HIGH WIRE NETWORKS, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may" "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission . Important factors known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of our company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our services, fluctuations in pricing for materials, and competition. Business Overview Telecommunications
Telecommunications providers, technology and enterprise customers continue to seek and outsource solutions in order to reduce their investment in capital equipment, provide flexibility in workforce sizing and expand product offerings without large increases in incremental hiring. As a result, we believe there is significant opportunity to expand both ourUnited States and international telecommunications solutions services and staffing services capabilities. As we continue to expand our presence in the marketplace, we will target those customers going through new network deployments and wireless service upgrades. We expect to continue to increase our gross margins by leveraging our single-source end-to-end network to efficiently provide a full spectrum of end-to-end next-generation network solutions and staffing services to our customers. We believe our solutions and services offerings can alleviate some of the inefficiencies typically present in our industry, which result, in part, from the highly-fragmented nature of the telecommunications industry, limited access to skilled labor and the difficulty industry participants have in managing multiple specialty-service providers to address their needs. As a result, we believe we can provide superior service to our customers and eliminate certain redundancies and costs for them. We believe our ability to address a wide range of end-to-end solutions, network infrastructure and project-staffing service needs of our telecommunications industry clients is a key competitive advantage. Our ability to offer diverse technical capabilities (including design, engineering, construction, deployment, and installation and integration services) allows customers to turn to a single source for those specific specialty services, as well as to entrust us with the execution of entire turn-key solutions. We have become a multi-faceted company with an international presence. We believe this platform will allow us to leverage our corporate and other fixed costs and capture gross margin benefits. Our platform is highly scalable. We typically hire workers to staff projects on a project-by-project basis and our other operating expenses are primarily fixed. Accordingly, we are generally able to deploy personnel to infrastructure projects inthe United States and beyond without incremental increases in operating costs, allowing us to achieve greater margins. We believe this business model enables us to staff our business efficiently to meet changes in demand.
Finally, given the worldwide popularity of telecommunications and wireless products and services, we will selectively pursue international expansion, which we believe represents a compelling opportunity for additional long-term growth.
Our planned expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our operations management systems, financial and management controls and information systems and to hire, train and retain skilled telecommunications personnel. The timing and amount of investments in our expansion could affect the comparability of our results of operations in future periods. Our planned acquisitions will be timed with additions to our management team of skilled professionals with deep industry knowledge and a strong track record of execution. Our senior management team brings an average of over 30 years of individual experience across a broad range of disciplines. We believe our senior management team is a key driver of our success and is well-positioned to execute our strategy.
We were incorporated in 2007 and functioned as a development stage company with limited activities through 2017.
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Factors Affecting Our Performance
Changes in Demand for Data Capacity and Reliability.
The telecommunications industry has undergone and continues to undergo significant changes due to advances in technology, increased competition as telephone and cable companies converge, the growing consumer demand for enhanced and bundled services and increased governmental broadband stimulus funding. As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services. The proliferation of smart phones and other wireless data devices has driven demand for mobile broadband. This demand and other advances in technology have prompted wireless carriers to upgrade their networks. Wireless carriers are actively increasing spending on their networks to respond to the explosion in wireless data traffic, upgrade network technologies to improve performance and efficiency and consolidate disparate technology platforms. These customer initiatives present long-term opportunities for us for the wireless services we provide. Further, the demand for mobile broadband has increased bandwidth requirements on the wired networks of our customers. As the demand for mobile broadband grows, the amount of cellular traffic that must be "backhauled" over customers' fiber and coaxial networks increases and, as a result, carriers are accelerating the deployment of fiber optic cables to cellular sites. These trends are increasing the demand for the types of services we provide.
Our Ability to Recruit, Manage and Retain High-Quality IT and Telecommunications Personnel.
The shortage of skilled labor in the telecommunications industry and the difficulties in recruiting and retaining skilled personnel can frequently limit the ability of specialty contractors to bid for and complete certain contracts. We believe our access to a skilled labor pool gives us a competitive edge over our competitors as we continue to expand.
Our Ability to Expand Internationally
We believe international expansion represents a compelling opportunity for additional growth over the long-term because of the worldwide need for telecommunications infrastructure. We plan to expand our global presence either by expanding our current operations or by acquiring subsidiaries with international platforms.
Our Ability to Expand and Diversify Our Customer Base.
Our customers for specialty contracting services consist of leading telephone, wireless, cable television, utility and other companies. Historically, our revenue has been significantly concentrated in a small number of customers. Although we still operate at a net loss, we have acquired additional subsidiaries and diversified our customer base and revenue streams.
