UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

Or

 

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

 

For the transition period from             to               

 

Commission File Number 000-53461

 

SPECTRUM GLOBAL SOLUTIONS, INC. 

(Exact name of registrant as specified in its charter)

 

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

 

407-512-9102

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

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

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☒
Emerging growth company	☐

 

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

 

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

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

 

301,401,440 common shares issued and outstanding as of August 17, 2018

 

 

 

Table of Contents

 

PART I – FINANCIAL INFORMATION		1
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II – OTHER INFORMATION		34
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
SIGNATURES		35

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The unaudited interim consolidated financial statements of our company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars, unless otherwise noted.

  

  

SPECTRUM GLOBAL SOLUTIONS, INC.

 

	Page Number
Condensed Consolidated balance sheets as of June 30, 2018 (unaudited) and December 31, 2017	3
Condensed Consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (unaudited)	4
Condensed Consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 (unaudited)	5
Notes to unaudited condensed consolidated financial statements	6 – 26

  

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated balance sheets

(Expressed in U.S. dollars)

 

		June 30,				December 31,
		2018				2017
		$				$
		(unaudited)
ASSETS
Current assets
Cash			180,229				28,893
Accounts receivable (net of allowance for doubtful accounts of $550,971 and $54,482, respectively)			8,160,183				1,473,377
Prepaid expenses and deposits			12,500				41,063
Total current assets			8,352,912				1,543,333
Property and equipment (net of accumulated depreciation of $1,009,003 and $999,769, respectively)			67,494				61,159
Goodwill			1,834,856				1,503,633
Customer lists (net of accumulated amortization of $123,655 and $65,269, respectively)			913,893				836,279
Tradenames (net of accumulated amortization of $78,586 and $41,600, respectively)			1,127,019				533,005
Other assets			29,159				27,931
Total assets			12,325,333				4,505,340
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued liabilities			4,765,283				2,368,652
Due to related parties			11,351				159,782
Loans payable			411,257				363,081
Loans payable to related parties			233,858				148,858
Convertible debentures (net of discount of $2,843,924 and $573,776, respectively)			4,179,662				1,913,224
Factor financing			2,730,993				-
Derivative liability			7,397,424				4,749,712
Warrant liability			100,000				-
Contingent liability			-				793,893
Preferred stock liability:
Preferred stock authorized: 8,000,000 Series A preferred stock, par value $0.00001 Issued and outstanding: 450,846 (December 31, 2017 – 1,262,945) shares			-				435,138
Total current liabilities			19,829,828				10,932,340
Mezzanine equity
Preferred stock authorized: 8,000,000 Series A preferred stock, par value $0.00001 Issued and outstanding: 450,846 (December 31, 2017 – 1,262,945) shares			89,012				-
Preferred stock authorized: 1,000 Series B stock, stated value $3,500 Issued and outstanding: 1,000 (December 31, 2017 – 0) shares			484,530				-
Stockholders’ deficit
Common stock Authorized: 750,000,000 shares, par value $0.00001 Issued 285,788,741 (December 32, 2017- 423,027,290); Outstanding: 161,537,231 (December 31, 2017 – 423,027,290)			2,858				4,233
Additional paid-in capital			17,575,434				15,905,400
Treasury stock, at cost			(277,436	)			-
Common stock subscribed			74,742				74,742
Subscriptions receivable			(222,964	)			-
Accumulated deficit			(25,230,671	)			(22,322,725	)
Total Spectrum Global Solutions, Inc. stockholders’ deficit			(7,504,495	)			(6,338,350	)
Non-controlling interest			-				(88,650	)
Total stockholders’ deficit			(7,504,495	)			(6,427,000	)
Total liabilities and stockholders’ deficit			12,325,333				4,505,340

  

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

 

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated statements of operations

(Expressed in U.S. dollars)

(Unaudited)

 

		Three Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,				Six Months Ended June 30,
		2018 $				2017 $				2018 $				2017 $
Revenue			10,964,122				2,230,249				15,291,886				2,230,249
Operating expenses
Cost of revenues			9,371,989				1,600,349				13,156,509				1,600,349
Depreciation and amortization			56,773				58,660				104,606				64,263
General and administrative			1,500,065				709,542				2,161,363				711,663
Salaries & wages			1,317,904				4,089,784				1,895,508				4,221,933
Total operating expenses			12,246,731				6,458,335				17,317,986				6,598,208
Loss from operations			(1,282,609	)			(4,228,086	)			(2,026,100	)			(4,367,959	)
Other income (expense)
Gain (loss) on settlement of debt			12,412				(8,802	)			574,375				(14,202	)
Gain on extinguishment of preferred stock liability			2,999				–				290,814				–
Loss on disposal of assets			–				–				–				(2,067	)
Amortization of discounts on convertible debentures			(887,157	)			(249,700	)			(1,541,244	)			(310,828	)
Gain (loss) on change in fair value of derivatives			(982,510	)			(3,579,737	)			(175,889	)			(4,207,715	)
Interest expense			(329,118	)			(38,500	)			(508,443	)			(141,148	)
Gain on disposal of subsidiaries			577,299				–				577,299				–
Impairment loss			–				–				–				(103,480	)
Total other income expense			(1,606,075	)			(3,876,739	)			(783,088	)			(4,779,440	)
Net income (loss) for the period			(2,888,684	)			(8,104,825	)			(2,809,188	)			(9,147,399	)
Less: net loss attributable to the non-controlling interest			(1,344	)			(4,889	)			53,429				(1,596	)
Net income (loss) attributable to Spectrum Global Solutions, Inc.			(2,890,028	)			(8,109,714	)			(2,755,759	)			(9,148,995	)
Less: Deemed dividend- Series A preferred stock redemption			(152,187	)			–				(152,187	)			–
Net income (loss) attributable to common shareholders			(3,042,215	)			(8,109,714	)			(2,907,946	)			(9,148,995	)
Net income (loss) per share attributable to Spectrum Global Solutions, Inc. common shareholders: Basic and diluted			(0.01	)			(0.04	)			(0.01	)			(0.06	)
Weighted average number of shares outstanding used in the calculation of net loss attributable to Spectrum Global Solutions, Inc. per common share: Basic and diluted			319,875,059				199,742,240				382,380,400				162,294,349

   

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

 

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Condensed consolidated statements of cash flows

(Expressed in U.S. dollars)

(Unaudited)

 

		Six Months Ended June 30,				Six Months Ended June 30,
		2018 $				2017 $
Operating activities
Net loss			(2,961,375	)			(9,147,399	)
Adjustments to reconcile net loss to net cash used in operating activities:
Loss (gain) on change in fair value of derivative liability			175,889				4,207,715
Amortization of discounts on convertible debentures			1,541,244				310,828
Depreciation and amortization			104,606				64,263
Foreign exchange loss (gain)			(4,721	)			13,735
Shares issued for services			1,151,739				3,976,068
Interest related to cash redemption premium on convertible notes			–				71,881
Gain on disposition of subsidiary			(577,299	)			–
Derivative warrants issued for services			68,536				–
Impairment loss			–				103,480
(Gain) loss on settlement of debt			(574,375	)			14,202
Gain on extinguishment of preferred stock liability			(290,814	)			–
Deemed dividend- Series A preferred stock redemption			152,187				–
Loss on disposal of assets			–				2,067
Changes in operating assets and liabilities:
Accounts receivable			(1,543,531	)			(51,379	)
Prepaid expenses and deposits			28,433				(88,964	)
Accounts payable and accrued liabilities			1,246,778				(65,125	)
Other assets			5,572				(1,445	)
Due to related parties			(42,872	)			96,154
Net cash used in operating activities			(1,520,003	)			(493,919	)
Investing activities
Cash received upon acquisition of subsidiary			191,744				115,112
Cash disposed upon disposition of subsidiary			(328	)			–
Purchase of equipment			(15,569	)			–
Net cash provided by(used in) investing activities			175,847				115,112
Financing activities
Cash paid for lease obligation			–				(7,911	)
Repayment of loan payable			(1,723,000	)			–
Proceeds from notes payable			1,133,493				282,801
Proceeds from related party loans			85,000				–
Proceeds from issuance of convertible debentures			2,280,959				431,839
Repurchase of preferred shares			(280,960	)			–
Net cash provided by financing activities			1,495,492				706,729
Change in cash			151,336				327,922
Cash, beginning of period			28,893				1,401
Cash, end of period			180,229				329,323
Non-cash investing and financing activities:
Common stock issued to settle accounts payable and debt			2,640				20,400
Common stock issued for conversion of notes payable			178,000				49,925
Net assets acquired in ADEX Acquisition			4,332,577				–
Net assets acquired in AW Solutions Acquisition			–				2,360,675
Non-controlling interest			–				(339,309	)
Goodwill			331,223				1,503,634
Warrant issued for non-controlling interest			133,256				–
Series A preferred stock issued to settle notes payable and accrued interest			406,560				–
Preferred stock issued to settle derivative liabilities			291,064				–
Debt issuance cost			247,500				–
Original issue discounts			496,234				72,444
Original debt discount against derivative liability			3,267,959				1,860,483
Supplemental disclosures:
Interest paid			338,235				2,709
Income taxes paid			–				–

 

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

 

SPECTRUM GLOBAL SOLUTIONS, INC.

Notes to the unaudited condensed consolidated financial statements

June 30, 2018

(Expressed in U.S. dollars)

 

1.	Organization and Significant Accounting Policies

 

a.

Organization and nature of operations

 

Spectrum Global Solutions, Inc. (the “Company”) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company continued its corporate jurisdiction out of the State of Nevada and into the province of British Columbia, Canada. On April 25, 2017, the Company entered into and closed on an Asset Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased 80.1% of the assets associated with InterCloud’s “AW Solutions” business. After the acquisition of AW Solutions, the Company provides professional, multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry. On November 15, 2017, the Company changed its name to “Spectrum Global Solutions, Inc.” On February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to the Company of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by the Company.

 

On February 6, 2018, the Company entered into and closed on an Stock Purchase Agreement with InterCloud Systems, Inc. (“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased all of the issued and outstanding capital stock and membership interests of ADEX Corp. (“ADEX”). The Company closed and completed the acquisition on February 27, 2018. After the acquisition of ADEX, the Company provides professional, multi-service line, telecommunications infrastructure, outsource services and staffing solutions the wireless and wireline industry. On May 18, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation, Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives Ltd. to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned entities assumed all liabilities and obligations with respect to such entities.

