The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Nature of operations
Charge Enterprises, Inc., through its subsidiaries (sometimes referred to herein as “we,” “us,” “our,” “Charge” or the “Company”) consists of a portfolio of global businesses with a vision to build the electrification and telecommunications infrastructure that will address and service requirements for EVC (“Electrical Vehicle Charging”) and WNI (“Wireless Network Infrastructure”) which includes 5G, tower, distributed antennae systems (“DAS”), small cell, and electrical infrastructure.
The Company operates in two segments: Telecommunications, which provides connection of voice calls and data to global carriers and Infrastructure which builds physical wireless network elements, provides electrical construction services and designs and installs EV charging stations and infrastructure. Financial information about each business segment is contained in “Note 13- Reportable segments” to the consolidated financial statements.
Note 2 Summary of significant accounting policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 have not been audited by an independent registered public accounting firm. These unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2021 and reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2022 and the results of operations, equity, comprehensive income (loss) and cash flows for the periods presented herein.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) in the United States have been omitted pursuant to such rules and regulations. References to GAAP in these notes are to the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™, sometimes referred to as the codification or “ASC.” These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission ("SEC") on March 29, 2022.
The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and the Company has and intends to continue to take advantage of certain exemptions from various reporting requirements
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements and related disclosures, presented in U.S. dollars, have been prepared in accordance with GAAP and pursuant to the rules and regulations of the SEC. The results and trends in these consolidated financial statements may not be representative of these for any future periods or full year.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. While we will continue to evaluate the potential impacts of the new guidance, the Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position or results of operations.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“AUS 2020-06”). ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective January 1, 2024, for the Company. Early adoption is permitted. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
In October 2021, the FASB issued ASU No. 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805). This ASU requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU should be applied prospectively. Early adoption is also permitted, including adoption in an interim period. If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements.
Note 3 Property, plant and equipment
Property, plant and equipment consisted of the following:
| | March 31, 2022 | | | December 31, 2021 | |
| | | | | | |
Equipment | | $ | 5,925,521 | | | $ | 5,924,332 | |
Computer hardware | | | 468,122 | | | | 468,122 | |
Computer software | | | 36,932 | | | | 36,932 | |
Furniture and fixtures | | | 106,424 | | | | 106,424 | |
Vehicles | | | 2,830,883 | | | | 2,830,883 | |
Leasehold improvements | | | 5,560 | | | | 5,560 | |
| | | 9,373,442 | | | | 9,372,253 | |
Less: Accumulated depreciation | | | (7,519,148 | ) | | | (7,360,584 | ) |
Property, plant and equipment – net | | $ | 1,854,294 | | | $ | 2,011,668 | |
Depreciation expense was $209,054 and $49,947 for the three months ended March 31, 2022 and 2021, respectively.
Note 4 Marketable securities and other investments
Our marketable securities are stated at fair value in accordance with ASC Topic 321, Investments- Equity Securities. Any changes in the fair value of the Company’s marketable securities are included in net income under the caption of income (loss) from investments, net on the Statements of Operations. The market value of the securities is determined using prices as reflected on an established market. Realized and unrealized gains and losses are determined on an average cost basis. The marketable securities are investments predominately in shares of large publicly traded securities which are being invested until such time the funds are needed for operations. The investments in marketable securities totals $23,721,546 and $9,618,743, as of March 31, 2022 and December 31, 2021 respectively.
The value of these marketable securities is as follows:
| | March 31, 2022 | | | December 31, 2021 | |
Description of Securities | | Brokerage Account | | | Other Securities | | | Total | | | Brokerage Account | | | Other Securities | | | Total | |
| | | | | | | | | | | | | | | | | | |
Cost | | $ | 24,026,456 | | | $ | 30,900 | | | $ | 24,057,356 | | | $ | 10,428,724 | | | $ | 120,800 | | | $ | 10,549,524 | |
Gross Unrealized Gains | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Gross Unrealized Losses | | | (324,578 | ) | | | (11,232 | ) | | | (335,810 | ) | | | (840,881 | ) | | | (89,900 | ) | | | (930,781 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fair Value | | $ | 23,701,878 | | | $ | 19,668 | | | $ | 23,721,546 | | | $ | 9,587,843 | | | $ | 30,900 | | | $ | 9,618,743 | |
The above marketable securities are reflected as level 1 assets as the security prices are quotes in an established market. During the three months ended March 31, 2022, the Company recognized a net loss of $110,006 within income (loss) from investments, net on the Statement of Operations, which includes $270,438 of unrealized losses and $160,432 of realized gains.