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Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based on our historical consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires management to make certain estimates and assumptions that affect the amounts reported therein and accompanying notes. On an ongoing basis, we evaluate these estimates and assumptions, including those related to recognition of revenue for costs, the fair value of reporting units for goodwill impairment analysis, the assessment of impairment of intangibles and other long-lived assets, income taxes, asset lives used in computing depreciation and amortization, allowance for doubtful accounts, stock-based compensation expense, contingent consideration and accruals for contingencies, including legal matters. These estimates and assumptions require the use of judgment as to the likelihood of various future outcomes and as a result, actual results could differ materially from these estimates. We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations because they involve making significant judgments and estimates that are used in the preparation of our historical consolidated financial statements. The impact of these policies affects our reported and expected financial results and are discussed in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." We have discussed the development, selection and application of our critical accounting policies with the Audit Committee of our board of directors, and the Audit Committee has reviewed the disclosure relating to our critical accounting policies in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also important to understanding our historical consolidated financial statements. The notes to our consolidated financial statements in this report contain additional information related to our accounting policies, including the critical accounting policies described herein, and should be read in conjunction with this discussion. Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by management. Liquidity Management believes that there is substantial doubt about our ability to continue as a going concern. Management believes that our available cash balance as of the date of this filing will not be sufficient to fund our anticipated level of operations for at least the next 12 months. Our ability to continue operations depends on our ability to sustain and grow revenue and results of operations as well as our ability to access capital markets when necessary to accomplish our strategic objectives. For the year endedDecember 31, 2020 we were unable to achieve positive cash flow from operations. Management expects to finance future cash needs from the results of operations and, depending on the results of operations, we may need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. During the years endedDecember 31, 2020 and 2019, we suffered recurring losses from operations. AtDecember 31, 2020 and 2019, we had a stockholders' deficit of$10,112,640 and$5,439,836 , respectively. AtDecember 31, 2020 , we had a working capital deficit of$6,115,451 , as compared to a working capital deficit of$9,790,032 atDecember 31, 2019 . On, or prior toMarch 31, 2022 , we have obligations relating to the payment of indebtedness on loans payable and convertible debentures of$357,876 and$1,581,763 , respectively. We anticipate meeting our cash obligations on indebtedness that is payable on or prior toMarch 31, 2022 from results of operations and from the proceeds of additional indebtedness or equity raises. If we are not successful in obtaining additional financing when required, we expect that we will be able to renegotiate and extend certain of our notes payable as required to enable us to meet our remaining debt obligations as they become due, although there can be no assurance that we will be able to do so. 27
Our future capital requirements for operations will depend on many factors, including the profitability of our businesses, the number and cash requirements of other acquisition candidates that we pursue, and the costs of operations. Management has taken several actions to ensure that we will have sufficient liquidity to meet our obligations, including the reduction of certain general and administrative expenses, consulting expenses and other professional services fees. Additionally, if our actual revenues are less than forecasted, we anticipate implementing headcount reductions to a level that more appropriately matches then-current revenue and expense levels. We are evaluating other measures to further improve our liquidity, including the sale of certain operating assets or businesses, the sale of equity or debt securities and entering into joint ventures with third parties. Lastly, we may elect to reduce certain related-party and third-party debt by converting such debt into common shares. Management believes that these actions will enable us to meet our liquidity requirements throughMarch 31, 2022 . There is no assurance that we will be successful in any capital-raising efforts that we may undertake to fund operations over the next 12 months. To execute our business plan, service existing indebtedness and implement its business strategy, we anticipate that we will need to obtain additional financing from time to time and may choose to raise additional funds through public or private equity or debt financings, a bank line of credit, borrowings from affiliates or other arrangements. We cannot be sure that any additional funding, if needed, will be available on terms favorable to us or at all. Furthermore, any additional capital raised through the sale of equity or equity-linked securities may dilute our current stockholders' ownership and could also result in a decrease in the market price of our common stock. The terms of any securities issued by us in future capital transactions may be more favorable to new investors and may include the issuance of warrants or other derivative securities, which may have a further dilutive effect. We also may be required to recognize non-cash expenses in connection with certain securities we issues, such as convertible notes and warrants, which may adversely impact our financial condition. Furthermore, any debt financing, if available, may subject us to restrictive covenants and significant interest costs. There can be no assurance that we will be able to raise additional capital, when needed, to continue operations in our current form.
