UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 2016.2017
Commission file number: 000-31355
FTE Networks, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 81-0438093 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
999 Vanderbilt Beach Road, Suite 601
Naples, Florida 34108
(Address of principal executive offices)
1-877-878-8136
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, smaller reporting company, or an emerging growth company. See definitionthe definitions of “accelerated filer and large“larger accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.Act (Check one):
| Large accelerated filer | [ ] | Accelerated filer | [ ] | |
| Non-accelerated filer | [ ] | (Do not check if a smaller reporting company) | Smaller | |
| Emerging growth company [ ] | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of NovemberAugust 21, 2016,2017, there were 85,625,252134,899,526 shares of FTE Networks, Inc. common stock, $0.001 par value issued outstanding.
FTE NETWORKS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SeptemberJUNE 30, 20162017
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
Some of the statements in this Quarterly Report on Form 10-Q may be “forward-looking statements.” Forward-looking statements are not historical facts but include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.
Forward-looking statements can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements which are contained in this Quarterly Report on Form 10-Q because they reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events.
All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Any forward looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
FTE NETWORKS, INC. AND SUBSIDIARIES CONDENSED
CONDENSEDCONSOLIDATED BALANCE SHEETS
(unaudited)(in thousands, except share and per share information)
| June 30, 2017 | December 31, 2016 | December 31, 2016 | ||||||||||||||||||
| September 30, 2016 | December 31, 2015 | (unaudited) | (Predecessor) | |||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current Assets: | ||||||||||||||||||||
| Cash | $ | 8,586 | $ | 205,133 | $ | 7,835 | $ | 1,412 | $ | 4,753 | ||||||||||
| Restricted Cash | - | 3,003,226 | ||||||||||||||||||
| Accounts receivable, net | 7,025,156 | 1,446,480 | 36,707 | 7,020 | 51,701 | |||||||||||||||
| Costs and estimated earnings in excess of billings on uncompleted contracts | 5,966 | - | 9,759 | |||||||||||||||||
| Other current assets | 2,829,789 | 2,047,606 | 6,736 | 2,833 | 3,175 | |||||||||||||||
| Total Current Assets | 9,863,531 | 6,702,445 | ||||||||||||||||||
| Total current assets | 57,244 | 11,265 | 69,388 | |||||||||||||||||
| Property and equipment, net | 3,268,877 | 2,544,497 | 5,556 | 3,467 | 23 | |||||||||||||||
| Intangible assets, net | 29,320 | - | - | |||||||||||||||||
| Goodwill | 46,922 | - | - | |||||||||||||||||
| Total Assets | $ | 13,132,408 | $ | 9,246,942 | $ | 139,042 | $ | 14,732 | $ | 69,411 | ||||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY) | ||||||||||||||||||||
| Current Liabilities: | ||||||||||||||||||||
| Accounts payable | 2,232,859 | 2,998,240 | $ | 22,255 | $ | 2,357 | $ | 50,714 | ||||||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 15,380 | - | 5,043 | |||||||||||||||||
| Due to related parties | 418,707 | 245,764 | 154 | 100 | - | |||||||||||||||
| Accrued expenses and other current liabilities | 4,109,342 | 3,578,945 | 6,609 | 3,204 | 5,700 | |||||||||||||||
| Notes payable, current portion | 4,105,491 | 1,887,120 | ||||||||||||||||||
| Notes payable, related parties, current portion | 287,301 | 287,301 | ||||||||||||||||||
| Notes payable, current portion, net of original issue discount and deferred costs | 12,012 | 3,444 | - | |||||||||||||||||
| Notes payable, related party | 791 | 791 | - | |||||||||||||||||
| Warrant derivative liability | 143,200 | - | 2,336 | 594 | - | |||||||||||||||
| Accrued litigation costs | 1,195,839 | 1,335,771 | ||||||||||||||||||
| Total Current Liabilities | 12,492,739 | 10,333,141 | 59,537 | 10,490 | 61,457 | |||||||||||||||
| Notes payable, non-current portion | 2,275,856 | 1,572,063 | 46,981 | 6,530 | - | |||||||||||||||
| Senior note payable, non-current portion, net of original issue discount and deferred costs | 7,244,074 | 6,846,110 | ||||||||||||||||||
| Senior note payable, non-current portion, net of deferred financing costs | 19,951 | 7,576 | - | |||||||||||||||||
| Total Liabilities | 126,469 | 24,596 | 61,457 | |||||||||||||||||
| Total Liabilities | 22,012,669 | 18,751,314 | ||||||||||||||||||
| Temporary Equity: | ||||||||||||||||||||
| Series D convertible preferred stock, subject to put provision, stated value $4.00, 2,000,000 designated and 0 and 163,441 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 129,027 | ||||||||||||||||||
| Series F convertible preferred stock, subject to put provision, stated value $4.00, 2,000,000 designated and 0 and 391,903 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 308,353 | ||||||||||||||||||
| Common stock; $0.001 par value, subject to put provision, 200,000,000 shares authorized and 11,106,880 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | 437,380 | - | ||||||||||||||||||
| Common stock; $0.001 par value, subject to put provision, 200,000,000 shares authorized and 0 and 11,106,880 shares issued and outstanding at June 30, 2017 and December 31, 2016 | - | 437 | - | |||||||||||||||||
| Total Temporary Equity | 437,380 | 437,380 | - | 437 | - | |||||||||||||||
| Commitments and contingencies | ||||||||||||||||||||
| Stockholders’ Deficiency: | ||||||||||||||||||||
| Stockholders’ Equity (Deficiency): | ||||||||||||||||||||
| Preferred stock; $0.01 par value, 5,000,000 shares authorized: | ||||||||||||||||||||
| Series A convertible preferred stock, stated value $1,000, 4,500 shares designated and 500 shares issued and outstanding at September 30, 2016 and December 31, 2015 (liquidation preference $1,422,178) | 5 | 5 | ||||||||||||||||||
| Series A-1 convertible preferred stock, stated value $1,000, 1,000 shares designated and 295 shares issued and outstanding at September 30, 2016 and December 31, 2015 (liquidation preference $877,373) | 3 | 3 | ||||||||||||||||||
| Series D convertible preferred stock, stated value $4.00, 2,000,000 designated and 0 and 1,830,759 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 18,308 | ||||||||||||||||||
| Series F convertible preferred stock, stated value $4.00, 1,980,000 designated and 0 and 525,559 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 5,256 | ||||||||||||||||||
| Common stock; $0.001 par value, 200,000,000 shares authorized and 67,505,373 and 2,319,524 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | 67,504 | 2,319 | ||||||||||||||||||
| Series A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at June 30, 2017 and December 31, 2016 (liquidation preference $1,447,200) | - | - | - | |||||||||||||||||
| Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at June 30, 2017 and December 31, 2016 (liquidation preference $892,133) | - | - | - | |||||||||||||||||
| Common stock; $0.001 par value, 200,000,000 shares authorized and 130,139,562 and 78,019,872 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 130 | 78 | - | |||||||||||||||||
| Common stock Predecessor; $1 par value; 10,000 shares authorized, issued and outstanding | - | - | 10 | |||||||||||||||||
| Additional paid-in capital | 7,489,707 | 3,053,075 | 43,011 | 11,500 | - | |||||||||||||||
| Common shares to be issued | 848,138 | - | ||||||||||||||||||
| Shares to be issued | 2,201 | - | - | |||||||||||||||||
| Subscriptions receivable | (1,716,997 | ) | (204,789 | ) | (4,656 | ) | (2,829 | ) | - | |||||||||||
| Accumulated deficit | (16,006,001 | ) | (12,815,929 | ) | ||||||||||||||||
| Total Stockholders’ Deficiency | (9,317,641 | ) | (9,941,752 | ) | ||||||||||||||||
| Total Liabilities and Stockholders’ Deficiency | $ | 13,132,408 | $ | 9,246,942 | ||||||||||||||||
| Accumulated (deficit) earnings | (28,113 | ) | (19,050 | ) | 7,944 | |||||||||||||||
| Total Stockholders’ Equity (Deficiency) | 12,573 | (10,301 | ) | 7,954 | ||||||||||||||||
| Total Liabilities, Temporary Equity and Stockholders’ Equity (Deficiency) | $ | 139,042 | $ | 14,732 | $ | 69,411 | ||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Revenues, net of discounts | $ | 3,827,853 | $ | 4,026,208 | $ | 9,083,959 | $ | 11,444,647 | ||||||||
| Cost of revenues | 2,402,605 | 3,475,189 | 5,648,968 | 9,353,841 | ||||||||||||
| Gross Profit | 1,425,248 | 551,019 | 3,434,991 | 2,090,805 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Compensation expense/selling, general and administrative | 605,491 | 645,235 | 1,705,892 | 1,594,552 | ||||||||||||
| Selling, general and administrative expenses | 547,376 | 1,223,478 | 1,919,791 | 2,318,212 | ||||||||||||
| Travel expense | 43,406 | 130,991 | 209,670 | 328,505 | ||||||||||||
| Occupancy costs | 201,057 | 62,641 | 559,411 | 163,607 | ||||||||||||
| Transaction expenses | - | 42,650 | - | 44,150 | ||||||||||||
| Total Operating Expenses | 1,397,330 | 2,104,995 | 4,394,764 | 4,449,027 | ||||||||||||
| Operating Income (Loss) | 27,918 | (1,553,976 | ) | (959,773 | ) | (2,358,221 | ) | |||||||||
| Other (Expense) Income | ||||||||||||||||
| Interest expense | (490,236 | ) | (630,959 | ) | (1,452,354 | ) | (1,044,879 | ) | ||||||||
| Amortization of debt discount | (109,314 | ) | - | (327,944 | ) | - | ||||||||||
| Forbearance expense | - | 971,956 | - | (51,156 | ) | |||||||||||
| Other income (expense) | (146,456 | ) | (331,270 | ) | (100,915 | ) | (320,314 | ) | ||||||||