 

b.

Condensed financial statements

 

The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and accompanying notes filed with the U.S. Securities and Exchange Commission in the Company’s Transition Report on Form 10-K for the seven month period from June 1, 2017 to December 31, 2017. In the opinion of management, the accompanying financial statements reflect all adjustments of a recurring nature considered necessary to present fairly the Company’s financial position and the results of its operations and its cash flows for the periods shown.

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ materially from those estimates. The results of operations and cash flows for the periods shown are not necessarily indicative of the results to be expected for the full year.

 

c.

Going concern

 

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 Company has yet to acquire commercially exploitable energy related technology and is unlikely to generate earnings in the immediate or foreseeable future. The recently acquired AW Solutions and ADEX business has also incurred losses and experienced negative cash flows from operations during its most recent fiscal years. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment of profitable operations. As of June 30, 2018, the Company has an accumulated deficit of $25,230,671, and a working capital deficit of $11,476,916. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

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

 

 

d.

Basis of Presentation/Principles of Consolidation

 

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, AW Solutions, Inc. (from the date of acquisition, April 25, 2017), Tropical Communications, Inc. (from the date of acquisition, April 25, 2017), AW Solutions Puerto Rico, LLC. (from the date of acquisition, April 25, 2017), ADEX Corp., ADEX Puerto Rico, LLC and ADEXCOMM (from the date of acquisition, February 27, 2018). All the subsidiaries are wholly-owned. As described in Note 4, during the six months ended June 30, 2018, the Company disposed of the following subsidiaries; Carbon Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., and Mantra Wind Inc. All inter-company balances and transactions have been eliminated.

  

e.

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.

 

f.

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.

 

g.

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. At June 30, 2018 and December 31, 2017, unbilled receivables totaled $1,988,543 and $11,429, respectively, and are included in accounts receivable. Management reviews a customer’s credit history before extending credit. The Company maintains an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts at June 30, 2018 and December 31, 2017 was $550,971 and $54,482, respectively.

 

h.

Property and Equipment

 

Property and equipment are stated at cost. The Company depreciates the cost of property and equipment over their estimated useful lives at the following annual rates:

 

	Automotive		3-5 years straight-line basis
	Computer equipment and software		3-7 years straight-line basis
	Leasehold improvements		5 years straight-line basis
	Office equipment and furniture		5 years straight-line basis
	Research equipment		5 years straight-line basis

 

i.

Goodwill

 

Goodwill was generated through the acquisition of AW Solutions and ADEX as the total consideration paid exceeded the fair value of the net assets acquired.

 

The Company tests its goodwill for impairment at least annually on December 31^st and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial results.

 

 

The Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital used to discount future cash flows to their present value. There were no impairment charges during the six months ended June 30, 2018.

 

j.

Intangible Assets

 

At June 30, 2018 and December 31, 2017, definite-lived intangible assets primarily consist of non-compete agreements, tradenames and customer relationships which are being amortized over their estimated useful lives ranging from 1-20 years.

 

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

 

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

 

k.

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.

 

l.

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.

 

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 exchange gains or losses are recognized in income.

 

m.

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 its 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 2017. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of the Company’s, or its subsidiaries’, income tax returns for the open taxation years noted above.

 

Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.

 

The Company follows the guidance set forth within ASC Topic 740, “Income Taxes” (“ASC Topic 740”) which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.

 

The Company received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014 in the amount of $166,084 plus penalties and interest of $96,764 for a total obligation due of $262,848. This tax assessment is included in accrued expenses at June 30, 2018 and December 31, 2017.

 

n.

Revenue Recognition

 

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), to update the financial reporting requirements for revenue recognition. Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. This guidance became effective for the Company beginning on January 1, 2018, and entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. The Company adopted this standard using the modified retrospective approach on January 1, 2018.

 

In preparation for adoption of the standard, the Company evaluated each of the five steps in Topic 606, which are as follows: 1) Identify the contract with the customer; 2) Identify the performance obligations in the contract; 3) Determine the transaction price; 4) Allocate the transaction price to the performance obligations; and 5) Recognize revenue when (or as) performance obligations are satisfied.

 

Reported revenue will not be affected materially in any period due to the adoption of ASC Topic 606 because: (1) the Company expects to identify similar performance obligations under Topic 606 as compared with deliverables and separate units of account previously identified; (2) the Company has determined the transaction price to be consistent; and (3) the Company records revenue at the same point in time, upon delivery of services, under both ASC Topic 605 and Topic 606, as applicable under the terms of the contract with the customer. Additionally, the Company does not expect the accounting for fulfillment costs or costs incurred to obtain a contract to be affected materially in any period due to the adoption of Topic 606.

 

There are also certain considerations related to accounting policies, business processes and internal control over financial reporting that are associated with implementing Topic 606. The Company has evaluated its policies, processes, and control framework for revenue recognition, and identified and implemented the changes needed in response to the new guidance.

 

Lastly, disclosure requirements under the new guidance in Topic 606 have been significantly expanded in comparison to the disclosure requirements under the current guidance, including disclosures related to disaggregation of revenue into appropriate categories, performance obligations, the judgments made in revenue recognition determinations, adjustments to revenue which relate to activities from previous quarters or years, any significant reversals of revenue, and costs to obtain or fulfill contracts.

 

 

The infrastructure and professional services revenues are derived from contracts to provide technical engineering services along with contracting services to commercial and governmental customers. The Company’s service contracts generally require specific tasks or services that the Company must perform under the contract. These contracts were accounted for under the proportional performance method. Under this method, revenue was recognized in proportion to the value provided to the customer for each project as of each reporting date. Direct costs incurred related to performance of the task or service are deferred and recorded as prepaid expense and are expensed when the related revenue is recognized.

 

The Company also generates revenue from service contracts with certain customers. These contracts are accounted for under the proportional performance method. Under this method, revenue is recognized in proportion to the value provided to the customer for each project as of each reporting date.

 

The Company records unbilled receivables for revenues earned, but not yet billed.

  

o.

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.

 

p.

Research and Development Costs

 

Research and development costs are expensed as incurred.

 

n.

Stock-based Compensation

 

The Company records stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation”, using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.

 

The Company applies ASC 505-50, “Equity-Based Payments to Non-Employees” with respect to options and warrants issued to non-employees which requires the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

 

The Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated statement of operations over the requisite service period.

 

q.

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 earnings 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 June 30, 2018, the Company had 2,373,127,808 (June 30, 2017 – 1,622,789,926) common stock equivalents outstanding.

 

r.

Comprehensive Loss

 

ASC 220, “Comprehensive Income,” establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As of June 30, 2018 and 2017, the Company has no items that represent a comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the consolidated financial statements.

 

 

s.

Recent Accounting Pronouncements

 

On January 1, 2018, we adopted the new accounting standard ASC 606, Revenue from Contracts with Customers, and all of the related amendments (“new revenue standard”) as discussed in Revenue Recognition accounting policy description.

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or result of operations.

 

t.

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 six months ended June 30, 2018, four customers accounted for 22%, 21%, 17% and 13%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 22%, 16%, 13% and 12%, respectively, of trade accounts receivable as of June 30, 2018. For the six months ended June 30, 2017, two customers accounted for 49% and 8%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 38% and 10%, respectively, of trade accounts receivable as of June 30, 2017.

 

The Company’s customers are primarily located within the domestic United States of America and Puerto Rico. Revenues generated within the domestic United States of America accounted for approximately 93% of consolidated revenues for the six month period ended June 30, 2018 (84% - 2017). Revenues generated from customers in Puerto Rico accounted for approximately 7% of consolidated revenues for the six month period ended June 30, 2018 (16% - 2017).

 

u.

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 six months ended June 30, 2018 and 2017. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.

 

Our financial assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2018 and December 31, 2017, consisted of the following:

 

Total fair value at June 30, 2018 $

Quoted prices in active markets (Level 1) $

Significant other observable inputs (Level 2) $

Significant unobservable inputs (Level 3) $

Description:

Derivative liability (1)

7,397,424

–

–

7,397,424

 

 

Total fair value at December 31, 2017 $

Quoted prices in active markets (Level 1) $

Significant other observable inputs (Level 2) $

Significant unobservable inputs (Level 3) $

Description:

Derivative liability (1)

4,749,712

–

–

4,749,712

 

(1)

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

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 11 for additional information.

 

v.

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 June 30, 2018 and December 31, 2017, the Company had a $7,497,424 and $4,749,712 derivative liability, respectively.

 

w.

Reclassifications

 

Certain prior period amounts have been reclassified to conform to current presentation.

 

2.	ADEX Acquisition

 

On February 6, 2018, pursuant to the Stock Purchase Agreement with InterCloud, the Company purchased all of the issued and outstanding capital stock and membership interests of ADEX. The Company closed and completed the acquisition on February 27, 2018.

 

The purchase price paid by the Company for the assets includes the assumption of certain liabilities and contracts associated with ADEX, $3,000,000 in cash, of which $2,500,000 was paid at closing and $500,000 was be retained by the Company for 90 days in order to satisfy any outstanding liabilities of ADEX incurred prior to the closing date, and the issuance to InterCloud of a one-year convertible promissory note in the aggregate principal amount of $2,000,000 (the “ADEX Note”).