Basis of Presentation/Principles of Consolidation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted inthe United States . These consolidated financial statements include the accounts of our company and our subsidiaries, the ADEX Entities, AWS PR, and Tropical. All subsidiaries are wholly-owned. During the year endedDecember 31, 2020 , we sold our AWS and TNS subsidiaries. The operations of AWS and TNS (from the date of acquisition,January 4, 2019 ) have been included as discontinued operations in the accompanying financial statements. All inter-company balances and transactions have been eliminated. Reverse Stock Split OnApril 14, 2020 , we filed a Certificate of Amendment to our Articles of Incorporation with the Secretary of State of the state ofNevada to effect a 1-for-300 reverse stock split with respect to the outstanding shares of our common stock. The Certificate of Amendment became effective onApril 14, 2020 with the state ofNevada , and onApril 20, 2020 ,Financial Industry Regulatory Authority, Inc. (FINRA) made the announcement of the reverse stock split. The reverse stock split was previously approved by our board of directors and the majority of our stockholders. The reverse stock split was deemed effective at the open of business onApril 21, 2020 . As a result of the reverse stock split, every three hundred (300) shares of outstanding common stock of our company as ofApril 14, 2020 were converted into one (1) share of common stock. Fractional shares resulting from the reverse stock split were rounded up to
the next whole number. All common share, warrant, stock option, and per share information in the consolidated financial statements gives retroactive effect to the 1-for-300 reverse stock split. There was no change to the number of authorized shares of common stock or preferred stock of our company as a result of the reverse stock split. The par value of our common stock was unchanged at$0.00001 per share post-split. 28 Use of Estimates The preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We regularly evaluate estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation allowances. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by our company may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected. Cash and Cash Equivalents
We consider all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Accounts Receivable Trade accounts receivable are recorded at the invoiced amount and do not bear interest. We record unbilled receivables for services performed but not billed. Management reviews a customer's credit history before extending credit. We maintain an allowance for doubtful accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change. The allowance for doubtful accounts atDecember 31, 2020 and 2019 was$38,881 and$440,486 , respectively. Property and Equipment
Property and equipment are stated at cost. We depreciate the cost of property and equipment over their estimated useful lives at the following annual rates:
Automotive 3-5 years straight-line basis
Computer equipment and software 3-7 years straight-line basis Leasehold improvements 5 years straight-line basis Office equipment and furniture 5 years straight-line basis
Goodwill Goodwill was initially generated through the acquisitions of the AWS Entities in 2017, the ADEX Entities in 2018, and TNS in 2019, as the total consideration paid exceeded the fair value of the net assets acquired. We perform our annual impairment test onDecember 31st at the reporting unit level, which is consistent with our operating segments. Our reportable segment is infrastructure and professional services. Infrastructure and professional services comprised of the ADEX Entities, AWS PR, and Tropical. These reporting units are aggregated to form one (1) operating segment and one (1) reportable segment for financial reporting. These reporting units are three (3) reportable segments for the evaluation of goodwill for impairment. As our business evolves and the acquired entities continue to be integrated, our operating segments may change. This may require us to reassess how goodwill at our reporting units
are evaluated for impairment.
We perform the impairment testing at least annually or at other times if we
believe that it is more likely than not that there may be an impairment to the
carrying value of our goodwill. A significant amount of judgment is involved in
determining if an indicator of impairment has occurred. Such indicators may
include, among others: a significant decline in our expected future cash flows;
a significant adverse change in legal factors or in the business climate;
unanticipated competition; and slower growth rates. Any adverse change in these
factors could have a significant impact on the recoverability of goodwill and
our consolidated financial results. If it is more likely than not that goodwill
impairment exists, the second step of the goodwill impairment test should be
performed to measure the amount of impairment loss, if any.
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We consider the results of an income approach and a market approach in
determining the fair value of the reportable units. We evaluated the forecasted
revenue using a discounted cash flow model for each of the reporting units. We
also noted no unusual cost factors that would impact operations based on the
nature of the working capital requirements of the components comprising the
reportable units. Current operating results, including any losses, are evaluated
by us in the assessment of goodwill. The estimates and assumptions used in
assessing the fair value of the reporting units and the valuation of the
underlying assets and liabilities are inherently subject to significant
uncertainties. Key assumptions used in the income approach in evaluating
goodwill are forecasts for each of the reporting unit revenue growth rates along
with forecasted discounted free cash flows for each reporting unit, aggregated
into each reporting segment. For the market approach, we used the guideline
public company method, under which the fair value of a business is estimated by
comparing the subject company to similar companies with publicly-traded
ownership interests. From these "guideline" companies, valuation multiples are
derived and then applied to the appropriate operating statistics of the subject
company to arrive at indications of value.
While we use available information to prepare estimates and to perform
impairment evaluations, actual results could differ significantly from these
estimates or related projections, resulting in impairment related to recorded
goodwill balances. Additionally, adverse conditions in the economy and future
volatility in the equity and credit markets could impact the valuation of our
reporting units. We can provide no assurances that, if such conditions occur,
they will not trigger impairments of goodwill and other intangible assets in
future periods.