| Incentive expense for investor | - | - | (35,186 | ) | - | |||||||||||
| Extinguishment loss | (313,900 | ) | - | (313,900 | ) | - | ||||||||||
| Total Other (Expense) Income | (1,059,906 | ) | 9,727 | (2,230,299 | ) | (1,416,349 | ) | |||||||||
| Net Loss | (1,031,988 | ) | (1,544,249 | ) | (3,190,072 | ) | (3,774,570 | ) | ||||||||
| Preferred stock dividends | (19,890 | ) | (19,891 | ) | (59,670 | ) | (59,670 | ) | ||||||||
| Net Loss attributable to common shareholders | $ | (1,051,878 | ) | $ | (1,564,140 | ) | $ | (3,249,742 | ) | $ | (3,834,241 | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.09 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 60,450,606 | 42,313,609 | 60,450,606 | 42,313,609 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE NINE MONTHS ENDED September 30, 2016
(unaudited)
| Series A | Series A-1 | Series D | Series F | Common | Paid in | Common shares to be | Subscription | Accumulated | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | issued | Receivable | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/2015 Shares/Amounts | 500 | $ | 5 | 295 | $ | 3 | 1,830,759 | $ | 18,308 | 525,559 | $ | 5,256 | 2,319,524 | $ | 2,319 | 3,053,075 | $ | - | $ | (204,789 | ) | $ | (12,815,929 | ) | $ | (9,941,752 | ) | |||||||||||||||||||||||||||||||||
| Preferred Series F Issued to Investor | 285,664 | 2,857 | 961,737 | (929,408 | ) | 35,186 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued to Employees | 2,229,000 | 2,229 | 1,375,551 | (1,357,800 | ) | 19,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares to Settle Debt | 1,559,389 | 1,559 | 896,879 | 898,438 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued to Consultant | 465,000 | 465 | 290,735 | 291,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued for Equity Raise | 2,507,000 | 2,507 | 850,917 | 853,424 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares to be issued for Equity Raise | 848,138 | 848,138 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series F adjustment to transfer agent records | 48,250 | 483 | (483 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series F issued to directors and employees for compensation | 231,041 | 2,310 | 150,177 | 152,487 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series D to Common Stock | (1,830,759 | ) | (18,308 | ) | 36,615,180 | 36,615 | (18,307 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series F to Common Stock | (1,090,514 | ) | (10,906 | ) | 21,810,280 | 21,810 | (10,904 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of Subscription Receivable | 775,000 | 775,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Dividends -Preferred Stock | (59,670 | ) | (59,670 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | (3,190,072 | ) | (3,190,072 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/30/2016 Amounts | 500 | $ | 5 | 295 | $ | 3 | 0 | $ | - | - | $ | - | 67,505,373 | $ | 67,504 | $ | 7,489,707 | $ | 848,138 | ($ | 1,716,997 | ) | $ | (16,006,001 | ) | $ | 9,317,641 | ) | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)(in thousands, except share and per share information)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (3,190,072 | ) | $ | (3,774,570 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of deferred financing costs | 327,944 | - | ||||||
| Change in value of term loan | 313,900 | - | ||||||
| Forbearance incentive expense | - | 101,156 | ||||||
| Depreciation expense | 374,935 | 98,762 | ||||||
| Amortization of original issue discount | 164,018 | - | ||||||
| Payment in kind interest-senior debt | 246,600 | - | ||||||
| Stock incentive expense to investor | 35,186 | - | ||||||
| Stock compensation expense to employees | 172,467 | 473,328 | ||||||
| Provision for bad debt | - | 409,481 | ||||||
| Gain on lease termination costs | - | (226,544 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (5,578,676 | ) | 1,167,146 | |||||
| Other current assets | (600,984 | ) | (1,316,984 | ) | ||||
| Due to related party | - | 183,538 | ||||||
| Accounts payable and accrued liabilities | 900,568 | 3,819,086 | ||||||
| Net cash (used in) provided by operating activities | (6,834,114 | ) | 934,399 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (308,907 | ) | 28,320 | |||||
| Restricted cash account | 3,003,226 | - | ||||||
| Net cash provided by investing activities | 2,694,319 | 28,320 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable | 2,500,000 | - | ||||||
| Payments on factor line of credit, net | - | (383,682 | ) | |||||
| Payments on notes payable | (691,183 | ) | (137,367 | ) | ||||
| Proceeds from issuance of notes payable-related parties | 195,086 | - | ||||||
| Payments on notes payable-related parties | (43,518 | ) | (210,302 | ) | ||||
| Payment of deferred financing costs | (493,699 | ) | (125,000 | ) | ||||
| Collection of subscription receivable | 775,000 | 60,000 | ||||||
| Net proceeds from sale of common stock | 1,701,562 | - | ||||||
| Net cash provided (used in) by financing activities | 3,943,248 | (796,351 | ) | |||||
| Net change in cash | (196,547 | ) | 166,368 | |||||
| Cash, beginning of period | 205,133 | 41,372 | ||||||
| Cash, end of period | $ | 8,586 | $ | 207,740 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 1,083,160 | 256,479 | |||||
| Non-cash financing activities: | ||||||||
| Notes payable issued to finance equipment purchases | $ | 794,302 | 1,220,305 | |||||
| Common stock shares issued for notes payable | $ | 898,438 | - | |||||
| Issuance of notes to settle accrued litigation | $ | 146,000 | 200,000 | |||||
| Issuance of notes to settle accounts payable | $ | 719,877 | 430,683 | |||||
| Accrued dividends, preferred stock | $ | 59,670 | 59,670 | |||||
| Cancellation of preferred shares | - | 202 | ||||||
| Repayment in kind of subscription receivable | - | (60,000 | ) | |||||
| Unpaid subscription for preferred shares | - | (433,883 | ) | |||||
| Preferred shares issued to settle rent obligation | - | 50,000 | ||||||
| Common shares issued as subscription receivable | 1,357,800 | - | ||||||
| Conversion of preferred shares to common shares | 58,425 | - | ||||||
| For the Three Months | For the Three Months | For the Six Months | ||||||||||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | Ended March 31, 2017 [*] | Ended June 30, 2016 | Ended June 30, 2016 | ||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | (Predecessor) | (Predecessor) | (Predecessor) | ||||||||||||||||||||||
| Revenues, net of discounts | $ | 50,697 | $ | 3,163 | $ | 55,783 | $ | 5,256 | $ | 42,089 | $ | 133,260 | $ | 226,973 | ||||||||||||||
| Cost of revenues | 42,377 | 1,934 | 45,055 | 3,246 | 33,789 | 107,839 | 183,992 | |||||||||||||||||||||
| Gross Profit | 8,320 | 1,229 | 10,728 | 2,010 | 8,300 | 25,421 | 42,981 | |||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||
| Compensation expense, selling, general and administrative | 4,169 | 566 | 5,356 | 1,100 | 5,671 | 7,283 | 13,398 | |||||||||||||||||||||
| Selling, general and administrative expenses | 3,529 | 814 | 4,503 | 1,372 | 2,009 | 6,412 | 11,331 | |||||||||||||||||||||
| Amortization of intangible assets | 589 | - | 589 | - | - | - | - | |||||||||||||||||||||
| Travel expense | 191 | 87 | 291 | 166 | 22 | 30 | 57 | |||||||||||||||||||||
| Occupancy costs | 280 | 197 | 394 | 360 | 160 | 153 | 202 | |||||||||||||||||||||
| Transaction expenses | 1,409 | - | 1,419 | - | - | - | - | |||||||||||||||||||||
| Loss on sale of asset | 429 | - | 472 | - | - | - | - | |||||||||||||||||||||
| Total Operating Expenses | 10,596 | 1,664 | 13,024 | 2,998 | 7,862 | 13,878 | 24,988 | |||||||||||||||||||||
| Operating Income (Loss) | (2,276 | ) | (435 | ) | (2,296 | ) | (988 | ) | 438 | 11,543 | 17,993 | |||||||||||||||||
| Other (Expense) Income | ||||||||||||||||||||||||||||
| Interest income (expense) | (1,793 | ) | (476 | ) | (2,527 | ) | (962 | ) | 5 | 2 | 47 | |||||||||||||||||
| Amortization of deferred financing costs and debt discount | (1,934 | ) | (109 | ) | (2,331 | ) | (219 | ) | - | - | - | |||||||||||||||||
| Change in warrant fair market valuation | 1,021 | - | (1,179 | ) | - | - | - | - | ||||||||||||||||||||
| Other Income (Expense) | 10 | (39 | ) | (46 | ) | 46 | 51 | 26 | 44 | |||||||||||||||||||
| Incentive expenses for investors | - | - | - | (35 | ) | - | - | - | ||||||||||||||||||||
| Financing Costs | - | - | (563 | ) | - | - | - | - | ||||||||||||||||||||
| Total Other (Expense) Income | (2,696 | ) | (624 | ) | (6,646 | ) | (1,170 | ) | 56 | 28 | 91 | |||||||||||||||||
| Income (Loss) before provision for local income taxes | (4,972) | (1,059) | (8,942) | (2,158) | 494 | 11,571 | 18,084 | |||||||||||||||||||||
| Provision for local income taxes | 121 | - | 121 | - | 240 | 1,141 | 1,688 | |||||||||||||||||||||
| Net Income (Loss) | (5,093 | ) | (1,059 | ) | (9,063 | ) | (2,158 | ) | 254 | 10,430 | 16,396 | |||||||||||||||||
| Preferred stock dividends | (20 | ) | (20 | ) | (40 | ) | (40 | ) | - | - | - | |||||||||||||||||
| Net Loss attributable to common shareholders | $ | (5,113 | ) | $ | (1,079 | ) | $ | (9,103 | ) | $ | (2,198 | ) | $ | 254 | $ | 10,430 | $ | 16,396 | ||||||||||
| Income (Loss) per share: | ||||||||||||||||||||||||||||
| Basic and Diluted | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.08 | ) | $ | (0.04 | ) | ||||||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||||||||||||||
| Basic and Diluted | 124,736,287 | 53,192,406 | 107,645,345 | 53,192,406 | ||||||||||||||||||||||||
[*] Activity for the period April 1, 2017 through April 20, 2017 was not material.
