Company owed $
Convertible promissory note, Jeffrey Gardner,
On June 15, 2021 the Company issued to Jeffrey Gardner an unsecured convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrues at a rate of
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
On September 15, 2021, this note matured and is now due on demand. Additionally, the interest rate increased to
At September 30, 2021, the Company owed $
F-25
Convertible promissory note, James Marsh,
On June 15, 2021 the Company issued to James Marsh an unsecured convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrues at a rate of 6% per annum. All principal and accrued but unpaid interest under the note is due on September 15, 2021. The note is convertible into shares of the Company’s common stock at a fixed conversion price of $
The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
On September 15, 2021, this note matured and is now due on demand. Additionally, the interest rate increased to
At September 30, 2021, the Company owed $
Convertible promissory note, Roger Ponder, 10% interest, unsecured, matures August 31, 2022
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s convertible promissory note issued to Roger Ponder. The note was originally issued on August 31, 2020 in the principal amount of $
As of September 30, 2021, the Company owed $
Convertible promissory note, Efrat Investments LLC,
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a convertible promissory note issued to Efrat Investments, LLC. The amount outstanding as of June 15, 2021 was $
The note was originally issued on September 14, 2020 in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 10% per annum. All principal and accrued but unpaid interest under the note was due on October 5, 2021. The note was convertible into shares of the Company’s common stock at a fixed conversion price of $
The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging.”
During the period of June 16, 2021 through September 30, 2021, the holder of the note converted $
During the nine months ended September 30, 2021, the holder of the warrants associated with the note converted the warrants on a cashless basis (refer to Note 11, Common Stock, for additional information). As a result of the exercise, the Company recorded a loss on settlement of warrants of $
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| 9. | Factor Financing |
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed a factor financing agreement between ADEX and Bay View Funding. The amount outstanding as of June 15, 2021 was $
The agreement began on February 11, 2020 when, pursuant to an assignment and consent agreement, Bay View Funding purchased and received all of a previous lender’s right, title, and interest in the loan and security agreement with Spectrum’s wholly-owned subsidiary, ADEX. In connection with the agreement, Spectrum received $
Under
During the period of June 16, 2021 through September 30, 2021, the Company paid $
During the period of June 16, 2021 through September 30, 2021, the Company received an aggregate of $
| 10. | Derivative Liabilities |
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s derivative liabilities. As of June 15, 2021, the derivative liability balance of $
The embedded conversion options of the convertible debentures described in Note 8, Convertible Debentures, which were assumed as part of the merger transaction, contain conversion features that qualify for embedded derivative classification. The fair value of the liability is re-measured at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on change in fair value of derivatives. Derivative liabilities also include the fair value of the Company’s share purchase warrants and stock options discussed in Note 13, Share Purchase Warrants and Stock Options. As of September 30, 2021, the derivative liability balance of $
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the period of June 16, 2021 through September 30, 2021:
| September 30, | ||||
| 2021 | ||||
| Balance at the beginning of the period | $ | |||
| Initial value of derivatives after reverse merger | ||||
| Change in fair value of embedded conversion option | ||||
| Initial value of derivatives upon issuance | ||||
| Conversion of derivative liability | ( |
) | ||
| Fair value of warrant exercises | ( |
) | ||
| Balance at the end of the period | $ | |||
F-27
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 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 September 30, 2021 | % | % | % | |||||||||||
| 11. | Common Stock |
Authorized Shares
The Company has
Issuance of shares pursuant to a Cobra Equities SPV, LLC convertible debenture or assignment
On June 16, 2021, the Company issued
On July 15, 2021, the Company issued
On August 12, 2021, the Company issued
On September 23, 2021, the Company issued
Issuance of shares pursuant to an Efrat Investments LLC convertible debenture
On June 17, 2021, the Company issued
Issuance of shares pursuant to a related party convertible debenture
On September 22, 2021, the Company issued
Issuance of Shares Pursuant to Conversion of Series A Preferred Stock
On June 24, 2021, the Company issued
F-28
On August 12, 2021, the Company issued
Issuance of shares pursuant to a Pawn Funding warrant
On June 29, 2021, the Company issued
Issuance of shares pursuant to an Efrat Investments LLC warrant
On September 30, 2021, the Company issued
Issuance of convertible debt to HWN shareholders
On June 16, 2021, the Company issued $
| 12. | Preferred Stock |
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s Series A preferred stock obligations. Additionally, the holders of Spectrum’s Series B preferred stock transferred their shares to the Company’s Chief Executive Officer. Lastly, a new class of preferred stock, Series D, was designated and issued. At the time of the merger transaction, the fair value of the Series A and Series B preferred stock was $1,024,000 and $0, respectively. The fair value of the Series D preferred stock which was received in the exchange was $
See below for a description of each of the Company’s outstanding classes of preferred stock, including historical and current information.
Series A
On November 15, 2017, Spectrum created one series of the
On October 29, 2018,
On August 16, 2019, Spectrum 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 in accordance with ASC 260-10-599-2.
On April 8, 2020, Spectrum made the third amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price and the conversion price floor to $
On June 18, 2020, Spectrum made the fourth amendment to the Certificate of Designation of its Series A preferred stock, which lowered the fixed conversion price to $
On January 27, 2021, Spectrum made the fifth amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price to $
F-29
Subsequent to the fifth 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 a fixed conversion price of $0.0975, subject to adjustment for any subdivision or combination of the Company’s outstanding shares of common stock. The conversion price has a floor of $0.01 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.
On June 24, 2021, the Company issued
On August 12, 2021, the Company issued
As a result of the conversions, on September, 2021, the fair value of the Series A Preferred Stock was $
In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series A preferred stock shares as temporary equity or “mezzanine.”
Series B
On April 16, 2018, Spectrum designated
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.
F-30
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 $
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 D
On June 14, 2021, Spectrum designated 1,590 shares of Series D preferred stock with a stated value of $10,000 per share. The Series D preferred stock is not redeemable. The principal terms of the Series D preferred stock shares are as follows:
Issue Price - The stated price for the Series D preferred stock shares shall be $
Redemption - The Series D preferred stock shares are not redeemable.
Dividends - The holders of the Series D preferred stock shares shall not be entitled to receive any dividends.
Preference of Liquidation - Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall (i) first be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to $
F-31
Conversion - Beginning ninety (90) days from the date of issuance, all or a portion of the Series D may be converted into Common Stock at the greater of the Fixed Price and the Average Price (as defined below). To determine the number of shares of Common Stock issuable upon any such conversion, the product of the number of shares of Series D being converted multiplied by the stated value of each share, would be divided by the conversion price set forth in the preceding sentence.
Vote to Change the Terms of or Issuance of Series D - The affirmative vote at a meeting duly called for such purpose, or written consent without a meeting, of the holders of not less than fifty-one (
As of September 30, 2021, the fair value of the Series D Preferred Stock was $
In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series D preferred stock shares as temporary equity or “mezzanine.”
On October 20, 2021, Keith Hayter assigned shares of Series D preferred stock to a third party (refer to Note 17, Subsequent Events, for additional detail).
| 13. | Share Purchase Warrants and Stock Options |
On June 15, 2021, in connection with the merger transaction discussed in Note 3, Reverse Merger, the Company assumed Spectrum’s share purchase warrants and stock options. As of June 15, 2021, the total fair value of Spectrum’s share purchase warrants and stock options was $
The total fair value of the Company’s share purchase warrants and stock options was $
The following table summarizes the activity of share purchase warrants for the period of June 16, 2021 through September 30, 2021:
| Number of warrants |
Weighted average exercise price |
Intrinsic value | ||||||||||
| Balance at December 31, 2020 | $ | $ | ||||||||||
| Assumed in merger transaction | ||||||||||||
| Issued | ||||||||||||
| Exercised | ( |
) | ||||||||||
| Expired | ||||||||||||
| Balance at September 30, 2021 | $ | $ | ||||||||||
F-32
As of September 30, 2021, the following share purchase warrants were outstanding:
| Number of warrants | Exercise price | Issuance Date | Expiry date | Remaining life | ||||||||||
The following table summarizes the activity of stock options for the period of June 16, 2021 through September 30, 2021:
| Number of stock options |
Weighted average exercise price |
Intrinsic value | ||||||||||
| Balance at December 31, 2020 | $ | $ | ||||||||||
| Assumed in merger transaction | ||||||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Expired | ||||||||||||
| Balance at September 30, 2021 | $ | $ | ||||||||||
As of September 30, 2021, the following stock options were outstanding:
| Number of stock options | Exercise price | Issuance Date | Expiry date | Remaining Life | ||||||||||
The remaining stock-based compensation expense on unvested stock options was $
| 14. | Leases |
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 following table sets forth the operating lease right of use (“ROU”) assets and liabilities as of September 30, 2021 and December 31, 2020:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Operating lease assets | $ | $ | ||||||
| Operating lease liabilities: | ||||||||
| Current operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
F-33
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, 2021, the Company recognized operating lease expense of $
Cash paid for amounts included in the measurement of operating lease liabilities were $
The operating lease liabilities as of September 30, 2021 reflect a weighted average discount rate of
| Year ending December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total lease payments | ||||
| Less: imputed interest | ( |
) | ||
| Total | $ | |||
| 15. | Commitments and Contingencies |
Leases
The Company leases certain of its properties under leases that expire on various dates through 2023. Some of these agreements include escalation clauses and provide for renewal options ranging from one to five years. Leases with an initial term of 12 months or less and immaterial leases are not recorded on the balance sheet (refer to Note 14, Leases, for amounts expensed during the three and nine months ended September 30, 2021 and 2020).
Proposed acquisition
On April 13, 2021, Spectrum, SVC, Inc., Secure Voice Corp. (“SVC”) and Telecom Assets Corp.
The business being purchased by Spectrum is a wholesale network services provider with network footprint and licenses in the Northeast and Southeast United States as well as Texas. This network carries VoIP and other traffic for other service providers. A transition services agreement will be entered into in order to begin the integration process prior to the closing of the transaction. As of September 30, 2021, the Company had a receivables balance from SVC of $
On November 4, 2021, the proposed acquisition was closed (refer to Note 17, Subsequent Events, for additional detail).
F-34
| 16. | Segment Disclosures |
During the three and nine months ended September 30, 2021, the Company had
| ● | Technology. which is comprised of the ADEX Entities, AWS PR, and High Wire. |
| ● | Construction, which is comprised of JTM and Tropical |
| ● | Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations. |
During the three and nine months ended September 30, 2020, the Company had
| ● | Technology, comprised of High Wire |
| ● | Construction, comprised of JTM. |
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.
Financial statement information by operating segment for the three and nine months ended September 30, 2021 is presented below:
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | |||||||||||||||||||||||||||||||
| Spectrum Global | Technology | Construction | Total | Spectrum Global | Technology | Construction | Total | |||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Operating (loss) income | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| Interest expense | $ | $ | ||||||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||||||||
| Total assets as of September 30, 2021 | ||||||||||||||||||||||||||||||||
Geographic information for the three and nine months ended and as of September 30, 2021 is presented below:
| Revenues | ||||||||||||
| Three Months Ended September 30, 2021 |
Nine Months Ended September 30, 2021 |
Long-lived Assets as of September 30, 2021 |
||||||||||
| Puerto Rico and Canada | $ | $ | $ | |||||||||
| United States | ||||||||||||
| Consolidated total | ||||||||||||
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Financial statement information by operating segment for the three and nine months ended September 30, 2020 is presented below:
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| Technology | Construction | Total | Technology | Construction | Total | |||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Operating (loss) income | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Interest expense | ||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Total assets as of December 31, 2020 | ||||||||||||||||||||||||
Geographic information for the nine months ended September 30, 2020 and as of December 31, 2020 is presented below:
| Revenues | ||||||||||||
| Three Months Ended September 30, 2020 |
Nine Months Ended September 30, 2020 |
Long-lived Assets as of December 31, 2020 |
||||||||||
| Puerto Rico | $ | $ | $ | |||||||||
| United States | ||||||||||||
| Consolidated total | ||||||||||||
| 17. | Subsequent Events |
Partial assignment of convertible promissory note, SCS Capital Partners, LLC,
During the period of October 1, 2021 through November 8, 2021, SCS, LLC assigned an aggregate of $
Issuance of shares pursuant to a Cobra Equities SPV, LLC convertible debenture or assignment
On October 6, 2021, the Company issued
On October 25, 2021, the Company issued
On November 4, 2021, the Company issued
Issuance of shares pursuant to a related party convertible debenture
On November 8, 2021, the Company issued
Assignment of Series D preferred stock
On October 20, 2021, Keith Hayter assigned
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Grant of stock options
On November 3, 2021, the Company granted
Private placement transaction
On November 3, 2021, the Company closed on a private placement transaction (the “Transaction”) whereby it issued a senior secured convertible promissory note with a principal amount of $
Additionally, the Company issued to the investor a common stock purchase warrant to purchase up to
In connection with the Transaction, the Company agreed to file a registration statement registering the resale of the shares of common stock issuable upon conversion of the note within 30 days of the closing of the Transaction.
Acquisition of Secure Voice Corp. (“SVC”)
On November 4, 2021, the Company closed on the proposed acquisition discussed in Note 15, Commitments and Contingencies. The closing of the acquisition was facilitated by the senior secured promissory note described in the “Private placement transaction” section of this note.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Spectrum Global Solutions Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Spectrum Global Solutions Inc. (“the Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2020 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses since inception, has negative cash flows from operations, and has negative working capital, which creates substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Long-Lived Asset Impairment Assessment
As described in Note 2 to the consolidated financial statements, the Company performs impairment testing for its long-lived assets when events or changes in circumstances indicate that its carrying amount may not be recoverable and exceeds its fair value. Due to challenging industry economic conditions, the Company tested its long-lived assets during the year ended December 31, 2020. The first step of the long-lived asset impairment review is a recoverability test based upon projected future undiscounted cash flows.
F-38
We identified the evaluation of the impairment analysis for long-lived assets as a critical audit matter because of the significant estimates and assumptions management used in the undiscounted cash flow analysis. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort.
Our audit procedures related to the following:
| ● | Testing management’s process for developing the fair value estimate. |
| ● | Evaluating the appropriateness of the undiscounted cash flow model used by management. |
| ● | Testing the completeness and accuracy of underlying data used in the fair value estimate. |
| ● | Evaluating the significant assumptions used by management related to revenues, gross margin, operating expenses, and long term growth rate to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. |
In addition, professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the undiscounted cash flow model.