During the three months ended March 31, 2021, the Company recognized net gain of $3,401,714 within income from investments,net on the Statement of Operations, which includes $197,464 of unrealized gains and $3,204,250 of realized gains.
Note 5 Business acquisitions
EV Group Holdings LLC
Our wholly owned subsidiary, Charge Infrastructure, Inc., entered into an agreement and plan of merger, dated January 14, 2022, with the shareholders of EV Group Holdings LLC (“EV Depot”) pursuant to which the Company agreed to purchase all the issued and outstanding shares of EV Depot for an aggregate purchase price of $18,787,105. $17,530,278 of the aggregate purchase price payable to the shareholders of EV Depot will be payable through the issuance of 5,201,863 shares of common stock. The agreement includes a clause protecting the sellers whereby if the average price of Charge’s common stock for the month ending December 31, 2022 is less than the per share price of Charge’s common stock determined at closing, the Company will increase the number of shares of common stock issued. The Company recorded this as a contingent consideration liability. The agreement also included a clause for gross margin protection to the Company should the 2022 gross margin of EV Depot fall below target levels, the Company will reduce the number of shares of common stock to be issued to EV Depot. The Company recorded this as a contingent consideration asset. The acquisition closed on January 14, 2022. This acquisition has been accounted for using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. The final determination of the fair value of certain assets and liabilities will be completed within the one year measurement period from the date of acquisition as required by Accounting Standards Codification (ASC) Topic 805, Business Combinations. This will allow us time to adequately analyze all the factors used in establishing the asset and liability fair values as of the acquisition date. Any potential adjustments could be material in relation to the preliminary values presented below.
The following table summarizes the preliminary fair values of the net assets acquired and liabilities assumed as of the January 14, 2022 acquisition date.
Cash | | $ | 1,231,250 | |
Accrued expenses | | | 18,750 | |
Contingent consideration liability, net of $72,748 of contingent consideration asset | | | 6,827 | |
Common Stock (5,201,863 Shares) | | | 17,530,278 | |
Total consideration | | $ | 18,787,105 | |
| | | | |
Fair values of identifiable net assets and liabilities: | | | | |
Assets | | | | |
Cash | | $ | 104,485 | |
Deposits, prepaids and other current assets, net | | | (11,167 | ) |
Operating lease right-of-use asset | | | 2,016,700 | |
Non-current assets | | | 390,625 | |
Total assets | | | 2,500,643 | |
Liabilities | | | | |
Accrued liabilities | | | 27,407 | |
Deferred revenue | | | 166,984 | |
Operating lease liability | | | 2,016,700 | |
Total liabilities | | | 2,211,091 | |
| | | | |
Total fair value of identifiable net assets and liabilities | | | 289,552 | |
| | | | |
Goodwill (consideration given minus fair value of identifiable net assets and liabilities) | | $ | 18,497,553 | |
The determination of goodwill in the amount of $18.5 million was recognized for the EV Depot acquisition as the excess of consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets, including an assembled workforce, which cannot be individually identified and separately recognized. The recorded goodwill is not deductible for tax purposes.
The inclusion of the EV Depot acquisition in our Consolidated Financial Statements is not deemed material with respect to the requirement to provide pro-forma results of operations. As such, pro-forma information is not presented.