The accompanying notes are an integral part of these condensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)
FOR THE SIX MONTHS ENDED JUNE 30, 2017
(unaudited)
(in thousands, except share and per share information)
| Series A | Series A-1 | Common | Paid in | Subscription | Shares to | Accumulated | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | be Issued | Deficit | Equity | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2016 | 500 | $ | 0 | 295 | $ | 0 | 78,019,872 | $ | 78 | $ | 11,500 | $ | (2,829 | ) | $ | - | $ | (19,050 | ) | $ | (10,301 | ) | ||||||||||||||||||||||
| Common Shares to Settle Legal Matter | - | - | - | - | 20,892 | - | 14 | - | - | - | 14 | |||||||||||||||||||||||||||||||||
| Common Shares Sold to Investors | - | - | - | - | 1,429,446 | 1 | 575 | - | (550 | ) | - | 26 | ||||||||||||||||||||||||||||||||
| Common Shares Issued to Consultants | - | - | - | - | 1,926,724 | 2 | 1,217 | - | - | - | 1,219 | |||||||||||||||||||||||||||||||||
| Common Shares Issued to Employees | - | - | - | - | 4,017,011 | 4 | 3,791 | (3,044 | ) | - | - | 751 | ||||||||||||||||||||||||||||||||
| Common Shares Reclassified from Temporary Equity | - | - | - | - | 11,106,880 | 11 | 426 | - | - | - | 437 | |||||||||||||||||||||||||||||||||
| Common Shares Issued to Senior Lender | - | - | - | - | 6,420,020 | 7 | 5,644 | - | - | - | 5,651 | |||||||||||||||||||||||||||||||||
| Common Shares Issued to Benchmark sellers | - | - | - | - | 26,738,445 | 27 | 21,631 | - | - | - | 21,658 | |||||||||||||||||||||||||||||||||
| Common Shares Issued to Settle Debt | - | - | - | - | 326,283 | - | 264 | - | - | - | 264 | |||||||||||||||||||||||||||||||||
| Common shares issued to investor relation firm | - | - | - | - | 133,989 | - | 125 | 125 | ||||||||||||||||||||||||||||||||||||
| Record stock compensation | - | - | - | - | - | - | - | 1,217 | - | - | 1,217 | |||||||||||||||||||||||||||||||||
| Shares to be issued | - | - | - | - | - | - | (2,136 | ) | - | 2,751 | - | 615 | ||||||||||||||||||||||||||||||||
| Accrued Dividends -Preferred Stock | - | - | - | - | - | - | (40 | ) | - | - | - | (40 | ) | |||||||||||||||||||||||||||||||
| Net Loss | - | - | - | - | - | - | - | - | - | (9,063 | ) | (9,063 | ) | |||||||||||||||||||||||||||||||
| Balance as of June 30, 2017 | 500 | $ | 0 | 295 | $ | 0 | 130,139,562 | $ | 130 | $ | 43,011 | $ | (4,656 | ) | $ | 2,201 | $ | (28,113 | ) | $ | 12,573 | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
| For the Three | For the Six | |||||||||||||||
| For the Six Months Ended June 30, | Months Ended March 31, 2017 [*] | Months Ended June 30, 2016 | ||||||||||||||
| 2017 | 2016 | (Predecessor) | (Predecessor) | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income (loss) | $ | (9,063 | ) | $ | (2,158 | ) | $ | 254 | $ | 16,396 | ||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||||||||
| Amortization of deferred financing costs | 2,331 | 219 | - | - | ||||||||||||
| Financing costs | 563 | - | - | - | ||||||||||||
| Depreciation | 289 | 237 | 5 | - | ||||||||||||
| Amortization of original issue discount | 182 | 109 | - | - | ||||||||||||
| Amortization of intangible assets | 2,310 | - | - | - | ||||||||||||
| Payment in kind interest - Senior debt | 446 | 163 | - | - | ||||||||||||
| Stock based compensation | 1,970 | 190 | - | - | ||||||||||||
| Provision for bad debts | 300 | - | - | 14 | ||||||||||||
| Change in fair value of warrant derivative liability | 1,179 | - | - | - | ||||||||||||
| Loss on sale of asset | 472 | - | - | - | ||||||||||||
| Changes in operating assets and liabilities: | - | - | - | - | ||||||||||||
| Accounts receivable | (13,961 | ) | (2,653 | ) | 37,076 | (30,940 | ) | |||||||||
| Other current assets | (423 | ) | (288 | ) | (1,061 | ) | 2,809 | |||||||||
| Due to related party | 54 | - | - | - | ||||||||||||
| Accounts payable and accrued liabilities | 5,818 | 565 | (37,498 | ) | 353 | |||||||||||
| Billings in excess of costs and estimated earnings on uncompleted contracts | 8,617 | - | 5,514 | 32,429 | ||||||||||||
| Net cash provided by (used in) operating activities | 1,084 | (3,616 | ) | 4,290 | 21,061 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Net cash paid for Benchmark Builders, Inc. acquisition | (14,834 | ) | - | - | - | |||||||||||
| Purchase of property and equipment | (2,391 | ) | (114 | ) | (28 | ) | (3 | ) | ||||||||
| Proceeds Investments / Restricted Cash | - | 2,873 | - | - | ||||||||||||
| Net cash (used in) provided by investing activities | (17,225 | ) | 2,759 | (28 | ) | (3 | ) | |||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from issuance of notes payable, net | 4,728 | 275 | - | - | ||||||||||||
| Payments on notes payable | (1,305 | ) | (446 | ) | - | - | ||||||||||
| Proceeds from issuance of senior notes payable, net | 11,000 | - | - | - | ||||||||||||
| Proceeds from series C notes | 7,500 | - | - | - | ||||||||||||
| Proceeds from issuance of notes payable -related parties | - | 176 | - | - | ||||||||||||
| Payments on notes payable - related parties | - | (32 | ) | - | - | |||||||||||
| Payment of deferred financing costs | - | (21 | ) | - | - | |||||||||||
| Proceeds for shares to be issued | 615 | - | - | - | ||||||||||||
| Distributions to stockholders | - | - | (6,599) | (11,894 | ) | |||||||||||
| Net proceeds from sale of common stock | 26 | - | - | - | ||||||||||||
| Proceeds from sale of preferred stock | - | 775 | - | - | ||||||||||||
| Net cash provided by (used in) financing activities | 22,564 | 727 | (6,599) | (11,894 | ) | |||||||||||
| Net change in cash | 6,423 | (130 | ) | (2,337 | ) | 9,164 | ||||||||||
| Cash, beginning of period | 1,412 | 205 | 4,753 | 14,021 | ||||||||||||
| Cash, end of period | $ | 7,835 | $ | 75 | $ | 2,416 | $ | 23,185 | ||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||||||||
| Cash paid for interest | $ | 2,528 | $ | 644 | $ | - | $ | - | ||||||||
| Cash paid for income taxes | $ | 173 | $ | - | $ | 68 | $ | 242 | ||||||||
| Non-cash investing and financing activities: | ||||||||||||||||
| Issuance of notes payable for the purchase of fixed assets | $ | - | $ | 631 | $ | - | $ | - | ||||||||
| Common stock shares issued to settled legal matter | $ | 14 | $ | - | $ | - | $ | - | ||||||||
| Common stock shares issued for notes payable and other debt | $ | 264 | $ | 10 | $ | - | $ | - | ||||||||
| Common shares issued to senior lender | $ | 5,651 | $ | - | $ | - | $ | - | ||||||||
| Issuance of notes to settle accrued litigation | $ | - | $ | 146 | $ | - | $ | - | ||||||||
| Issuance of notes to settle accounts payables | $ | - | $ | 123 | $ | - | $ | - | ||||||||
| Preferred shares issued -Investors incentive | $ | - | $ | 155 | $ | - | $ | - | ||||||||
| Accrued dividends, preferred stock | $ | 40 | $ | 40 | $ | - | $ | - | ||||||||
| Common shares issued to employees under employment agreement for future services | $ | 3,795 | $ | - | $ | - | $ | - | ||||||||
| Common shares issued to consultants for services to be rendered | $ | 1,219 | $ | - | $ | - | $ | - | ||||||||
| Common shares issued to investor relation firm for services to be rendered | $ | 125 | $ | - | $ | - | $ | - | ||||||||
| Series A, B notes consideration for Benchmark acquisition | $ | 42,500 | $ | - | $ | - | $ | - | ||||||||
| Common shares issued as consideration for Benchmark acquisition | $ | 21,658 | $ | - | $ | - | $ | - | ||||||||
| Common Shares Reclassified from Temporary Equity | $ | 437 | $ | - | $ | - | $ | - | ||||||||
[*] Activity for the period April 1, 2017 through April 20, 2017 was not material.
The accompanying notes are an integral part of these condensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
1. DESCRIPTION OF BUSINESS AND HISTORY
Overview
FTE Networks, Inc. (FTNW), and its wholly owned subsidiaries, is a leading international networking infrastructure service solutions company. The Company designs,businesses provide end-to-end design, build, and support telecommunicationssolutions for state-of-the-art network and technology systemscommercial properties, creating the most advanced and infrastructure services fortransformative smart platforms and buildings. Working with some of the world’s leading Fortune 500 companies operating four (4) telecommunication segments;corporations and communications service providers, FTE’s businesses are predicated on smart design and consistent standards that reduce deployment costs and accelerate delivery of innovative projects and services. FTE Networks and its subsidiaries operate 8 Lines of Business, including: Data Center Infrastructure, Fiber Optics, Wireless Integration, Network Engineering, Internet Service Provider, Construction Management, General Contracting, & Pre-Construction Services. With approximately 200+ employees, FTE and Surveillance & Security. FTE Networks is headquarteredits entities have operations in Naples, Florida, with offices throughout the United States17 states and Europe.
FTE Network Services and FTE Wireless Service, LLC are reported in the Company’s telecommunications segment. FVP Worx represents the Company’s staffing segment. The Company will not include segment reporting per Accounting Standards Codification (“ASC”) 280 as the revenue, profit and loss, and assets of the staffing segment are immaterial for both the six months ended June 30, 2017 and 2016. On April 20, 2017, FTE expanded its product offering with the consummation of an acquisition of Benchmark Builders, Inc. (“Benchmark” or “Predecessor”). Benchmark is a full-service construction management and general contracting firm incorporated in 2008 as a New York State S-Corporation. Benchmark is a construction manager and general contractor serving a diverse and sophisticated corporate client base in the telecommunications, commercial, industrial, broadcast, technology, infrastructure, financial services, healthcare, and education industries, primarily in the New York area. Management believes that the historical operations of the Company and those or Benchmark operate under the same segment. Any assets outside of the continental U.S. are immaterial.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective January 27, 2016, the Company changed its fiscal year end from September 30 to December 31 and filed an unaudited transitional report on Form 10-QT to cover the period from October 1, 2015 to December 31, 2015 with the Securities and Exchange Commission on April 11, 2016. Basis of Presentation
The unaudited condensed consolidated financial statements and thesethe accompanying notes should be read in conjunction with the audited consolidated financial statements included in ourthe Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015December 31, 2016 (the “Annual Report”). The condensed consolidated balance sheet data as of December 31, 2015 is unaudited and was derived from the Company’s Form 10-QT andJune 30, 2017 included does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. The unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures, including critical and significant accounting policies, normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Results of operations and cash flows for interim periods presented in the unaudited condensed consolidated financial statements are not necessarily indicative of results of operations and cash flows for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 5, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating how the adoption of this standard will impact itscondensed consolidated financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02” Topic 842). The core change with ASU 2016-02 is the requirementstatements includes results from Benchmark for the recognitionperiod of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginningApril 21, 2017 through June 30, 2017, the period after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the adoptionclosing date of ASU 2016-02 will have on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” or ASU 2016-09, which amends ASC Topic 718, “Compensation – Stock Compensation.” ASU 2016-09 simplifies several aspectsacquisition of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 31, 2016, and interim periods within those years and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact its consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments(ASU 2016-13”). This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU 2016-13.
On August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230 “ASU 2016-15”). ASU 2016-15 amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The updated guidance requires a retrospective transition method to each period presented. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its statements of consolidated operations and cash flows.April 20, 2017.
Liquidity-
The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of SeptemberJune 30, 2016,2017, the Company has an accumulated deficit of $16 million.$28,113. In addition, the Company has negative working capital deficiencies of $2.6 million and $3.6 million$2,293 as of SeptemberJune 30, 20162017. On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral Investment Management (“Lateral”) amended its existing credit facility to provide for approximately $10,110 towards the cash purchase price, and December 31, 2015, respectively. The Company recently closed on an equity raise thru a private placement, resulting in net proceedsextended the maturity date of the existing credit facility to June 30, 2019. Additionally, the Company, in conjunction with the Benchmark acquisition, took on approximately $50,000 of $1.5 milliondebt. With Benchmark’s significant annual revenue and its backlog as of SeptemberJune 30, 2016. Management plans2017 of $195,417, the Company believes that it has the ability to continue to raisesupport this additional funds through the sales of debt or equity securities until such time itsand fund all current operations, will begin to produce a positive cash flow.thereby mitigating this uncertainty. However, if needed, there is no assurance that additional financing will be available when needed or that management will be able to obtain and close financing transactions on terms acceptable to the Company, enter an acceptable installment plan with the IRS, which is scheduled to be presented in the third quarter of 2017, or whether the Company will become profitableCompany’s anticipated future profitability and generate positive operating cash flow.flow generated through its backlog will coincide with its debt service requirements and debt maturity schedules. If the Company is unable to raise sufficient additional funds or generate positive operating cash flow when required, it will have to develop and implement a plan which may include but may not be limited to further extendsuch measures as extending payables, renegotiating debt facilities, extending debt maturities, and reducereducing overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. AsWe have considerable discretion over the extent of September 30, 2016,expenditures and have the Company hasability to curtail the related cash flows as needed. We believe all of these factors are sufficient to alleviate substantial doubt about the Company’s ability to continue as a backlog of approximately $32,500,000 of future orders to be fulfilled in the next twelve months.going concern.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Reclassifications-
Certain prior period balances have been reclassified in order to conform to current period presentation. The Company recently, in conjunction with the Benchmark acquisition, refinanced its senior debt and the maturity was extended to June 30, 2019. At the time of filing its Annual Report, the Company inadvertently did not reclassify approximately $4,168 of senior debt that had been included in short term notes. In as much as such debt was refinanced prior to the issuance of its Annual Report, it should have been presented as long term. These reclassifications havehad no effect on previously reported results of operations, or loss per share.share or total liabilities.