Goodwill Impairment Assessment
Critical Audit Matter Description
As described in Note 2 to the consolidated financial statements, the Company tests goodwill for impairment annually at the reporting unit level, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount, not to exceed the associated carrying amount of goodwill. The Company’s annual impairment test occurred on December 31, 2020. The Company utilized a third-party valuation specialist to assist in the preparation of the goodwill impairment test for this reporting unit. The Company primarily used a discounted cash flow income method to estimate the fair value of the reporting unit.
How the Critical Audit Matter was Addressed in the Audit
We identified the evaluation of the impairment analysis for goodwill as a critical audit matter because of the significant estimates and assumptions management used in the discounted cash flow analysis performed by management to determine fair value of the reporting unit. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Our audit procedures related to the following:
| ● | Testing management’s process for developing the fair value of the reporting unit. |
| ● | Evaluating the appropriateness of the discounted cash flow model utilized by the Company. |
| ● | Testing the completeness and accuracy of underlying data used in the fair value estimate. |
| ● | Evaluating the significant assumptions provided by management or developed by the third-party valuation specialist related to revenues, gross margin, operating expenses, income taxes, long term growth rate, and discount rate to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. |
In addition, professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the discounted cash flow model.
Determination and Valuation of Derivative Liabilities
F-39
Critical Audit Matter Description
As described further in Note 10 of the financial statements, during the year ended December 31, 2020 and in prior periods, the Company issued convertible notes and warrants that required management to assess whether the conversion features of the convertible notes required bifurcation and separate valuation as a derivative liability and whether the warrants required accounting as derivative liabilities. The Company determined that the conversion features of certain of its convertible notes and certain warrants issued in financing arrangements required to be accounted for as derivative liabilities due to: (1) certain conversion features did not contain an explicit limit on the number of shares to be delivered in share settlement; and (2) the fact the Company could not assert it had sufficient authorized but unissued shares available to settle certain instruments considering all other stock-based commitments. The derivative liabilities were recorded at fair value when issued and subsequently re-measured to fair value upon settlement or at the end of each reporting period. The Company utilized either Monte Carlo Simulation models or Black Scholes option pricing models to determine the fair value of the derivative liabilities depending on the features embedded in the instruments. These models use certain assumptions related to exercise price, term, expected volatility, and risk-free interest rate.
We identified auditing the determination and valuation of the derivative liabilities as a critical audit matter due to the significant judgements used by the Company in determining whether the embedded conversion features and warrants required derivative accounting treatment and the significant judgements used in determining the fair value of the derivative liabilities. Auditing the determination and valuation of the derivative liabilities involved a high degree of auditor judgement, and specialized skills and knowledge were needed.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures included the following, among others:
| ● | We inspected and reviewed debt agreements, warrant agreements, conversion notices, and settlement agreements to evaluate the Company’s determination of whether derivative accounting was required, including assessing and evaluating management’s application of relevant accounting standards to such transactions. |
| ● | We evaluated the reasonableness and appropriateness of the choice of valuation model used for each specific derivative instrument. |
| ● | We tested the reasonableness of the assumptions used by the Company in the Monte Carlo and Black Scholes models, including exercise price, term, expected volatility, and risk-free interest rate. |
| ● | We tested the accuracy and completeness of data used by the Company in developing the assumptions used in the valuation models. |
| ● | We developed an independent expectation for comparison to the Company’s estimate, which included developing our own valuation model and assumptions. |
| ● | We evaluated the accuracy and completeness of the Company’s presentation of these instruments in the financial statements and related disclosures in Note 10, including evaluating whether such disclosures were in accordance with relevant accounting standards. |
Professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the Company estimate of fair value and the development of our own independent expectation.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2014.
Draper, UT
April 1, 2021
F-40
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated balance sheets
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ |
||||||||
| Contract assets | ||||||||
| Prepaid expenses and deposits | ||||||||
| Current assets of discontinued operations | - | |||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ |
||||||||
| Goodwill | ||||||||
| Customer lists, net of accumulated amortization of $ |
||||||||
| Tradenames, net accumulated amortization of $ |
||||||||
| Operating lease right-of-use assets | ||||||||
| Non-current assets of discontinued operations | - | |||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Contract liabilities | ||||||||
| Loans payable to related parties, current portion | - | |||||||
| Loans payable, current portion, net of debt discount of $ |
||||||||
| Convertible debentures, current portion, net of discount of $ |
||||||||
| Factor financing | - | |||||||
| Derivative liabilities, current portion | ||||||||
| Warrant liability | ||||||||
| Operating lease liabilities | ||||||||
| Current liabilities of discontinued operations | - | |||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Convertible loans payable to related parties | ||||||||
| Loans payable, net of current portion | ||||||||
| Derivative liabilities, net of current portion | - | |||||||
| Convertible debentures, net of current portion, net of debt discount of $ |
||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Series A preferred stock; $ |
||||||||
| Series B preferred stock; $ |
||||||||
| Total mezzanine equity | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock; $ |
||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost | ( |
) | ( |
) | ||||
| Common stock subscribed | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ deficit | ( |
) | ( |
) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-41
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of operations
| For the years ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue | $ | $ | ||||||
| Operating expenses: | ||||||||
| Cost of revenues | ||||||||
| Depreciation and amortization | ||||||||
| Salaries and wages | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( |
) | ( |
) | ||||
| Other (expenses) income: | ||||||||
| (Loss) gain on settlement of debt | ( |
) | ||||||
| Amortization of discounts on convertible debentures and loans payable | ( |
) | ( |
) | ||||
| Loss (gain) on change in fair value of derivatives | ( |
) | ||||||
| Default and debt extension fees | ( |
) | ||||||
| Foreign exchange loss | ( |
) | ( |
) | ||||
| Loss on fair value of additional shares | ( |
) | ||||||
| Loss on return of common stock | ( |
) | ||||||
| Initial derivative expense | ( |
) | ( |
) | ||||
| Interest expense | ( |
) | ( |
) | ||||
| Total other expense | ( |
) | ( |
) | ||||
| Loss from continuing operations before taxes | ( |
) | ( |
) | ||||
| Provision for income taxes | ||||||||
| Net loss from continuing operations | ( |
) | ( |
) | ||||
| Net loss from discontinued operations, net of tax | ( |
) | ( |
) | ||||
| Net loss attributable to Spectrum Global Solutions, Inc. | ( |
) | ( |
) | ||||
| Less: deemed dividend - Series A preferred stock modification | ( |
) | ||||||
| Net loss attributable to Spectrum Global Solutions, Inc. common shareholders | $ | ( |
) | $ | ( |
) | ||
| Loss per share attributable to Spectrum Global Solutions, Inc. common shareholders, basic and diluted: | ||||||||
| Net loss from continuing operations | $ | ( |
) | $ | ( |
) | ||
| Net loss on discontinued operations, net of taxes | $ | ( |
) | $ | ( |
) | ||
| Net loss per share | $ | ( |
) | $ | ( |
) | ||
| Weighted average common shares outstanding, basic and diluted: | ||||||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-42
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of stockholder’s deficit
| For the year ended December 31, 2020 | ||||||||||||||||||||||||||||
| Common stock | Additional paid-in |
Common stock |
Treasury | Accumulated | ||||||||||||||||||||||||
| Shares | $ | capital | subscribed | stock | deficit | Total | ||||||||||||||||||||||
| Balances, January 1, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
| Issuance of common stock to M2B Funding upon conversion of Series A preferred stock | ||||||||||||||||||||||||||||
| Issuance of common stock to CCAG Investments upon execution of convertible debenture agreements | ||||||||||||||||||||||||||||
| Issuance of common stock to FJ Vulis upon execution of convertible debenture agreements | ||||||||||||||||||||||||||||
| Issuance of common stock to Dominion Capital upon conversion of Series A preferred stock | ||||||||||||||||||||||||||||
| Issuance of common stock to GS Capital Partners upon conversion of a convertible debenture | ||||||||||||||||||||||||||||
| Issuance of common stock to Power Up Lending upon conversion of convertible debentures | ||||||||||||||||||||||||||||
| Issuance of common stock to SCS, LLC upon conversion of a convertible debenture | ||||||||||||||||||||||||||||
| Issuance of common stock to Crown Bridge Partners upon conversion of a convertible debenture | ||||||||||||||||||||||||||||
| Common stock issued for related party receivable from WaveTech GmbH debt assumption | ||||||||||||||||||||||||||||
| Issuance of common stock to CCAG Investments based on terms of a convertible debenture | ||||||||||||||||||||||||||||
| Issuance of common stock to FJ Vulis based on terms of a convertible debenture | ||||||||||||||||||||||||||||
| Shares returned by GS Capital Partners and canceled | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||
| Shares returned by Raven and Roeske and canceled | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||
| Net loss for the period | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Ending balance, December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
F-43
| For the year ended December 31, 2019 | ||||||||||||||||||||||||||||
| Common stock | Additional paid-in |
Common stock |
Treasury | Accumulated | ||||||||||||||||||||||||
| Shares | $ | capital | subscribed | stock | deficit | Total | ||||||||||||||||||||||
| Balances, January 1, 2019 | $ | - | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Issuance of common stock to Dominion Capital | ||||||||||||||||||||||||||||
| Issuance of common stock to InterCloud Systems | ||||||||||||||||||||||||||||
| Issuance of common stock to M2B Funding | - | |||||||||||||||||||||||||||
| Issuance of common stock to MZ Group for services | ||||||||||||||||||||||||||||
| Issuance of common stock to RDW Capital | ||||||||||||||||||||||||||||
| Issuance of common stock to Silverback Capital | ||||||||||||||||||||||||||||
| Issuance of common stock to Virtual Capital | ||||||||||||||||||||||||||||
| Issuance of common stock to employees pursuant to the conversions of convertible debt | ||||||||||||||||||||||||||||
| Impact of Dominion Capital beneficial conversion feature | - | - | ||||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||||||
| Cancellation of shares for services | ( |
) | ||||||||||||||||||||||||||
| Deemed dividend - Series A preferred stock modification | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Net loss for the period | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Ending balance, December 31, 2019 | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||||
(The accompanying notes are an integral part of these consolidated financial statements)
F-44
SPECTRUM GLOBAL SOLUTIONS, INC.
Consolidated statements of cash flows
| For the years ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss (gain) on change in fair value of derivative liability | ( |
) | ||||||
| Amortization of discounts on convertible debentures and notes payable | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of operating right of use assets | ||||||||
| Amortization of operating right of use liabilities | ( |
) | ( |
) | ||||
| Stock-based compensation | ||||||||
| Loss (gain) on settlement of debt | ( |
) | ||||||
| Initial derivative expense | ||||||||
| Default and debt extension fees | ||||||||
| Loss on return of shares | ||||||||
| Loss on fair value of additional shares | ||||||||
| Foreign exchange loss | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Contract assets | ||||||||
| Prepaid expenses and deposits | ||||||||
| Other assets | ||||||||
| Accounts payable and accrued liabilities | ( |
) | ||||||
| Contract liabilities | ( |
) | ||||||
| Net cash used in operating activities of continuing operations | ( |
) | ( |
) | ||||
| Net cash provided by (used in) operating activities of discontinued operations | ( |
) | ||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of equipment | ( |
) | ( |
) | ||||
| Net cash used in investing activities of continuing operations | ( |
) | ( |
) | ||||
| Net cash used in investing activities of discontinued operations | ( |
) | ( |
) | ||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from loans payable | ||||||||
| Repayments of loans payable | ( |
) | ( |
) | ||||
| Proceeds from loans payable to related parties | ||||||||
| Repayments of loans payable to related parties | ( |
) | ||||||
| Proceeds from convertible notes | ||||||||
| Repayments of convertible notes | ( |
) | ( |
) | ||||
| Proceeds from factor financing | ||||||||
| Repayments of factor financing | ( |
) | ||||||
| Net cash provided by financing activities of continuing operations | ||||||||
| Net cash provided by financing activities of discontinued operations | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( |
) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
F-45
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Common stock issued for conversion of convertible debentures | $ | $ | ||||||
| Original issue discounts | $ | $ | ||||||
| Original debt discount against derivative liability | $ | $ | ||||||
| Common stock issued for conversion of Series A preferred stock | $ | $ | ||||||
| Common stock issued for WaveTech GmbH debtholders | $ | $ | ||||||
| Addition to principal of convertible debenture due to defaults and debt extension fees | $ | $ | ||||||
| Issuance of common stock upon execution of convertible debenture agreements | $ | $ | ||||||
| Addition to derivative liability due to issuance of stock options | $ | $ | ||||||
| Addition to derivative liability due to issuance of warrants | $ | $ | ||||||
| Additional shares issued based on terms of convertible debentures | $ | $ | ||||||
| Shares returned and canceled | $ | $ | ||||||
| Net assets disposed of in TNS sale | $ | $ | ||||||
| Net liabilities disposed of in AWS sale | $ | $ | ||||||
| Third party payment of third-party debt | $ | $ | ||||||
| Addition to principal of convertible debenture due to Barn 11 default | $ | $ | ||||||
| Addition to derivative liability due to Barn 11 default | $ | $ | ||||||
| Deemed dividend - Series A preferred stock modification | $ | $ | ||||||
| Right-of-use operating lease assets obtained in exchange for operating lease liabilities | $ | $ | ||||||
| Accounts payable exchanged for convertible note | $ | $ | ||||||
| Assignment of related party debt | $ | $ |
(The accompanying notes are an integral part of these consolidated financial statements)
F-46
SPECTRUM GLOBAL SOLUTIONS, INC.
Notes to the consolidated financial statements
December 31, 2020
| 1. | Organization and Going Concern |
Spectrum Global Solutions, Inc., (the “Company”) (f/k/a Mantra Venture Group Ltd.) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company reincorporated in the province of British Columbia, Canada.
On April 25, 2017, the Company entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased
On November 15, 2017, the Company changed its name to “Spectrum Global Solutions, Inc.” and reincorporated in the state of Nevada.
On February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to the Company of the remaining
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. and formed ADEX Canada LLC in September 2019 (collectively “ADEX” or the “ADEX Entities”). The Company completed the acquisition on February 27, 2018.