B W Electrical Services LLC
Our wholly owned subsidiary, Charge Infrastructure, Inc., entered into a securities purchase agreement, dated December 22, 2021, with the shareholders of B W Electrical Services LLC (“BW”) pursuant to which we agreed to purchase all the issued and outstanding shares of BW for an aggregate purchase price of $18,038,570. $4,538,570 of the aggregate purchase price payable to the shareholders of BW will be payable through the issuance of 1,285,714 shares of common stock. The acquisition closed on December 27, 2021. While we continue to finalize the
preliminary fair values of the net assets acquired and liabilities assumed as of the December 27, 2021 acquisition date, we did not recognize any adjustments in the period ended March 31, 2022. Any potential adjustments could be material in relation to the preliminary values presented previously.
Note 6 Related party
During the first quarter of 2021, the Company granted Mr. Deutsch, a Board member of the Company, options to acquire 1,500,000 shares of common stock, at an exercise price of $2.00, for services rendered related to financial consulting.
During 2021, the Company paid $320,000 to Korr Acquisition Group, Inc. related to successful acquisition efforts. Kenneth Orr, the former Chairman of the Company, has sole voting and dispositive power over the shares held by KORR Acquisitions Group, Inc.
Note 7 Convertible notes payable
The Company’s outstanding convertible notes payables as of March 31, 2022 and December 31, 2021 are summarized below:
Convertible Notes Payable: | | March 31, 2022 | | | December 31, 2021 | |
Issued on May 8, 2020 (8% interest) | | $ | 3,000,000 | | | $ | 3,000,000 | |
Issued on November 3, 2020 (8% interest) | | | 3,888,889 | | | | 3,888,889 | |
Issued on May 19, 2021 (8% interest) | | | 5,610,000 | | | | 5,610,000 | |
Issued on April 30, 2021 (6% interest) | | | - | | | | 66,400 | |
Total face value | | | 12,498,889 | | | | 12,565,289 | |
Less: unamortized discount | | | (4,843,907 | ) | | | (5,389,693 | ) |
Total convertible notes payable | | $ | 7,654,982 | | | $ | 7,175,597 | |
April 30, 2020 Sutton Global Note $227,525 Face Value
On April 30, 2020, the former CEO converted his payable into a convertible note with a face value of $300,000. The note has a coupon rate of 6% and a maturity date of December 31, 2021. The note is convertible at a rate of $0.0005 per share. Since the note added a conversion option, it resulted in a debt modification requiring the Company to record a loss on modification of debt in the amount of $98,825. On March 25, 2021, Sutton Global Associates converted $149,000 in principal and $12,125 in accrued interest into 644,499 shares of the Company’s common stock. The remaining note balance was subsequently sold to an unrelated party who converted the entire principal and accrued interest balance into 319,950 shares of the company common stock on March 12, 2022.
Interest expense and amortization of debt discount and debt issuance costs for the convertible notes payables is as follows:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Interest Expense | | $ | 247,076 | | | $ | 146,467 | |
Amortization of debt discount | | | 545,786 | | | $ | 61,874 | |
Amortization of debt issuance costs | | | - | | | | 7,397 | |
Total | | $ | 792,862 | | | $ | 215,738 | |
The accrued interest relating to the convertible notes payable as of March 31, 2022 and December 2021 was $175,178 and $183,067, respectively.
Note 8 Convertible notes payable, related parties
The Company did not have any outstanding convertible notes payables, related parties as of March 31, 2022 and December 31, 2021.
Interest expense and amortization of debt discount for the convertible notes, related parties is as follows:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Interest Expense | | $ | - | | | $ | 6,019 | |
Amortization of debt discount | | | - | | | | 95,127 | |
Total | | $ | - | | | $ | 101,146 | |
KORR Value Financing
In May and June 2020, the Company entered into a securities purchase agreement with KORR Value LP, an entity controlled by Kenneth Orr, pursuant to which the Company issued convertible notes in an aggregate principal amount of $550,000 for an aggregate purchase price of $495,000 (collectively, the “KORR Notes”). In connection with the issuance of the KORR Notes, the Company issued to KORR Value warrants to purchase an aggregate of 1,151,515 shares of Common Stock (collectively, the “KORR Warrants”). The KORR Notes and KORR Warrants are on substantially the same terms as the Notes and Warrants issued to the Selling Shareholders except that the KORR Notes are subordinated to the Notes. On August 27, 2020, notes totaling $288,889 and 658,667 warrants were assigned to an unrelated party.