| As Reported | As Restated | |||||||
| Current Liabilities | $ | 14,657 | $ | 10,490 | ||||
| Long Term Liabilities | $ | 9,939 | $ | 14,106 | ||||
| Total Liabilities | $ | 24,596 | $ | 24,596 | ||||
Use of Estimates -
The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates relate to its allowances for receivables, taxes, equity issuances and equity issuances.revenue recognition from construction contracts including estimating costs, and estimates of the value of intangible assets acquired from Benchmark.
| 10 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue and Cost of Goods Sold Recognition -
Generally, for the staffing business, revenue is recognized when all of the following criteria are met: (1)(i) persuasive evidence of an arrangement exists, (2)(ii) delivery has occurred or services have been rendered, (3)(iii) the price to the buyer is fixed or determinable, and (4)(iv) collectability is reasonably assured. Revenue from telecommunication services is principally all derived from construction projects performed under master and other service agreements as well as from contracts for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. The Company provides services under unit price or fixed price master service or other service agreements under which the Company furnishes specified units of service for a fixed price per unit of service and revenue is recognized upon completion of the defined project due to its short term nature. Revenue from fixed price contracts provides for a fixed amount of revenue for the entire project, subject to certain additions for changed scope or specifications. Such contracts provide that the customer accept completion of progress to date and compensate the Company for services rendered, which may be measured in terms of costs incurred, units installed, hours expended or some other measure of progress. Contract costs include all direct materials, labor and subcontracted costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and the operational costs of capital equipment. Much of the materials associated with the Company’s work are customer-furnished and are therefore not included in contract revenue and costs.
Management reviews estimates of contract revenue and costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected contract settlements are factors that influence estimates of total contract value and total costs to complete those contracts and, therefore, the Company’s profit recognition. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined and accepted by the customer. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. The majority of fixed price contracts are completed within one year.
The Company may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Management determines the probability that such costs will be recovered based upon engineering studies and legal opinions, past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer. The Company treats such costs as a cost of contract performance in the period incurred if it is not probable that the costs will be recovered, or defers costs and/or recognizes revenue up to the amount of the related cost if it is probable that the contract price will be adjusted and can be reliably estimated. As of June 30, 2017 and 2016, such amounts were not material. The Company actively engages in substantive meetings with its customers to complete the final approval process, and generally expects these processes to be completed within one year. The amounts ultimately realized upon final acceptance by its customers could be higher or lower than such estimated amounts.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
Due to the2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
For short term nature of the Company’s construction contracts, revenue is recognized once 100% of a contract segment is completed. A contract may have many segments, of which, once a segment is completed, the revenue for the segment is recognized when no further significant performance obligations exists. The Company’snetwork’s construction contracts or segments of contracts typically range from several days to two to four months. Contract costs may be billed as incurred. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. The Company begins recognizing revenue on a project as project costs are incurred and revenue recognition criteria are met.As expenses are incurred on a project but the invoicing criteria are not met, but the work has been accepted by the customer, revenue is recognized in that period and recognized in accounts receivable as unbilled revenue. Such amount approximated $5 million and $1 million at September 30, 2016 and December 31, 2015, respectively. Provisions for losses on uncompleted contracts are made in the period such losses are known.
Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, changes in raw materialmaterials costs, and final contract settlements may result in revisions to revenue, costs and income and are recognized in the period in which the revisions are determined. Provisions for losses on uncompleted contracts are made in the period such losses are known.
The Company also recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimated costs, it is at least reasonably possible that the estimates used will change within the near term. Contract cost of sales include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
| 12 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Balance Sheet Classifications
In accordance with normal practice in the construction industry, the Corporation includes asset and liability accounts relating to construction contracts in current assets and liabilities even when such amounts are realizable or payable over a period in excess of one year. For the six months ended June 30, 2017, the Company has included retainage payable as part of Billings in excess of costs and estimated earnings on uncompleted contracts. Retainage payable is anticipated to be paid within the next twelve months. The Company has also included any unbilled retention receivable as part of costs and estimated earnings in excess of billings on uncompleted contracts-and such amounts are also expected to be billed and collected within the next twelve months.
Valuation of Long-lived Assets
The Company evaluates its long-lived assets for impairment in accordance with related accounting standards. Assets to be held and used (including projects under development as well as property and equipment), are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the Company first groups its assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, the Company estimates the undiscounted future cash flows that are directly associated with and expected to arise from the completion, use and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs. There were no impairments during the periods presented.
Income Taxes
The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more likely than not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. The Company provided for a full valuation allowance against its net operating loss carryforwards, however it was subject to New York local tax.
Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the underlying net tangible and intangible assets acquired. The Company tests goodwill resulting from acquisitions for impairment annually on March 1, or whenever events or changes in circumstances indicate an impairment. For purposes of the goodwill impairment test, the Company has determined that it operates as a single reporting unit. If it is determined that an impairment has occurred, the Company adjusts the carrying value accordingly and charges the impairment as an operating expense in the period the determination is made. Although the Company believes goodwill is appropriately stated in the consolidated condensed financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance. There were no impairments during the periods presented.
Intangible assets that are not considered to have an indefinite life are amortized over their useful lives on a straight-line basis (see Note 4). Customer relationships acquired through business combinations are amortized over the estimated remaining useful life of the acquired customer base. This remaining useful life is based on historical customer retention and attrition rates. Contracts in progress acquired through business combinations are amortized over the estimated duration of the underlying projects. Trademarks and tradenames acquired through business combinations are amortized over the estimated useful life that such trademarks and tradenames are expected to be used. Non-compete arrangements entered into in connection with business combinations are amortized over the contractual life of the arrangements. On a periodic basis, the Company evaluates the estimated remaining useful life of acquired intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.
| 13 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Basic and Diluted Loss Per Share -
The basic net loss per share is computed by dividing the net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include convertible debt, warrants an dand preferred stock. The number of potential common shares outstanding relating to convertible debt, warrants and preferred stock is computed using the treasury stock method. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Comparative data for the previous period has been adjusted to reflect the 1 for 20 reverse split effectuated May 26, 2016.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The following securities are excluded from the calculation of weighted average dilutive common shares because they are not currently convertible, or because their inclusion would have been anti-dilutive:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Convertible preferred stock, Series A | 667,169 | 667,169 | ||||||
| Convertible preferred stock, Series A-1 | 393,645 | 393,645 | ||||||
| Convertible preferred stock, Series D [1] | - | 760,959,600 | ||||||
| Convertible preferred stock, Series F [1] | - | - | ||||||
| Warrants | 11,658,814 | 797,358 | ||||||
| Convertible debt | - | 200,000 | ||||||
| Total potentially dilutive shares | 12,719,628 | 763,017,722 | ||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2017 | 2016 | |||||||
| Convertible preferred stock, Series A | 667,169 | 667,169 | ||||||
| Convertible preferred stock, Series A-1 | 393,645 | 393,645 | ||||||
| Convertible preferred stock, Series D [1] | - | - | ||||||
| Convertible preferred stock, Series F [1] | - | - | ||||||
| Warrants | 20,498,126 | - | ||||||
| Total potentially dilutive shares | 21,558,940 | 1,060,814 | ||||||
[1] The Series D (39,883,500) and Series F (19,415,460) preferred shares are convertible at a rate of 400 pre-split shares of common stock for each share of preferred stock but not until the Company has effected a sufficient increase in the authorized common shares. The Series D and Series F preferred shares were mandatorily converted to common shares at a ratio of 1 to 20 when the reverse split of common shares was effectuated on May 26, 2016.
Concentration of Credit Risk-
Financial instruments that potentially expose the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash at onetwo financial institutioninstitutions that management believes isare a high-credit, high-quality financial institution and accordingly, subject to minimal credit risk. Deposits held with these financial institutions may be in excess of the amount of insured limits provided on such deposits, if any. The Company is subject to risk of nonpayment of its trade accounts receivable.
The Company’s customer base is highly concentrated. As of December 31, 2015, the Company’s three largest customers, Customer E, Customer H and Customer B, represented 47%, 14%, and 10% of accounts receivable, respectively. As of September 30, 2016, the Company’s four largest customers, innovative communications service providers, Customer M, Customer E, Customer N and Customer J represented 34%, 13%, 12%, and 11% of accounts receivable, respectively.
Revenue may significantly decline if the Company were to lose one or more of its significant customers. For the three and nine months ended September 30, 2015, Customer E represented approximately 51% and 47% of revenues respectively, and customer B represented approximately 8% and 23% respectively. During the three and nine months ended September 30, 2016 the Company generated revenue by four major customers, Customer M, represented approximately 49% and 33% of revenues respectively Customer J, represented approximately 8% and 19% of revenues respectively, Customer N, represented approximately 16% and 13% of revenues respectively, and Customer L representing 6% and 10% of revenues, respectively.
Amortization of Senior Note Debt Discount and Deferred Financing Costs - The amortization of the senior note debt discount (Note 7. Senior Debt) is calculated monthly using the straight line method, which approximates the interest rate method, over the original term of the note, twenty-four months, using the straight-line method which approximates the interest rate method. The result of this monthly amortization is recognized in amortization of debt discount in the period amortized for the debt discount and interest expense for the deferred finance costs.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Due to the fact that the majority of our revenues are nonrecurring, project based revenues, it is not unusual for there to be significant period to period shifts in customer concentrations. Revenue may significantly decline if the Company were to lose one or more of its significant customers, or if the Company were not able to obtain new customers upon the completion of significant contracts.
The following tables set forth the Company’s revenues and accounts receivable balances for the periods indicated:
| For the Three Months | For the Six Months | |||||||||||||||
| June 30, 2017 | June 30, 2017 | |||||||||||||||
| Revenues | $ | % | $ | % | ||||||||||||
| Customer A | 7,527 | 15 | % | 7,527 | 13 | % | ||||||||||
| Customer B | 8,126 | 16 | % | 8,126 | 15 | % | ||||||||||
| Customer C | 8,857 | 17 | % | 8,857 | 16 | % | ||||||||||
| For the Three Months | For the Six Months | |||||||||||||||
| June 30, 2016 | June 30, 2016 | |||||||||||||||
| Revenues | $ | % | $ | % | ||||||||||||
| Customer J | 1,044 | 33 | % | 1,419 | 27 | % | ||||||||||
| Customer L | 348 | 11 | % | 683 | 13 | % | ||||||||||
| Customer M | 285 | 9 | % | 578 | 11 | % | ||||||||||
| June 30, 2017 | December 31, 2016 | |||||||||||||||
| Account Receivable | $ | % | $ | % | ||||||||||||
| Customer A | 5,302 | 14 | % | - | - | % | ||||||||||
| Customer B | 5,040 | 14 | % | - | - | % | ||||||||||
| Customer C | 3,698 | 10 | % | - | - | % | ||||||||||
| Customer M | 3,415 | 12 | % | 4,633 | 66 | % | ||||||||||
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments-The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs other than quoted prices in active markets that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments consist of cash, accounts receivable, inventory, prepaid expenses, leasehold improvements, property and equipment, deposits, other current assets, accounts payable, accrued expenses, deferred revenue, capital leases, equity-linked warrants, and notes payable. The recorded values of cash, accounts receivable, inventory, prepaid expenses, andother current assets, accounts payable, and accrued expenses approximate fair values due to the short maturities of such instruments. Recorded values for notes payable and related liabilities approximate fair values, since their amortization of deferred financing cost stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.