Events that could cause the risk for impairment to increase are the loss of a major customer or group of customers, the loss of key personnel and changes to current legislation that may impact our industry or its customers' industries. There were no impairment charges during the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we sold our TNS and AWS subsidiaries. In connection with the sales, the Company tested its goodwill for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year endedDecember 31, 2020 . Intangible Assets
At
We periodically evaluate the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. We have no intangibles with indefinite lives. For long-lived assets, impairment losses are only recorded if the asset's carrying amount is not recoverable through its undiscounted, probability-weighted future cash flows. We measure the impairment loss based on the difference between the carrying amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value. There were no impairment charges during the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we sold our TNS and AWS subsidiaries. In connection with the sales, the Company tested its intangible assets for impairment. The Company completed a recoverability test as there were indicators of impairment and determined that the value was recoverable. As such, no impairment was recorded for the year endedDecember 31, 2020 . Long-lived Assets In accordance with ASC 360, "Property, Plant and Equipment", we test long-lived assets or asset groups for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances. An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
Foreign Currency Translation
Transactions in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date. Monetary balance sheet items expressed in foreign currencies are translated intoU.S. dollars at the exchange rates in effect at the balance sheet date. The resulting exchange gains and losses are recognized in income. Our integrated foreign subsidiaries are financially or operationally dependent on our company. We use the temporal method to translate the accounts of its integrated operations intoU.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. 30 Income Taxes We account for income taxes using the asset and liability method in accordance with ASC 740, "Accounting for Income Taxes". The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to
be realized. We conduct business, and file federal and state income, franchise or net worth, tax returns inCanada ,the United States , in various states withinthe United States and theCommonwealth of Puerto Rico . We determine our filing obligations in a jurisdiction in accordance with existing statutory and case law. We may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. For Canadian andU.S. income tax returns, the open taxation years range from 2010 to 2020. In certain circumstances, theU.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 ofCanada andU.S. have not audited any of our company's, or our subsidiaries', income tax returns for the open taxation years noted above. Significant management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded against our deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. We currently have significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income. We follow the guidance set forth within ASC Topic 740, "Income Taxes" ("ASC Topic 740") which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component of current income tax expense. We received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014. The amount due as ofDecember 31, 2020 was$156,711 plus penalties and interest of$129,967 for a total obligation due of$286,678 . The amount due as ofDecember 31, 2019 was$156,711 plus penalties and interest of$126,700 for a total obligation due of$283,411 . This tax assessment is included in accrued expenses atDecember 31, 2020 and 2019. Revenue Recognition
Adoption of New Accounting Guidance on Revenue Recognition
We recognize revenue based on the five criteria for revenue recognition established under Topic 606: 1) identify the contract, 2) identify separate performance obligations, 3) determine the transaction price, 4) allocate the transaction price among the performance obligations, and 5) recognize revenue as the performance obligations are satisfied. Contract Types Our contracts fall under three main types: 1) unit-price, 2) fixed-price, and 3) time-and-materials. Unit-price contracts relate to services being performed and paid on a unit basis, such as per mile of construction completed. Fixed-price contracts are based on purchase order line items that are billed on individual invoices as the project progresses and milestones are reached. Time-and-materials contracts include employees working permanently at customer locations and materials costs incurred by those employees.
A significant portion of our revenues come from customers with whom we have a master service agreement ("MSA"). These MSA's generally contain customer specific service requirements.
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Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the new revenue standard. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For our different revenue service types the performance obligation is satisfied at different times. For professional services revenue, the performance obligation is met when the work is performed. In certain cases this may be each day, or each week depending on the customer. For construction services, the performance obligation is met when the work is completed and the customer has approved the work. Contract assets include unbilled amounts for costs of services incurred on contracts with open performance obligations. These amounts are included in contract assets on the consolidated balance sheets. Contract liabilities include costs incurred and are included in contract liabilities on the consolidated balance sheets. Revenue Service Types
The following is a description of our revenue service types, which include professional services and construction:
? Professional services are services provided to the clients where we
deliver distinct contractual deliverables and/or services. Deliverables
may include but are not limited to: engineering drawings, designs, reports
and specification. Services may include, but are not limited to:
consulting or professional staffing to support our client's objectives.
Consulting or professional staffing services may be provided remotely or
on client premises and under their direction and supervision.
? Construction Services are services provided to the client where we may
self-perform or subcontract services that require the physicalconstruction of infrastructure or installation of equipment and materials.
Disaggregation of Revenues
We disaggregate our revenue from contracts with customers by service type,
contract type, contract duration, and timing of transfer of goods or services.
See the below tables:
Year Ended Year Ended
December 31, December 31,
Revenue by service type 2020 2019
Professional Services $ 17,167,905 $ 19,452,318
Construction 1,509,539 6,043,753
Total $ 18,677,444 $ 25,496,071
Year Ended Year Ended
December 31, December 31,
Revenue by contract duration 2020 2019
Short-term $ 79,279 $ 8,821
Long-term 18,598,165 25,487,250
Total $ 18,677,444 $ 25,496,071
Year Ended Year Ended
December 31, December 31,
Revenue by contract type 2020 2019
Unit-price $ 377,065 $ 4,625,229
Fixed-price $ 1,132,474 $ 1,418,524
Time-and-materials 17,167,905 19,452,318
Total $ 18,677,444 $ 25,496,071
We also disaggregate our revenue by operating segment and geographic location.
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Accounts Receivable
Accounts receivable include amounts from work completed in which we have billed.
The amounts due are stated at their net estimated realizable value. We maintain
an allowance for doubtful accounts to provide for the estimated amount of
receivables that will not be collected. The allowance is based upon an
assessment of customer creditworthiness, historical payment experience, the age
of outstanding receivables and collateral to the extent applicable.