On March 15, 2021, KORR Value converted $261,111 in principal and $17,798 in accrued interest related to the convertible notes issued May 8, 2020 into 1,115,638 shares of the Company’s common stock.
9 Madison Inc. Financing
On September 2, 2020, the Company entered into a securities purchase agreement with 9 Madison, Inc., an entity controlled by Andrew Fox, the Company’s CEO, pursuant to which the Company issued a convertible note in the amount of $110,000 for an aggregate purchase price of $100,000. The notes are convertible at the holder’s option at a conversion price of $0.25 per share. In connection with the issuance of the Notes, the Company issued to 9 Madison warrants to purchase an aggregate of 440,000 shares of Common Stock
On March 15, 2021, 9 Madison converted $110,000 in principal and $4,677 in accrued interest related to the convertible notes issued September 2, 2020 into 458,709 shares of common stock.
Note 9 Line of credit
Advanced Networks Services, LLC (“ANS”) has a revolving $4,000,000 line of credit available with a bank, collateralized by all the assets of ANS. Interest is payable monthly at the Wall Street Journal prime rate (3.50% at March 31, 2022 and 3.25% at December 31, 2021). There are no financial commitments or covenants on the line of credit. As of March 31, 2022, and December 31, 2021 the Company had an outstanding balance of $0 and $1,898,143 respectively on this line of credit.
ANS also has a $750,000 equipment and vehicle line of credit available with a bank. Interest is payable monthly at the Wall Street Journal prime rate. On June 1, 2022 the line will convert to a term loan with the then five-year Federal Home Loan Bank rate +2.5% and have a five year term with a five year amortization. There are no financial commitments or covenants on the line of credit. As of March 31, 2022, and December 31, 2021 the Company had no outstanding borrowings under this line of credit.
BW has a revolving $3,000,000 line of credit available with a bank, collateralized by all the assets of BW. Interest is payable monthly at the Wall Street Journal prime rate (3.50% at March 31, 2022 and 3.25% at December 31, 2021). There are no financial commitments or covenants on the line of credit. As of March 31, 2022 and December 31, 2021, the Company had no outstanding balance on this line of credit.
Note 10 Notes payable
The Company’s notes payables as of March 31, 2022 and December 31, 2021 are summarized below:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Paycheck Protection Program loan issued February 10, 2021 | | $ | - | | | $ | 2,000,000 | |
Notes payable issued May 19, 2021 (8% interest) | | | 11,860,055 | | | | 11,860,055 | |
Notes payable issued December 17, 2021 (7.5% interest) | | | 15,925,926 | | | | 15,925,926 | |
Total face value | | | 27,785,981 | | | | 29,785,981 | |
Less: unamortized discount | | | (3,214,648 | ) | | | (3,698,458 | ) |
Total notes payable | | $ | 24,571,333 | | | $ | 26,087,523 | |
Prior to our acquisition, BW was approved for a Paycheck Protection Program loan on February 10, 2021 from the Small Business Administration (“SBA”) in the amount of $2,000,000. In the first quarter of 2022, the loan was forgiven by the SBA. Although the loan was forgiven by the SBA, per our purchase agreement with the sellers of BW in December 2021, if such an event occurred, the Company is obligated to reimburse the SBA loan of $2,000,000 to such sellers. As such, the $2,000,000 SBA loan was reclassified from Notes payable to Accrued liability on the Consolidated Balance Sheet as of March 31, 2022.
Interest expense and amortization of debt discount for the notes payable is as follows:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Interest Expense | | $ | 484,639 | | | $ | - | |
Amortization of debt discount | | | 483,810 | | | | - | |
Total | | $ | 968,449 | | | $ | - | |
The accrued interest relating to the notes payable as of March 31, 2022 and December 2021 was $161,546 and $115,250, respectively.