 

The Company has performed a valuation analysis of the fair market value of ADEX’s assets and liabilities. The following table summarizes the allocation of the preliminary purchase price as of the acquisition date:

 

	Purchase Price
	$2,000,000 Convertible Note		$	3,663,800
	Cash			2,500,000
	Cash retained for 90 days			500,000
	Total Purchase Price		$	4,663,800
	Allocation of Purchase Price
	Cash		$	191,744
	Accounts receivable			5,143,749
	Other assets			6,800
	Tradenames			631,000
	Customer lists			136,000
	Accounts payable			(136,684	)
	Accrued expenses			(1,627,116	)
	Other current liabilities			(12,916	)
	Goodwill			331,223
	Net assets acquired		$	4,663,800

 

 

The following table summarizes our consolidated results of operations for the six months ended June 30, 2018, as well as unaudited pro forma consolidated results of operations as though the acquisition had occurred on January 1, 2017:

 

			June 30, 2018 $								June 30, 2017 $
			As Reported				Pro Forma				As Reported				Pro Forma
	Net Sales			15,291,886				18,856,657				2,230,249				7,037,463
	Net Loss			(2,907,946	)			(2,762,710	)			(9,148,995	)			(12,642,097	)
	Earnings per common share:
	Basic			(0.01	)			(0.01	)			(0.06	)			(0.08	)
	Diluted			(0.01	)			(0.01	)			(0.06	)			(0.08	)

  

3.	AWS Acquisition

 

On April 25, 2017, pursuant to the Asset Purchase Agreement with InterCloud, the Company purchased, 80.1% of the assets associated with InterCloud’s “AW Solutions” business (“AWS”) including, but not limited to, fixed assets, real property, intellectual property, and accounts receivables (collectively, the “Assets”).

 

The purchase price paid by the Company for the Assets includes the assumption of certain liabilities and contracts associated with AWS, the issuance to InterCloud of a convertible promissory note in the aggregate principal amount of $2,000,000 (as described in Note 10(j)), and a potential earn-out after three months in an amount equal to the lesser of (i) three times EBITDA (as defined in the Asset Purchase Agreement) of the business for the six-month period immediately following the closing and (ii) $1,500,000. During the seven months ended December 31, 2017, InterCloud agreed to reduce the contingent liability to $793,893, as a result, the Company recorded a $615,518 gain on settlement of debt. The Company also issued InterCloud the convertible note described in Note 10(f) with a principal amount of $793,894 to settle a contingent liability of $793,893.

 

On February 14, 2018, the Company entered into an agreement with InterCloud providing for the sale, transfer, conveyance and delivery to the Company of the remaining 19.9% of the assets associated with InterCloud’s AWS business not already purchased by the Company (collectively, the “Remaining Assets”). The acquisition of the initial 80.1% of AWS took place during the fiscal year ended December 31, 2017. As consideration for the Remaining Assets, the Company issued InterCloud a common stock purchase warrant that entitles InterCloud to purchase a number of shares equal to 4% of the number of shares of the Company’s common stock outstanding at the time of exercise at an exercise price of $0.006 per share. The warrant has a three year term.

 

The Company recorded the fair value of the warrant of $259,000, reduced the carrying value of the AWS non-controlling interest from $133,256 to $0 and recorded the difference of $125,744 as additional paid in capital.

 

4.	Disposition of Subsidiaries

 

During the six months ended June 30, 2018, the Company transferred all of its ownership interests in and to its subsidiaries Carbon Commodity Corporation, Mantra China Limited, Mantra Media Corp., Mantra NextGen Power Inc., Mantra Wind Inc., Climate ESCO Ltd. and Mantra Energy Alternatives Ltd. (collectively the Mantra Venture Group) to an entity controlled by the Company’s former Chief Executive Officer, Larry Kristof. The new owner of the aforementioned entities assumed all liabilities and obligations with respect to such entities and the Company will have no further involvement with the deconsolidated subsidiaries.

 

The Company recorded a gain on the disposal of the Mantra Venture Group of $577,299. The Mantra Venture Group was essentially inactive and its operations were immaterial to the rest of the Company’s operations.

 

 

5.	Property and Equipment

 

			June 30, 2018 $				December 31, 2017 $
	Computers and office equipment			324,219				308,649
	Equipment			382,139				382,140
	Research equipment			143,129				143,129
	Software			177,073				177,073
	Vehicles			94,356				94,356
	Total			1,120,916				1,105,347
	Less: impairment			(44,419	)			(44,419	)
	Less: accumulated depreciation			(1,009,003	)			(999,769	)
	Equipment, Net			67,494				61,159

 

During the six months ended June 30, 2018, the Company recorded $9,234 (2017 - $32,083) of depreciation expense.

 

6.	Intangible Assets

 

			Cost $				Accumulated amortization $				Impairment $				June 30, 2018 Net carrying value $				December 31, 2017 Net carrying value $
	Customer relationship and lists			1,037,548				78,586				–				913,893				836,279
	Trade names			1,205,605				123,655				–				1,127,019				533,005
				2,243,153				202,241				–				2,040,912				1,369,284

 

During the six months ended June 30, 2018, the Company recorded $95,372 (2017 - $28,489) of amortization expense.

 

Estimated Future Amortization Expense:

 

			$
	For year ending December 31, 2018			103,694
	For year ending December 31, 2019			207,387
	For year ending December 31, 2020			207,387
	For year ending December 31, 2021			207,387
	For year ending December 31, 2022			207,387
	For year ending December 31, 2023			207,387
	For year ending December 31, 2024			207,387
	For year ending December 31, 2025			191,193
	For year ending December 31, 2026			149,591
	For year ending December 31, 2027			92,432

 

7.	Related Party Transactions

   

a)

As of June 30, 2018, the Company owes a total of $11,351 (December 31, 2017 - $109,978) to the former President of the Company and his spouse, and a company controlled by the former President of the Company which is non-interest bearing, unsecured, and due on demand.

     

b)

On November 30, 2017, the Company received $18,858 pursuant to a promissory note issued to the Chief Executive Officer of the Company. The note issued is unsecured, due on November 30, 2018 and bears interest at a rate of 8% per annum. At June 30, 2018, the amount of $18,858 was owed.

 

c)

On November 30, 2017, the Company received $130,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, due on November 30, 2018 and bears interest at a rate of 8% per annum. At June 30, 2018, the amount of $130,000 was owed.

 

 

d)

On April 13, the Company received $85,000 pursuant to a promissory note issued to the President of the Company. The note issued is unsecured, due on April 10, 2019 and bears interest at a rate of 8% per annum. At June 30, 2018, the amount of $85,000 was owed.

 

e)

On April 23, 2018, each of Roger Ponder, the Company’s Chief Executive Officer, and Keith Hayter, the Company’s President, exchanged certain shares of common stock of the Company held by each of them for shares of the newly designated Series B Preferred Stock. Mr. Ponder exchanged 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter exchanged 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock.  The Company recorded the fair value of the Series B Preferred Stock of $517,547 as mezzanine equity and reduced common shares and additional paid in capital an equal amount.

 

8.	Loans Payable and Factor Financing

 

(a)

As of June 30, 2018, the amount of $41,361 (Cdn$53,300) (December 31, 2017 - $50,349 (Cdn$63,300)) is owed to a non-related party which is non-interest bearing, unsecured, and due on demand. A loan of $7,760 (Cdn$10,000) was owed by a subsidiary of the Company at December 31, 2017. The subsidiary was disposed of during the six months ended June 30, 2018.

 

(b)

As of December 31, 2017, $17,500 was owed by a subsidiary of the Company to a non-related party which was non-interest bearing, unsecured, and due on demand. During the six months ended June 30, 2018, the Company disposed of the subsidiary.

  

(c)

As of June 30, 2018, the amounts of $7,500 and $2,636 (Cdn$3,400)  (December 31, 2017 - $7,500 and $29,430 (Cdn$33,600)) are owed to a non-related party which are non-interest bearing, unsecured, and due on demand. The loan of $28,712 (Cdn$37,000) was owed by a subsidiary of the Company at December 31, 2017. The subsidiary was disposed of during the six months ended June 30, 2018.

 

(d)

As of December 31, 2017, the amount of $4,490 was owed by a subsidiary to a non-related party which is non-interest bearing, unsecured, and due on demand. During the six months ended June 30, 2018, the Company disposed of the subsidiary.

 

(e)

As of December 31, 2017, $14,370 (Cdn$18,066) was owed by a subsidiary to a non-related party. The amount owing is non-interest bearing, unsecured, and due on demand. During the six months ended June 30, 2018, the Company disposed of the subsidiary.

 

(f)

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

 

(g)

On August 4, 2015, the Company borrowed $50,000 pursuant to a promissory note. The note was due on September 4, 2015. The note bears interest at 120% per annum prior September 4, 2015, and at 180% per annum after September 4, 2015. The holder of the note was also granted the rights to buy 100,000 shares of the Company’s common stock at a price of $0.15 per share until August 4, 2017. During the year ended May 31, 2016, the Company repaid the $50,000 note and $1,200 of accrued interest remains owing. At June 30, 2018, the amount of $1,200 was owed.

 

(h)

As of December 31, 2017, the amounts of $15,000 and $43,361 (Cdn$55,878) was owed to non-related parties.  A loan of $35,601 (Cdn$45,878) owed by a subsidiary of the Company at December 31, 2017, and the subsidiary was disposed of during the six months ended June 30, 2018.  As of June 30, 2018, and December 31, 2017, the amounts of $15,000 and $7,760 (Cdn$10,000) was owed to non-related parties.  These advances are non-interest bearing, unsecured, and due on demand.

 

(i)

On April 12, 2017, received $12,000 pursuant to a promissory note. The note issued is unsecured, due on demand and bears interest at a rate of 10% per annum. At June 30, 2018, the amount of $12,000 was owed.

 

(j)

On June 27, 2017, received $250,200 net of a $27,800 Original Issue Discount pursuant to a $278,000 promissory note. The note issued is unsecured, due on demand and bears interest at a rate of 12% per annum. The Company also issued a warrant with a term of three years to purchase up to 50,000,000 shares of common stock of the Company at an exercise price of $0.005 per share. The fair value of the warrants of $332,966 resulted in a discount to the note payable of $250,200 and the recognition of a loss on derivatives of $82,766. During the period ended December 31, 2017, the Company repaid $160,000 of the loan and recorded accretion of $278,000, increasing the carrying value of the note to $118,000. During the six month period ended June 30, 2018, the Company repaid the remaining balance outstanding.

 

 

(k)

On February 27, 2018, the Company, and its subsidiaries entered into a Business Loan and Security Agreement with Super G Capital, LLC, a Delaware limited liability company (“Super G”), as lender and received a term loan from Super G in an amount equal to $1,150,000, a portion of the proceeds of which were used to fund the Acquisition.