On May 18, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation, Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives Ltd. to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned entities assumed all liabilities and obligations with respect to such entities.
On January 4, 2019, the Company entered into a Stock Purchase Agreement with InterCloud. Pursuant to the terms of the Purchase Agreement, InterCloud agreed to sell, and the Company agreed to purchase, all of the issued and outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporation.
On September 30, 2020, the Company sold its TNS subsidiary (refer to Note 3, Disposals of Subsidiaries, for additional detail).
On December 31, 2020, the Company sold its AWS subsidiary (refer to Note 3, Disposals of Subsidiaries, for additional detail).
As a result of the sale of AWS, the remaining subsidiaries from the Company’s former AWS Entities, AWS PR and Tropical, are now broken out separately.
The Company’s AWS PR and Tropical subsidiaries are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. The Company’s ADEX Entities are a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and enterprise customers domestically and internationally.
F-47
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The recently acquired AWS and ADEX businesses have also incurred losses and experienced negative cash flows from operations during their most recent fiscal years. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of December 31, 2020, the Company had an accumulated deficit of $
Management requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be no certainty that these sources will provide the additional funds required for the next twelve months.
| 2. | Significant Accounting Policies |
Basis of Presentation/Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, the ADEX Entities, AWS PR, and Tropical. All subsidiaries are wholly-owned.
During the year ended December 31, 2020, the Company sold its AWS and TNS subsidiaries (refer to Note 3, Disposals of Subsidiaries, for additional detail). The operations of AWS and TNS (from the date of acquisition, January 4, 2019) have been included as discontinued operations in the accompanying financial statements.
All inter-company balances and transactions have been eliminated.
Impact of the COVID-19 Pandemic
The extent to which the coronavirus (“COVID-19”) outbreak and measures taken in response thereto impact the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
Global health concerns relating to the COVID-19 outbreak have been weighing on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. Risks related to consumers and businesses lowering or changing spending, which impact domestic and international spend. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business shutdowns. These measures have not only negatively impacted consumer spending and business spending habits, they have also adversely impacted and may further impact the Company’s workforce and operations and the operations of its customers, suppliers and business partners. These measures may remain in place for a significant period of time and they are likely to continue to adversely affect the Company’s business, results of operations and financial condition.
The spread of COVID-19 has caused the Company to modify its business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and the Company may take further actions as may be required by government authorities or that the Company determines are in the best interests of its employees, customers and business partners. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus or otherwise be satisfactory to government authorities.
F-48
The extent to which the COVID-19 outbreak impacts the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, the Company may continue to experience materially adverse impacts to its business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19 and a global pandemic, and, as a result, the ultimate impact of the COVID-19 outbreak or a similar health epidemic is highly uncertain and subject to change. The Company does not yet know the full extent of the impacts on its business, its operations or the global economy as a whole. However, the effects could have a material impact on the Company’s results of operations, and the Company will continue to monitor the COVID-19 situation closely. As of March 2021, multiple variants of the COVID-19 virus are circulating globally that are highly transmissible, and there is uncertainty around vaccine effectiveness on the new strains of the virus. Uncertainty around vaccine distribution, supply and effectiveness will impact when the negative economic effects as a result of COVID-19 will abate or end and the timing of such recovery may affect the Company’s financial condition.
Reverse Stock Split
On April 14, 2020, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the state of Nevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of the Company’s common stock. The Certificate of Amendment became effective on April 14, 2020 with the state of Nevada, and on April 20, 2020, Financial Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split.
The reverse stock split was previously approved by the board of directors and the majority of stockholders of the Company.
All common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock of the Company as a result of the reverse stock split. The par value of the Company’s common stock was unchanged at $0.00001 per share post-split.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
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Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records unbilled receivables for services performed but not billed. Management reviews a customer’s credit history before extending credit. The Company maintains an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts at December 31, 2020 and 2019 was $
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 | |
| Computer equipment and software | |
| Leasehold improvements | |
| Office equipment and furniture |
Goodwill
Goodwill was initially generated through the acquisitions of the AWS Entities in 2017, the ADEX Entities in 2018, and TNS in 2019, as the total consideration paid exceeded the fair value of the net assets acquired.
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 year ended December 31, 2019.
During the year ended December 31, 2020, the Company sold its TNS and AWS subsidiaries. In connection with the sales, the Company tested its goodwill for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year ended December 31, 2020.
Intangible Assets
At December 31, 2020 and 2019, definite-lived intangible assets primarily consist of tradenames and customer relationships which are being amortized over their estimated useful lives ranging from
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.
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For long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were no impairment charges during the year ended December 31, 2019.
During the year ended December 31, 2020, the Company sold its TNS and AWS subsidiaries. In connection with the sales, the Company tested its intangible assets for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year ended December 31, 2020.
Long-lived Assets
In accordance with ASC 360, “Property, Plant and Equipment”, the Company tests long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value. There were no impairment charges recorded during the years ended December 31, 2020 and 2019.
Foreign Currency Translation
Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. The resulting foreign exchange gains and losses are recognized in income.
The Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the same basis as the related asset. The resulting foreign exchange gains or losses are recognized in income.
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The Company conducts business, and files federal and state income, franchise or net worth, tax returns in Canada, the United States, in various states within the United States and the Commonwealth of Puerto Rico. The Company determines it’s filing obligations in a jurisdiction in accordance with existing statutory and case law. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010 to 2020. 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.
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Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
The Company follows the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.
The Company received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as of December 31, 2020 was $
Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
The Company recognizes revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied.
Contract Types
The Company’s contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of the Company’s revenues come from customers with whom the Company has a master service agreement (“MSA”). These MSA’s generally contain customer specific service requirements.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For the Company’s different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets.
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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 limited to: engineering drawings, designs, reports and specification. Services may include, but are not limited to: consulting or professional staffing to support our client’s objectives. Consulting or professional staffing services may be provided remotely or on client premises and under their direction and supervision. |
| ● | Construction Services are services provided to the client where the Company may self-perform or subcontract services that require the physical construction of infrastructure or installation of equipment and materials. |
Disaggregation of Revenues
The Company disaggregates its revenue from contracts with customers by service type, contract type, contract duration, and timing of transfer of goods or services. See the below tables:
| Revenue by service type | Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
||||||
| Professional Services | $ | $ | ||||||
| Construction | ||||||||
| Total | $ | $ | ||||||
| Revenue by contract duration | Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
||||||
| Short-term | $ | $ | ||||||
| Long-term | ||||||||
| Total | $ | $ | ||||||
| Revenue by contract type | Year Ended December 31, 2020 |
Year Ended December 31, 2019 |
||||||
| Unit-price | $ | $ | ||||||
| Fixed-price | $ | $ | ||||||
| Time-and-materials | ||||||||
| Total | $ | $ | ||||||
The Company also disaggregates its revenue by operating segment and geographic location (refer to Note 16, Segment Disclosures, for additional information).
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Accounts Receivable
Accounts receivable include amounts from work completed in which the Company has billed. The amounts due are stated at their net estimated realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and collateral to the extent applicable.
Contract Assets and Liabilities
Contract assets include costs and services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. At December 31, 2020 and 2019, contract assets totaled $
Contract liabilities include payment received for incomplete performance obligations and are included in contract liabilities on the consolidated balance sheets. At December 31, 2020 and 2019, contract liabilities totaled $
Cost of Revenues
Cost of revenues includes all direct costs of providing services under the Company’s contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation” (“ASC 718”), using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The Company accounts for stock-based compensation awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in ASU 2018-07.
The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to, the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.
Loss per Share
The Company computes loss per share in accordance with ASC 260, “Earnings per Share” which requires presentation of both basic and diluted loss per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As of December 31, 2020 and 2019, respectively, the Company had
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Leases
The Company adopted FASB Accounting Standards Codification, Topic 842, Leases (“ASC 842”) on January 1, 2019.
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. A number of the Company’s lease agreements contain options to renew and options to terminate the leases early. The lease term used to calculate ROU assets and lease liabilities only includes renewal and termination options that are deemed reasonably certain to be exercised.
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. The Company has elected not to separate lease and non-lease components for all property leases for the purposes of calculating ROU assets and lease liabilities.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. The Company adopted this standard on January 1, 2020. The adoption of this standard did not materially impact the Company’s consolidated financial statements and related disclosures.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables. The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
The Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the year ended December 31, 2020, three customers accounted for
The Company’s customers are primarily located within the domestic United States of America, Puerto Rico, and Canada. Revenues generated within the domestic United States of America accounted for approximately
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Fair Value Measurements
The Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy is defined as follows:
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended December 31, 2020 and 2019. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
The Company’s financial assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2020 and 2019 consisted of the following:
| Total fair value at December 31, 2020 |
Quoted prices in active markets (Level 1) |
Quoted prices in active markets (Level 2) |
Quoted prices in active markets (Level 3) |
|||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | $ | $ | $ | ||||||||||||
| Total fair value at December 31, 2019 |
Quoted prices in active markets (Level 1) |
Quoted prices in active markets (Level 2) |
Quoted prices in active markets (Level 3) |
|||||||||||||
| Description: | ||||||||||||||||
| Derivative liability (1) | $ | $ | $ | $ | ||||||||||||
| (1) | The Company has estimated the fair value of these derivatives using the Monte-Carlo 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.
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Derivative Liabilities
The Company accounts for derivative instruments in accordance with ASC Topic 815, “Derivatives and Hedging” and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above. As of December 31, 2020 and 2019, the Company had a derivative liability of $
Sequencing Policy
Under ASC 815-40-35, the Company has adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to the Company’s employees or directors are not subject to the sequencing policy.
Reclassifications
Certain balances in previously issued consolidated financial statements have been reclassified to be consistent with the current period presentation. The reclassification had no impact on total financial position, net income, or stockholders’ equity.
| 3. | Disposals of Subsidiaries |
WaveTech GmbH Background Information
Prior to the Company’s sale of its interest in WaveTech GmbH (refer to the “Sale of TNS and Interest in WaveTech GmbH” section of this note for additional detail), the Company had a due from related party balance of $
In connection with the share purchase agreement with WaveTech GmbH discussed in Note 15, Commitments and Contingencies, the Company assumed $
Prior to the Company’s sale of its interest in WaveTech GmbH, the balance of the loan with WaveTech GmbH discussed in Note 6, Related Party Transactions, was $
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Sale of TNS and Interest in WaveTech GmbH
On September 30, 2020, the Company entered into a stock purchase agreement with WaveTech Group, Inc. “WaveTech Group”), a Delaware corporation. In connection with the agreement, the Company sold to WaveTech Group its TNS subsidiary. Additionally, the Company sold to WaveTech Group all shares of WaveTech GmbH common stock held in escrow for the Company. As of the date of the sale, the Company held
The consideration for the sale is as follows:
| ● | WaveTech Group agreed to assume $ |
| ● | WaveTech Group agreed to assume $ |
| ● | WaveTech Group agreed to assume the $ |
| ● | WaveTech Group and the Company agreed to eliminate all intercompany balances reflected on the financial statements of the seller and acquisition companies. | |
|
| ||
|
| ● | In connection with the Certificate of Designation of the Company’s Series C preferred stock filed on September 29, 2020 (refer to Note 12, Preferred Stock, for additional detail), the Company agreed to provide |
| ● | WaveTech Group agreed to assign to the Company all shares of the Company’s common stock acquired by WaveTech Group following the closing of the transaction as a result of a tender offer. WaveTech Group offered shares of its common stock to the holders of the |
The Company considered whether or not this transaction would cause TNS to qualify for discontinued operations treatment. The Company determined that the sale of TNS qualifies for discontinued operations treatment as of December 31, 2020 as the sale represents a strategic shift.
In connection with the sale of TNS, the Company tested its goodwill and intangible assets for impairment. The Company completed a recoverability test as there was an indicator of impairment and determined that the value was recoverable. As such, no impairment was recorded.
As a result of the sale of TNS and the Company’s interest in WaveTech GmbH, the Company recorded a loss on disposal of subsidiary of $
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The following table shows a breakout of the consideration received and given:
| Liabilities disposed of | ||||
| Assumption of portion of Dominion Capital LLC note | $ | |||
| Assumption of Joel Raven note | ||||
| Assumption of Michael Roeske note | ||||
| Assumption of TNS CARES Act loan | ||||
| Assumption of accounts payable and accrued expenses | ||||
| Assumption of contract liabilities | ||||
| Total liabilities disposed of | $ | |||
| Assets disposed of | ||||
| Cash | $ | |||
| Accounts receivable, net | ||||
| Due from related party | ||||
| Prepaid expenses and deposits | ||||
| Goodwill | ||||
| Customer lists, net | ||||
| Tradenames, net | ||||
| Total assets disposed of | $ | |||
| Loss on disposal of subsidiary | $ | |||
Sale of AW Solutions, Inc.
On December 31, 2020, the Company sold its AW Solutions, Inc. (“AWS”) subsidiary for the aggregate consideration consisting of $
The Company considered whether or not this transaction would cause AWS to qualify for discontinued operations treatment. The Company determined that the sale of AWS qualifies for discontinued operations treatment as of December 31, 2020 as the sale represents a strategic shift.
In connection with the sale of AWS, the Company tested its goodwill and intangible assets for impairment. The Company completed a recoverability test as there was an indicator of impairment and determined that the value was recoverable. As such, no impairment was recorded.
