Quarterly report pursuant to Section 13 or 15(d)

Notes Receivable

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Notes Receivable
9 Months Ended
Sep. 30, 2018
Notes Receivable [Abstract]  
NOTES RECEIVABLE

4. NOTES RECEIVABLE 

 

Loans receivable as of September 30, 2018 and December 31, 2017 consisted of the following:

 

    September 30,     December 31,  
    2018     2017  
Loans to employees, net of reserves of $924, due December 2018   $ -     $ 4  
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., matured April 2018   $ 3,998     $ 3,613  
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., due March 2019   $ 2,240     $ -  
Fair value of convertible loan receivable from Spectrum Global Solutions, Inc., due August 2019     905       -  
Loans receivable   $ 7,143     $ 3,617  

  

Loans to employees

 

Loans to employees bore interest at rates between 2% and 3% per annum. As of December 31, 2017, the value of the collateral was below the value of the outstanding loans to employees. As a result, the Company recorded a reserve of $924 on the balance of loans to employees as of December 31, 2017. As of September 30, 2018, the balance in loans to employees was $0. 

 

Spectrum Global Solutions, Inc. (“Spectrum”) April 25, 2017 convertible note receivable

 

On April 25, 2017, the Company sold 80.1% of the assets associated with its AWS Entities subsidiaries. In connection with the sale, the Company received from Spectrum a one-year convertible promissory note in the principal amount of $2,000. This note accrues interest at a rate of 8% per annum. The interest income associated with this loan receivable during the year ended December 31, 2017 amounted to $69. This note is convertible into shares of common stock of Spectrum at a conversion price per share equal to 75% of the lowest VWAP during the fifteen (15) trading days immediately prior to the conversion date.

    

The Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC Topic 825, Financial Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations is the fair value of the loan receivable. On April 25, 2017, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $1,057, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $1,174. The total fair value of $2,231 was recorded in the consolidated balance sheet.

 

On December 22, 2017, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.

 

On March 2, 2018, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.

 

On March 9, 2018, the Company assigned $105 of the note receivable to RDW Capital LLC in exchange for cash of $100.

 

On June 8, 2018, the Company assigned $38 of the note receivable to RDW Capital LLC in exchange for cash of $35.

 

On September 30, 2018 and December 31, 2017, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $1,684 and $1,650, respectively, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $2,314 and $1,963, respectively. The total fair value of $3,998 and $3,613 was included in notes receivable on the unaudited condensed consolidated balance sheet as of September 30, 2018 and December 31, 2017, respectively. The Company recorded the change in fair value as a gain of $679 and $318, respectively, on the unaudited condensed consolidated statement of operations for the three months ended September 30, 2018 and 2017. The Company recorded the change in fair value as a gain of $633 and $544, respectively, on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2018 and 2017.

 

On April 25, 2018 the note matured and is now due on demand.

   

The fair value of the note receivable as of September 30, 2018 and December 31, 2017 was calculated using the discounted cash flow method and a Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    September 30,
2018
    December 31,
2017
 
Principal amount and guaranteed interest   $ 1,860     $ 2,005  
                 
Conversion price per share      *        *  
Conversion trigger price per share      None        None  
Risk free rate     2.19 %     1.39 %
Life of conversion feature (in years)     0.00       0.32  
Volatility     272 %     272 %

 

 

* The conversion price per share is equal to 75% of the lowest VWAP during the fifteen trading days immediately prior to the conversion date.

  

Spectrum February 27, 2018 convertible note receivable

 

On February 27, 2018, the Company sold the ADEX Entities for $3,000 in cash plus a one-year convertible promissory note in the aggregate principal amount of $2,000. The convertible promissory note accrues interest at a rate of 6% per annum and is due on March 27, 2019. The note is convertible into shares of common stock of Spectrum at a conversion price per share equal to 75% of the lowest VWAP during the fifteen (15) trading days immediately prior to the conversion date. The conversion price has a floor of $0.005 per share. The floor is removed in the event of a default.

  

The Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC Topic 825, Financial Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations is the fair value of the loan receivable. On February 27, 2018, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $1,361, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $303. The total fair value of $1,664 was recorded in the consolidated balance sheet.

 

On September 30, 2018, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $2,049, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $191. The total fair value of $2,240 was included in notes receivable on the unaudited condensed consolidated balance sheet as of September 30, 2018. The Company recorded the change in fair value as a gain of $215 and $576, respectively, on the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018.

  

The fair value of the note receivable as of September 30, 2018 was calculated using the discounted cash flow method and a Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 1,997  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.36 %
Life of conversion feature (in years)     0.49  
Volatility     313 %

 

 

* The conversion price per share is equal to 75% of the lowest VWAP during the fifteen trading days immediately prior to the conversion date, with a floor of $0.005 per share.

  

Spectrum February 16, 2018 convertible promissory note

 

On February 16, 2018, the Company settled the potential earn-out with the buyer of the AWS Entities, Spectrum. The Company received from Spectrum a convertible promissory note in the principal amount of $794. The convertible promissory note accrues interest at a rate of 1% per annum and is due on August 16, 2019. The note is convertible into shares of common stock of Spectrum at a conversion price per share equal to 80% of the lowest VWAP over the five (5) trading days immediately prior to, but not including, the conversion date.

 

The Company evaluated the convertible note’s settlement provisions and elected the fair value option afforded in ASC Topic 825, Financial Instruments, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of derivative instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair value of the embedded conversion option using a Monte Carlo simulation. The sum of these two valuations is the fair value of the loan receivable. On February 16, 2018, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $433, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $348. The total fair value of $781 was recorded in the consolidated balance sheet.

 

On September 30, 2018, the Company used the discounted cash flow method to value the straight debt portion of the convertible note and determined the fair value to be $569, and used a Monte Carlo simulation to value the settlement features of the convertible note and determined the fair value to be $336. The total fair value of $905 was included in notes receivable on the unaudited condensed consolidated balance sheet as of September 30, 2018. The Company recorded the change in fair value as a gain of $77 and $111, respectively, on the unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2018.

  

The fair value of the working capital note receivable as of September 30, 2018 was calculated using the discounted cash flow method and a Monte Carlo simulation with the following factors, assumptions and methodologies:

 

    September 30,
2018
 
Principal amount and guaranteed interest   $ 799  
         
Conversion price per share      *  
Conversion trigger price per share      None  
Risk free rate     2.33 %
Life of conversion feature (in years)     0.88  
Volatility     174 %

 

 

* The conversion price per share is equal to 80% of the lowest VWAP during the five trading days immediately prior to the conversion date.