 

Borrowings under the Super G Loan Agreement are to be repaid in semi-monthly installments (including interest) of $43,125 for 36 months starting on March 16, 2018, for total payments of $1,552,500. The total interest charge is expected to total $402,500 and the company paid additional finance fees of $247,500. The obligations of the Company under the Super G Loan Agreement are secured by a lien on substantially all of the assets of the Company and its subsidiaries, including accounts receivable, intellectual property, equipment and other personal property. The Super G Loan Agreement contains certain restrictions and covenants and requires the Company to comply with certain financial covenants, including maintaining unrestricted cash and minimum levels of revenue and adjusted EBITDA.

 

The Super G Loan Agreement contains customary events of default, including failure to pay any principal or interest when due, failure to perform or observe covenants, breaches of representations and warranties, certain cross defaults, certain bankruptcy related events, monetary judgments defaults and failure to own 100% of the Company’s subsidiaries. Upon the occurrence of an event of default, the outstanding obligations may be accelerated and become immediately due and payable. During the period ended June 30, 2018, the Company repaid the loan and recorded accretion equal to the debt discount of $477,500.

 

(l)

The Company owed Intercloud $500,000 of the acquisition price of ADEX (described in Note 3) which was retained by the Company in order to satisfy outstanding liabilities acquired by ADEX. During the six month period ended June 30, 2018, the Company repaid $225,000 of this amount, leaving an ending balance of $275,000

 

(m)

On February 27, 2018, a subsidiary of the Company, ADEX entered into a Purchase and Sale Agreement with Prestige Capital Corporation (“Prestige”) pursuant to which ADEX agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owing to ADEX. Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of accounts, Prestige will pay ADEX eighty percent (80%) of the face value of the assigned Accounts, up to a maximum total borrowings of $5,000,000 outstanding at any point in time. ADEX additionally granted Prestige a continuing security interest in and lien upon all accounts receivable, inventory, fixed assets, general intangibles and other assets. Prestige shall have the right to chargeback to the Company any account that is not paid within 100 days of the invoice date for any reason other than insolvency.  Prestige shall have no recourse against the Company if payments are not received solely due to the insolvency of an account debtor within 100 days of the invoice date. At June 30, 2018, the Company owed $2,730,993 pursuant to this agreement.

 

9.	Convertible Debentures

 

(a)

In October 2008, the Company issued three convertible debentures for total proceeds of $250,000 which bear interest at 10% per annum, are unsecured, and due one year from date of issuance. The unpaid amount of principal and accrued interest can be converted at any time at the holder’s option into 625,000 shares of the Company’s common stock at a price of $0.40 per share. The Company also issued 250,000 detachable, non-transferable share purchase warrants. Each share purchase warrant entitles the holder to purchase one additional share of the Company’s common stock for a period of two years from the date of issuance at an exercise price of $0.50 per share.

  

In accordance with ASC 470-20, “Debt with Conversion and Other Options”, the Company determined that the convertible debentures contained no embedded beneficial conversion feature as the convertible debentures were issued with a conversion price higher than the fair market value of the Company’s common shares at the time of issuance.

 

In accordance with ASC 470-20, the Company allocated the proceeds of issuance between the convertible debt and the detachable share purchase warrants based on their relative fair values. Accordingly, the Company recognized the fair value of the share purchase warrants of $45,930 as additional paid-in capital and an equivalent discount against the convertible debentures. The Company had recorded accretion expense of $45,930, increasing the carrying value of the convertible debentures to $250,000.

 

On January 19, 2012, the Company entered into a settlement agreement with one of the debenture holders to settle a $50,000 convertible debenture and $122,535 in accounts payable and accrued interest with the debt holder. Pursuant to the agreement, the debt holder agreed to reduce the debt to Cdn$100,000 on the condition that the Company pays the amount of Cdn$2,500 per month for 40 months, beginning March 1, 2012 and continuing on the first day of each month thereafter.

 

 

On July 18, 2012, the Company entered into a settlement agreement with the $150,000 debenture holder. Pursuant to the settlement agreement, the lender agreed to extend the due date until April 11, 2013 and the Company agreed to pay $43,890 of accrued interest within five days of the agreement (paid), pay the accruing interest on a monthly basis (paid), and pay a $10,000 premium in addition to the $150,000 principal outstanding on April 11, 2013. On April 29, 2013, the Company entered into an amended settlement agreement whereby the lender agreed to extend the due date to September 15, 2013 and the Company agreed to pay $6,836 of interest for the period from April 1 to September 15, 2013 upon execution of the agreement (paid) and granted the lender 100,000 stock options exercisable at $0.12 per share for a period of two years.

 

On November 15, 2013, the Company entered into a second settlement agreement amendment. Pursuant to the second amendment, on November 15, 2013, the Company agreed to pay interest of $4,438 (paid) and commencing February 1, 2014, the Company would make monthly payments of $10,000 on the outstanding principal and interest. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.

 

The Company evaluated the modifications and determined that the creditor did not grant a concession. In addition, as the present value of the amended future cash flows had a difference of less than 10% of the cash flows of the original debt, it was determined that the original and new debt instruments are not substantially different. As a result, the modification was not treated as an extinguishment of the debt and no gain or loss was recognized because the fair value of the old debt and new debt remained the same. The Company recorded the fair value of $12,901 for the stock options as additional paid-in capital and a discount. During the year ended May 31, 2014, the Company repaid $40,000 of the debenture. As of May 31, 2014, the Company had accreted $12,901 of the discount bring the carrying value of the convertible debenture to $114,661. During the year ended May 31, 2015, the Company repaid $54,808 decreasing the carrying value to $59,853. During the year ended May 31, 2017, the Company recorded an additional fee of $21,266 increasing the carrying value to $81,119. On November 16, 2017, the debenture and $15,423 of accrued interest was converted into Series A Preferred Stock as described in Note 10(b).

 

At December 31, 2017, the other remaining debenture of $50,000 remained owed by a subsidiary and past due. During the six months ended June 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.

 

(b)

On August 19, 2013, the Company issued a convertible debenture for total proceeds of $10,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $10,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $10,000. The loan was owed by a subsidiary and during the six months ended June 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.

   

(c)

On December 27, 2013, the Company issued a convertible debenture for total proceeds of $5,000, which bear interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion features of $5,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value was be accreted over the term of the convertible debenture up to its face value of $5,000. The loan was owed by a subsidiary and during the six months ended June 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.

 

(d)

On February 4, 2014, the Company issued a convertible debenture for total proceeds of $15,000, which bears interest at 10% per annum, is unsecured, and due two years from date of issuance. The unpaid amount of principal and accrued interest can be converted at the holder’s option into shares of the Company’s common stock at $0.04 per share at any time after the first anniversary of the notes. The Company recognized the intrinsic value of the embedded beneficial conversion feature of $15,000 as additional paid-in capital and reduced the carrying value of the convertible debenture to $nil. The carrying value will be accreted over the term of the convertible debenture up to its face value of $15,000. The loan was owed by a subsidiary and during the six months ended June 30, 2018, the Company disposed of the subsidiary and no amounts remained owed by the Company.

 

 

(e)

On April 27, 2017, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest on the outstanding principal due under the unsecured note accrues at a rate of 8% per annum. All principal and accrued interest under the unsecured note is due one year following the issue date of the unsecured Note and is convertible into shares of common stock at a conversion price equal to 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $1,174,000 resulted in a discount to the note payable of $943,299. During the year ended May 31, 2017, the Company recorded accretion of $77,465 increasing the carrying value of the note to $1,134,166. On December 15, 2017, February 14, 2018 and February 21, 2018, the holder of the convertible promissory note entered into agreement to sell and assign a total of $315,000 of the outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement. As a result of the assignment, the conversion price for the $354,375 of notes assigned is now equal to the lesser 70% of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion and $0.04. The Company accounted for this assignment in accordance with ASC 470-50 “Modifications and Extinguishments”. In accordance with ASC 470-50, the Company accounted for the assignment as a debt extinguishment and adjusted the fair value of the derivative to its fair value on the assignment date. During the six-month period ended June 30, 2018, $145,000 of the note was converted into 40,233,059 shares of common stock. During the six-month period ended June 30, 2018, the Company recorded accretion of $361,333 increasing the carrying value of the notes to $1,855,000.

 

(f)

On April 28, 2017, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor (the “Lender”), pursuant to which the Company issued to the Lender a senior secured convertible promissory note in the aggregate principal amount of $440,000 for an aggregate purchase price of $400,000, and a warrant with a term of three years to purchase up to 27,500,000 shares of common stock of the Company at an exercise price of $0.0255 per share. The interest on the outstanding principal due under the secured note accrues at a rate of 8% per annum. All principal and accrued interest under the secured note is due on April 27, 2018 and is convertible into shares of the Company’s common stock at a conversion price equal to 75% of the lowest volume-weighted average price during the 15 trading days immediately preceding the conversion, subject to adjustment upon the occurrence of certain events.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $1,744,661 and the fair value of the warrants of $425,918 resulted in a discount to the note payable of $400,000 and the recognition of a loss on derivatives of $1,770,579. During the year ended May 31, 2017, the Company recorded accretion of $54,526, increasing the carrying value of the note to $54,526. During the six-month period ended December 31, 2017, the Company recorded accretion of $173,031 increasing the carrying value of the note to $194,557. On March 12, 2018, the Company issued 10,560,000 shares of common stock upon the conversion of $33,000 of principal pursuant of accrued interest of $2,640. On February 6, 2018, $374,000 of the debenture and $32,560 of accrued interest was converted into Series A Preferred Stock as described in Note 12(a).

 

(g)

On February 27, 2018, the Company issued a convertible promissory note in the aggregate principal amount of $2,000,000. The interest on the outstanding principal due under the ADEX Note accrues at a rate of 6% per annum. All principal and accrued interest under the ADEX Note is due one year following the issue date of the ADEX Note and is convertible into shares of common stock at a conversion price equal to of the lowest volume-weighted average price during the 15 trading days immediately preceding the date of conversion, but in no event ever lower than $0.005 (the “Floor”), unless the note is in default, at which time the Floor terminates.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $2,455,000 resulted in a discount to the note payable of $639,000. During the six-month period ended June 30, 2018, the Company recorded accretion of $131,233 increasing the carrying value of the notes to $1,492,233.