As a result of the sale of AWS, the Company recorded a gain on disposal of subsidiary of $
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The following table shows a breakout of the consideration received and given:
| Liabilities disposed of | ||||
| Assumption of AWS CARES Act loan | $ | |||
| Assumption of accounts payable and accrued expenses | ||||
| Total liabilities disposed of | $ | |||
| Assets disposed of | ||||
| Cash | $ | |||
| Accounts receivable, net | ||||
| Other assets | ||||
| Intangible assets | ||||
| Total assets disposed of | $ | |||
| Gain on disposal of subsidiary | $ | |||
| 4. | Property and Equipment |
Property and equipment as of December 31, 2020 and 2019 consisted of the following:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Computers and office equipment | $ | $ | ||||||
| Vehicles | ||||||||
| Leasehold improvements | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Equipment, net | $ | $ | ||||||
During the years ended December 31, 2020 and 2019, the Company recorded depreciation expense of $
| 5. | Intangible Assets |
Intangible assets as of December 31, 2020 and 2019 consisted of the following:
| Cost | Accumulated Amortization | Impairment | Net carrying value at December 31, 2020 |
Net carrying value at December 31, 2019 |
||||||||||||||||
| Customer relationship and lists | $ | $ | $ | $ | $ | |||||||||||||||
| Trade names | ||||||||||||||||||||
| Total intangible assets | $ | $ | $ | $ | $ | |||||||||||||||
During the years ended December 31, 2020 and 2019, the Company recorded amortization expense of $
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The estimated future amortization expense for the next five years and thereafter is as follows:
| Year ending December 31, | ||||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total | $ | |||
| 6. | Related Party Transactions |
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
If the High Wire Networks, Inc. (“High Wire”) transaction as proposed closes, the Series B preferred stock shares will be exchanged for
InterCloud Related Party Reclassification
During May 2019, as a result of shares of common stock issued to InterCloud as a result of conversions of convertible debentures, the Company determined that InterCloud was a related party. As of December 31, 2020, due to additional shares issued by the Company, the Company determined that InterCloud was no longer a related party. The effective date of the reclassification was January 1, 2019.
WaveTech GmbH Related Party Reclassification
During November 2019, as a result of the Company acquiring
Sales to WaveTech GmbH
During the year ended December 31, 2020 the Company’s ADEX subsidiary made sales to WaveTech GmbH totaling $193,573.
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Loans Payable to Related Parties
As of December 31, 2020 and 2019, the Company had outstanding the following loans payable to related parties:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible promissory note issued to Keith Hayter, |
$ | $ | ||||||
| Convertible promissory note issued to Roger Ponder, |
||||||||
| Promissory note issued to Keith Hayter, |
||||||||
| Promissory note issued to Keith Hayter, |
||||||||
| Promissory note issued to Keith Hayter, |
||||||||
| Promissory note issued to Keith Hayter, |
||||||||
| Loan with WaveTech GmbH, |
||||||||
| Total | $ | $ | ||||||
The Company’s loans payable to related parties have an effective interest rate of
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 $
The note matured on November 30, 2019 and was due on demand.
On August 31, 2020, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Roger Ponder,
Convertible promissory note, Roger Ponder,
On August 31, 2020, Roger Ponder exchanged one note into a new convertible promissory note with a principal amount of $
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 was $
As of December 31, 2020, the Company owed $
On January 14, 2021, the Company entered into an agreement with the holder whereby the conversion price was updated to $
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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 $
The note matured on November 30, 2019 and was due on demand.
On August 31, 2020, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Keith Hayter,
Promissory note issued to Keith Hayter,
On April 13, 2018, the Company received $
The note matured on April 13, 2020 and was due on demand.
On August 31, 2020, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Keith Hayter,
Promissory note issued to Keith Hayter, 8% interest, unsecured, matured October 1, 2019
On August 21, 2018, the Company received $
The note matured on October 1, 2019 and was due on demand.
On August 31, 2020, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Keith Hayter,
Promissory note issued to Keith Hayter, 10% interest, unsecured, matures August 11, 2020
On August 12, 2019, the Company received $
On August 31, 2020, the holder of the note exchanged this note for a new note (refer to the “Convertible promissory note, Keith Hayter,
Convertible promissory note, Keith Hayter,
On August 31, 2020, Keith Hayter exchanged four notes into a new convertible promissory note with a principal amount of $
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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 was $
As of December 31, 2020, the Company owed $
On January 14, 2021, the Company entered into an agreement with the holder whereby the conversion price was updated to $
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 $
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $
On May 6, 2019, the remaining principal balance of $1,445,625 was converted into shares of the Company’s common stock through an automatic forced conversion.
Convertible promissory note, InterCloud Systems, Inc,
On February 16, 2018, the Company issued InterCloud a convertible note with a principal amount of $
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging.” The initial fair value of the conversion feature of $
On August 16, 2019, the remaining principal balance of $
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Convertible promissory note, InterCloud Systems, Inc,
On February 27, 2018, the Company issued a convertible promissory note in the aggregate principal amount of $
The embedded conversion option qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $
On September 26, 2018,
During the year ended December 31, 2019, the Company repaid $
During the year ended December 31, 2019, the principal amount was reduced by $
On May 6, 2019, the remaining principal balance of $1,452,299 was converted into shares of the Company’s common stock through an automatic forced conversion.
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
In connection with the acquisition of ADEX from InterCloud, $
During the year ended December 31, 2019, the Company repaid $
As of December 31, 2020, principal of $
Loan with WaveTech GmbH.,
On July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German corporation (refer to Note 15, Commitments and Contingencies, for additional detail). In connection with the share purchase agreement, the Company was to receive $
On November 14, 2019, the Company acquired
During the year ended December 31, 2020, in connection with amounts owed to the Company from WaveTech GmbH, the loan with WaveTech GmbH was being netted against amounts due from WaveTech GmbH (refer to Note 3, Disposals of Subsidiaries, for additional detail).
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| 7. | Loans Payable |
As of December 31, 2020 and 2019, the Company had outstanding the following loans payable:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand | $ | $ | ||||||
| Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand | ||||||||
| Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand | ||||||||
| Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand | ||||||||
| Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand | ||||||||
| Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand | ||||||||
| Promissory note issued to Old Main Capital LLC, |
||||||||
| Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand* | ||||||||
| Future receivables financing agreement with Pawn Funding, non-interest bearing, matures |
||||||||
| Future receivables financing agreement with Cedar Advance Funding, non-interest bearing, matures |
- | |||||||
| CARES Act Loans | - | |||||||
| Future receivables financing agreement with RDM Capital Funding, non-interest bearing, matures |
- | |||||||
| Loan with Heritage Bank of Commerce, interest rate of prime plus |
- | |||||||
| Future receivables financing agreement with C6 Capital, non-interest bearing, matures |
- | |||||||
| Total | $ | $ | ||||||
| Less: Long-term portion of loans payable | ( |
) | - | |||||
| Loans payable, current portion, net of debt discount | $ | $ | ||||||
| * |
Promissory note issued to J. Thacker, non-interest bearing, unsecured and due on demand
The Company owed $
Promissory note issued to S. Kahn, non-interest bearing, unsecured and due on demand
The Company owed $
Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand
The Company owed $
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Promissory note issued to 0738856 BC Ltd, non-interest bearing, unsecured and due on demand
The Company owed $
Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand
The Company owed $
Subscription amount due to T. Warkentin non-interest bearing, unsecured and due on demand
In March 2012, the Company received $
Promissory note issued to Old Main Capital LLC,
On April 12, 2017, received $
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
In connection with the acquisition of ADEX from InterCloud, $
During the year ended December 31, 2019, the Company repaid $
As of December 31, 2020, principal of $
Loan with Heritage Bank of Commerce, interest rate of prime plus
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”).
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
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.
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In connection with the financing, on October 10, 2018,
During the year ended December 31, 2019, the Company received an aggregate of $
During the year ended December 31, 2020, the Company received an aggregate of $
On February 11, 2020, pursuant to an assignment and consent agreement, Heritage sold, transferred and assigned to Bay View Funding all of Heritage’s right, title, and interest in the loan and security agreement (refer to Note 9, Factor Financing, for additional detail). As a result of the assignment, the Company recorded a loss on settlement of debt of $
Loan with Libertas Funding LLC
On January 4, 2019, the Company, together with its subsidiaries, (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 $
On February 1, 2019, the Company fully repaid the Financing Agreement. As a result, the amount owed at December 31, 2019 was $
Loan with WaveTech Global, Inc., matured
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 $
Loan with C6 Capital
On August 16, 2019, the Company, together with its subsidiaries (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 $
Pursuant to the terms of the Financing Agreement, the Company agreed to pay C6 Capital $
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During the year ended December 31, 2019, the Company paid $
Loan with Pawn Funding
On December 10, 2019, the Company, together with its subsidiaries (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Pawn Funding. Under the Financing Agreement, the Financing Parties sold to Pawn Funding future receivables in an aggregate amount equal to $
On April 10, 2020,
On July 14, 2020, in connection with the reduction of the weekly payment amount, the Company issued to Pawn Funding a warrant to purchase up to
During the year ended December 31, 2019, the Company paid $
At December 31, 2020, the Company owed $
Loan with RDM Capital Funding
On December 10, 2019, the Company, together with its subsidiaries (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with RDM Capital Funding. Under the Financing Agreement, the Financing Parties sold to RDM Capital Funding future receivables in an aggregate amount equal to $
During the year ended December 31, 2019, the Company paid $
During the year ended December 31, 2020, the Company repaid the balance in full. Total cash payments during this period were $
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Loan with C6 Capital
On August 16, 2019, the Company, together with its subsidiaries (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with C6 Capital.
During the year ended December 31, 2019, the Company paid $
Loan with Cedar Advance LLC
On September 29, 2020, the Company, together with its subsidiaries (collectively with the Company, the “Financing Parties”), entered into an Agreement of Sale of Future Receipts (the “Financing Agreement”) with Cedar Advance LLC. Under the Financing Agreement, the Financing Parties sold to Cedar Advance future receivables in an aggregate amount equal to $
Pursuant to the terms of the Financing Agreement, the Company agreed to pay Cedar Advance $11,658 each week based upon an anticipated 25% of its future receivables until such time as $349,750 has been paid, a period Cedar Advance and the Financing Parties estimate to be approximately seven months. The Financing Agreement also contains customary affirmative and negative covenants, representations and warranties, and default and termination provisions.
During the year ended December 31, 2020, the Company paid $
At December 31, 2020, the Company owed $
During the period of January 1, 2021 through March 26, 2021, the Company repaid the outstanding principal of the note (refer to Note 19, Subsequent Events, for additional detail).
CARES Act Loans
On April 27, 2020 and October 14, 2020, the Company’s ADEX subsidiary received $2,692,125 and $150,000 respectively (the “PPP Funds”). On May 12, 2020, the Company’s AWS PR subsidiary received $78,000 in PPP Funds. ADEX entered into loan agreements with Heritage Bank of Commerce and AWS PR entered into a loan agreement with Banco Popular de Puerto Rico.
Additionally, on April 21, 2020 and May 14, 2020, the Company’s former AWS and TNS subsidiaries received $682,400 and $108,658, respectively, in PPP Funds. AWS entered into a loan agreement with Iberia Bank and TNS entered into a loan agreement with TCF National Bank. In connection with the sales of these subsidiaries discussed in Note 3, Disposals of Subsidiaries, these CARES Act Loans were assumed by the purchasers.
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As of December 31, 2020, the aggregate balance of these loans is $
As of the date of this report, ADEX and AWS PR have applied to have their CARES Act Loans forgiven and are awaiting a decision from the SBA.
| 8. | Convertible Debentures |
As of December 31, 2020 and 2019, the Company had outstanding the following convertible debentures:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible promissory note, Barn 11, |
$ | $ | ||||||
| Convertible promissory note, SCS, LLC, |
||||||||
| Convertible promissory note, GS Capital Partners, LLC, |
||||||||
| Convertible promissory note, Crown Bridge Partners, LLC, |
||||||||
| Convertible promissory note, Efrat Investments LLC, |
||||||||
| Convertible promissory note, SCS, LLC, |
||||||||
| Convertible promissory note, SCS, LLC, |
||||||||
| Convertible promissory note, Dominion Capital, |
||||||||
| Convertible promissory note, Michael Roeske, |
||||||||
| Convertible promissory note, Joel Raven, |
||||||||
| Convertible promissory note, GS Capital Partners, LLC, |
||||||||
| Convertible promissory note, Power Up Lending Group LTD., |
||||||||
| Convertible promissory note, Power Up Lending Group LTD., |
||||||||
| Total | ||||||||
| Less: Long-term portion of convertible debentures, net of debt discount | ( |
) | ||||||
| Convertible debentures, current portion, net of debt discount | $ | $ | ||||||
The Company’s convertible debentures have an effective interest rate range of
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Convertible promissory note, Barn 11,
On February 21, 2018, the Company issued a convertible note with a principal amount of $
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 $
On June 1, 2019, the Company was in default on the note. As a result of the default, a
During the year ended December 31, 2019, the Company paid $
On January 27, 2021, Barn 11 assigned the note to Cobra Equities SPV, LLC (refer to Note 19, Subsequent Events, for additional detail).
Convertible promissory note, Dominion Capital,
On April 17, 2019, Dominion Capital exchanged two notes into a new note (the “Exchange Note”) with a principal amount of $
As a result of the beneficial conversion feature associated with the Dominion notes, $
On April 2, 2020 the Company paid a $20,000 modification fee in order to avoid an event of default under the note and receive payment forbearance for a period of 30 days.
On September 30, 2020, in connection with the stock purchase agreement described in Note 3, Disposals of Subsidiaries, the Company entered into an amendment with Dominion and WaveTech Group, Inc. The parties agreed that as of the date of the amendment the outstanding principal and accrued interest was $
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During the year ended December 31, 2019 the Company paid $
On December 1, 2020, the holder of the note assigned the full outstanding amount to a third party, SCS, LLC (refer to the “Convertible promissory note, SCS, LLC,
In connection with the assignment, the Company recorded a loss on settlement of debt of $
Convertible promissory note issued in connection with the acquisition of TNS, Inc.
On January 4, 2019, as part of the TNS acquisition,
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 $
On January 28, 2019,
Convertible promissory note, Michael Roeske,
On January 28, 2019, InterCloud assigned $
During the year ended December 31, 2019, Mr. Roeske converted $
On February 14, 2020, the Company and Mr. Roeske entered into an amendment which revised the maturity date to December 31, 2020. Additional, per the amendment, as cash deposits were received by TNS in the ordinary course of business, a portion of such cash deposits could have been directed to Mr. Roeske. These payments would reduce the outstanding obligations of the Company to Mr. Roeske.
During the year ended December 31, 2020, the Company remitted $
On September 8, 2020, Mr. Roeske returned the shares issued in 2019. These shares were then canceled and $
On September 30, 2020, the Company entered into a stock purchase agreement (refer to Note 3, Disposals of Subsidiaries, for further detail). The outstanding balance of $
Convertible promissory note, Joel Raven,
On January 28, 2019, InterCloud assigned $434,000 of the note issued in connection with the acquisition of TNS to Joel Raven. The note accrued interest at a rate of
During the year ended December 31, 2019, Mr. Raven converted $
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On February 14, 2020, the Company and Mr. Raven entered into an amendment which revised the maturity date to December 31, 2020. Additional, per the amendment, as cash deposits were received by TNS in the ordinary course of business, a portion of such cash deposits could have been directed to Mr. Raven. These payments would reduce the outstanding obligations of the Company to Mr. Raven.