Note 11 Derivative liabilities
The May 2020 Notes embodied certain terms and features that were not clearly and closely related to the host debt agreement in terms of economic risks and characteristics. These certain terms and features were classified as a derivative liability on the Company’s balance sheet upon issuance of the May 2020 Notes. These terms and features provided a cash true-up provision in the event that the proceeds received by the holder from the sale of all the Conversion Shares and up to 50% of the Commitment Shares did not equal at least $750,000 on June 1, 2021.
No cash payment was triggered, and the true-up provision expired on June 1, 2021, therefore there was no derivative liability as of December 31, 2021. For the three months ended March 31, 2021, the changes in fair value inputs and assumptions related to the derivative liability was a loss of $330, which is reflected in “Other income (expense), net” in the Consolidated Statement of Operations.
Note 12 Leases
In connection with the Company’s acquisition of EV Depot (see Note 5 Business acquisitions), the Company, as the lessor, recorded $1.1 million of lease revenue relating to EV Depot’s operating leases for the three months ended March 31, 2022.
Note 13 Reportable segments
The Company currently has one primary reportable geographic segment - United States. The Company has two reportable operating segments – Telecommunications and Infrastructure. The Company also have included a Non-operating Corporate segment. All inter-segment revenues are eliminated.
Summary information with respect to the Company’s operating segments is as follows for the three months ended March 31:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Revenue | | | | | | |
Telecommunications | | $ | 143,360,289 | | | $ | 111,119,244 | |
Infrastructure | | | 19,617,601 | | | | 8,397 | |
Total revenue | | $ | 162,977,890 | | | $ | 111,127,641 | |
| | Three months ended March 31, |
| | 2022 | | | 2021 | |
(Loss) Income from operations | | | | | | | | |
Telecommunications | | $ | 526,662 | | | $ | 689,470 | |
Infrastructure | | | 1,636,816 | | | | (468,518 | ) |
Non-operating corporate | | | (14,949,759 | ) | | | (5,594,597 | ) |
Total (loss) from operations | | $ | (12,786,281 | ) | | $ | (5,373,645 | ) |
A reconciliation of the Company's consolidated segment loss from operations to consolidated loss from operations before income taxes and net income (loss) for the three months ended March 31, 2022 and 2021 are as follows:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Loss from operations | | $ | (12,786,281 | ) | | $ | (5,373,645 | ) |
Net income from investments | | | (110,006 | ) | | | 3,401,714 | |
Amortization of debt discount | | | (1,029,597 | ) | | | (61,874 | ) |
Other income (expense), net | | | 198,353 | | | | - | |
Interest expense | | | (735,053 | ) | | | (181,002 | ) |
Foreign exchange adjustments | | | (255,602 | ) | | | (451,478 | ) |
Amortization of debt discount, related party | | | - | | | | (95,127 | ) |
Change in fair value of derivative liabilities | | | - | | | | (330 | ) |
Total other expenses | | | (1,931,905 | ) | | | 2,611,903 | |
Loss from operations before income taxes | | | (14,718,186 | ) | | | (2,761,742 | ) |
Income tax (expense) benefit | | | 1,578,283 | | | | 1,182,635 | |
Net income (loss) | | $ | (13,139,903 | ) | | $ | (1,579,107 | ) |
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Depreciation and Amortization | | | | | | |
Telecommunications | | $ | 43,500 | | | $ | 49,947 | |
Infrastructure | | | 165,554 | | | | - | |
Total | | $ | 209,054 | | | $ | 49,947 | |
Summary information with respect to the Company’s operating segments as of March 31, 2022 and December 31, 2021 is as follows:
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Capital Expenditures | | | | | | |
Telecommunications | | $ | - | | | $ | - | |
Infrastructure | | | 34,942 | | | | 1,355,297 | |
Total | | $ | 34,942 | | | $ | 1,355,297 | |
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Investments | | | | | | |
Telecommunications | | $ | - | | | $ | - | |
Infrastructure | | | 1,840,235 | | | | 2,279,978 | |
Non-operating corporate | | | 21,981,311 | | | | 7,438,765 | |
Total | | $ | 23,821,546 | | | $ | 9,718,743 | |
| | March 31, | | | December 31, | |
| | 2022 | | | 2021 | |
Total Assets | | | | | | |
Telecommunications | | $ | 88,968,620 | | | $ | 73,658,598 | |
Infrastructure | | | 73,327,864 | | | | 56,700,602 | |
Non-operating corporate | | | 106,369,998 | | | | 79,579,215 | |
Eliminations | | | (82,124,007 | ) | | | (66,328,903 | ) |
Total | | $ | 186,542,475 | | | $ | 143,609,512 | |
Note 14 Equity
Preferred Stock
The Company has 10,000,000 shares of Preferred Stock authorized with a par value of $0.0001. The Company has authorized 1,000,000 shares of Series A Preferred Stock, 2,395,105 shares of Series B Preferred Stock, and 6,226,370 shares of Series C Preferred Stock, and 378,525 shares of Preferred Stock are unallocated as of March 31, 2021. No shares of Series A Preferred Stock were issued and outstanding as of March 31,2022 and December 31,2021.