 

(h)

The Company also issued Intercloud a convertible note with a principal amount of $793,894 to settle a contingent liability of $793,893 owed as a result of the acquisition of AWS. The note is due on August 16, 2019 and bears interest at 1% per annum. The note is convertible into common shares of the Company at a conversion price equal to the 80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion.

 

The embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $348,000 resulted in a discount to the note payable of $348,000. During the six-month period ended June 30, 2018, the Company recorded accretion of $66,061 increasing the carrying value of the notes to $511,955.

 

 

(i)

On February 21, 2018, the Company issued a convertible note with a principal amount of $500,000 and a warrant with a term of three years to purchase up to 25,000,000 shares of common stock of the Company at an exercise price of $0.008 per share. The exercise price of the warrant will reduce to 85% of the closing price of the Company’s common stock if the closing price of the Company’s common stock is less than $0.008 on July 31, 2018. The note is due on January 15, 2019, and bears interest at 6% per annum. The note is convertible into common shares of the Company at a conversion price equal to the lower of 80% of the lowest volume-weighted average price during the 5 trading days immediately preceding the date of conversion and $0.005 (the “Floor”), unless the note is in default, at which time the Floor terminates.

 

The embedded conversion option and warrant qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $571,079 and the warrant of $158,772 resulted in a discount to the note payable of $500,000 and an initial derivative expense of $229,851. During the six-month period ended June 30, 2018, the Company recorded accretion of $137,309 increasing the carrying value of the notes to $137,309.

  

j)

On April 23, 2018, the Company entered into and closed on a Securities Purchase Agreement with an institutional investor, pursuant to which the Company issued to the lender a senior secured convertible promissory note in the aggregate principal amount of $1,578,947.37 for an aggregate purchase price of $1,500,000.00.

 

The interest on the outstanding principal due under the secured note accrues at a rate of 12% per annum. All principal and accrued interest under the secured note is due on October 23, 2019 and is convertible into shares of the Company’s common stock at a fixed conversion price of $0.005. While during the first three months that the secured note is outstanding, only interest payments are due to the lender, beginning in month four, and on each monthly anniversary thereafter until maturity, amortization payments are due for principal and interest due under the secured note. The secured note includes customary events of default, including non-payment of the principal or accrued interest due on the secured note. Upon an event of default, all obligations under the secured note will become immediately due and payable.   If the Company issues any common stock or common stock equivalents at an effective price per share less than $0.005 then the conversion price of the note will be reduced to the lower price. As long as the note is not in default the Company may repay the note at 110% of the outstanding principal amount. If the Company defaults upon the note it bears interest at 18% per annum.   In connection with the Purchase Agreement, the Company entered into a security agreement, dated as of April 23, 2018, with the Lender (the “Security Agreement”) and an intellectual property security agreement, dated as of April 23, 2018, with the Lender pursuant to which the Company granted a security interest in substantially all of the assets of the Company, but for those assets over which Prestige Capital Corporation holds a lien, to secure the Company’s obligations under the secured note. In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Lender pursuant to the Secured Note.   The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $3,325,000 resulted in a discount to the note payable of $1,500,000 and an initial derivative expense of $1,825,000. During the six-month period ended June 30, 2018, the Company recorded accretion of $142,719 increasing the carrying value of the notes to $142,719.

 

k)

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

 

The interest on the outstanding principal due under the secured note accrues at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note is due on May 18, 2019. The secured note is convertible into shares of the Company’s common stock at a fixed conversion price of $0.005 per share. Interest is payable monthly on the 18th of each month. While interest payments must be made in cash during the first six months that the secured note is outstanding, beginning in month seven, and on each monthly anniversary thereafter until maturity, the Company has the option to pay interest payments in stock, subject to certain equity conditions being satisfied. Any payment of interest or principal scheduled after December 1, 2018 that is made in cash will be subject to a 5% prepayment premium. Any other prepayment is subject to a 10% premium. The secured note includes customary events of default, including non-payment of the principal or accrued interest due on the secured note and cross default to other notes owing to the investor. Upon an event of default, all obligations under the secured note and other notes owing to the investor will become immediately due and payable. In connection with the issuance of the secured note, the Company issued the investor 496,101 shares of Series A Preferred Stock. The investor was granted a right to participate in future financing transactions of the Company while the secured note remains outstanding.

 

 

If the Company issues any common stock or common stock equivalents at an effective price per share less than $0.005 then the conversion price of the note will be reduced to the lower price. As long as the note is not in default the Company may repay the note at 110% of the outstanding principal amount. If the Company defaults upon the note it bears interest at 18% per annum.   In connection with the Securities Purchase Agreement, the Company entered into an amendment to the existing Security Agreement described in Note 9(j). Pursuant to the amendment, the Company agreed that obligations under the secured note and related documents will be secured pursuant to the existing security interest in substantially all of the assets of the Company securing other notes issued to the Investor (except for those assets over which Prestige Capital Corporation holds a lien). In addition, all of the Company’s subsidiaries are guarantors of the Company’s obligations to the Investor pursuant to the Secured Note and have granted a similar security interest over substantially their assets.   The embedded conversion option qualified for derivative accounting and the conversion option qualified for bifurcation under ASC 815-15 “Derivatives and Hedging”. The initial fair value of the conversion feature of $468,000 resulted in a discount to the note payable of $280,959 and an initial derivative expense of $187,041. During the six-month period ended June 30, 2018, the Company recorded accretion of $40,448 increasing the carrying value of the notes to $40,446.

 

10.	Derivative Liabilities

 

The embedded conversion option of the convertible debenture described in Note 9(e) contains a conversion feature that qualifies for embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.

 

Upon the issuance of the convertible note payable described in Note 9(e), the Company concluded that it only has sufficient shares to satisfy the conversion of some but not all of the outstanding convertible notes, warrants and options. The Company elected to reclassify contracts from equity with the earliest inception date first. As a result, none of the Company’s previously outstanding convertible instruments qualified for derivative reclassification, however, any convertible securities issued after the election, including the convertible note described in Notes 9(e) to 9(k), qualified for derivative classification. The Company reassesses the classification of the instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

During the year ended May 31, 2017, the Company reclassified 350,000 options exercisable at $0.03 until March 16, 2017 with a fair value of $2,350, 2,000,000 warrants exercisable at $0.03 until August 29, 2018 with a fair value of $13,745, 533,333 warrants exercisable at $0.80 with a fair value of $Nil, 4,075,000 warrants exercisable at $0.37 with a fair value of $16,978, and a $59,853 note convertible at $0.40 with a fair value of $41 that qualified for treatment as derivative liabilities.

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities.

 

			June 30, 2018				December 31, 2017
	Balance at the beginning of period		$	4,749,712			$	3,760,067
	Derivative issued as part of acquisition			302,800				-
	Original discount limited to proceeds of notes			3,267,959				250,200
	Fair value of derivative liabilities in excess of notes proceeds received			2,241,892				82,766
	Derivative warrants issued for services and to acquire non-controlling interest			327,536				-
	Derivative liability settled through the issuance of preferred stock			(458,556	)			(2,591,345	)
	Conversion of derivative liability			(430,212	)			-
	Change in fair value of embedded conversion option			(2,603,707	)			3,248,024
	Balance at the end of the period		$	7,397,424			$	4,749,712

  

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

 

 

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

 

			Expected Volatility				Risk-free Interest Rate				Expected Dividend Yield				Expected Life (in years)
	At issuance			0-299	%			0.07-2.63	%			0	%			0.50-3.00
	At December 31, 2017			259-294	%			1.39-1.89	%			0	%			0.30-2.33
	At January 3, 2018 upon conversion			280	%			1.41	%			0	%			0.31
	At February 6, 2018 upon conversion			331	%			1.52	%			0	%			0.22
	At March 12, 2018 upon conversion			340	%			1.71	%			0	%			0.13
	At March 30, 2018 upon conversion			192	%			1.63	%			0	%			0.07
	At May 3, 2018 upon conversion			289	%			2.02	%			0	%			0.79
	At May 24, 2018 upon conversion			293	%			2.09	%			0	%			0.73
	At June 30, 2018			167-301	%			1.39-2.63	%			0	%			0.07-2.89

 

11.	Common Stock

 

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

 

(a)

As of December 31, 2017, the Company’s subsidiary, Mantra Energy Alternatives Ltd., had received subscriptions for 67,000 shares of common stock at Cdn$1.00 per share for proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of the non-controlling interest portion of $7,231.

 

(b)

As of December 31, 2017, the Company’s subsidiary, Climate ESCO Ltd., had received subscriptions for 210,000 shares of common stock at $0.10 per share for proceeds of $21,000, which is included in common stock subscribed, net of the non-controlling interest portion of $7,384.

 

(c)

On January 3, 2018, the Company issued 20,516,000 shares of common stock upon the conversion of $67,703 of principal pursuant to the loan described in Note 10(e). The Company recorded a gain on extinguishment of debt of $13,718 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

(c)

On March 12, 2018, the Company issued 10,560,000 shares of common stock upon the conversion of $33,000 of principal and accrued interest of $2,640 pursuant to the loan described in Note 10(f). The Company recorded a loss on extinguishment of debt of $8,092 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

(c)

On March 30, 2018, the Company issued 6,578,947 shares of common stock upon the conversion of $25,000 of principal pursuant to the loan described in Note 10(e). The Company recorded a gain on extinguishment of debt of $1,794 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

(e)

On December 28, 2017, the Company issued 46,374,245 shares of common stock with a fair value of $510,117 to the President of the Company and 46,374,245 shares of common stock with a fair value of $510,117 to the Chief Executive Officer of the Company in exchange for services for the Company. The shares vest over 12 months. During the six months ended June 30, 2018, the Company recorded $505,927 for the vested portion of the shares.

 

(f)

On December 28, 2017, the Company issued 43,400,000 shares of common stock with a fair value of $477,400 to a consultant for compensation and services rendered to the Company. The shares vest over 12 months. During the six months ended June 30, 2018, the Company recorded $136,858 for the vested portion of the shares.