During the year ended December 31, 2020, the Company remitted $
On September 8, 2020, Mr. Raven returned the shares issued in 2019. These shares were then canceled and $
On September 30, 2020, the Company entered into a stock purchase agreement (refer to Note 3, Disposals of Subsidiaries, for further detail). The outstanding balance of $
Convertible promissory note, GS Capital Partners, LLC,
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 $
The interest on the outstanding principal due under the secured note accrued at a rate of
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 $
On July 28, 2020, GS Capital Partners, LLC returned
During the year ended December 31, 2020, the holder of the note converted $123,000 of principal and $13,429 of accrued interest into shares of the Company’s common stock (refer to Note 11, Common Stock, for additional information). As a result of these conversions, the amount owed at December 31, 2020 was $0.
Convertible promissory note, GS Capital Partners, LLC,
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 $
The interest on the outstanding principal due under the note accrued at a rate of 8% per annum. All principal and accrued but unpaid interest under the note was due on October 24, 2020.
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 $
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During the year ended December 31, 2020, the holder of the note converted $
At December 31, 2020, the Company owed $
In the period of January 1, 2021 through March 26, 2021, the holder of the note converted the remaining principal amount into shares of the Company’s common stock (refer to Note 19, Subsequent Events, for additional detail).
Convertible promissory note, SCS, LLC,
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 $
The interest on the outstanding principal due under the unsecured note accrued at a rate of
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 $
The note matured on March 30, 2020 and was in default. As a result of the default, the note balance was increased by 25% of outstanding principal, resulting in additional principal of $12,758. The interest also increased from 8% per annum to 24% per annum.
During the year ended December 31, 2020, the holder of the note converted $12,000 of principal and $720 of accrued interest into shares of the Company’s common stock (refer to Note 11, Common Stock, for additional information). As a result of these conversions, the Company recorded a loss on settlement of debt of $7,013 to the consolidated statement of operations for the year ended December 31, 2020.
At December 31, 2020, the Company owed $
In the period of January 1, 2021 through March 26, 2021, the holder of the note converted the remaining principal amount into shares of the Company’s common stock (refer to Note 19, Subsequent Events, for additional detail). In connection with the conversions, the holder of the note forgave the $
Convertible promissory note, Power Up Lending Group LTD.,
On September 17, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 8% per annum. All principal and accrued but unpaid interest under the note was originally due on September 17, 2020. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date.
The 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 $
During the year ended December 31, 2020, the holder of the note converted $
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Convertible promissory note, Power Up Lending Group LTD.,
On October 22, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 8% 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 $
During the year ended December 31, 2020, the holder of the note converted $
Convertible promissory note, Power Up Lending Group LTD., 8% interest, unsecured, matures February 26, 2021
On November 27, 2019, the Company entered into and closed on a Securities Purchase Agreement with Power Up Lending Group LTD. (“Power Up Lending”), pursuant to which the Company issued to Power Up Lending a convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 8% per annum. All principal and accrued but unpaid interest under the note was due on February 26, 2021. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 15 trading days prior to and including the conversion date.
The 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 $
During the year ended December 31, 2020, the holder of the note converted $58,000 of principal and $3,656 of accrued interest into shares of the Company’s common stock (refer to Note 11, Common Stock, for additional information). As a result of these conversions, the amount owed at December 31, 2020 was $0. The Company recorded a loss on settlement of debt of $69,438 to the consolidated statement of operations for the year ended December 31, 2020.
Convertible promissory note, Crown Bridge Partners, LLC,
On November 12, 2019, the Company entered into and closed on a Securities Purchase Agreement with Crown Bridge Partners, LLC, pursuant to which the Company issued to Crown Bridge Partners, LLC a convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the first tranche of the note accrues at a rate of 10% per annum. All principal and accrued but unpaid interest under the first tranche of the note is due on November 21, 2020. The first tranche of the note is convertible into shares of the Company’s common stock at 60% of the average of the three lowest VWAPs in the 20 trading days prior to and including the conversion date.
The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion option feature of $
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The first tranche of the note matured on November 21, 2020. The holder of the note accepted guaranteed interest of
During the year ended December 31, 2020, the holder of the note converted $35,672 of principal and $6,000 of accrued interest into shares of the Company’s common stock (refer to Note 11, Common Stock, for additional information). As a result of these conversions, the Company recorded a loss on settlement of debt of $101,629 to the consolidated statement of operations for the year ended December 31, 2020.
At December 31, 2020, the Company owed $
On January 29, 2021, the Company repaid the outstanding principal and accrued interest related to the first tranche of the note (refer to Note 19, Subsequent Events, for additional detail).
Convertible promissory note, Efrat Investments LLC,
On September 14, 2020 the Company issued to Efrat Investments LLC a secured convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrues at a rate of
The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion option feature of $
The terms of the note dictated that principal payments of $
At December 31, 2020, the Company owed $
Subsequent to December 31, 2020, in lieu of the $
Convertible promissory note, SCS, LLC,
On December 1, 2020, Dominion Capital LLC assigned the note described in the “Convertible promissory note, Dominion Capital, 12% interest, unsecured, matures October 17, 2020” section of this note to SCS, LLC. The Company issued to SCS, LLC a new secured convertible promissory note in the principal amount of $257,442.
The interest on the outstanding principal due under the note accrues at a rate of
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 was $
At December 31, 2020, the Company owed $
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Convertible promissory note, SCS, LLC,
On December 29, 2020, the Company issued to SCS, LLC a secured convertible promissory note in the principal amount of $
The interest on the outstanding principal due under the note accrues at a rate of
At December 31, 2020, the Company owed $
Convertible promissory note, CCAG Investments, LLC,
On February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with CCAG Investments, LLC, pursuant to which the Company issued to CCAG Investments, LLC a secured convertible redeemable note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In connection with the issuance of the note, the Company also issued to CCAG Investments, LLC 9,755 shares of common stock (refer to Note 11, Common Stock, for additional detail).
The embedded conversion option and warrants issued qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature and warrants issued was $
The Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal if paid greater than 90 days after issuance.
During the year ended December 31, 2020, the Company repaid
Under the terms of the agreement, if the shares issued upon execution of the note are no longer worth $87,500 at the time of the shares becoming eligible for resale pursuant to Rule 144, the Company shall issue additional shares to the holder in an amount holding a market value to equal the difference between the value of these shares and $87,500. The 9,755 shares became eligible for resale pursuant to Rule 144 during August 2020 and the value was less than $87,500. As a result, the Company began issuing additional shares to the holder (refer to Note 11, Common Stock, for additional detail). During the year ended December 31, 2020, the Company issued an aggregate of 1,542,000 shares to the holder and recorded a loss on fair value of additional shares of $109,706 to the consolidated statement of operations for the year ended December 31, 2020.
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Convertible promissory note, FJ Vulis and Associates, LLC,
On February 7, 2020, the Company entered into and closed on a Securities Purchase Agreement with FJ Vulis and Associates, LLC, pursuant to which the Company issued to FJ Vulis and Associates, LLC a secured convertible redeemable note in the aggregate principal amount of $
The interest on the outstanding principal due under the note accrued at a rate of 20% per annum. All principal and accrued but unpaid under the secured note was originally due on June 30, 2020. The note was convertible into shares of the Company’s common stock at 70% of the average of the three lowest VWAPs in the 12 trading days prior to and including the conversion date.
In connection with the issuance of the note, the Company also issued to FJ Vulis and Associates, LLC 9,755 shares of common stock (refer to Note 11, Common Stock, for additional detail).
The embedded conversion option and warrants issued qualified for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature and warrants issued was $
The Company had the option of repaying 120% of the principal balance if paid within 90 days of issuance, or 125% of the principal if paid greater than 90 days after issuance.
During the year ended December 31, 2020, the Company repaid
Under the terms of the agreement, if the shares issued upon execution of the note are no longer worth $87,500 at the time of the shares becoming eligible for resale pursuant to Rule 144, the Company shall issue additional shares to the holder in an amount holding a market value to equal the difference between the value of these shares and $87,500. The 9,755 shares became eligible for resale pursuant to Rule 144 during August 2020 and the value was less than $87,500. As a result, the Company began issuing additional shares to the holder (refer to Note 11, Common Stock, for additional detail). During the year ended December 31, 2020, the Company issued an aggregate of 900,000 shares to the holder and recorded a loss on fair value of additional shares of $68,040 to the consolidated statement of operations for the year ended December 31, 2020.
On January 18, 2021, the Company issued an additional 642,000 shares to the holder (refer to Note 19, Subsequent Events, for additional detail).
| 9. | Factor Financing |
On February 11, 2020, pursuant to an assignment and consent agreement, Bay View Funding purchased and received all of Heritage’s right, title, and interest in the loan and security agreement with the Company’s wholly-owned subsidiary, ADEX, discussed in Note 7, Loans Payable. In connection with the agreement, the Company received $
Under the factoring agreement,
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During the year ended December 31, 2020, the Company paid $
During the year ended December 31, 2020, the Company received an aggregate of $
On February 11, 2021, the initial term of the factor financing expired. The agreement has been extended on a month to month basis.
| 10. | Derivative Liabilities |
The embedded conversion options of the convertible debentures described in Note 8, Convertible Debentures, contain conversion features that qualify for embedded derivative classification. The fair value of the liability is re-measured at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on change in fair value of derivatives. Derivative liabilities also include the fair value of the Company’s share purchase warrants and stock options discussed in Note 13, Share Purchase Warrants and Stock Options.
The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities for the years ended December 31, 2020 and 2019:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Balance at the beginning of the period | $ | $ | ||||||
| Change in fair value of embedded conversion option | ( |
) | ||||||
| Conversion of derivative liability | ( |
) | ( |
) | ||||
| Repayment of convertible note | ( |
) | ( |
) | ||||
| Impact of note extinguishment | ( |
) | ||||||
| Original discount limited to proceeds of notes | ||||||||
| Fair value of derivative liabilities in excess of notes proceeds received | ||||||||
| Fair value of warrant derivatives at issuance | ||||||||
| Fair value of option derivatives at issuance | ||||||||
| Derivative issued as part of acquisition | ||||||||
| Addition to derivative due to default penalty | ||||||||
| Balance at the end of the period | $ | $ | ||||||
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 based on various assumptions.
Significant changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions used in the calculations:
| Expected volatility | Risk-free interest rate | Expected dividend yield | Expected life (in years) |
|||||||||||||
| At December 31, 2019 | % | % | % | |||||||||||||
| At December 31, 2020 | % | % | % | |||||||||||||
F-80
| 11. | Common Stock |
Authorized Shares
On November 15, 2017, the Company revised its authorized share capital to increase the number of authorized common shares from
Treasury Stock
The Company holds
Issuance of Shares Pursuant to Conversion of Series A Preferred Stock
On August 26, 2019, the Company issued
On August 30, 2019, the Company issued
On September 18, 2019, the Company issued
On September 27, 2019, the Company issued
On October 15, 2019, the Company issued
On October 21, 2019, the Company issued
On October 24, 2019, the Company issued
On January 7, 2020, the Company issued
On February 11, 2020, the Company issued
On April 9, 2020, the Company issued
On April 29, 2020, the Company issued
On June 22, 2020, the Company issued
On June 25, 2020, the Company issued
F-81
On June 26, 2020, the Company issued
On July 13, 2020, the Company issued
On August 27, 2020, the Company issued
On September 1, 2020, the Company issued
On September 10, 2020, the Company issued
Issuance of Shares Pursuant to the Execution of New Convertible Debentures
On February 7, 2020, the Company issued
On February 7, 2020, the Company issued
Issuance of Shares Pursuant to GS Capital Partners, LLC Convertible Debentures
On February 12, 2020, the Company issued
On March 13, 2020, the Company issued
On April 30, 2020, the Company issued
On August 17, 2020, the Company issued
On August 24, 2020, the Company issued
On August 27, 2020, the Company issued
On September 3, 2020, the Company issued
On September 15, 2020, the Company issued
On October 7, 2020, the Company issued
F-82
On October 14, 2020, the Company issued
On October 27, 2020, the Company issued
On November 3, 2020, the Company issued
On November 23, 2020, the Company issued
On December 7, 2020, the Company issued
On December 21, 2020, the Company issued
On December 31, 2020, the Company issued
Issuance of Shares Pursuant to WaveTech GmbH Post-Closing Notes
On February 18, 2020, the Company issued
Issuance of Shares Pursuant to Power Up Lending Group LTD. Convertible Debentures
On April 1, 2020, the Company issued
On April 13, 2020, the Company issued
On April 16, 2020, the Company issued
On April 16, 2020, the Company issued
On April 20, 2020, the Company issued
On April 30, 2020, the Company issued
F-83
On May 12, 2020, the Company issued
On May 13, 2020, the Company issued
On May 20, 2020, the Company issued
On June 9, 2020, the Company issued
On June 9, 2020, the Company issued
On June 12, 2020, the Company issued
On June 16, 2020, the Company issued
On June 26, 2020, the Company issued
On July 8, 2020, the Company issued
On July 20, 2020, the Company issued
On July 27, 2020, the Company issued
On August 4, 2020, the Company issued
On August 11, 2020, the Company issued
On August 13, 2020, the Company issued
On August 17, 2020, the Company issued
On August 20, 2020, the Company issued
On August 24, 2020, the Company issued
F-84
Issuance of Shares Pursuant to an SCS, LLC Convertible Debenture
On June 19, 2020, the Company issued
On July 13, 2020, the Company issued
On July 29, 2020, the Company issued
Issuance of Shares Pursuant to a Crown Bridge Partners Convertible Debenture
On May 21, 2020, the Company issued
On June 8, 2020, the Company issued
On August 24, 2020, the Company issued
On August 26, 2020, the Company issued
On September 11, 2020, the Company issued
On October 5, 2020, the Company issued
Additional Shares Issued Pursuant to Convertible Debentures
On August 11, 2020, the Company issued
On August 11, 2020, the Company issued
On September 21, 2020, the Company issued
On September 21, 2020, the Company issued
On September 23, 2020, the Company issued
On September 23, 2020, the Company issued
On December 18, 2020, the Company issued
F-85
Issuance of Shares Pursuant to RDW Capital LLC Convertible Debentures
On January 14, 2019, the Company issued
On February 7, 2019, the Company issued
On February 12, 2019, the Company issued
On March 7, 2019, the Company issued
On May 21, 2019, the Company issued
Issuance of Shares Pursuant to Silverback Capital Convertible Debentures
On January 14, 2019, the Company issued
On January 28, 2019, the Company issued
On February 11, 2019, the Company issued
On May 17, 2019, the Company issued
On July 2, 2019, the Company issued
On August 29, 2019, the Company issued
On October 21, 2019, the Company issued
Issuance of Shares Pursuant to Virtual Capital Convertible Debentures
On February 7, 2019, the Company issued
On April 1, 2019, the Company issued
On April 25, 2019, the Company issued
F-86
Issuance of Shares Pursuant to InterCloud Convertible Debentures
On May 6, 2019, the Company issued
On August 16, 2019, the Company issued
Issuance of Shares Pursuant to Employee Convertible Debentures
On February 14, 2019, the Company issued
Issuance of Shares for Services
On February 1, 2019, the Company issued
On July 18, 2019, the Company issued
As of December 31, 2020, there was no unvested stock compensation expense.