Contract Assets and Liabilities
Contract assets include unbilled amounts for costs and services incurred on
contracts with open performance obligations. These amounts are included in
contract assets on the consolidated balance sheets. At
Contract liabilities include payment received for incomplete performance obligations and are included in contract liabilities on the consolidated balance sheets. AtDecember 31, 2020 and 2019, contract liabilities totaled$287,775 and$355,988 , respectively. Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs.
Research and Development Costs
Research and development costs are expensed as incurred.
Stock-based Compensation
We record stock-based compensation in accordance with ASC 718, "Compensation -
Stock Compensation" ("ASC 718"), using the fair value method. All transactions
in which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
We account for stock-based compensation awards issued to non-employees for
services, as prescribed by ASC 718-10, at either the fair value of the services
rendered or the instruments issued in exchange for such services, whichever is
more readily determinable, using the measurement date guidelines enumerated
in
ASU 2018-07.
We use the Black-Scholes option pricing model to calculate the fair value of
stock-based awards. This model is affected by our stock price as well as
assumptions regarding a number of subjective variables. These subjective
variables include, but are not limited to, our expected stock price volatility
over the term of the awards, and actual and projected employee stock option
exercise behaviors. The value of the portion of the award that is ultimately
expected to vest is recognized as an expense in the consolidated statement of
operations over the requisite service period.
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Loss Per Share
We compute loss per share in accordance with ASC 260, "Earnings per Share" which
requires presentation of both basic and diluted loss per share ("EPS") on the
face of the income statement. Basic EPS is computed by dividing the loss
available to common shareholders (numerator) by the weighted average number of
shares outstanding (denominator) during the period. Diluted EPS gives effect to
all dilutive potential common shares outstanding during the period using the
treasury stock method and convertible preferred stock using the if-converted
method. In computing diluted EPS, the average stock price for the period is used
in determining the number of shares assumed to be purchased from the exercise of
stock options or warrants. Diluted EPS excludes all dilutive potential shares if
their effect is anti-dilutive. As of December 31, 2020 and 2019, respectively,
we had 53,429,108 and 286,736 common stock equivalents outstanding.
Leases
We adopted FASB Accounting Standards Codification, Topic 842, Leases ("ASC 842")
on
The new leasing standard requires recognition of leases on the consolidated
balance sheets as right-of-use ("ROU") assets and lease liabilities. ROU assets
represent our right to use underlying assets for the lease terms and lease
liabilities represent our obligation to make lease payments arising from the
leases. Operating lease ROU assets and operating lease liabilities are
recognized based on the present value and future minimum lease payments over the
lease term at commencement date. As our leases do not provide an implicit rate,
we uses our estimated incremental borrowing rate based on the information
available at commencement date in determining the present value of lease
payments. A number of our lease agreements contain options to renew and options
to terminate the leases early. The lease term used to calculate ROU assets and
lease liabilities only includes renewal and termination options that are deemed
reasonably certain to be exercised.
We recognized lease liabilities, with corresponding ROU assets, based on the
present value of unpaid lease payments for existing operating leases longer than
twelve months. The ROU assets were adjusted per ASC 842 transition guidance for
existing lease-related balances of accrued and prepaid rent, unamortized lease
incentives provided by lessors, and restructuring liabilities, Operating lease
cost is recognized as a single lease cost on a straight-line basis over the
lease term and is recorded in selling, general and administrative expenses.
Variable lease payments for common area maintenance, property taxes and other
operating expenses are recognized as expense in the period when the changes in
facts and circumstances on which the variable lease payments are based occur. We
have elected not to separate lease and non-lease components for all property
leases for the purposes of calculating ROU assets and lease liabilities.