 

(g)

On April 18, 2018, the Company issued 3,415,889 shares of common stock upon the conversion of $12,297 of principal pursuant to the loan described in Note 10(e). The Company recorded a gain on extinguishment of debt of $2,049 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

h)

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 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter exchanged 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock. Of the 217,000,000 common shares exchanged, 92,748,490 shares were unvested. The remaining stock-based compensation related to the unvested shares in the amount of $715,561 was recorded during the period. Of the 217,000,00 common shares exchanged, 124,251,510 were fully vested, these shares were placed in treasury.

 

 

(j)

On May 2, 2018, 27,188 Series A Preferred Shares were converted by the holders into 12,330,196 common shares of the Company and on May 18, 2018, 29,156 Series A Preferred Shares were converted by the holders into 13,222,696 common shares of the Company in error.  The Company has recorded the fair value of the common shares of $222,964 as subscriptions receivable while the Company attempts to regain the shares.

 

(k)

On May 3, 2018, the Company issued 5,555,556 shares of common stock upon the conversion of $20,000 of principal pursuant to the loan described in Note 10(e). The Company recorded a gain on extinguishment of debt of $13,432 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

(l)

On May 24, 2018, the Company issued 4,166,667 shares of common stock upon the conversion of $20,000 of principal pursuant to the loan described in Note 10(e). The Company recorded a gain on extinguishment of debt of $15,386 which was equal to the difference between the fair value of the shares issued and the liabilities settled.

 

(m)

On June 2, 2018, 13,622 Series A Preferred Shares were converted by the holders into 3,415,500 common shares of the Company pursuant to the conversion terms of the Series A Preferred Shares.   As the Series A Preferred Shares are equity classified and the conversion was pursuant to the terms of the agreement, the conversion did not result in a deemed dividend or a gain/loss upon conversion.   Upon conversion the Company derecognized the Preferred Shares and adjusted the par value of Common stock and APIC.   Treasury stock- The Company holds 124,251,510 shares in treasury at a cost of $277,436.

 

12.	Preferred Stock

 

Series A

 

On November 15, 2017, the Company created one series of the 20,000,000 preferred shares it is authorized to issue, consisting of 8,000,000 shares, to be designated as Series A Preferred Shares. The principal terms of the Series A Preferred Shares are as follows:

 

Voting rights – The Series A Preferred Shares do not have voting rights.

 

Dividend rights – The holders of the Series A Preferred Shares shall not be entitled to receive any dividends. No dividends (other than those payable solely in common stock) shall be paid on the common stock or any class or series of capital stock ranking junior, as to dividends, to the Series A Preferred Shares during any fiscal year of the Corporation until there shall have been paid or declared and set apart during that fiscal year for the holders of the Series A Preferred Shares a dividend in an amount per share equal to (i) the number of shares of common stock issuable upon conversion of the Series A Preferred Stock times (ii) the amount per share of the dividend to be paid on the common stock.

 

Conversion rights – The holders of the Series A Preferred Shares have the right to convert each Class A Preferred Share and all accrued and unpaid dividends thereon shall be convertible at the option of the holder thereof, at any time after the issuance of such share into fully paid and nonassessable shares of common stock of the Corporation. The number of shares of common stock into which each share of the Series A Preferred Shares may be converted shall be determined by dividing the sum of the Stated Value of the Series A Preferred Shares ($0.25 per share) being converted and any accrued and unpaid dividends by the Conversion Price in effect at the time of the conversion. The Series A Preferred Shares may be converted at an initial conversion price of the greater of 75% of the lowest VWAP during the ten (10) trading day period immediately preceding the date a conversion notice is delivered or $0.004.

 

Liquidation rights - Upon the occurrence of any liquidation, each holder of Series A Preferred Shares then outstanding shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any payment shall be made in respect of the common stock, or other series of preferred stock then in existence that is outstanding and junior to the Series A Preferred Shares upon liquidation, an amount per share of Series A Preferred Shares equal to the amount that would be receivable if the Series A Preferred Shares had been converted into common stock immediately prior to such liquidation distribution, plus, accrued and unpaid dividends.

 

 

In accordance with ASC 480 Distinguishing Liabilities from Equity, the Company has classified the following Series A Preferred Shares as a liability. On March 23, 2018, the Company revised the conversion rights of the Series A Preferred Stock to include a minimum conversion price of $0.004. This modification resulted in the reclassification of the Series A Preferred Shares from a liability to temporary equity or “mezzanine”. As a result of the reclassification the Company recognized a gain on extinguishment of $290,814.

 

●

On February 6, 2018, the Company issued 505,494 shares of Series A Preferred Stock with a fair value of $170,445 to settle $374,000 of principal, and $32,560 of accrued interest on the convertible notes described in Note 9(f). The Company recognized a gain on settlement of debt of $531,904.

 

●

On May 18, 2018, the Company paid $280,959 and issued a warrant to purchase up to 100,000,000 shares of our common stock at an exercise price of $0.005 per share for 2 years to repurchase and retire 1,273,161 shares of Series A Preferred Stock. The warrant qualified for derivative accounting under ASC 815-15 “Derivatives and Hedging” and had an initial fair value of $100,000. The carrying value of the retired Series A Preferred Shares was $228,772. There was a deficit between the carrying value and the repurchase price of $380,959 which resulted in an increase to net income attributable to common shareholders of $152,187.

 

●

On June 22, 2018, 13,622 Series A Preferred Shares were converted by the holders into 3,415,500 common shares of the Company pursuant to the conversion terms of the Series A Preferred Shares.

 

●

On May 2, 2018, 27,188 Series A Preferred Shares were converted by the holders into 12,330,196 common shares of the Company and on May 18, 2018, 29,156 Series A Preferred Shares were converted by the holders into 13,222,696 common shares of the Company.

 

Series B

 

On April 6, 2018, the Company designated 1,000 shares of Series B preferred stock of the Company (the “Series B Preferred Stock”) with a stated value of $3,500 per share. The Series B Preferred Stock is neither redeemable nor convertible into common stock. The principal terms of the Series A Preferred Shares are as follows:

 

Issue Price - The stated price for the Series B Preferred shall be $3,500 per share.

 

Redemption - The Series B Preferred are not redeemable.

 

Dividends - The holders of the Series B Preferred shall not be entitled to receive any dividends.

 

Preference of Liquidation - The Corporation’s Series A Preferred Stock (the “Senior Preferred Stock) shall have a liquidation preference senior to the Series B Preferred. Upon any Fundamental Transaction, liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the Holders of the shares of the Series B Preferred shall be entitled, after any distribution or payment is made upon any shares of capital stock of the Corporation having a liquidation preference senior to the Series B Preferred, including the Senior Preferred Stock, but before any distribution or payment is made upon any shares of Common Stock or other capital stock of the Corporation having a liquidation preference junior to the Series B Preferred, to be paid in cash the sum of $3,500 per share. If upon such liquidation, dissolution or winding up, the assets to be distributed among the Series B Preferred Holders and all other shares of capital stock of the Corporation having the same liquidation preference as the Series B Preferred shall be insufficient to permit payment to said holders of such amounts, then all of the assets of the Corporation then remaining shall be distributed ratably among the Series B Preferred Holders and such other capital stock of the Corporation having the same liquidation preference as the Series B Preferred, if any. Upon any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after provision is made for Series B Preferred Holders and all other shares of capital stock of the Corporation having the same liquidation preference as the Series B Preferred, if any, then-outstanding as provided above, the holders of Common Stock and other capital stock of the Corporation having a liquidation preference junior to the Series B Preferred shall be entitled to receive ratably all remaining assets of the Corporation to be distributed.

 

Voting - The holders of shares of Series B Preferred shall be voted together with the shares of Common Stock such that the aggregate voting power of the Series B Preferred is equal to 51% of the total voting power of the Company.

 

Conversion - There are no conversion rights.

 

●

On April 23, 2018, each of Roger Ponder, the Company’s Chief Executive Officer, and Keith Hayter, the Company’s President, exchanged certain shares of common stock of the Company held by each of them for shares of the newly designated Series B Preferred Stock. Mr. Ponder exchanged 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock, and Mr. Hayter exchanged 108,500,000 shares of common stock for an aggregate of 500 shares of Series B Preferred Stock. Of the 217,000,000 common shares exchanged, 92,748,490 shares were unvested. The remaining stock-based compensation related to the unvested shares in the amount of $715,561 was recorded during the period. Of the 217,000,00 common shares exchanged, 124,251,510 were fully vested, these shares were placed in treasury.

 

 

13.	Share Purchase Warrants

 

As of June 30, 2018, the following table summarizes the continuity of share purchase warrants:

 

			Number of warrants				Weighted average exercise price $
	Balance, December 31, 2017			83,575,000				0.03
	Issued			148,431,550				0.005
	Balance, June 30, 2018			232,006,550				0.01

 

As of June 30, 2018, the following share purchase warrants were outstanding:

 

	Number of warrants				Exercise price $			Expiry date
		666,667			0.03			August 28, 2018
		4,075,000			0.37			April 10, 2019
		1,333,333			0.03			August 29, 2018
		27,500,000			0.03			April 28, 2020
		50,000,000			0.005			June 27, 2020
		11,431,550	*		0.006			February 13, 2021
		25,000,000			0.008			February 21, 2021
		12,000,000			0.0016			March 22, 2019
		100,000,000			0.005			May 17, 2020
		232,006,550

 

*

This warrant is convertible into 4% of the number of common shares of the Company outstanding. At June 30, 2018, 4% of the number of shares of the Company outstanding was 11,431,550 shares.

 

As of June 30, 2018, the embedded conversion feature of the warrant issued as an inducement to repurchase the series A preferred shares had a fair value of $100,000.

 

14.	Stock Options

 

The following table summarizes the continuity of the Company’s stock options:

 

Number of options

Weighted average exercise price $

Weighted average remaining contractual life (years)

Aggregate intrinsic value $

Outstanding, December 31, 2017

350,000

0.03

0.13

–

Expired

(350,000

)

0.03

Outstanding June 30, 2018

–

–

–

–

Exercisable June 30, 2018

–

–

–

–

  

15.	Commitments and Contingencies

  

(a)

On May 23, 2012, a former employee of the Company delivered a Notice of Application seeking judgment against the Company for approximately $55,000. The hearing of that Application took place on July 31, 2012, at which time the former employee obtained judgment in the approximate amount of $55,000. The Company did not defend the amount of the judgment and the amount is included in accounts payable, but claims a complete set-off on the basis that the former employee retains 1,000,000 shares of common stock of the Company as security for payment of the outstanding consulting fees owed to him. On November 30, 2012, the Company commenced a separate action against the former employee seeking a return of the 1,000,000 shares of common stock and a stay of execution of the judgment. That application is pending and has not yet been heard or determined by the court. The payment of the judgment claim of approximately $55,000 is dependent upon whether the former employee will first return the 1,000,000 shares of common stock noted above. The probable outcome of the Company’s claim for the return of the shares cannot yet be determined as the Company has not received a response from the former employee for nearly two years.