FTE NETWORKS, INC. AND SUBSIDIARIES
3. RESTRICTED CASH ACCOUNTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
The restricted cash account was created to deposit the unused proceeds from the Company’s new senior debt (Note 7. Senior Debt). The funds are kept at a bank in an account segregated from our main operating account. The Company does not have direct access to or control over the funds held in this account. The funds are disbursed to the Company upon the written request of the lender. These balances were $0 as of September 30, 2016 and $3,003,226 as of December 31, 2015.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
4. OTHER CURRENT ASSETSRecent Accounting Pronouncements
Other currentIn February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets consistand liabilities on the balance sheet for leases with lease terms greater than 12 months. The standard is effective for annual reporting periods beginning after December 15, 2018, which for the Company will commence with the year beginning January 1, 2019, with early application permitted. The adoption will require a modified retrospective approach for leases that exist or are entered into after the beginning of the following asearliest period presented. The Company is currently evaluating the standard to determine the impact of September 30, 2016 and December 31, 2015: the adoption on the financial statements.
| September 30, 2016 | December 31, 2015 | |||||||
| Other receivables, net of reserve of $150,000 as of September 30, 2016 and December 31, 2015 | $ | 1,306,781 | $ | 1,232,555 | ||||
| Security deposits | 82,489 | 69,805 | ||||||
| Prepaid expenses | 654,060 | 121,448 | ||||||
| Prepaid consultants fees | 291,200 | - | ||||||
| Pre-paid Cost (Work in Process) | 495,259 | 623,798 | ||||||
| TOTAL | $ | 2,829,789 | $ | 2,047,606 | ||||
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted. The Company is currently evaluating the standard to determine the impact of the adoption on the financial statements and what changes to systems and controls may be warranted.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
There have been four new ASUs issued amending certain aspects of ASU 2014-09. ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.
In July 2017, the FASB issued Accounting Standards Update 2017-11 – Earnings Per Share. The Company is currently evaluating the standard to determine the impact of the adoption on the financial No. 2017-11—Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.
In March 2016, the FASB issued Accounting Standards Update 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The Company is currently evaluating the standard to determine the impact of the adoption on the financial statements.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
3. ACQUISITION OF BENCHMARK BUILDERS
On April 20, 2017, FTE acquired all of the issued and outstanding shares of common stock of Benchmark pursuant to the Amendment No. 1 to Stock Purchase Agreement, (and together with the Stock Purchase Agreement dated March 9, 2017, the “Amended Purchase Agreement”). The purchase price set forth in the Amended Purchase Agreement consists of (i) cash consideration of approximately $17,250 subject to certain prospective working capital adjustments (ii) 26,738,445 shares of FTE common stock with a fair value of $21,658, (iii) convertible promissory notes in the aggregate principal amount of $12,500 to certain stockholders of Benchmark (the “Series A Notes”, which mature on April 20, 2019) and (iv) promissory notes in the aggregate principal amount of $30,000 to certain stockholders of Benchmark (the “Series B Notes”, which mature on April 20, 2020). On April 20, 2017, in conjunction with the acquisition of Benchmark, FTE’s senior lender, Lateral, amended the original credit agreement to provide for approximately $10,110 towards the cash purchase price of the Benchmark acquisition, refinancing this new advance with the existing debt and extending the maturity date of the facility to March 31, 2019. In addition, certain sellers of Benchmark additionally provided approximately $7,500 towards the cash purchase price for which they received promissory notes in the aggregate principal amount of $7,500 to certain stockholders of Benchmark (the “Series C Notes”, which mature on October 20, 2018). The acquisition has been accounted for as a business combination.
The following is a summary of the consideration transferred for the acquisition of Benchmark:
| Cash consideration | $ | 17,250 | ||
| Shares of common stock | 21,658 | |||
| Series A notes | 12,500 | |||
| Series B notes | 30,000 | |||
| Merger consideration | $ | 81,408 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
3. ACQUISITION OF BENCHMARK BUILDERS, continued
The purchase price was assigned to the assets acquired based on their estimated fair values. The following is the preliminary purchase price allocation as of the April 20, 2017 closing date for Benchmark:
| Cash | $ | 2,416 | ||
| Accounts receivable | 14,625 | |||
| Other current assets | 10,272 | |||
| Property and equipment | 47 | |||
| Total identifiable assets acquired | 27,360 | |||
| Accounts payable | 15,393 | |||
| Accrued expenses and other current liabilities | 9,111 | |||
| Total liabilities assumed | 24,504 | |||
| Fair value of net tangible assets acquired and liabilities assumed | 2,856 | |||
| Contracts in progress | 10,352 | |||
| Trademarks and tradenames | 1,592 | |||
| Customer relationships | 19,087 | |||
| Non-compete | 599 | |||
| Fair value of identified intangible assets | 31,630 | |||
| Total consideration transferred | 81,408 | |||
| Goodwill | $ | 46,922 |
As discussed in Note 4, variations of the income approach were used to value the intangible assets. Goodwill of $46,922 was recorded related to this acquisition. The Company believes the goodwill related to the acquisition was a result of the expected growth platform to be used for growing the business. The Company’s finalization of the purchase price allocation, including assets acquired, intangible assets acquired, liabilities assumed, and deferred income taxes assumed, related to the acquisition was in process as of June 30, 2017. The Company expects to complete the purchase price allocation during 2017. As of April 20, 2017, goodwill that is currently expected to be deductible for tax purposes is $36,875 and will be amortized over 15 years.
The operating results of Benchmark for the period from April 21, 2017 to June 30, 2017, included revenues of $44,538 and net loss of $577 and have been included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2017. The net loss for Benchmark reflects $2,310 of amortization expense in the Company’s consolidated statements of operations for the three and six months ended June 30, 2017, in connection with Benchmark’s intangible assets. The Company incurred a total of $1,409 and $1,419 in transaction costs in connection with the acquisition, which are included within the consolidated statement of operations for the three and six months ended June 30, 2017, respectively.
Unaudited Predecessor financial information has been provided in these condensed consolidated financial statements since the operations of the Company before the acquisition of Benchmark were insignificant relative to the operations acquired.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
3. ACQUISITION OF BENCHMARK BUILDERS, continued
The unaudited pro forma combined results, which assumes the transaction was completed on January 1 of the respective six month periods, are as follows for the six months ended June 30, 2017 and 2016:
| Revenue [*] | Earnings (Losses) [*] | |||||||
| Actual six months ended June 30, 2017 | $ | 55,783 | $ | (9,063 | ) | |||
| 2017 supplemental pro forma from January 1, 2017 through June 30, 2017 | $ | 97,872 | $ | (13,448) | ||||
| 2016 supplemental pro forma from January 1, 2016 through June 30, 2016 | $ | 232,229 | $ | 4,893 | ||||
| 2016 supplemental pro forma from April 1, 2016 through June 30, 2016 | $ | 136,423 | $ | 4,699 | ||||
[*] The unaudited supplemental pro forma from April 1, 2017 through June 30, 2017 has been excluded as the activity for the period April 1, 2017 through April 20, 2017 was not material.
Significant adjustments included within the Company’s Proforma earnings and losses for the six months ended June 30, 2017 and 2016 are as follows:
| · | Adjustment to increase amortization expense of $3,717, $3,103 and $6,027 for the six months ended June 30, 2017 and the three and six months ended June 30, 2016, respectively, reflects the preliminary adjustment to the amortization expense associated with the fair value of the identifiable intangible assets acquired in the acquisition. |
| · | Adjustment to eliminate transaction costs of $1,419 for the six months June 30, 2017, respectively, reflects the removal of transaction costs incurred by the Company related to the Benchmark acquisition. There were no such transaction costs incurred during the three and six months ended June 30, 2016. |
| · | Adjustment of interest expense of $1,038, $842 and $1,684 for the six months ended June 30, 2017 and the three and six months ended June 30, 2016, respectively, reflects an increase in interest expense resulting from financing the total cash consideration paid in the acquisition and the issuance of promissory notes. |
| · | Adjustment of amortization expense of $1,304, $817 and $1,635 for the six months ended June 30, 2017 and the three and six months ended June 30, 2016, respectively, on deferred financing costs for financing cost of $890 incurred in amending the original credit agreement with Lateral, in addition to the 6,420,020 shares of common stock issued to Lateral with a fair value of $2,568 in connection with this amendment. |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
4. INTANGIBLE ASSETS AND GOODWILL
The fair value of identifiable intangible assets acquired in the acquisition of Benchmark consist of the following:
| Contracts in progress | $ | 10,352 | ||
| Trademarks and tradenames | 1,592 | |||
| Customer relationships | 19,087 | |||
| Non-compete | 599 | |||
| Total identifiable intangible assets | 31,630 | |||
| Goodwill | 46,922 | |||
| Total Intangible Assets | $ | 78,552 |
Contracts in progress
The contracts in progress were valued within the income approach, multi-period excess earnings method. The contracts in progress are being amortized on a straight-line basis over an estimated useful life of eighteen months based on the remaining duration of the contracts in progress.
Trademarks and tradenames
The acquired trademarks and tradenames were valued using the income approach relief from royalty method. The Company has assumed the trade names will generate cash flows for the Company for seven years and will be amortized on a straight-line basis over their determined useful life.
Customer relationships
The existing customer relationships were valued within the income approach, multi-period excess earnings method. The customer relationships are being amortized on a straight-line basis over an estimated useful life of seven years, which is based on historical customer retention and attrition rates.
Non-compete
Non-competes were valued using the income approach, difference in cash flows “with” and “without” competition. The non-competes are being amortized on a straight-line basis over an estimated useful life of five years, which is based on the duration of the agreements.
Goodwill
The existing goodwill was valued as the excess of the purchase price of Benchmark assets over the fair market value of the assets purchased. Goodwill will be evaluated for impairment annually or when events and circumstances warrant such review. Impairment charges, if any, will be charged to operating expenses.
A cost approach was determined to be the most appropriate method for valuing the Assembled Workforce. The Assembled Workforce is not an identified intangible asset under ASC 805, Business Combinations so proceeds are not allocated directly to this asset. Rather, the fair value of the Assembled Workforce is calculated in order to determine the contributory asset charges for use in the multi-period excess earnings method which was used to value the Customer Relationships and the Contracts in Progress. For purposes of the purchase price allocation, the value of the assembled workforce is included within the value of residual goodwill.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
4. INTANGIBLE ASSETS AND GOODWILL, continued
Identifiable intangible assets consisted of the following at June 30, 2017:
| Weighted average remaining useful life (Months) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||
| Indefinite- Lived Intangible | ||||||||||||||||
| Goodwill | - | $ | 46,922 | $ | - | $ | 46,922 | |||||||||
| Definite- Lived Intangibles | ||||||||||||||||
| Trademarks and tradenames | 81.7 | 1,592 | 44 | 1,548 | ||||||||||||
| Customer relationships | 81.7 | 19,087 | 523 | 18,564 | ||||||||||||
| Contracts in progress | 15.7 | 10,352 | 1,720 | [1] | 8,632 | |||||||||||
| Non-compete | 57.7 | 599 | 23 | 576 | ||||||||||||
| Total Definite Intangible Assets | 31,630 | 2,310 | 29,320 | |||||||||||||
| Total Intangible Assets | $ | 78,552 | $ | 2,310 | $ | 76,242 | ||||||||||
[1] Amortization expense for the three and six months ended June 30, 2017 totaled $2,310, of which $589 was charged to operating expenses and $1,720 was charged to cost of revenues.