Recent Accounting Pronouncements
InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. We adopted this standard onJanuary 1, 2020 . The adoption of this standard did not materially impact our consolidated financial statements and related disclosures. We have implemented all new accounting pronouncements that are in effect and that may impact our financial statements and do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or result of operations. 34 Concentrations of Credit Risk Financial instruments that potentially subject our company to concentrations of credit risk consist principally of cash and accounts receivables. We maintain our cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk. We provide credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the year endedDecember 31, 2020 , three customers accounted for 31%, 21%, and 10%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 34%, 20%, and 3%, respectively, of trade accounts receivable as ofDecember 31, 2020 . For the year endedDecember 31, 2019 , four customers accounted for 37%, 19%, 14%, and 12%, respectively, of consolidated revenues for the period. In addition, amounts due from these customers represented 57%, 2%, 1%, and 9%, respectively, of trade accounts receivable as ofDecember 31, 2019 . Our customers are primarily located within the domesticUnited States of America ,Puerto Rico , andCanada . Revenues generated within the domesticUnited States of America accounted for approximately 93% of consolidated revenues for the year endedDecember 31, 2020 . Revenues generated from customers inPuerto Rico andCanada accounted for approximately 7% of consolidated revenues for the year endedDecember 31, 2020 . Revenues generated within the domesticUnited States of America accounted for approximately 94% of consolidated revenues for the year endedDecember 31, 2019 . Revenues generated from customers inPuerto Rico andCanada accounted for approximately 6% of consolidated revenues for the year endedDecember 31, 2019 . Fair Value Measurements We measure and disclose the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy
is defined as follows:
Level 1 - quoted prices for identical instruments in active markets;
Level 2 - quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 - fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable and convertible debentures. Derivative liabilities are determined based on "Level 3" inputs, which are significant and unobservable and have the lowest priority. There were no transfers into or out of "Level 3" during the years endedDecember 31, 2020 and 2019. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations. 35 Our financial assets and liabilities carried at fair value measured on a recurring basis as ofDecember 31, 2020 and 2019, consisted of the following: Quoted Quoted prices in prices in Quoted prices Total fair value active active in active at December 31, markets markets markets 2020 (Level 1) (Level 2) (Level 3) Description: Derivative liability (1)$ 3,390,504 $ - $ -$ 3,390,504 Quoted Quoted Quoted prices in prices in prices in Total fair value active active active at December 31, markets markets markets 2019 (Level 1) (Level 2) (Level 3) Description: Derivative liability (1) $ 992,733 $ - $ -$ 992,733
(1) We have estimated the fair value of these derivatives using the
model.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial statement. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Derivative Liabilities
We account for derivative instruments in accordance with ASC Topic 815,
"Derivatives and Hedging" and all derivative instruments are reflected as either
assets or liabilities at fair value in the balance sheet. We use estimates of
fair value to value our derivative instruments. Fair value is defined as the
price to sell an asset or transfer a liability in an orderly transaction between
willing and able market participants. In general, our policy in estimating fair
values is to first look at observable market prices for identical assets and
liabilities in active markets, where available. When these are not available,
other inputs are used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and credit spreads,
relying first on observable data from active markets. Depending on the
availability of observable inputs and prices, different valuation models could
produce materially different fair value estimates. The values presented may not
represent future fair values and may not be realizable. We categorize our fair
value estimates in accordance with ASC 820 based on the hierarchical framework
associated with the three levels of price transparency utilized in measuring
financial instruments at fair value as discussed above. As of December 31, 2020
and 2019, we had a derivative liability of $3,390,504 and $992,733 ,
respectively.
Sequencing Policy
Under ASC 815-40-35, we have adopted a sequencing policy whereby, in the event
that reclassification of contracts from equity to assets or liabilities is
necessary pursuant to ASC 815 due to our inability to demonstrate we have
sufficient authorized shares as a result of certain securities with a
potentially indeterminable number of shares, shares will be allocated on the
basis of the earliest issuance date of potentially dilutive instruments, with
the earliest grants receiving the first allocation of shares. Pursuant to ASC
815, issuance of securities to our employees or directors are not subject to the
sequencing policy.
Reclassifications
Certain balances in previously issued consolidated financial statements have
been reclassified to be consistent with the current period presentation. The
reclassification had no impact on total financial position, net income, orstockholders' equity. Results of Operations
Year Ended
The following summary of our results of operations should be read in conjunction
with our financial statements for the years ended
36
Our operating results for the years ended December 31, 2020 and 2019 are
summarized as follows:
Year Ended Year Ended
December 31 , December 31,
2020 2019Statement of Operations Data:
Revenues$ 18,677,444 $ 25,496,071 Operating expenses 22,982,226 28,986,092 Loss from continuing operations before taxes (4,304,782 ) (3,490,021 ) Total other expense (6,086,715 ) (1,266,278 ) Provision for income taxes 1,908 204,231 Loss on discontinued operations, net of tax (7,316,891 ) (873,728 ) Net loss attributable to common stockholders (17,710,296 ) (6,322,330 ) Net loss per share, basic and diluted
(3.92 ) (52.98 ) Weighted average common shares outstanding, basic and diluted 4,521,290
119,344
Our significant balances sheet accounts as of
December 31, December 31,
2020 2019
Balance Sheet Data:
Cash $ 580,800 $ 375,141
Accounts receivable, net 2,481,124 3,860,623
Total current assets 3,242,598 6,297,881
Goodwill and intangible assets, net 953,791 1,004,767
Total assets 4,327,392 12,168,819
Total current liabilities 9,358,049 16,087,913
Total long-term liabilities 3,860,050 28,324
Mezzanine equity 1,221,933 1,492,418
Stockholders' deficit $ (10,112,640 ) $ (5,439,836 )
Revenue
Our revenue decreased from$25,496,071 for the year endedDecember 31, 2019 to$18,677,444 for the year endedDecember 31, 2020 . The decrease is primarily related to a$7,641,749 decrease in sales for our ADEX subsidiary. ADEX's three largest customers in 2019 combined for revenues of$17,822,102 . These customers accounted for revenues of$10,269,128 in 2020. This decrease was partially offset by an increase for one ADEX customer of$1,539,167 , with sales of$1,923,203 in 2020 compared to sales of$384,036 is 2019. We also saw the addition of new customers in 2020 that did not have revenue in 2019.