 

 

(b)

On November 15, 2013, the Company entered into a second settlement agreement with the $150,000 debenture holder described in Note 10(a). Pursuant to the second amendment, on November 15, 2013, the Company agreed to make monthly payments of $10,000 on the outstanding principal and interest. Payments were made until December 2014, but have not been made after. The plaintiff was seeking relief of amounts owed along with 10% interest per annum, from the date of judgments. All amounts are recorded in these financial statements. On December 4, 2015, the holder of the convertible debenture entered into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by the assignment and sale agreement.

 

(c)

On September 3, 2015, a former prospective employee of the Company delivered a Notice of Claim seeking judgment against the Company for approximately $11,400. During the year ended May 31, 2017 the prospective employee received a judgement which is recorded in these financial statements.

 

(d)

On March 14, 2016, the Company entered into a consulting agreement. Pursuant to the agreement, the Company will pay the consultant $10,000 per month ($20,000 paid) and issue 550,000 shares per month for a period of three months. At December 31, 2017, the Company had not issued the shares to the consultant due to non-performance.

   

(e)

On September 10, 2016, the Company entered into a debt settlement agreement to settle $7,500 of amounts owed for services in exchange for 2,000,000 common shares. The Company has not yet issued the shares. The Company will record the debt settlement upon the issuance of shares.

 

(f)

On August 22, 2016, the Company entered into a consulting agreement for the provision of consulting services until November 22, 2016. Pursuant to the agreement the Company will pay the consultant $5,000 per month and issue 2,000,000 shares of common stock to the consultant. On December 7, 2016, the Company entered into a settlement agreement. Pursuant to the agreement, the Company agreed to issue the consultant 1,000,000 common shares in exchange for fully releasing and discharging the Company of any and all further obligations.

 

(g)

On February 27, 2018, a subsidiary of the Company, ADEX entered into a Purchase and Sale Agreement with Prestige pursuant to which ADEX agreed to sell and assign and Prestige agreed to buy and accept, certain accounts receivable owing to ADEX. Under the terms of the Purchase and Sale Agreement, upon the receipt and acceptance of each assignment of accounts, Prestige will pay ADEX eighty percent (80%) of the face value of the assigned Accounts, up to a maximum total borrowings of $5,000,000 outstanding at any point in time. ADEX additionally granted Prestige a continuing security interest in and lien upon all accounts receivable, inventory, fixed assets, general intangibles and other assets.

 

(g)

The Company leases certain of its properties under leases that expire on various dates through 2019. Some of these agreements include escalation clauses and provide for renewal options ranging from one to five years.

 

(h)

Rent expense incurred under the Company’s operating leases amounted to $189,570 during the six months ended June 30, 2018.

 

(i)

The future minimum obligation during each year through 2019 under the leases with non-cancelable terms in excess of one year is as follows:

  

			Future
			Minimum
			Lease
	Years Ending December 31,		Payments
	2018		$	122,926
	2019			71,184
	2020			0
	Total		$	194,110

 

16.	Segment Disclosures

 

During the six months ended June 30, 2017, the Company had two operating segments including:

 

●

AW Solutions Inc., a Longwood, Florida-based company and AW Solutions Puerto Rico LLC, which is in the business of the provision of professional, multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry and,

 

●

Mantra Energy Alternatives (MEA), which consists of the rest of the Company’s operations.

 

 

During the six months ended June 30, 2018, the Company had three operating segments including:

 

●

AW Solutions, which is in the business of the provision of professional, multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry;

 

●

ADEX Corporation, an Alpharetta, Georgia-based company and ADEX Puerto Rico LLC. offering turnkey wireless and wireline telecom services and project staffing; and,

 

●

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

 

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

 

Financial statement information by operating segment for six months ended June 30, 2018 is presented below:

  

			Spectrum Global $				AW Solutions $				ADEX $				Total $
	Net Sales			–				6,015,488				9,276,398				15,291,886
	Operating (loss) income			(2,184,704	)			161,342				(2,738	)			(2,026,100	)
	Interest expense			(286,712	)			(7,206	)			(214,525	)			(508,443	)
	Depreciation and amortization			–				87,614				16,992				104,606
	Total Assets as of June 30, 2018			1,638				4,918,653				7,405,042				12,325,333

  

Geographic information for the six months ended and as of June 30, 2018 is presented below:

 

			Revenues $				Long-Lived Assets $
	Puerto Rico			1,012,462				5,377
	United States			14,279,424				3,967,045
	Consolidated Total			15,291,886				3,972,422

 

Financial statement information by operating segment for the six months ended June 30, 2017 is presented below:

 

			Mantra Ventures $				AW Solutions $				Total $
	Net Sales			–				2,230,249				2,230,249
	Operating (loss) income			(9,282,803	)			135,404				(9,147,398	)
	Interest expense			140,671				477				141,148
	Depreciation and amortization			5,603				58,660				64,263
	Impairment loss			103,480				–				103,480
	Total Assets as of June 30, 2017			5,420				5,478,708				5,484,128

 

Geographic information for the six months ended and as at June 30, 2017 is presented below:

 

			Revenues $				Long-Lived Assets $
	United States			1,880,183				3,058,594
	Puerto Rico			350,066				6,607
	Consolidated Total			2,230,249				3,065,201

  

 

17.	Subsequent Events

 

a)

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

  

The interest on the outstanding principal due under the secured note accrues at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note is due on March 15, 2019. The secured note is convertible into shares of the Company’s at the greater of $0.004 or 75% of the lowest VWAP in the 10 trading days prior to conversion.

  

b)

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

 

The interest on the outstanding principal due under the secured note accrues at a rate of 12% per annum. All principal and accrued but unpaid interest under the secured note is due on March 15, 2019. The secured note is convertible into shares of the Company’s at the greater of $0.005 or 75% of the lowest VWAP in the 10 trading days prior to conversion.

  

c)

August 1, 2018, the Company entered into and closed on a Settlement Agreement.  On May 2, 2018, 27,188 Series A Preferred Shares were converted by the holders into 12,330,196 common shares of the Company and on May 18, 2018, 29,156 Series A Preferred Shares were converted by the holders into 13,222,696 common shares of the Company in error.   August 1, 2018, the Company entered into and closed on a Settlement Agreement pursuant to which the shareholders agreed to cancel the remaining Series A Preferred shares held by the and return up to 5,000,000 common shares on a best effort basis.

  

	d)	On July 2, 2018, 47,520 Series A Preferred Shares were converted by the holders into 10,057,143 common shares of the Company.
	e)	On July 18, 2018, the Company issued 5,555,556 shares of common stock upon the conversion of convertible note principal pursuant to the loan described in Note 10(e).

 

 

  

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

 

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

 

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

 

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

 

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

 

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

 

Description of Business

 

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

 

We are a leading provider of services and solutions in the telecommunications sector and research developer of alternative energy alternatives in the energy sector. The telecommunications sector provides services and solutions throughout the United States, Guam, Canada and the Caribbean. Our energy sector services are related to research and development of alternative energy technologies.

 

 

Our telecommunications division, which was acquired on April 25, 2017, is supported by its subsidiaries: AW Solutions, Inc., AW Solutions Puerto Rico, LLC and Tropical Communications, Inc. (collectively known as “AW Solutions”) and ADEX CORP. and ADEX Puerto Rico LLC. (collectively known as “ADEX”). AW Solutions provides a broad range of professional services and solutions to top tier communication carriers and Fortune 1000 enterprise customers. The telecommunication division offers carriers, service providers and enterprise customers professional contracting services, to include: infrastructure audits; site acquisition; architectural, structural and civil design and analysis; construction management; construction; installation; warehousing and logistics; maintenance services, that support the build-out and upgrade and operation of some of the most advanced networks, small cell, Wi-Fi, fiber and distributed antenna system (DAS) networks. We believe the expansion and migration of these next-generation networks, our long-term relationships supported by multiyear Master Service Agreements (MSA) and multi-year service contracts with major wireless, commercial wireline and wireless operators, DAS operators, tower companies, original equipment manufacturers (OEM’s) and prime contractor/project management organization provides us a significant opportunity as a long term leading and well respected industry leader in this marketplace. ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and Enterprise customers. ADEX’s managed solutions diversifies the ability to service customers domestically and internationally throughout the project lifecycle. ADEX customers include many leading wireless and wireline telecommunications providers, cable broadband MSOs and Original Equipment Manufacturers (“OEM”). On a weekly basis, the Company deploys hundreds of telecommunication professionals in support of its customers. The Company believes that its global footprint of support is a differentiating factor for national and international-based customers needing a broad range of technical expertise for management of their legacy and next generation networks. The Company seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include Consulting and Professional Staffing services to service providers as well as Enterprise customers, Network Implementation, Network Installation, Network Upgrades, Rebuilds, Design, Engineering and Integration Wireless Network Support, Wireless Network Integration, Wireless and Wireline Equipment Installation & Commissioning, Wireless Site Development & Construction Management, Network Engineering, Project Management, Disaster Recovery design engineering and integration.

 

We provide the following categories of offerings to our customers:

 

●

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

 

Our Operating Units

 

Our company is comprised of the following:

 

●

AW Solutions. - AW Solutions, Inc., a Florida corporation (April 17, 2006), AW Solutions Puerto Rico, LLC, Puerto Rico corporation (March 14, 2011) and Tropical Communications, Inc., a Florida corporation (May 9, 1984), (Collectively known as, “AW Solutions”). We are professional, multi-service line, telecommunications infrastructure companies that provide outsourced services to the wireless and wireline industry. AW Solution’s services include network systems design, site acquisition services, asset audits, architectural and engineering services, program management, construction management and inspection, construction, installation, maintenance and other technical services. AW Solutions provides in-field design, Computer Aided Design and Drawing services (CADD), fiber and DAS deployments.