Cancellation of Shares for Services
On April 12, 2019, the Company cancelled
On May 22, 2019, the Company cancelled
On June 18, 2019, the Company cancelled
On December 4, 2019, the Company cancelled
Shares Returned and Canceled
On July 28, 2020, GS Capital Partners returned
On September 8, 2020, Joel Raven and Mike Roeske returned an aggregate of
| 12. | Preferred Stock |
Series A
On November 15, 2017, the Company created one series of the
On October 29, 2018,
F-87
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 $
On April 8, 2020, the Company made the third amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price and the conversion price floor to $3.00 per share.
On June 18, 2020, the Company made the fourth amendment to the Certificate of Designation of its Series A preferred stock, which lowered the fixed conversion price to $0.20 per share and the conversion price floor to $0.01 per share.
On January 27, 2021, the Company made the fifth amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price to $0.0975 per share (refer to Note 17, Subsequent Events, for additional detail).
Subsequent to the fourth amendment, the principal terms of the Series A preferred stock shares were as follows:
Voting rights – The Series A preferred stock shares do not have voting rights.
Dividend rights – The holders of the Series A preferred stock shares shall not be entitled to receive any dividends. No dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the Series A preferred stock shares during any fiscal year of the Company until there shall have been paid or declared and set apart during that fiscal year for the holders of the Series A preferred stock shares a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the Series A preferred stock times (ii) the amount per share of the dividend to be paid on the common stock.
Conversion rights – The holders of the Series A preferred stock shares have the right to convert each Series A preferred stock share and all accrued and unpaid dividends thereon shall be convertible at the option of the holder thereof, at any time after the issuance of such share into fully paid and nonassessable shares of common stock of the Company.
Liquidation rights – Upon the occurrence of any liquidation, each holder of Series A preferred stock shares then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders, before any payment shall be made in respect of the common stock, or other series of preferred stock then in existence that is outstanding and junior to the Series A preferred stock shares upon liquidation, an amount per share of Series A preferred stock shares equal to the amount that would be receivable if the Series A preferred stock shares had been converted into common stock immediately prior to such liquidation distribution, plus, accrued and unpaid dividends.
In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the Series A preferred stock shares as temporary equity or “mezzanine.”
Holders of Series A preferred stock shares began converting into shares of common stock during May 2018 (refer to Note 11, Common Stock, for additional detail).
Series B
On April 16, 2018, the Company designated
Issue Price - The stated price for the Series B preferred stock shares shall be $
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.
F-88
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 $
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.”
If the High Wire transaction as proposed closes, the Series B preferred stock shares will be exchanged for
Series C
On November 14, 2019, the Company designated
Issue Price - The stated price for the Series C preferred stock shall be $
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 $
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 $
F-89
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
For purposes hereof, a “Triggering Event” shall include any liability arising from a breach of the representations or warranties of WaveTech GmbH (as defined below) contained in the share purchase agreement dated July 15, 2019 and all amendments thereto (as amended, the “SPA”), by and between the Company and WaveTech GmbH, a corporation organized under the laws of the Republic of Germany. “Closing Date” shall have the meaning ascribed to the term in the SPA. “Strike Price” shall mean the closing price per share of the Company’s common stock on the trading day immediately preceding the Series C Conversion Date.
On April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement with WaveTech GmbH. Amendment Number 2 replaced the conversion terms of the Series C preferred stock included with Amendment Number 1 with the following:
Conversion. On the second business day following the earlier of (i) the later of (A) April 30, 2020, or such later date as may be determined by the Board, and (B) a reverse split of the common stock. (ii) the listing of the Company on a national securities exchange and (iii) the six-month anniversary of the issuance of shares of Series C to such holder (such earliest date. the “Series C Conversion Date”), without any further action, all outstanding shares of Series C shall automatically convert into an aggregate number of shares of common stock equal to $
For purposes hereof, a “Triggering Event” shall include any liability arising from a breach by WaveTech GmbH, a corporation organized under the laws of the Republic of Germany, of any of its representations or warranties contained in that certain Share Purchase Agreement (the “SPA”), by and between the Corporation and WaveTech GmbH. “Losses” shall have the meaning set forth in the SPA.
Additionally, Amendment Number 2 adjusted the amount of common stock issued on the Series C Conversion Date as follows:
If on the earlier of (a) the tenth (l0th) business day prior to the listing of the Company on a national securities exchange (“Uplisting”), or (b) December 15, 2020, the aggregate value of the shares of common stock issued upon conversion of the Series C (the “Conversion Shares”) is less than
On September 29, 2020, the Company amended the Series C preferred stock certificate of designation. In connection with the amendment, the designated shares amount was reduced to
On September 30, 2020, the Company sold its interest in WaveTech GmbH (refer to Note 3, Disposals of Subsidiaries, for additional detail). As a result of the sale, the Series C shares will not be issued.
F-90
| 13. | Share Purchase Warrants and Stock Options |
From time to time, the Company issues share purchase warrants and stock options, which are classified as liabilities. The total fair value of the Company’s share purchase warrants and stock options was $
The following table summarizes the activity of share purchase warrants for the year ended December 31, 2020:
| Number of warrants | Weighted average exercise price |
||||||||
| Balance at December 31, 2019 | $ | ||||||||
| Issued | |||||||||
| Expired | ( |
) | |||||||
| Balance at December 31, 2020 | $ | ||||||||
As of December 31, 2020, the following share purchase warrants were outstanding:
| Number of warrants | Exercise price | Issuance date | Expiry date | Remaining life | ||||||||||||
| * | ||||||||||||||||
| * |
The following table summarizes the activity of stock options for the year ended December 31, 2020:
| Number of stock options | Weighted average exercise price | ||||||||
| Balance at December 31, 2019 | $ | ||||||||
| Issued | |||||||||
| Expired | |||||||||
| Balance at December 31, 2020 | $ | ||||||||
As of December 31, 2020, the following stock options were outstanding:
| Number of stock options | Exercise price | Issuance Date | Expiry date | ||||||||
F-91
| 14. | 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 $
The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term. The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The Company used the incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The following table sets forth the operating lease right of use (“ROU”) assets and liabilities as of December 31, 2020 and 2019:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Operating lease assets | $ | $ | ||||||
| Operating lease liabilities: | ||||||||
| Current operating lease liabilities | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
Expense related to leases is recorded on a straight-line basis over the lease term, including rent holidays.
During the years ended December 31, 2020 and 2019, the Company recognized operating lease expense of $
Cash paid for amounts included in the measurement of operating lease liabilities was $
The operating lease liabilities as of December 31, 2020 reflect a weighted average discount rate of
| Year ending December 31, | |||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| Total lease payments | |||||
| Less: imputed interest | ( |
) | |||
| Total | $ |
F-92
| 15. | Commitments and Contingencies |
Leases
The Company leases certain of its properties under leases that expire on various dates through 2023. Some of these agreements include escalation clauses and provide for renewal options ranging from one to five years. Leases with an initial term of 12 months or less and immaterial leases are not recorded on the balance sheet (refer to Note 14, Leases, for amounts expensed during the year ended December 31, 2020 and 2019).
WaveTech GmbH Share Purchase Agreement
On July 15, 2019, the Company entered into a share purchase agreement with WaveTech GmbH, a German corporation.
The merger of WaveTech GmbH into the Company was to be effected through a sale and exchange of shares and cash. Pursuant to the share purchase agreement, the Company was to acquire all right, title and interest in all of the issued and outstanding shares of stock of WaveTech GmbH in exchange for the issuance of the Company’s Series C preferred stock as well as the assumption by the Company of $
The consummation of the Transactions was 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 were 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 were 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 contained certain termination rights for both the Company and WaveTech GmbH, including that the Company or WaveTech GmbH could have terminated the share purchase agreement if WaveTech GmbH had 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 was 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.
On November 14, 2019, the Company entered into Amendment Number 1 of the share purchase agreement and acquired approximately
As of December 31, 2019, the Company had received $
On April 14, 2020, the Company entered into Amendment Number 2 of the share purchase agreement. This amendment primarily related to conversion terms for the Company’s Series C preferred stock (refer to Note 12, Preferred Stock, for additional detail).
F-93
During the year ended December 31, 2020, the Company obtained additional executed assignment agreements from shareholders holding an aggregate of
On September 30, 2020, the Company sold its interest in WaveTech GmbH (refer to Note 3, Disposals of Subsidiaries, for additional detail). Prior to the sale, The Company determined that the acquisition had not been completed for accounting purposes because the Series C preferred stock shares were never issued. Additionally, Mr. Poel resigned from his position as Chief Operating Officer and Mr. Valand, Mr. Poel, and Mr. Meling resigned their positions as members of the Board of Directors.
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 $
Following effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in
As of February 19, 2021, the Company had not received the funds described in the equity purchase agreement and has not filed the Registration Statement with the SEC.
On February 19, 2021, the Company entered into a new agreement with Oasis Capital which terminated the obligations of the August 29, 2019 agreement (refer to Note 19, Subsequent Events, for additional detail).
| 16. | Segment Disclosures |
During the year ended December 31, 2020, the Company had
| ● | ADEX/AWS PR/TROP, which is comprised of the ADEX Entities, AWS PR, and Tropical. |
| ● | Spectrum Global Solutions (SGS), which consists of the rest of the Company’s operations. |
During the year ended December 31, 2019, the Company had
| ● | 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.
F-94
Financial statement information by operating segment for the year ended December 31, 2020 is presented below:
| Year Ended December 31, 2020 | ||||||||||||
| Spectrum Global | ADEX/AWS PR/TROP | Total | ||||||||||
| Net sales | $ | $ | $ | |||||||||
| Operating loss | ( |
) | ( |
) | ( |
) | ||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total assets as of December 31, 2020 | ||||||||||||
Geographic information as of and for the year ended December 31, 2020 is presented below:
| Revenues For The Year Ended December 31, 2020 |
Long-lived Assets as of December 31, 2020 |
|||||||
| Puerto Rico and Canada | $ | $ | ||||||
| United States | ||||||||
| Consolidated total | ||||||||
Financial statement information by operating segment for the year ended December 31, 2019 is presented below:
| Year Ended December 31, 2019 | ||||||||||||
| Spectrum Global | ADEX/AWS | Total | ||||||||||
| Net sales | $ | $ | $ | |||||||||
| Operating (loss) income | ( |
) | ( |
) | ||||||||
| Interest expense | ||||||||||||
| Depreciation and amortization | ||||||||||||
| Total assets as of December 31, 2019 | ||||||||||||
Geographic information as of and for the year ended December 31, 2019 is presented below:
| Revenues For The Year Ended December 31, 2019 |
Long-lived Assets as of December 31, 2019 |
|||||||
| Puerto Rico and Canada | $ | $ | ||||||
| United States | ||||||||
| Consolidated total | ||||||||
F-95
| 17. | Income Taxes |
The Company’s pre-tax loss for the years ended December 31, 2020 and 2019 consisted of the following:
| Years Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| Domestic | $ | ( |
) | $ | ( |
) | ||
| Foreign | ( |
) | ||||||
| Pre-tax Loss | $ | ( |
) | $ | ( |
) | ||
The provision for income taxes for the years ended December 31, 2020 and 2019 was as follows:
| Years Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Foreign | ||||||||
| Total current | $ | $ | ||||||
| Deferred: | ||||||||
| Federal | $ | $ | ||||||
| State | ||||||||
| Total deferred | ||||||||
| Total provision for income taxes | $ | $ | ||||||
The Company’s income taxes were calculated on the basis of foreign pre-tax income and domestic pre-tax loss of $
The Company’s effective tax rate for the years ended December 31, 2020 and 2019 differed from the U.S. federal statutory rate as follows:
| Years Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| % | % | |||||||
| Federal tax benefit at statutory rate | ( |
) | ( |
) | ||||
| Permanent differences | ( |
) | ( |
) | ||||
| State tax benefit, net of Federal benefits | ||||||||
| Other | ||||||||
| Effect of foreign income taxed in rates other than the U.S. Federal statutory rate | ||||||||
| Net change in valuation allowance | ||||||||
| Provision | ||||||||
F-96
The tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities were as follows:
| Years Ended December 31, |
||||||||
| 2020 | 2019 | |||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Depreciation | ||||||||
| Total assets | ||||||||
| Total liabilities | ||||||||
| Less: Valuation allowance | ( |
) | ( |
) | ||||
| Net deferred tax liabilities | $ | $ | ||||||
As of December 31, 2020 and 2019, the Company had federal net operating loss carryforwards (“NOL’s”) of $
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss, capital loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating losses capital losses and credits prior to full utilization.
The Company has not completed a study to assess whether ownership change occurred as a result of the Company’s acquisition of AWS and related issuance of shares. However, as a result of the issuance of common shares in 2017, the Company believes an ownership change under Sec. 382 may have occurred. As a result of this ownership change certain of the Company’s net operating loss, capital loss and credit carryforwards will expire prior to full utilization. Additionally, further share issuances, such as the share issuances for debt conversions or acquisitions, may cause a change in ownership.