Additionally, our operations, as well as the operations of many of our customers, were impacted by the ongoing COVID-19 pandemic, which negatively impacted our revenues for 2020. We anticipate that as the COVID-19 restrictions are removed, revenues should begin to increase.
If the High Wire transaction as proposed closes, we anticipate significantly higher revenues in 2021 and beyond.
A significant portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are currently party to numerous master service agreements, and typically have multiple agreements with each of our customers.Master Service Agreements (MSAs) generally contain customer-specified service requirements, such as discreet pricing for individual tasks. To the extent that such contracts specify exclusivity, there are often a number of exceptions, including the ability of the customer to issue work orders valued above a specified dollar amount to other service providers, perform work with the customer's own employees and use other service providers when jointly placing facilities with another utility. In most cases, a customer may terminate an agreement for convenience with written notice. The remainder of our services are provided pursuant to contracts for specific projects. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts for specific projects are generally three to four months in duration. The percentage of revenue from long-term contracts varies between periods depending on the mix of work performed under our contracts. 37 Cost of Revenues
Cost of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct materials, insurance claims and other direct costs. For a majority of the contract services we perform, our customers provide all required materials while we provide the necessary personnel, tools and equipment. Materials supplied by our customers, for which the customer retains financial and performance risk, are not included in our revenue or costs of revenues.
Our cost of revenues decreased from
If the High Wire transaction as proposed closes, we anticipate significantly higher cost of revenues in 2021 and beyond.
General and Administrative Costs
General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries' management personnel and administrative overhead. These costs primarily consist of employee compensation and related expenses, including legal, consulting and professional fees, information technology and development costs, provision for or recoveries of bad debt expense and other costs that are not directly related to performance of our services under customer contracts. Information technology and development costs included in general and administrative expenses are primarily incurred to support and to enhance our operating efficiency. We expect these expenses to continue to generally increase as we expand our operations, but expect that such expenses as a percentage of revenues will decrease if we succeed in increasing revenues. General and administrative costs were$3,266,994 for the year endedDecember 31, 2020 compared to$3,172,708 for the year endedDecember 31, 2019 . The increase in general and administrative expenses was primarily due to an increase in general and administrative costs for our ADEX subsidiary of$538,861 , including factoring fees of$323,919 related to our factor financing, which is new for 2020.
We anticipate replacing the factor financing with traditional financing in 2021. Additionally, if the High Wire transaction as proposed closes, we anticipate higher general and administrative costs in 2021 and beyond. We expect general and administrative costs as a percentage of revenue to be lower than in 2020.
Salaries and Wages Expenses
Salaries and wages were$4,256,997 for the year endedDecember 31, 2020 compared to$3,567,574 for the year endedDecember 31, 2019 . The increase during the year endedDecember 31, 2020 was primarily due to stock compensation expense, which increased from$622,739 to$1,897,423 in 2020 compared to$1,274,694 in 2019. Stock compensation increased due to a decision in 2020 to fully vest all unvested RSUs. 38 Net Income (Loss)
Our net loss attributable to common stockholders increased from$6,322,330 for the year endedDecember 31, 2019 to$17,710,296 for the year endedDecember 31, 2020 . As ofDecember 31, 2020 , our stockholders' deficit was$10,112,640 . Accounts Receivable We had accounts receivable, net of allowance for doubtful accounts atDecember 31, 2020 and 2019 of$2,481,124 and$3,860,623 , respectively. The decrease in accounts receivable was a result of decreased revenues in the final quarter of 2020 compared to the same period of 2019. Capital expenditures We had capital expenditures of$7,760 and$7,759 for the years endedDecember 31, 2020 and 2019, respectively. We expect to fund capital expenditures for the 12 months endedDecember 31, 2021 out of our working capital. Income Taxes
As of
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating loss, capital loss and credit carryforwards if we were to undergo an ownership change, as defined in Section 382 of the Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating losses capital losses and credits prior to full utilization. We have not completed a study to assess whether ownership change has occurred as a result of our acquisition of AWS and related issuance of shares. However, as a result of the issuance of common shares in 2017, we believe an ownership change under Sec. 382 may have occurred. As a result of this ownership change, certain of our net operating loss, capital loss and credit carryforwards will expire prior to full utilization. Additionally, further share issuances such as the shares issuances to InterCloud Systems, Inc. and other convertible debt transactions may result in additional ownership changes. We perform an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. Our recent operating results and projections of future income weigh heavily in our overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because we had sustained cumulative losses since the commencement of operations.
Our continuing practice is to recognize interest and/or penalties related to
income tax matters as a component of income tax expense. As of
We are subject toU.S. federal income taxes and to income taxes in various states inthe United States . Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Due to our net operating loss carryforwards all years remain open to examination by the major domestic taxing jurisdictions to which we are subject. In addition, all of the net operating loss and credit carryforwards that may be used in future years are still subject to adjustment. 39
Liquidity and Financial Condition
As ofDecember 31, 2020 , our total current assets were$3,242,598 and our total current liabilities were$9,358,049 , resulting in a working capital deficit of$6,115,451 compared to working capital deficit of$9,790,032 as of December
31, 2019.