Future projected annual amortization consists of the following for each of the following fiscal years ended December 31:
| 2017 (Remaining) | $ | 6,027 | ||
| 2018 | 7,215 | |||
| 2019 | 3,074 | |||
| 2020 | 3,231 | |||
| 2021 | 2,954 | |||
| Thereafter | 6,819 | |||
| Total | $ | 29,320 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
5. OTHER CURRENT ASSETS
Other current assets consist of the following as of June 30, 2017 and December 31, 2016:
| June 30, 2017 | December 31, 2016 | |||||||
| Other receivables, net of reserves of $150 and $150, respectively | $ | 1,583 | $ | 1,233 | ||||
| Prepaid contract costs for work in process | 265 | 409 | ||||||
| Prepaid operating expenses | 4,888 | 1,191 | ||||||
| Other current assets | $ | 6,736 | $ | 2,833 | ||||
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of SeptemberJune 30, 20162017 and December 31, 2015, Accrued Expenses2016, accrued expenses and Other Current Liabilitiesother current liabilities were comprised of the following:
| September 30, 2016 | December 31, 2015 | |||||||
| Accrued interest payable[1] | $ | 748,465 | $ | 817,452 | ||||
| Accrued dividends payable | 510,804 | 451,133 | ||||||
| Accrued compensation expense[2] | 1,984,029 | 2,015,277 | ||||||
| Other accrued expense | 866,044 | 295,083 | ||||||
| Accrued expenses, current | $ | 4,109,342 | $ | 3,578,945 | ||||
| June 30, 2017 | December 31, 2016 | |||||||
| Accrued interest payable[1] | $ | 1,581 | $ | 365 | ||||
| Accrued local franchise tax | 479 | - | ||||||
| Accrued dividends payable | 571 | 531 | ||||||
| Accrued compensation expense[2] | 3,898 | 2,300 | ||||||
| Other accrued expense | 80 | 8 | ||||||
| Accrued expenses, current | $ | 6,609 | $ | 3,204 | ||||
| [1] | Accrued interest payable includes approximately |
| [2] | Accrued compensation expense includes |
6. NOTES PAYABLE
| September 30, 2016 | December 31, 2015 | |||||||
| Vendors Notes (Unsecured) | ||||||||
| Long term vendor Notes (“Vendor Notes”) issued to settle litigation bearing interest rates between 0% and 6% per annum. Terms range from 1 to 9 months. | $ | 1,059,337 | $ | 491,000 | ||||
Other Notes Payable
| Notes payable bearing interest at a stated rate of 12% and a 4% PIK per annum. Terms is for 7 months. | 2,560,700 | - | ||||||
| Less deferred financing costs | (473,100 | ) | ||||||
| Total other note payable, net | 2,087,600 | |||||||
| Notes payable bearing interest at a stated rate between 10% and 12% per annum. Terms range from 1 to 4 months. | 609,000 | 709,000 |
Equipment Notes
| Obligations under capital leases, bearing interest rates between 4.1% and 8.2% per annum, secured by equipment having a value that approximates the debt value. Terms range from 48 to 60 months. | 1,050,935 | 960,205 | ||||||
| Various Equipment notes, bearing interest rates between 2% and 41% per annum, secured by equipment having a value that approximates the debt value. Terms range from 36 to 72 months. | 1,574,475 | 1,298,978 | ||||||
| Total Notes payables | $ | 6,381,347 | $ | 3,459,183 | ||||
| Less: Current portion | $ | 4,105,491 | $ | (1,887,120 | ) | |||
| Total Notes non-current portion | $ | 2,275,856 | $ | 1,572,063 |
| 24 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
7. NOTES PAYABLE
| June 30, 2017 | December 31, 2016 | |||||||
| Vendors Notes (Unsecured) | ||||||||
| Long term vendor Notes (“Vendor Notes”) issued to settle litigation bearing interest rates between 0% and 6% per annum. Terms range from 1 to 48 months. | $ | 3,613 | 1,337 | |||||
| Other Notes Payable | ||||||||
| Notes refinanced in conjunction with the senior debt | - | 5,094 | ||||||
| Less deferred financing costs | - | (926 | ) | |||||
| Total other notes payable, net | - | 4,168 | ||||||
| Notes payable bearing interest at a stated rate between 10% and 12% per annum. Terms range from 1 to 12 months. | 3,110 | 2,000 | ||||||
| UnsecuredNotes Issued in Connection with Benchmark Acquisition | ||||||||
| Series A Convertible Notes | 12,500 | - | ||||||
| Series B Notes | 30,000 | - | ||||||
| Series C Notes | 7,500 | - | ||||||
| Total notes issued in connection with Benchmark acquisition | 50,000 | - | ||||||
| Equipment Notes | ||||||||
| Obligations under leases, bearing interest rates between 4.1% and 8.2% per annum, secured by equipment having a value that approximates the debt value. Terms range from 48 to 60 months. | 838 | 961 | ||||||
| Various Equipment notes, bearing interest rates between 2% and 41% per annum, secured by equipment having a value that approximates the debt value. Terms range from 36 to 72 months. | 1,432 | 1,508 | ||||||
| Total Notes payables | $ | 58,993 | $ | 9,974 | ||||
| Less: Current portion | $ | (12,012 | ) | $ | (3,444 | ) | ||
| Total Notes non-current portion | $ | 46,981 | $ | 6,530 |
During the six months ended June 30, 2017, the Company issued in Series A Notes, convertible promissory notes, in the aggregate principal amount of $12,500 to certain stockholders of Benchmark, which mature on April 20, 2019. Interest is computed at the rate of five percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $122 for the six months ended June 30, 2017. This Note shall be convertible into conversion shares, at the holder’s option, upon an event of default at a conversion price per share of $0.475.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
7. NOTES PAYABLE, continued
During the six months ended June 30, 2017, the Company issued in Series B Notes in the aggregate principal amount of $30,000 to certain stockholders of Benchmark which mature on April 20, 2020. Interest is computed at the rate of three percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $175 for the six months ended June 30, 2017.
During the six months ended June 30, 2017, the Company issued in Series C Notes in the aggregate principal amount of $7,500 to certain stockholders of Benchmark which mature on October 20, 2018. Interest is computed at the rate of three percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $42 for the six months ended June 30, 2017.
The required principal payments for all borrowings for each of the five years following the balance sheet date are as follows:
| 2017 (Remaining) | $ | 5,052 | ||
| 2018 | 9,782 | |||
| 2019 | 13,152 | |||
| 2020 | 30,532 | |||
| 2021 | 334 | |||
| Thereafter | 141 | |||
| Total | $ | 58,993 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
8. SENIOR DEBT
On October 28, 2015, the Company, through its main operating entity Jus-Com, Inc. entered into an $8 million dollar senior credit facility. The facility has a two year term, and calls for interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a “payment in kind” (PIK) provision which calls for a 4% per annum increase in the principal balance monthly. The facility is a senior credit facility, and is secured by principally all assets of the Company. The uses of the senior facility wereare to retire the existing senior debt and related accrued interest through a tender offer, retire the factoring line of credit, pay certain senior loan closing costs, settle certain pending litigation, and provide working capital to the Company. A “blocked” bank deposit account, controlled by the lender, was also initially established in the amount of $3,000,000$3,000 to be held for future advances. (See restricted cash, note 3). The Company is prohibited from an early payoff of the facility until October 28, 2017. There are several affirmative and negative covenants the Company must comply with, such as minimum bank account balances, minimum EDITDAEBITDA thresholds, capital expenditures, leverage ratio, and debt service coverage ratio. As a condition of the facility, the Company issued 163,441 shares of its Series D preferred stock and 391,903 shares of its Series F preferred stock to the lender. As a result of a market valuation performed on this transaction by a qualified third party valuation firm, an original issue discount of $437,380$437 was determined, which will be amortized on a straight line method, which approximates the interest rate method, over a twenty four month period to interest expense. During the period ended September 30,December 31, 2016, $164,018$249 was included in amortization of debt discount, and $236,914$237 remained unamortized as of September 30,December 31, 2016. On April 5, 2016, the Company entered into an amendment agreement to its existing credit facility with Lateral, amending the original credit agreement signed October 28, 2015. The agreement amends select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. On September 30, 2016, the Company entered into a second amendment agreement to its existing credit facility, maturing October 28, 2017, amending the original credit agreement signed October 28, 2015. The agreement was amended solely to consolidate a series of short term bridge loans granted to the Companycompany from time to time during the second and third quarter of 2016 into a $2.5 million loan, which matures onwith a maturity date of April 30, 2017. The second amendment also amended the covenants related to consolidated EBITDA consolidated leverage, consolidated debt service, SG&A expenses, and compensation expense. On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral amended its existing credit facility to provide for $11,480 of which approximately $10.1 million went towards the cash purchase price, combining this new advance with the existing debt, extending the maturity date of the combined facility to March 31, 2019. The Company isincurred deferred financing cost of approximately $890 in complianceamending the original credit agreement with its covenantsLateral in conjunction with the acquisition of Benchmark to provide for partial financing of $10,110 towards the cash purchase price, refinancing this new advance with the existing debt, extending the maturity date of the facility to March 31, 2019. The Company issued 6,420,020 shares of common stock to Lateral with a fair value of $5,651 in connection with this amendment. Deferred financing cost are included within the senior note payable on the balance sheet as of SeptemberJune 30, 2016.2017.