The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. The Company’s recent operating results and projections of future income weighed heavily in the Company’s overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because the Company had sustained cumulative losses since the commencement of operations.
The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters as a component of income tax expense. As of December 31, 2020 and 2019, there was no accrued interest and penalties related to uncertain tax positions.
The Company is subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to the Company’s net operating loss carryforwards all years remain open to examination by the major domestic taxing jurisdictions to which the Company is subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years are still subject to adjustment.
F-97
| 18. | Discontinued Operations |
During the year ended December 31, 2020, the Company disposed of its TNS and AWS subsidiaries (refer to Note 3, Disposals of Subsidiaries, for additional detail). The Company determined that both sales qualified for discontinued operations treatment.
As a result of the sales of TNS and AWS, the Company recorded a loss and gain on disposal of subsidiary of $
The assets and liabilities of TNS and AWS as of December 31, 2019 have been included within the consolidated balance sheet as current assets of discontinued operations, long-term assets of discontinued operations, and current liabilities of discontinued operations.
The results of operations of TNS and AWS have been included within loss on discontinued operations, net of tax on the statements of operations for the years ended December 31, 2020 and 2019.
The following table shows the balance sheet of the Company’s discontinued operations as of December 31, 2019.
| December 31, 2019 |
||||
| Current assets: | ||||
| Cash | $ | |||
| Accounts receivable, net of allowance of $ |
||||
| Contract assets | ||||
| Prepaid expenses and deposits | ||||
| Current assets of discontinued operations | $ | |||
| Long-term assets: | ||||
| Property and equipment, net of accumulated depreciation of $ |
$ | |||
| Goodwill | ||||
| Customer lists, net of accumulated amortization of $ |
||||
| Tradenames, net accumulated amortization of $ |
||||
| Operating lease right-of-use assets | ||||
| Other assets | ||||
| Long-term assets of discontinued operations | $ | |||
| Current liabilities: | ||||
| Accounts payable and accrued liabilities | $ | |||
| Contract liabilities | ||||
| Operating lease liabilities | ||||
| Current liabilities of discontinued operations | $ | |||
F-98
The following table shows the statement of operations for the Company’s discontinued operations for the years ended December 31, 2020 and 2019.
| For the years ended | ||||||||
| December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue | $ | $ | ||||||
| Operating expenses: | ||||||||
| Cost of revenues | ||||||||
| Depreciation and amortization | ||||||||
| Salaries and wages | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( |
) | ( |
) | ||||
| Other (expenses) income: | ||||||||
| Interest expense | ( |
) | ( |
) | ||||
| Loss on disposal of subsidiary | ( |
) | ||||||
| Loss on disposal of assets | ( |
) | ||||||
| Total other expense | ( |
) | ( |
) | ||||
| Pre-tax loss from operations | ( |
) | ( |
) | ||||
| Provision for income taxes | ||||||||
| Loss on discontinued operations, net of tax | $ | ( |
) | $ | ( |
) | ||
| 19. | Subsequent Events |
Issuance of shares pursuant to a GS Capital Partners, LLC convertible debenture
On January 11, 2021, the Company issued
On January 25, 2021, the Company issued
Amendments to convertible promissory notes
On January 14, 2021, the Company entered into agreements with Roger Ponder and Keith Hayter whereby the conversion price of their convertible promissory notes discussed in Note 6, Related Party Transactions was updated to $
Additional shares issued to FJ Vulis and Associates, LLC
Under the terms of the agreement described in Note 8, Convertible Debentures, the Company needed to issue additional shares of common stock to FJ Vulis and Associates, LLC in connection with the shares issued upon execution of the convertible promissory note.
On January 18, 2021, the Company issued an additional
F-99
Fifth Amendment to the Certificate of Designation of the Company’s Series A Preferred Stock
On January 27, 2021, the Company made the fifth amendment to the Certificate of Designation of its Series A preferred stock which lowered the fixed conversion price to $
Convertible promissory note, IQ Financial Inc.,
On January 27, 2021, the Company entered into and closed on a convertible note purchase agreement with IQ Financial Inc., pursuant to which the Company issued to IQ Financial Inc. a secured convertible promissory note in the aggregate principal amount of $
The interest on the outstanding principal due under the secured note accrues at a rate of
Assignment of convertible promissory note
On January 27, 2021, Barn 11 assigned its convertible promissory note to Cobra Equities SPV, LLC, who then obtained Barn 11’s right, title, and interest in the convertible promissory note, including the accrued interest owed on the note.
Proposed merger with High Wire
On January 27, 2021, the Company, HW Merger Sub, Inc., High Wire Networks, Inc. (“High Wire”) and the stockholders of High Wire (the “Stockholders”) entered into an Agreement and Plan of Merger (the “Agreement”) whereby the Stockholders agreed to sell to the Company all of the capital stock of High Wire. The closing of the transaction contemplated by the Agreement is subject to certain closing conditions, as set forth in the Agreement. Following such closing, HW will be a wholly-owned subsidiary of the Company.
In connection with the Company’s purchase of the capital stock of High Wire, the Company will issue to the Stockholders shares of a newly established Series D Preferred Stock of the Company, and a convertible note in the aggregate principal amount of $
The newly established Series D Preferred Stock will not be redeemable, will vote on an as-converted basis with the Company’s common stock, will have a liquidation preference of $
As of the date of this report, all but one of the closing conditions of the merger have been satisfied or waived by the parties. The lone remaining closing condition concerns a pending Paycheck Protection Program Loan Forgiveness Application submitted by one of the Company’s subsidiaries. Closing the merger after Small Business Administration (SBA) forgiveness prevents a change of control event under SBA rules that would jeopardize the forgiveness and impact the Company’s statement of operations for 2021. The Company submitted its forgiveness application in accordance with Paycheck Protection Program rules and expects forgiveness to be received in the second quarter of 2021.
Repayment of loan with Cedar Advance LLC
During January 2021, the Company made four weekly payments of $
F-100
Repayment of Crown Bridge Partners, LLC convertible promissory note
On January 29, 2021, the Company repaid the outstanding principal and accrued interest on the first tranche of the note with Crown Bridge Partners, LLC described in Note 8, Convertible Debentures. The total payment amount of $
Issuance of shares pursuant to an SCS, LLC convertible debenture
On February 1, 2021, the Company issued
Issuance of shares pursuant to an Efrat Investments LLC convertible debenture
On February 2, 2021, the Company issued
Issuance of Shares Pursuant to Conversion of Series A Preferred Stock
On February 2, 2021, the Company issued
On February 9, 2021, the Company issued
Issuance of shares pursuant to a Cobra Equities SPV, LLC convertible debenture
On February 1, 2021, the Company issued
On February 19, 2021, the Company issued
On March 15, 2021, the Company issued
Issuance of shares pursuant to a CCAG Investments, LLC warrant
On February 3, 2021, the Company issued
Issuance of shares pursuant to a FJ Vulis and Associates, LLC warrant
On February 9, 2021, the Company issued
Exchange agreement with Oasis Capital, LLC
On February 19, 2021, the Company entered into an exchange agreement with Oasis Capital, LLC which terminated the obligations of the August 29, 2019 agreement discussed in Note 15, Commitments and Contingencies.
In exchange for
F-101
Stock option awards
On February 23, 2021, the Company granted
Assignment of shares by WaveTech Group to the Company
As of the date of this report, WaveTech Group has assigned to the Company
F-102
No dealer, salesperson, or other person has been authorized to give any information or to make any representation not contained in this prospectus, and, if given or made, such information and representation should not be relied upon as having been authorized by us or the selling shareholder. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered by this prospectus in any jurisdiction or to any person to whom it is unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall under any circumstances create an implication that there has been no change in the facts set forth in this prospectus or in our affairs since the date hereof.
Until , all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold overallotments or subscriptions.
5,000,000 Shares
HIGH WIRE Networks, INC.
COMMON STOCK
PROSPECTUS
, 2022
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses expected to be incurred by us in connection with the issuance and distribution of the common stock registered hereby, all of which expenses, except for the Securities and Exchange Commission registration fee, are estimates:
| Description | Amount | |||
| Securities and Exchange Commission registration fee | $ | 106.61 | ||
| Accounting fees and expenses | $ | 7,000 | ||
| Legal fees and expenses | $ | 30,000 | ||
| Miscellaneous fees and expenses | $ | 393.39 | ||
| Total | $ | 37,500 | ||
| * | Estimated |
Item 14. Indemnification of Directors and Officers
Nevada Revised Statutes (“NRS”) Section 78.7502 provides that a corporation shall indemnify any director, officer, employee or agent of a corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with any the defense to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to Section 78.7502(1) or 78.7502(2), or in defense of any claim, issue or matter therein.
NRS 78.7502(1) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
NRS Section 78.7502(2) provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including amounts paid in settlement and attorneys’ fees actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable pursuant to NRS 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
NRS Section 78.747 provides that except as otherwise provided by specific statute, no director or officer of a corporation is individually liable for a debt or liability of the corporation, unless the director or officer acts as the alter ego of the corporation. The court as a matter of law must determine the question of whether a director or officer acts as the alter ego of a corporation.
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Our Articles of Incorporation and Bylaws provide that we shall indemnify our directors, officers, employees and agents to the full extent permitted by NRS, including in circumstances in which indemnification is otherwise discretionary under such law.
These indemnification provisions may be sufficiently broad to permit indemnification of our officers, directors and other corporate agents for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of our company pursuant to the foregoing provisions, or otherwise, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
We have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors or officers, or is or was serving at our request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other business against any liability asserted against the person or incurred by the person in any of these capacities, or arising out of the person’s fulfilling one of these capacities, and related expenses, whether or not we would have the power to indemnify the person against the claim under the provisions of the NRS. We do not currently maintain director and officer liability insurance on behalf of our director and officers; however, we intends to so purchase and maintain such insurance when economically feasible.
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Item 15. Recent Sales of Unregistered Securities
On January 14, 2019, we issued 100,000 shares of common stock upon the conversion of $9,746 of principal pursuant to a loan.
On January 14, 2019, we issued 110,742 shares of common stock upon the conversion of $10,000 of principal pursuant to a loan.
On January 28, 2019, we issued 200,000 shares of common stock upon the conversion of $15,552 of principal pursuant to a loan.
On February 1, 2019, we issued 2,859,230 shares of common stock to employees and directors of the Company in exchange for services for the Company. The shares vest over periods between 11 and 36 months.
On February 7, 2019, the holder of an assigned note converted $75,000 of the note and $7,499 of interest into 1,071,418 shares of our common stock.
On February 7, 2019, we issued 172,414 shares of common stock upon the conversion of $12,500 of principal pursuant to a loan.
On February 11, 2019, we issued 317,600 shares of common stock upon the conversion of $24,697 of principal pursuant to a loan.
On February 12, 2019, we issued 300,000 shares of common stock upon the conversion of $21,750 of principal pursuant to a loan.
On February 14, 2019, we issued 1,400,000 shares of common stock upon the conversion of $140,000 principal pursuant to a convertible promissory note.
On March 7, 2019, we issued 576,501 shares of common stock upon the conversion of $39,375 of principal pursuant to a loan.
On April 1, 2019, we issued 1,400,000 shares of our common stock to Virtual Capital upon the conversion of $70,000 of principal and $6,930 of accrued interest pursuant to a convertible debenture.
On April 25, 2019, we issued 1,499,960 shares of our common stock to Virtual Capital upon the conversion of $55,000 of principal and $19,998 of accrued interest pursuant to a convertible debenture.
On May 6, 2019, we issued 15,707,163 shares of our common stock to InterCloud upon the conversion of $3,192,924 of principal pursuant to a convertible debenture.
On May 17, 2019, we issued 200,000 shares of our common stock to Silverback Capital upon the conversion of $13,000 of principal pursuant to a convertible debenture.
On May 21, 2019, we issued 77,598 shares of our common stock to RDW Capital LLC upon the conversion of $5,750 of principal pursuant to a convertible debenture.
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.
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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.
On October 15, 2019, we issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 21, 2019, we issued 1,806 shares of common stock to Silverback Capital upon the conversion of $627 of accrued interest pursuant to a convertible debenture.
On October 21, 2019, we issued 1,112 shares of common stock to Dominion Capital upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On October 24, 2019, we issued 1,112 shares of common stock to M2B Funding upon the conversion of 10,000 shares of Series A preferred stock with a stated value of $1 per share.
On January 7, 2020, we issued 1,112 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 February 7, 2020, we issued 9,755 shares of our common stock to CCAG Investments, LLC upon the execution of a new convertible note.
On February 7, 2020, we issued 9,755 shares of our common stock to FJ Vulis and Associates, LLC upon the execution of a new convertible note.
On February 11, 2020, we issued 2,778 shares of our common stock to Dominion Capital upon the conversion of 25,000 shares of Series A preferred stock with a stated value of $1 per share.
On February 12, 2020, we issued 1,647 shares of our common stock to GS Capital Partners, LLC upon the conversion of $8,000 of principal and $323 of accrued interest pursuant a convertible debenture.
On February 18, 2020, we issued 1,082,731 shares of our common stock to holders of WaveTech GmbH post-closing notes upon the conversion of $8,507,557 of principal and accrued interest.
On March 13, 2020, we issued 11,212 shares of our common stock to GS Capital Partners, LLC upon the conversion of $15,000 of principal and $703 of accrued interest pursuant to a convertible debenture.
On April 1, 2020, we issued 5,715 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of principal pursuant to a convertible debenture.
On April 9, 2020, we issued 8,334 shares of our common stock to Dominion Capital upon the conversion of 25,000 shares of our Series A preferred stock with a stated value of $1 per share.
On April 13, 2020, we issued 9,196 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $16,000 of principal pursuant to a convertible debenture.
On April 16, 2020, we issued 8,621 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to a convertible debenture.
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On April 16, 2020, we issued 8,621 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to a convertible debenture.
On April 20, 2020, we issued 12,122 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to a convertible debenture.
On April 29, 2020, we issued 8,334 shares of our common stock to Dominion Capital upon the conversion of 25,000 shares of our Series A preferred stock with a stated value of $1 per share.
On April 30, 2020, we issued 58,434 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $15,000 of principal pursuant to a convertible debenture.