 

 

 

●

ADEX - ADEX CORP, a New York corporation (October 29, 1993) and ADEX Puerto Rico, LLC. a Puerto Rico limited liability company (April 17, 2008), (collectively known as “ADEX”). ADEX is a leading outsource provider of engineering and installation services, staffing solutions and other services which include consulting to the telecommunications industry, service providers and Enterprise customers domestically and internationally. The Company seeks to assist its customers throughout the entire life cycle of a network deployment via its comprehensive suite of managed solutions that include Consulting and Professional Staffing services to service providers as well as Enterprise customers, Network Implementation, Network Installation, Network Upgrades, Rebuilds, Design, Engineering and Integration Wireless Network Support, Wireless Network Integration, Wireless and Wireline Equipment Installation & Commissioning, Wireless Site Development & Construction Management, Network Engineering, Project Management, Disaster Recovery design engineering and integration.

 

Results of Operations for the Three Month Periods Ended June 30, 2018 and June 30, 2017

 

Revenues

 

Our operating results for the three month periods ended June 30, 2018 and 2017 are summarized as follows:

 

		Three Months Ended June 30, 2018				Three Months Ended June 30, 2017				Difference
Revenue		$	10,964,122			$	2,230,249			$	8,733,873
Operating expenses		$	12,246,731			$	6,458,335			$	5,788,396
Other income (expense)		$	(1,606,075	)		$	(3,876,739	)		$	2,270,664
Net income (loss)		$	(2,888,684	)		$	(8,104,825	)		$	5,216,141

   

Revenue generated during the three months ended June 30, 2018, was $10,964,122 compared to $2,230,249 revenues during the same period ended June 30, 2017. During this period ended June 30, 2018, all of our revenues and a significant portion of our expenses were generated by our acquired telecommunications division (AW Solutions, Inc.; AW Solutions Puerto Rico, LLC; Tropical Communications, Inc.) on April 25, 2017 and ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC., ADEX TELECOM, INC. on February 28, 2018.

 

Expenses

 

During the three months ended June 30, 2018, our operating expenses were $12,246,731 compared to operating expenses of $6,458,335 for the three month period ended June 30, 2017. The increase on operating expense is a result of the acquisition of ADEX on February 28, 2018, which consisting of ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC and ADEX TELECOM, INC. These expenses include general and administrative costs, all of our corporate costs, as well as costs from our subsidiaries management personnel and administrative overhead. These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology, provisions for recoveries of bad debt and other costs not directly related to performance of our services under customer contracts. We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenue will decrease if we succeed in increasing revenues.

 

 

General and administrative costs were $1,500,065 for the three months ended June 30, 2018 compared to $709,542 for the three months ended June 30, 2017. Salaries and wages were $1,317,904 for the three months ended June 30, 2018 compared to $4,089,784 for the three months ended June 30, 2017. This decrease was due to a decrease in stock based compensation of $3,136,100. Depreciation and amortization costs were $56,773 for the three months ended June 30, 2018 compared to $58,660 for the three months ended June 30, 2017.

 

Other Income (Expense)

 

For the three months ended June 30, 2018, we had other expenses of $1,606,075 compared to other expenses of $3,876,739 the same period in 2017. The increase was primarily due to a gain on disposal of subsidiaries of $577,299, gain on extinguishment of preferred share liability of $2,999 during the three months ended June 30, 2018, a gain on settlement of debt of $12,412 during the three months ended June 30, 2018, compared to a loss on settlement of debt of $8,802 during the same period in 2017, and a decrease in loss from the change in fair value of conversion features of $2,597,227. This was offset by an increase in accretion of discounts on convertible debentures of $637,457.

 

Net Income (Loss)

 

For the three months ended June 30, 2018, we incurred a net loss of $2,888,684, compared to a net loss of $8,104,825 for the same period in 2017.

 

Results of Operations for the Six Month Periods Ended June 30, 2018 and June 30, 2017

 

Revenues

 

Our operating results for the six month periods ended June 30, 2018 and 2017 are summarized as follows:

 

		Six Months Ended June 30, 2018				Six Months Ended June 30, 2017				Difference
Revenue		$	15,291,886			$	2,230,249			$	13,061,637
Operating expenses		$	17,317,986			$	6,598,208			$	10,719,778
Other income (expense)		$	(783,088	)		$	(4,779,440	)		$	3,996,352
Net income (loss)		$	(2,809,188	)		$	(9,147,399	)		$	6,338,211

  

Revenue generated during the six months ended June 30, 2018, was $15,291,886 compared to $2,230,249 during the period ended June 30, 2017. During this period ended June 30, 2018, all of our revenues and a significant portion of our expenses were generated by our acquired telecommunications division (AW Solutions, Inc.; AW Solutions Puerto Rico, LLC; Tropical Communications, Inc.) on April 25, 2017 and (ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC., ADEX TELECOM, INC.) on February 28, 2018.

 

Expenses

 

During the six months ended June 30, 2018, our operating expenses were $17,317,986 compared to operating expenses of $6,598,208 for the six month period ended June 30, 2017. The increase on operating expense is a result of the acquisition of ADEX on February 28, 2018, which consisted of ADEX Corp, ADEX PUERTO RICO LLC, ADEX TOWERS, INC and ADEX TELECOM, INC. These expenses include general and administrative costs, all of our corporate costs, as well as costs from our subsidiaries management personnel and administrative overhead. These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology, provisions for recoveries of bad debt and other costs not directly related to performance of our services under customer contracts. We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenue will decrease if we succeed in increasing revenues. 

 

 

General and administrative costs were $2,161,363 for the six months ended June 30, 2018 compared to $711,663 for the six months ended June 30, 2017. Salaries and wages were $1,895,508 for the six months ended June 30, 2018 compared to $4,221,933 for the six months ended June 30, 2017. This was due to a decrease in stock based compensation of $2,824,329. Depreciation and amortization costs were $104,606 for the six months ended June 30, 2018 compared to $64,263 for the six months ended June 30, 2017.

 

Other Income (Expense)

 

For the six months ended June 30, 2018, we had other expenses of $783,088 compared to other expenses of $4,779,440 the same period in 2017. The increase was primarily due to a gain on disposal of subsidiaries of $577,299, gain on extinguishment of preferred share liability of $290,814 during the six months ended June 30, 2018, a gain on settlement of debt of $574,375 during the six months ended June 30, 2018, compared to a loss on settlement of debt of $14,202 during the same period in 2017, and a decrease in loss from the change in fair value of conversion features of $4,031,826. This was offset by an increase in accretion of discounts on convertible debentures of $1,230,416.

 

Net Income (Loss)

 

For the six months ended June 30, 2018, we incurred a net loss of $2,809,188, compared to a net loss of $9,147,399 for the same period in 2017.

 

Liquidity and Capital Resources

 

As of June 30, 2018, our total current assets were $8,352,912 and our total current liabilities were $19,829,828, resulting in a working capital deficit of $11,476,916 compared to a working capital deficit of $9,389,007 as of December 31, 2017.

 

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

 

Cash Flows

 

		Six Months Ended June 30, 2018				Six Months Ended June 30, 2017
Statement of Operations Data:
Net Cash Used In Operating Activities		$	(1,520,003	)		$	(493,919	)
Net Cash Provided by Investing Activities		$	175,847			$	115,112
Net Cash Provided by Financing Activities		$	1,495,492			$	706,729
Change In Cash		$	151,336			$	327,922

 

The increase in cash that we experienced in the period ended June 30, 2018, compared to the decrease during the period ended June 30, 2017, is primarily due to the acquisition of ADEX and its subsidiaries and increased funding requirements for ongoing operating activities. During the period ended June 30, 2018, the repayment of loans payable of $1,723,000 was made, and proceeds were received from notes and convertible notes payable of $3,499,452, which created the cash balance as noted above. We expect that our cash position will increase, due to operating profits in the telecommunication division. Over the coming months and year, subject to raising additional funds, we plan to primarily concentrate on our telecommunications business and associated projects.

 

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

 

As of June 30, 2018, we had cash of $180,229 compared to $329,323 as of June 30, 2017. Our cash balance at the beginning of this year was $28,893.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Inflation

 

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

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of disclosure controls and procedures.

 

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

 

Based on management’s evaluation, our Chief Executive Officer concluded that, as a result of the material weaknesses described below, as of December 31, 2017, our disclosure controls and procedures are not designed at a reasonable assurance level and are not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

 

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

 

We are committed to improving our financial organization. In addition, we will look to increase our personnel resources and technical accounting expertise within the accounting function to resolve non-routine or complex accounting matters. In addition, as funds are available, we will take the following action to enhance our internal controls: Hiring additional knowledgeable personnel with technical accounting expertise to further support our current accounting personnel, which management estimates will cost approximately $200,000 per annum. As our operations are relatively small we expect that both our technical and accounting expertise will be improved, however our overall financial requirements will only increase. We continue to have net cash losses each quarter, we do not anticipate being able to hire additional internal personnel until such time as our operations are profitable on a cash basis or until our operations are large enough to justify the hiring of additional accounting personnel. We currently engage an outside accounting firm to assist us in the preparation of our consolidated financial statements this past year and will plan to evaluate our internal capabilities as we integrate the business segments to address the sufficient number of internal accounting personnel to achieve compliance. As necessary, we will engage consultants in the future in order to ensure proper accounting for our consolidated financial statements.

 

Due to the fact that our internal accounting staff consists solely of a Chief Executive Officer, who functions as our Principal Accounting Officer, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turn over issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.

  

Changes in internal control over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

Item 1A. Risk Factors

 

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

 

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

 

Since the beginning of the six month period ended June 30, 2018, we have not sold any equity securities that were not registered under the Securities Act of 1933 that were not previously reported in an annual report on Form 10-K, in a quarterly report on Form 10-Q or in a current report on Form 8-K.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits 

                

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

 

 

SIGNATURES

 

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

 

	SPECTRUM GLOBAL SOLUTIONS, INC.
Date: August 20, 2018	By:	/s/ Roger M. Ponder
		Roger M. Ponder
		Chief Executive Officer and Principal Financial Officer