Senior Debt DisclosureDuring the six months ended June 30, 2017, the Company reclassified 11,106,880 shares of its common stock with a fair value of $437 to its senior lender from temporary equity to permanent equity which is now included in the consolidated statement of changes in stockholders’ equity. Reclassification was due to the put provision from the Lateral senior credit agreement dated October 28, 2015 was removed when the agreement was amended for the Benchmark acquisition on April 20, 2017.
| On October 28, 2015 the Company entered into a credit agreement, pursuant to which the Company received $8,000,000. The funds were disbursed as follow $6,000,000 and $2,000,000 on October 28, 2015 and November 11, 2015 respectively. The interest rate used is 12% per annum, also required to make 4% PIK payments, which is booked monthly as an increase to the senior debt balance. | $ | 8,295,282 | $ | 8,048,682 | ||||
| Less: Original issue discount | (236,914 | ) | (400,932 | ) | ||||
| Less: Deferred financing cost | (814,294 | ) | (801,640 | ) | ||||
| Total Senior Debt, non-current portion | $ | 7,244,074 | $ | 6,846,110 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
8. TERM LOANSENIOR DEBT, continued
On September 30, 2016, the Company and its senior lender modified certain bridge loans entered into from June 2016 through September 2016.
| June 30, 2017 | December 31,2016 | |||||||
| On October 28, 2015 the Company entered into a credit agreement, pursuant to which the Company received $8,000. The funds were disbursed as follow: $6,000 and $2,000 on October 28, 2015 and November 11, 2015 respectively. On April 20, 2017, the Company amended existing credit facility to which the Company received $11,480. The interest rate used is 12% per annum, also required to make 4% PIK payments, which is booked monthly as an increase to the senior debt balance. | $ | 26,831 | $ | 8,378 | ||||
| Less: Original issue discount | - | (182 | ) | |||||
| Less: Deferred financing cost | (6,880 | ) | (620 | ) | ||||
| Total Senior Debt, non-current portion | $ | 19,951 | $ | 7,576 | ||||
The various bridge loans with an outstanding balance of $2.25 million were restructured into one term loanrequired principal payments for $2.5 million, with a maturity date of April 30, 2017 and an interest rate of 16% per year. Consideration was then made whether the termsall borrowings for each of the restructured debt instrument were substantially different fromfive years following the original debt instrument. Under ASC 470-50 Modificationsbalance sheet date are as follows:
| 2017 (Remaining) | $ | - | ||
| 2018 | - | |||
| 2019 | 26,831 | |||
| 2020 | - | |||
| 2021 | - | |||
| Thereafter | - | |||
| Total | $ | 26,831 |
| 28 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and Extinguishment if the present value of the cash flows under the new debt is at least 10% different from the present value of the remaining cash flows under the original debt, they are considered to be substantially different and extinguishment accounting is applied. Based on the calculations performed, there was a greater than 10% difference between the present value of cash flows under the restructured debt compared to the present value of the remaining cash flows under the original debt. Therefore, the restructuring met the conditions for debt extinguishment accounting under ASC 470-50. As of September 30, 2016, the fair value of this debt was determined to be $2,560,700, and is recorded as such in Section 6, Notes Payable. The difference in the face value of the note and the fair value of the note, $60,700 was recorded as a one time extinguishment expense in this period, along with $110,000 of fees paid to the lender and $143,200 to establish the warrant liability, for a total one time extinguishment expense of $313,900. See Footnote 10 “Warrants and Derivative Warrant Liability” for the fair value calculation of the warrant issued in conjunction with this term loan. As of September 30, 2016 there are $473,100 in deferred financing costs associated with the term loan, which will be amortized on a straight line method, which approximates the interest rate method, over a seven month period to interest expense.per share information)
9. COMMITMENTS AND CONTINGENCIES
Property Lease Obligations
Rental expense, resulting from property lease agreements was $158,469$282 and $56,265$159 for the three months ending SeptemberJune 30, 2017 and June 30, 2016, and September 30, 2015, respectively, and $442,848$398 and $147,239$284 for the ninesix months ending SeptemberJune 30, 2017, and June 30, 2016, and September 30, 2015, respectivelyrespectively.
Following is a schedule by years of future minimum payments required under leases obligations with initial or remaining non-cancelable lease terms in excess of one year as of SeptemberJune 30, 2016:2017:
| 2016 (Remaining) | $ | 142,584 | ||||||
| 2017 | 473,172 | |||||||
| 2017(Remaining) | $ | 476 | ||||||
| 2018 | 452,189 | 888 | ||||||
| 2019 | 410,589 | 806 | ||||||
| 2020 | 381,252 | 778 | ||||||
| 2021 | 424 | |||||||
| Thereafter | 508,398 | 131 | ||||||
| Total Lease Obligations | $ | 2,368,184 | $ | 3,503 | ||||
Accrued Litigation Expense
Legal Matters - The Company is involved in litigation claims arising in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. There have been no material developments in any legal proceedings since the disclosures contained in the Company’s Form 10-K for the year ended SeptemberDecember 31, 2016.
Related Party Advances
Through June 30, 2015, at2017, the Chief Executive Officer (CEO) provided cash advances witnessed by an interest bearing note, these advances totaled $583 as of June 30, 2017 and are included as part of notes payable-related party. The Company entered into several secured equipment financing arrangements with total obligations of approximately $265 as of June 30, 2017 that required the guaranty of a Company officer, which timewas provided by the CompanyCEO. Interest accrued on these advances were not material for the three and six months ended June 30, 2017 and 2016.
The Chief Financial Officer (CFO) personally guaranteed several secured equipment financing arrangements with total obligations of approximately $110 as of June 30, 2017. Additionally, the CFO provided $150 cash, which is included as part of due to related parties as of June 30, 2017 and a personal credit card account for an accrualthe purchase of $1,840,891 to settlegoods and services by FTE. While these claims. On November 20, 2015,credit card balances are reflected in the Company settledCompany’s books and records, the Martin and Arey lawsuitCFO is personally liable for $150,000 cash, a promissory note for $250,000, and 512,820 sharethe payment of common stock, having a valuethe entire amount of $5,120. On November 24, 2015, the Company settled the Daniel Fournier lawsuit for $100,000 in cash. On December 14, 2015, the Company settled the RoadSafe lawsuit for $130,000, payable in 13 monthly installmentsopen credit obligation, which was approximately $58 as of $10,000 in cash.June 30, 2017.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. COMMITMENTS AND CONTINGENCIES, continued(in thousands, except share and per share information)
Related Party Advances
Through September 30, 2016, the Chief Executive Officer (CEO) provided cash advances witnessed by a note, and from time to time, advances for the Company’s behalf on credit cards the CEO is personally liable for, aggregating $380,316. Additionally, the Company entered into several secured equipment financing arrangements with total obligations of approximately $321,000 as of September 30, 2016 that required the guaranty of a Company officer, which was provided by the CEO.
10. STOCKHOLDERS’ EQUITY
Stock To Be Issued
On September 29, 2016, the Company closed on its second round of an equity raise thru its investment banker. The transaction, which resulted in proceeds to the Company of $848,138 (gross proceeds of $969,475 less transaction fees of $121,337) called for the issuance of 2,423,687 shares of common stock on the closing date. Since the transfer agent did not issue the shares until October 12, 2016, these shares, as of September 30, 2016, were classified as common shares to be issued in stockholder’s equity. As of December 31, 2015, there were no shares classified as common shares to be issued.
Dividends
Dividend charges recorded during the three months and ninesix months ended SeptemberJune 30, 20162017 and 20152016 are as follows:
| For the three Months Ended | For the Three Months Ended | |||||||||||||||
| September 30, | June 30, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| Series | ||||||||||||||||
| A | $ | 12,510 | 12,510 | $ | 13 | $ | 13 | |||||||||
| A-1 | 7,380 | 7,381 | 7 | 7 | ||||||||||||
| Total | $ | 19,890 | 19,891 | $ | 20 | $ | 20 | |||||||||
| For the nine Months Ended | For the Six Months Ended | |||||||||||||||
| September 30, | June 30, | |||||||||||||||
| 2016 | 2015 | 2017 | 2016 | |||||||||||||
| Series | ||||||||||||||||
| A | $ | 37,530 | 37,529 | $ | 25 | $ | 25 | |||||||||
| A-1 | 22,140 | 22,141 | 15 | 15 | ||||||||||||
| Total | $ | 59,670 | 59,670 | $ | 40 | $ | 40 | |||||||||
Accrued dividends payable at SeptemberJune 30, 20162017 and December 31, 20152016 are comprised of the following:
| September 30, 2016 | December 31, 2015 | June 30,2017 | December 31,2016 | |||||||||||||
| Series | ||||||||||||||||
| A | $ | 297,176 | $ | 259,646 | $ | 329 | $ | 304 | ||||||||
| A-1 | 213,628 | 191,487 | 242 | 227 | ||||||||||||
| Total | $ | 510,804 | $ | 451,133 | $ | 571 | $ | 531 | ||||||||
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
10. STOCKHOLDERS’ EQUITY, continued
Warrants and Derivative Warrant Liability
The Company accounts for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock by the Company are at a lower price per share than the then-current warrant exercise price. We classifyThe Company classifies derivative warrant liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant. As of SeptemberJune 30, 2016,2017, the following warrants arewere outstanding:
| Issued to | Amount | Issue date | Expiration Date | Exercise Price | Amount | Issue Date | Expiration Date | Exercise Price | ||||||||||||||||
| Term Note Lender(1) | 2,343,750 | 9/30/2016 | 9/30/2021 | 0.80 | 2,344 | 9/30/2016 | 9/30/2021 | 0.80 | ||||||||||||||||
| Investment Bank | 1,969,837 | 12/9/2012 | 12/9/2019 | 0.20 | 1,970 | 12/9/2012 | 12/9/2019 | 0.20 | ||||||||||||||||
| Investment Bank | 2,434,539 | 10/31/2014 | 10/31/2021 | 0.20 | 2,435 | 10/31/2014 | 10/31/2021 | 0.20 | ||||||||||||||||
| Equity Investors | 2,487,000 | 9/8/2016 | 9/8/2021 | 0.80 | 2,487 | 9/8/2016 | 9/8/2021 | 0.80 | ||||||||||||||||
| Equity Investors | 2,423,688 | 9/29/2016 | 9/29/2021 | 0.80 | 2,424 | 9/29/2016 | 9/29/2021 | 0.80 | ||||||||||||||||
| Equity Investors | 2,589 | 10/12/2016 | 10/12/2021 | 0.80 | ||||||||||||||||||||
| Term Note Lender (1) | 2,500 | 11/11/2016 | 11/11/2021 | 0.40 | ||||||||||||||||||||
| Term Note Lender (1) | 3,750 | 1/3/2017 | 1/3/2022 | 0.40 | ||||||||||||||||||||
| 11,658,814 | 20,499 | |||||||||||||||||||||||
| (1) | Warrant was determined to be a derivative subject to fair value accounting and is booked as a warrant liability. |
A summary of the warrant activity during the ninesix months ended SeptemberJune 30, 20162017 is presented below:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Warrants | Price | Life in Years | Value | |||||||||||||
| Outstanding, December 31, 2015 | 437,335 | $ | 0.60 | - | - | |||||||||||
| Issued | 11,658,814 | 0.57 | 4.7 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | (437,335 | ) | 0.60 | - | - | |||||||||||
| Outstanding, September 30, 2016 | 11,658,814 | $ | .57 | 4.7 | $ | - | ||||||||||
| Exercisable, September 30, 2016 | 11,658,814 | $ | .57 | 4.7 | $ | - | ||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Warrants | Price | Life in Years | Value | |||||||||||||
| Outstanding, December 31, 2016 | 16,749 | $ | 0.55 | 4.60 | $ | 3,435 | ||||||||||
| Issued | 3,750 | 0.40 | 4.52 | 863 | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | - | - | - | - | ||||||||||||
| Outstanding, June 30, 2017 | 20,499 | $ | 0.55 | 4.15 | $ | 4,298 | ||||||||||
| Exercisable, June 30, 2017 | 20,499 | $ | 0.55 | 4.15 | $ | 4,298 | ||||||||||
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
10. STOCKHOLDERS’ EQUITY, continued
The Company has assessed its outstanding equity-linked financial instruments issued with the term loan citedloans discussed in Footnote 8Note 7 and has concluded that the warrants are subject to derivative accounting as a result of certain anti-dilution provisions contained in the warrants. The fair value of these warrants at issuance are classified as a loan fee and are being amortized over the life of the loan. The fair value of these warrants is classified as a liability in the financial statements, with the change in fair value during the future periods being recorded in the statement of operations.