On April 30, 2020, we issued 302,121 shares of our common stock to GS Capital Partners, LLC upon the conversion of $100,000 of principal and $5,742 of accrued interest pursuant to a convertible debenture.
On May 12, 2020, we issued 38,956 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $10,000 of principal pursuant to a convertible debenture.
On May 13, 2020, we issued 77,912 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to a convertible debenture.
On May 20, 2020, we issued 113,379 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to a convertible debenture.
On June 9, 2020, we issued 62,359 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,000 of principal and $5,520 of accrued interest pursuant to a convertible debenture.
On June 9, 2020, we issued 71,132 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of principal pursuant to a convertible debenture.
On June 12, 2020, we issued 118,554 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to a convertible debenture.
On June 16, 2020, we issued 118,554 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $20,000 of principal pursuant to a convertible debenture.
On June 19, 2020, we issued 23,555 shares of our common stock to SCS, LLC upon the conversion of $4,000 of principal and $240 of accrued interest pursuant to a convertible debenture.
On June 22, 2020, we issued 85,000 shares of our common stock to M2B Funding upon the conversion of 17,000 shares of our Series A preferred stock with a stated value of $1 per share.
On June 25, 2020, we issued 75,000 shares of our common stock to Dominion Capital upon the conversion of 15,000 shares of our Series A preferred stock with a stated value of $1 per share.
On June 26, 2020, we issued 75,000 shares of our common stock to Dominion Capital upon the conversion of 15,000 shares of our Series A preferred stock with a stated value of $1 per share.
On June 26, 2020, we issued 118,777 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $16,500 of principal and $2,540 of accrued interest pursuant to a convertible debenture
On July 8, 2020, we issued 119,403 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $12,000 of principal pursuant to a convertible debenture.
On July 13, 2020, we issued 75,000 shares of our common stock to Dominion Capital upon the conversion of 15,000 shares of Series A preferred stock with a stated value of $1 per share.
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On July 13, 2020, we issued 42,400 shares of our common stock to SCS, LLC upon the conversion of $4,000 of principal and $240 of accrued interest pursuant to a convertible debenture.
On July 20, 2020, we issued 130,037 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $7,100 of principal pursuant to a convertible debenture.
On July 27, 2020, we issued 154,639 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $6,000 of principal pursuant to a convertible debenture.
On July 29, 2020, we issued 88,333 shares of our common stock to SCS, LLC upon the conversion of $4,000 of principal and $240 of accrued interest pursuant to a convertible debenture.
On August 4, 2020, we issued 153,631 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,500 of principal pursuant to a convertible debenture.
On August 11, 2020, we issued 153,203 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,500 of principal pursuant to a convertible debenture.
On August 11, 2020, we issued 300,000 shares of our common stock to CCAG Investments, LLC, pursuant to the terms of a convertible debenture.
On August 11, 2020, we issued 300,000 shares of our common stock to FJ Vulis and Associates, LLC, pursuant to the terms of a convertible debenture.
On August 13, 2020, we issued 159,218 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,700 of principal pursuant to a convertible debenture.
On August 17, 2020, we issued 204,447 shares of our common stock to GS Capital Partners, LLC upon the conversion of $6,296 of principal and $512 of accrued interest pursuant to a convertible debenture.
On August 17, 2020, we issued 158,055 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,200 of principal pursuant to a convertible debenture.
On August 20, 2020, we issued 159,509 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,200 of principal pursuant to a convertible debenture.
On August 24, 2020, we issued 236,963 shares of our common stock to Power Up Lending Group LTD. upon the conversion of $5,800 of principal and $1,925 of accrued interest pursuant to a convertible debenture.
On August 24, 2020, we issued 236,602 shares of our common stock to GS Capital Partners, LLC upon the conversion of $7,000 of principal and $580 of accrued interest pursuant to a convertible debenture.
On August 24, 2020, we issued 170,000 shares of our common stock to Crown Bridge Partners upon the conversion of $3,590 of principal and $1,000 of accrued interest pursuant to a convertible debenture.
On August 26, 2020, we issued 170,500 shares of our common stock to Crown Bridge Partners upon the conversion of $3,604 of principal and $1,000 of accrued interest pursuant to a convertible debenture.
On August 27, 2020, we issued 253,656 shares of our common stock to GS Capital Partners, LLC upon the conversion of $7,500 of principal and $626 of accrued interest pursuant to a convertible debenture.
On August 27, 2020, we issued 85,000 shares of our common stock to M2B Funding upon the conversion of 17,000 shares of Series A preferred stock with a stated value of $1 per share.
On September 1, 2020, we issued 150,000 shares of our common stock to Dominion Capital upon the conversion of 30,000 shares of Series A preferred stock with a stated value of $1 per share.
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On September 3, 2020, we issued 316,672 shares of our common stock to GS Capital Partners, LLC upon the conversion of $9,350 of principal and $795 of accrued interest pursuant to a convertible debenture.
On September 10, 2020, we issued 142,960 shares of our common stock to Dominion Capital upon the conversion of 28,592 shares of Series A preferred stock with a stated value of $1 per share.
On September 11, 2020, we issued 250,000 shares of our common stock to Crown Bridge Partners upon the conversion of $5,355 of principal and $1,000 of accrued interest pursuant to a convertible debenture.
On September 15, 2020, we issued 333,053 shares of our common stock to GS Capital Partners, LLC upon the conversion of $12,750 of principal and $1,118 of accrued interest pursuant to a convertible debenture.
On September 21, 2020, we issued 300,000 shares of our common stock to CCAG Investments, LLC, pursuant to the terms of a convertible debenture.
On September 21, 2020, we issued 300,000 shares of our common stock to FJ Vulis and Associates, LLC, pursuant to the terms of a convertible debenture.
On September 23, 2020, we issued 300,000 shares of our common stock to CCAG Investments, LLC, pursuant to the terms of a convertible debenture.
On September 23, 2020, we issued 300,000 shares of our common stock to FJ Vulis and Associates, LLC, pursuant to the terms of a convertible debenture.
On October 5, 2020, we issued 255,000 shares of our common stock to Crown Bridge Partners upon the conversion of $5,324 of principal and $1,000 of accrued interest pursuant to a convertible debenture.
On October 7, 2020, we issued 458,809 shares of our common stock to GS Capital Partners, LLC upon the conversion of $12,200 of principal and $1,129 of accrued interest pursuant to a convertible debenture.
On October 14, 2020, we issued 507,518 shares of our common stock to GS Capital Partners, LLC upon the conversion of $13,000 of principal and $1,222 of accrued interest pursuant to a convertible debenture.
On October 27, 2020, we issued 274,219 shares of our common stock to GS Capital Partners, LLC upon the conversion of $7,000 of principal and $678 of accrued interest pursuant to a convertible debenture.
On November 3, 2020, we issued 502,869 shares of our common stock to GS Capital Partners, LLC upon the conversion of $10,350 of principal and $844 of accrued interest pursuant to a convertible debenture.
On November 23, 2020, we issued 516,128 shares of our common stock to GS Capital Partners, LLC upon the conversion of $10,000 of principal and $859 of accrued interest pursuant to a convertible debenture.
On December 7, 2020, we issued 553,818 shares of our common stock to GS Capital Partners, LLC upon the conversion of $10,700 of principal and $952 of accrued interest pursuant to a convertible debenture.
On December 18, 2020, we issued 642,000 shares of our common stock to CCAG Investments, LLC, pursuant to the terms of a convertible debenture.
On December 21, 2020, we issued 565,834 shares of our common stock to GS Capital Partners, LLC upon the conversion of $16,950 of principal and $1,560 of accrued interest pursuant to a convertible debenture.
On December 31, 2020, we issued 551,562 shares of our common stock to GS Capital Partners, LLC upon the conversion of $20,500 of principal and $1,932 of accrued interest pursuant to a convertible debenture.
On January 11, 2021, we issued 668,787 shares of our common stock to GS Capital Partners, LLC upon the conversion of $29,000 of principal and $2,803 of accrued interest pursuant to a convertible debenture.
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On January 18, 2021, we issued 642,000 shares of our common stock to FJ Vulis and Associates, LLC, pursuant to the terms of a convertible debenture.
On January 25, 2021, we issued 694,707 shares of our common stock to GS Capital Partners, LLC upon the conversion of $25,500 of principal and $2,543 of accrued interest pursuant to a convertible debenture.
On January 28, 2021, we issued 397,272 shares of our common stock to M2B Funding upon the conversion of 38,734 shares of Series A preferred stock with a stated value of $1 per share.
On February 1, 2021, we issued 919,356 shares of our common stock to SCS, LLC upon the conversion of $39,030 of principal and $2,341 of accrued interest pursuant to a convertible debenture.
On February 1, 2021, we issued 760,234 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $26,000 of accrued interest pursuant to a convertible debenture.
On February 2, 2021, we issued 750,000 shares of our common stock to Efrat Investments LLC upon the conversion of $37,500 of principal pursuant to a convertible debenture.
On February 3, 2021, we issued 1,015,505 shares of our common stock to CCAG Investments, LLC upon the cashless exercise of a warrant.
On February 9, 2021, we issued 738,462 shares of our common stock to M2B Funding upon the conversion of 72,000 shares of Series A preferred stock with a stated value of $1 per share.
On February 9, 2021, we issued 989,587 shares of our common stock to FJ Vulis and Associates, LLC upon the cashless exercise of a warrant.
On February 19, 2021, we issued 809,524 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $136,000 of accrued interest pursuant to a convertible debenture.
On February 22, 2021, we issued 250,000 shares of our common stock to Oasis Capital, LLC pursuant to an exchange agreement.
On March 15, 2021, we issued 819,444 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $104,000 of principal and $73,000 of accrued interest pursuant to a convertible debenture.
On June 16, 2021, we issued 1,086,917 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $116,000 of principal and $2,300 of accrued interest pursuant to a convertible debenture.
On June 17, 2021, we issued 660,000 shares of our common stock to Efrat Investments LLC upon the conversion of $33,000 of principal pursuant to a convertible debenture.
On June 24, 2021, we issued 985,651 shares of our common stock to Dominion Capital upon the conversion of 96,101 shares of Series A preferred stock with a stated value of $1 per share.
On June 29, 2021, we issued 69,281 shares of our common stock to Pawn Funding upon the cashless exercise of a warrant.
On July 15, 2021, we issued 688,069 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $90,000 of principal and $1,320 of accrued interest pursuant to a convertible debenture.
On August 12, 2021, we issued 1,363,636 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $37,500 of assigned accrued interest pursuant to a convertible debenture.
On August 12, 2021, we issued 1,025,641 shares of our common stock to Dominion Capital upon the conversion of 100,000 shares of Series A preferred stock with a stated value of $1 per share.
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On September 22, 2021, we issued 1,500,000 shares of our common stock to Keith Hayter upon the conversion of $90,000 of principal pursuant to a related party convertible debenture.
On September 23, 2021, we issued 1,272,727 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $35,000 of assigned accrued interest pursuant to a convertible debenture.
On September 30, 2021, we issued 1,338,620 shares of our common stock to Efrat Investments LLC upon the cashless exercise of a warrant.
On October 6, 2021, we issued 1,761,527 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $36,000 of principal and $12,442 of accrued interest pursuant to a convertible debenture.
On October 27, 2021, we issued 1,254,545 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $33,000 of principal and $1,500 of accrued interest pursuant to a convertible debenture.
On November 4, 2021, we issued 1,181,818 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $32,500 of principal pursuant to a convertible debenture.
On November 8, 2021, we issued 1,833,333 shares of our common stock to Keith Hayter upon the conversion of $110,000 of principal pursuant to a related party convertible debenture.
On November 24, 2021, we issued 1,345,455 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $35,500 of principal and $1,500 of accrued interest pursuant to a convertible debenture.
On December 15, 2021, we issued 1,261,818 shares of our common stock to Cobra Equities SPV, LLC upon the conversion of $33,500 of principal and $1,200 of accrued interest pursuant to a convertible debenture.
On December 17, 2021, we issued 2,045,455 shares of our common stock to SCS Consulting LLC upon the conversion of 45 shares of Series D preferred stock with a stated value of $10,000 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.
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Item 16. – Exhibits and Financial Statement Schedules.
(a)
| (3) | Exhibits: |
| 107 | Filing fee table |
| ** | To be filed by amendment. |
| *** | Filed herewith. |
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Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers and controlling persons of the Company, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
| (1) | To file, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: |
| (i) | Include any prospectus required by Section 10(a)(3) of the Securities Act; | |
| (ii) | Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; and | |
| (iii) | Include any additional or changed information on the plan of distribution. |
| (2) | For determining liability under the Securities Act, the Company will treat each such post-effective amendment as a new Registration Statement of the securities offered, and the offering of such securities at that time to be the initial bona fide offering. | |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | |
| (4) | For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new Registration Statement for the securities offered in the Registration Statement, and that offering of the securities at that time as the initial bona fide offering of those securities. | |
| (5) | For determining liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | |
| (6) | For determining liability under the Securities Act, if securities are offered or sold to a purchaser by means of any of the following communications, the Company will be a seller to such purchaser and will be considered to offer or sell such securities to such purchaser: |
| (i) | Any preliminary prospectus or prospectus relating to the offering required to be filed pursuant to Rule 424; | |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the Company or used or referred to by the Company; | |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the Company or its securities provided by or on behalf of the Company; and | |
| (iv) | Any other communication that is an offer in the offering made by the Company to a purchaser. |
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it met all the requirements of filing on Form S-1 and authorized this Registration Statement to be signed on its behalf by the undersigned, in Boca Raton, Florida, on February 8, 2022.
| HIGH WIRE NETWORKS, INC. | ||
| By: | /s/ Mark W. Porter | |
| Mark W. Porter | ||
| Chief Executive Officer | ||
In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated.
| Signature | Title | Date | ||
| /s/ Mark W. Porter | Chief Executive Officer | February 8, 2022 | ||
| Mark W. Porter | (Principal Executive Officer) | |||
| /s/ Daniel J. Sullivan | Chief Financial Officer | February 8, 2022 | ||
| Daniel J. Sullivan | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Stephen LaMarche | Director | February 8, 2022 | ||
| Stephen LaMarche | ||||
| /s/ Peter Kruse | Director | February 8, 2022 | ||
| Peter Kruse |
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