We have suffered recurring losses from operations. The continuation of our
company is dependent upon us attaining and maintaining profitable operations and
raising additional capital as needed. In this regard we have historically raised
additional capital through equity offerings and loan transactions.
Cash Flows
Year Ended December 31,
2020 2019
Net cash used in operating activities
$ 205,659 $ (210,058 ) The increase in cash that we experienced during the year endedDecember 31, 2020 as compared to the decrease in cash during the year endedDecember 31, 2019 was primarily a result of a decrease in cash used in operating activities in 2020 compared to 2019. This was partially offset by a decrease is cash provided by financing activities in 2020 compared to 2019. We have not been able to reach the break-even point since our inception and have had to rely on raising capital. We anticipate generating increased revenues over the next year. Over the next 12 months, we anticipate raising additional funds, and we plan to primarily concentrate on our telecommunications business and associated projects along with our anticipated merger with High Wire. In order to improve our liquidity, we intend to pursue additional equity financing from private placement sales of our equity securities or shareholders' loans. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to preserve our liquidity. Indebtedness As ofDecember 31, 2020 , the outstanding balances of convertible loans payable to related parties, loans payable, convertible debentures and factor financing were$577,925 ,$3,452,506 ,$1,002,463 and$1,914,611 , respectively, net of debt discounts of$0 ,$38,874 and$301,957 , respectively. The total outstanding principal balance per the loan agreements and factor financing due to our debt holders was$7,488,336 atDecember 31, 2020 . We are currently in discussions with certain of our creditors to restructure some of these loan agreements to reduce the principal balance and extend maturity dates. However, there can be no assurance that we will be successful in reducing the principal balance or extending the maturity dates of any of our outstanding
notes.
40
Loans Payable to Related Parties
AtDecember 31, 2020 and 2019, we had outstanding the following loans payable to related parties:December 31 ,December 31, 2020 2019
Convertible promissory note issued to
$ 554,031 $ -
Convertible promissory note issued to
23,894 -
Promissory note issued to
- 18,858
Promissory note issued to
- 130,000
Promissory note issued to
- 85,000
Promissory note issued to
- 80,000
Promissory note issued to
- 170,000
Loan with WaveTech GmbH , 8% interest, due on demand - 3,000,000 Total$ 577,925 $ 3,483,858
Additional information on our loans payable to related parties is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
Loans Payable
As of
December 31 ,December 31, 2020 2019
Promissory note issued to
$
41,361
7,760 7,760
Promissory note issued to 0738856 BC ltd non-interest bearing, unsecured and due on demand
2,636 2,636
Promissory note issued to 0738856
15,000 15,000
Promissory note issued to Bluekey Energy, non-interest bearing, unsecured and due on demand
7,500 7,500
Subscription amount due to
50,000 50,000
Promissory note issued to
12,000 12,000
Promissory note issued to InterCloud Systems, Inc., non-interest bearing, unsecured and due on demand
217,400 217,400
Future receivables financing agreement with Pawn Funding,
non-interest bearing, matures
18,334 94,928
Future receivables financing agreement with Cedar Advance
Funding, non-interest bearing, matures
160,390 -
CARES Act Loans 2,920,125 -
Future receivables financing agreement with RDM Capital
Funding, non-interest bearing, matures
- 237,319
Loan with
- 2,973,458
Future receivables financing agreement with
- 136,424
Total $ 3,452,506 $ 3,795,786
Less: Long-term portion of loans payable (2,920,125 ) -
Loans payable, current portion, net of debt discount $ 532,381 $ 3,795,786
Additional information on our loans payable is set forth in our consolidated
financial statements included in this report in Item 8, Financial Statements and
Supplementary Data.
41
Convertible Debentures
At December 31, 2020 and 2019, we had outstanding the following convertible
debentures:
December 31, December 31,
2020 2019
Convertible promissory note, Barn 11, 18% interest,
unsecured, matured
$
594,362
51,788 38,025
Convertible promissory note,
54,500 99,014
Convertible promissory note,
39,328 16,352
Convertible promissory note,
- -
Convertible promissory note,
257,442 -
Convertible promissory note,
5,043 -
Convertible promissory note,
- 1,461,265
Convertible promissory note,
- 112,488
Convertible promissory note,
- 355,342
Convertible promissory note,
- 98,181
Convertible promissory note,
- 34,326
Convertible promissory note,
- 15,449
Convertible promissory note,
- 12,875
Total 1,002,463 2,837,679 Less: Long-term portion of convertible debentures, net of debt discount
- (28,324 )
Convertible debentures, current portion, net of debt
discount $ 1,002,463 $ 2,809,355 Additional information on our convertible debentures is set forth in our consolidated financial statements included in this report in Item 8, Financial Statements and Supplementary Data.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders. Inflation
The effect of inflation on our revenue and operating results has not been significant.
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