The Company has evaluated each series of the Preferred Stock for proper classification under ASC 480 and ASC 815. ASC 480 generally requires liability classification for financial instruments that are certain to be redeemed, as they represent obligations to purchase shares of stock or represent obligations to issue a variable number of common shares.
Series B — On May 21, 2021, the Company issued 2,395,105 shares as part of the acquisition of ANS at an aggregate purchase price of $6,850,000. In 2017, 200,000 shares of Series B Preferred Stock were issued to the Company’s CEO in exchange for a conversion of $200,000 of related party advances. On May 8, 2020, the 200,000 shares were cancelled. As of March 31, 2022 and December 31, 2021, there were 2,395,105 shares of Series B Preferred issued and outstanding.
The Series B Preferred has the following designations as of March 31, 2022 and December 31, 2021:
| · | Convertible at option of holder. |
| · | The holders are entitled to receive cumulative dividends at 4% per annum, payable quarterly on January 1, April 1, July 1 and October 1. |
| · | 1 preferred share is convertible to 1 common share. |
| · | The Series B holders are entitled to receive liquidation in preference to the common holders or any other class or series of preferred stock. |
| · | Voting: The Series B holders are entitled to vote together with the common holders as a single class. |
| · | Mandatorily redeemable 180 days following the mandatory redemption date. |
The 2,395,105 shares of Series B Preferred Stock are mandatorily redeemable, and therefore are required to be classified as a liability in the mezzanine section of the balance sheet. They are valued at $6,850,000. The Company concluded that all other series of Preferred Stock were not to be classified as a liability.
Series C — On December 17, 2021, the Company entered into a securities purchase agreement with funds affiliated with Arena Investors LP pursuant to which the Company issued 2,370,370 shares of Series C Preferred Stock in an aggregate face value of $7,407,406 for an aggregate purchase price of $6,666,800. In connection with the issuance of the Series C Preferred Stock, the Company also issued warrants to purchase 2,370,370 shares of the Company’s common stock. A Registration Rights Agreement was executed in connection with the issuance of the Series C Preferred Stock. If the Company fail to have the registration statement filed within 6 months of the closing date or if the Company fails to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, without any volume or manner of sale restrictions, then the Company will be obligated to pay to the investors liquidated damages equal to then, in addition to any other rights the holders may have hereunder or under applicable law, upon the occurrence of any such event and on each monthly anniversary of thereafter until the event is cured, the Company shall pay to the investors an amount in cash equal to their pro rata portion of $75,000 per month until such events are satisfied. The Company has valued the beneficial conversion feature of the Series C Preferred Stock at $3,550,747 and the warrants at $3,116,054. The recording of the par value and related additional paid in capital resulted in a deemed dividend of $7,407,407 at the time of issuance.
On February 25, 2022 the Company entered into a securities purchase agreement with an affiliate of Island Capital Group LLC (the “February 2022 Investors”) pursuant to which it issued 3,856,000 Series C Preferred Stock in an aggregate face value of $12,050,000 for an aggregate purchase price of $10,845,000. A Registration Rights Agreement was executed in connection with the issuance of the Series C Preferred Stock. If the Company fails to have the registration statement filed within 6 months of the closing date or if the Company fails to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act of 1933, as amended, without any volume or manner of sale restrictions, then the Company will be obligated to pay to the investors liquidated damages equal to then, in addition to any other rights the holders may have hereunder or under applicable law, upon the occurrence of any such event and on each monthly anniversary of thereafter until the event is cured, the Company shall pay to the investors an amount in cash equal to their pro rata portion of $75,000 per month until such events are satisfied. The Company has valued the beneficial conversion feature of the Series C Preferred Stock at $3,856,000. The recording of the par value and related additional paid in capital resulted in a deemed dividend of $3,856,000 at the time of issuance
As of March 31, 2022 and December 31, 2021 there were 6,226,370 and 2,370,370 shares of Series C Preferred Stock issued and outstanding.
The Series C Preferred has the following designations as of March 31, 2022 and December 31, 2021:
| · | Convertible at option of holder at a conversion price of $3.125 per share. |
| · | The holders are entitled to receive dividends. |
| · | In the event of reorganization this class of Preferred will not be affected by any such capital reorganization. |
| · | The Series C liquidation preference is equal to the stated value, plus any accrued and unpaid dividends. |
| · | Voting: No voting rights. |
| · | Redemption features: |
| | |
| ○ | If the closing price exceeds 200% of the effective conversion price, the Company may force the conversion of preferred stock with 10 days written notice; |
| ○ | At any time after the original issue date, the Company has the option to redeem some or all the outstanding preferred stock for cash with 10 days written notice; and |
| ○ | On the third anniversary of the issue date, the holder may request redemption, at the Company’s option of cash or common stock, at the conversion price equal to the four-year redemption amount (a) 100% of the aggregate stated value then outstanding, (b) accrued but unpaid dividends (c) additional cash consideration in order for the Purchasers to achieve a 20% internal rate of return and (d) all liquidated damages and other amounts due in respect of the Preferred Stock. |
The 6,226,370 shares of Series C Preferred Stock provides that the Company shall redeem the preferred stock for cash or common stock at a certain date. This provision does not raise the Preferred Stock to the definition of mandatorily redeemable because the Company has the option to redeem the Preferred Stock in Common Stock in lieu of cash.
Because the Series C Preferred Stock is perpetual (has no stated maturity date) and is convertible at any time, the discount created in the conversion feature of the Series C Preferred Stock is fully amortized at issuance. As such the Company recorded a deemed dividend in the amount of $3,856,000 for the three months ended March 31, 2022.
Stock Options
Stock options activity for the three months ended March 31, 2022 is summarized as follows:
| | Shares | | | Weighted Average Exercise Price | |
Options outstanding December 31, 2021 | | | 44,920,000 | | | $ | 1.78 | |
Options granted | | | 2,550,000 | | | | 3.47 | |
Options exercised | | | - | | | | - | |
Options cancelled | | | (565,000 | ) | | | 3.16 | ) |
Options outstanding at March 31, 2022 | | | 46,905,000 | | | | 1.85 | |
Options exercisable at March 31, 2022 | | | 14,737,501 | | | $ | 1.14 | |
At March 31, 2022, the weighted average remaining life of the stock options is 5.15 years. At March 31, 2022, there was $42,426,783 in unrecognized costs related to the stock options granted.
Warrants
The following table represents warrants activity for three months ended March 31, 2022:
| | Number of Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life | |
Warrants outstanding - December 31, 2021 | | | 24,084,772 | | | $ | 1.74 | | | 3.0 years | |
Issued | | | - | | | | | | | | |
Exercised | | | - | | | | | | | | |
Expired | | | - | | | | | | | | |
Warrants outstanding - March 31, 2022 | | | 24,084,772 | | | $ | 1.74 | | | 2.7 years | |
Options exercisable - March 31, 2022 | | | 24,084,772 | | | $ | 1.74 | | | 2.7 years | |
Note 15 Commitments, contingencies and concentration risk
Contingencies
During the normal course of business, the Company may be named from time to time as a party to lawsuits arising in the ordinary course of business related to its sales, marketing, and the provision of its services and equipment. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with ASC 450, Contingencies. Litigation and contingency accruals are based on our assessment, including advice of legal counsel, regarding the expected outcome of litigation or other dispute resolution proceedings. If the Company determines that an unfavorable outcome is probable and can be reasonably assessed, it establishes the necessary accruals. As of March 31, 2022 and December 31, 2021, the Company is not aware of any contingent legal liabilities that should be reflected in the consolidated financial statements.
Other Commitments:
Indemnities
The Company generally indemnifies its customers for the services it provides under its contracts, as well as other specified liabilities, which may subject the Company to indemnity claims, liabilities and related litigation. As of March 31, 2022 and December 31, 2021, the Company was not aware of any material asserted or unasserted claims in connection with these indemnity obligations.
Performance and Payment Bonds
Many customers, particularly in connection with new construction within Infrastructure, require the Company to post performance and payment bonds issued by a financial institution known as a surety. If the Company fails to perform under the terms of a contract or to pay subcontractors and vendors who provided goods or services under a contract, the customer may demand that the surety make payments or provide services under the bond. The Company must reimburse the surety for any expenses or outlays it incurs. To date, the Company is not aware of any losses to their sureties in connection with bonds the sureties have posted on their behalf, and do not expect such losses to be incurred in the foreseeable future. Generally, 10% of bonding needs are held in cash on the balance sheet.
Concentration of Credit Risk
The Company maintains accounts with financial institutions. All cash in checking accounts is non-interest bearing and is insured by the Federal Deposit Insurance Corporation (FDIC) up to a $250,000 limit. At times, cash balances may exceed the maximum coverage provided by the FDIC on insured depositor accounts. The Company believes it mitigates its risk by depositing its cash and cash equivalents with major financial institutions. At March 31, 2022 and December 31, 2021, the Company had $24,111,296 and $17,503,737 in excess of FDIC insurance, respectively.
Major Customer Concentration
There are no customers whose individual accounts receivable represented 10% or more of the Company’s total accounts receivable as of March 31, 2022. The company had two customers whose accounts receivable individually represented 10% or more of the Company’s total accounts receivable and whose accounts receivable in aggregate accounted for approximately 25% of the Company’s total accounts receivable as of December 31, 2021
The Company has three customers whose revenue individually represented 10% or more of the Company’s total revenue and whose revenue in aggregate accounted for approximately 33% of the Company’s total revenue for the three months ended March 31, 2022 and four customers whose revenue individually represented 10% or more of the Company’s total revenue and in aggregate accounted for approximately 56% of the Company’s total revenue for the three months ended March 31, 2021.
Labor Concentration
One of our operating subsidiaries within Infrastructure sources direct labor from local unions, which have collective bargaining agreements expiring at various times over the next four years. Although the Company’s past experience has been favorable with respect to resolving conflicting demands with these unions, it is possible that contract negotiations are unsuccessful which could impact the renewal of the collective bargaining agreements.
Note 16 Income taxes
The following table includes the Company’s income (loss) before income tax provision (benefit), income tax provision (benefit) and effective benefit tax rate for the three months ended March 31:
| | 2022 | | | 2021 | |
Income (loss) before income tax benefit | | $ | (14,718,191 | ) | | $ | (2,761,742 | ) |
Income tax benefit | | | 1,578,283 | | | | 1,182,635 | |
Effective tax rate | | (10.7%) | | | (42.8%) | |
For the three months ended March 31, 2022 and 2021, the Company’s effective tax rate differed from the statutory rate primarily due to permanent book-tax differences resulting primarily from stock-based compensation expense and the impact of state and local taxes.
Note 17 Subsequent event
On April 20, 2022 the Company entered into a securities purchase agreement with an affiliate of Island Capital Group, LLC pursuant to which the Company issued 1,428,575 shares of Charge’s common stock and three-year warrants to purchase up to 2,000,000 shares of Charge’s common stock at $8.50 per share for an aggregate purchase price of $10,000,025.