The following table summarizes the calculated aggregate fair values for the warrant derivative liabilityliabilities using the Lattice Model method based on the following assumptions:
| January 2017 | January 2017 | November 2016 | September 2016 | |||||||||||||||||
| September 30, 2016 | Warrants at | Warrants as of | Warrants as of | Warrants as of | ||||||||||||||||
| Inception | June 30, 2017 | June 30, 2017 | June 30, 2017 | |||||||||||||||||
| Risk free rate | 1.14 | % | 1.94 | % | 1.808 | % | 1.783 | % | 1.763 | % | ||||||||||
| Volatility | 37.80 | % | 37.46 | % | 37.37 | % | 37.63 | % | 37.79 | % | ||||||||||
| Dividends | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
| Time to maturity | 5 years | 5 years | 4.52 years | 4.37 years | 4.25 years | |||||||||||||||
| Fair value per share price | .0611 | $0.15 | $0.32 | $0.31 | $0.16 | |||||||||||||||
| Fair value of warrants | $ | 143,200 | $563 | $1,185 | $785 | $366 | ||||||||||||||
| Market price on date of issuance | $0.41 | |||||||||||||||||||
These warrants are Level 3 valuation which were issued and measured on SeptemberJune 30, 2016.2017.
The following table summarizes the change in fair value of the warrants from December 31, 2016 through June 30, 2017.
| Fair value as of | New | Change in Fair Value | Fair value as of | |||||||||||||
| 12/31/2016 | Issuances | gain (loss) | June 30, 2017 | |||||||||||||
| Investor warrants (9/30/16) | $ | (170 | ) | $ | - | $ | (196 | ) | $ | (366 | ) | |||||
| Investor warrants (11/11/16) | $ | (424 | ) | $ | - | $ | (361 | ) | $ | (785 | ) | |||||
| Investor warrants (1/3/17) | $ | - | $ | (563 | ) | $ | (622 | ) | $ | (1,185 | ) | |||||
| Totals | $ | (594 | ) | $ | (563 | ) | $ | (1,179 | ) | $ | (2,336 | ) | ||||
Subscription Receivable
During the ninesix months ended SeptemberJune 30, 20162017 the Company issued 2,229,0004,017,011 shares of common stock to employees that were subject to certain vesting requirements.requirements, with a fair value of $3,795. As of September 30,December 31, 2016,, 2,100,000 shares of such shares that were previously issued to employees with a grant datefair value of $1,357,800 remain$2,829 remained unvested. Because these common shares are subject to forfeiture if the employees are no longer employed with the Companycompany at the end of their employment agreements, their unvested value is carried in subscriptions receivable within stockholder’sstockholders equity.
Equity Transactions
During the ninesix months ended, September 30, 2016, the Company issued 285,664 shares of its of its Preferred Series F stock with a grant date value of $35,186 to one of its investors as an incentive to continue raising equity proceeds.
During the nine months ended September 30, 2016, the Company issued 231,041 shares of its of its Preferred Series F stock to its independent directors and two officers with a grant date value of $152,487 for compensation.
During the nine months ended September 30, 2016, the Company issued 1,559,389 shares of its common stock with a grant date value of $898,438 to settle debt, with a $100,913 expense recorded in other income/expense.
During the nine months ended September 30, 2016, the Company issued 465,000 shares of its common stock with a grant date value of $291,200 to consultants for services performed for the Company.
During the nine months ended September 30, 2016, the Company issued 2,507,000 shares of its common stock to individual investors for an equity raise totaling $853,424.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCKHOLDERS EQUITY, continued
Temporary Equity
In conjunction with the Lateral senior credit agreement dated October 28, 2015, the Company also entered into a Redemption Rights Agreement (“agreement”). Contained in this agreement is a put provision related to the preferred shares of stock issued as a condition of the transaction. The Redemption Rights may be exercised at any time on or after October 28, 2017, provided the following conditions are met:
(i) The Company’s market capitalization on such date is equal to greater than $25,000,000, or (ii) the last twelve months earnings before interest, taxes depreciation, and amortization ending on the last day of the month preceding such date is greater than $3,000,000.
Further, the Redemption Rights are barred from being exercised if the exercise$1,970 of such Redemption Rights would, in good faith, prevent the Company from continuingamount vested and was reflected as a going concern.
The Redeemable Shares are redeemable at the per share price implied by 10 multiplied by the Company’s LTM EBITDA, multiplied by the Ownership Percentage, divided by the numberstock compensation and $4,656 remained unvested as of Redeemable shares then held.
An analysis was performed, under ASC 480-10-25-7 to determine if the redeemable shares should be classified as debt or equity. The results of this analysis determined the redeemable shares did not fall under the definition of mandatorily redeemable financial instruments and therefore should not be classified as debt.
Pursuant to ASC 480-10-S99, preferred stock redeemable for cash or other assets are to be classified outside of permanent equity if it is redeemable with any one of the following characteristics:
The Redeemable Shares are redeemable upon the occurrence of certain events that are not solely within the control of the reporting entity. In the natural course of pursuing the fulfillment of its required fiduciary duties, the Company may meet the conditions upon which the shares would become redeemable (i.e. market capitalization and/or EBITDA, along with going concern status), and would be thus unable to control the events leading to redemption. As a result of the evaluation, the Company has concluded that the Redeemable Shares are appropriately classified outside of permanent equity as temporary equity.
The Redeemable Shares originally issued with the transaction, 163,441 of Series D Preferred Convertible shares and 391,903 of Series F Preferred Convertible shares, were converted to 11,106,880 shares of the Company’s Common Stock on or around May 26,June 30, 2016. The conversion was completed due to the mandatory conversion feature of the preferred shares due to the reverse split of the Company’s Common Stock on May 26, 2016.
Reverse Split
On December 23, 2015, the Board unanimously authorized and approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at a 1-for-20 ratio (the “Reverse Split”) and increase our common shares authorized to 200,000,000. On December 30, 2015, stockholders holding a majority of our voting power approved by written consent the amendment to our Articles of Incorporation, which would affect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. The reverse stock was approved by the Financial Industry Regulatory Authority (“FINRA”) on May 25, 2016 and effectuated on May 26, 2016. In conjunction with the Reverse Split approval, all of the Series D and Series F preferred convertible shares mandatorily converted to common shares at a 1-for-20 ratio.
| 32 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. SEGMENT DATA(in thousands, except share and per share information)
The Company’s reportable operating segments consist10. STOCKHOLDERS’ EQUITY, continued
Equity Transactions
During the six months ended June 30, 2017, the Company issued 20,892 shares of its telecommunications segment and its staffing segment, which are organized, managed and operated along key product and service lines.common stock with a fair value of $14 for settlement of a legal matter.
The following tables summarize financial information aboutDuring the Company’s business segmentssix months ended June 30, 2017, the Company issued 1,429,446 shares of its common stock to individual investors, which resulted in net proceeds to the Company of $26.
During the six months ended June 30, 2017, the Company issued 1,926,724 shares of its common stock with a fair value of $1,219 pursuant to consulting agreements.
During the six months ended June 30, 2017, the Company issued 4,017,011 shares of its common stock with a fair value of $3,795 to employees under employment agreement for future services.
During the six months ended June 30, 2017, the Company issued 6,420,020 shares of its common stock with a fair value of $5,651 to its senior lender in conjunction with the refinancing of the senior debt on April 20, 2017 in conjunction with the Benchmark acquisition.
During the six months ended June 30, 2017, the Company reclassified 11,106,880 shares of its common stock with a fair value of $437 to its senior lender that from temporary equity to permanent equity which is now included in the consolidated statement of changes in stockholders’ equity. Reclassification was due to the put provision from the Lateral senior credit agreement dated October 28, 2015 was removed when the agreement was amended for the three and nineBenchmark acquisition on April 20, 2017.
During the six months ended SeptemberJune 30, 2016 and September 30, 2015.2017, the Company issued 326,283 shares of its common stock with a fair value of $264 to settle debt having an approximate value.
| For the Three Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 3,795,306 | 32,547 | 3,827,853 | ||||||||
| Income (Loss) from Operations | $ | 23,000 | 4,918 | 27,918 | ||||||||
| Depreciation and Amortization | $ | (247,512 | ) | - | (247,512 | ) | ||||||
| Interest Expense | $ | 485,926 | 4,310 | 490,236 | ||||||||
During the six months ended June 30, 2017, the Company issued 133,989 shares of its common stock with a fair value of $125 to investor relation firm for services.
| For the Three Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 1,729,915 | 2,296,293 | 4,026,208 | ||||||||
| Income (Loss) from Operations | $ | (1,563,759 | ) | 9,783 | (1,553,976 | ) | ||||||
| Depreciation and Amortization | $ | (45,714 | ) | - | (45,714 | ) | ||||||
| Interest Expense | $ | 326,649 | 304,310 | 630,959 | ||||||||
During the six months ended June 30, 2017, the Company received $615 of proceeds subject to the issuance of shares.
| For the Nine Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 9,017,652 | 66,307 | 9,083,959 | ||||||||
| Income (Loss) from Operations | $ | (1,009,788 | ) | 50,015 | (959,773 | ) | ||||||
| Depreciation and Amortization | $ | (702,878 | ) | - | (702,878 | ) | ||||||
| Interest Expense | $ | 1,439,425 | 12,929 | 1,452,354 | ||||||||
On April 21, 2017, the Company issued 26,738,445 shares of its common stock with a fair value of $21,658 to certain Benchmark shareholders in conjunction with the acquisition of Benchmark.
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share information)
| For the Nine Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 5,822,267 | 5,622,380 | 11,444,647 | ||||||||
| Income (Loss) from Operations | $ | (2,382,750 | ) | 24,529 | (2,358,221 | ) | ||||||
| Depreciation and Amortization | $ | (98,762 | ) | - | (98,762 | ) | ||||||
| Interest Expense | $ | 728,732 | 316,147 | 1,044,879 | ||||||||
11. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts are summarized as follows:
| June 30, 2017 | ||||
| Costs incurred on uncompleted contracts | $ | 94,817 | ||
| Estimated earnings | 18,073 | |||
| 112,890 | ||||
| Billings to date | (122,304 | ) | ||
| $ | (9,414 | ) | ||
| Included in the accompanying balance sheets: | ||||
| Costs and estimated earnings in excess of billings | $ | 5,966 | ||
| Billings in excess of costs and estimated earnings | (15,380 | ) | ||
| Total | $ | (9,414 | ) | |
12. BACKLOG
The following is a reconciliation of backlog representing signed contracts in progress at June 30, 2017:
| Balance - December 31, 2016 | $ | - | ||
| New contracts and adjustments (1) | 239,955 | |||
| 239,955 | ||||
| Less contract revenues earned for the six months ended June 30, 2017 | (44,538 | ) | ||
| Balance – June 30, 2017 | 195,417 |
(1) Reflects Benchmark’s contracts that were in place and/or obtained as of or subsequent to the date of acquisition.
13. SUBSEQUENT EVENTS
The Company has evaluated events and transactions that occurred through the date the financial statements were issued, for possible disclosure and recognition in the financial statements.
On October 12, 2016,July 5, 2017, the Company issued 2,423,68750,000 shares of its common stock with a grant datefair value of $969,475$31 for proceeds from an equity raise purchase, resulting in net proceeds to the Company of $848,138.consulting services.
On October 19, 2016,July 10, 2017, the Company issued 2,589,31215,000 shares of its common stock with a grant datefair value of $1,035,725$9 for proceeds from an equity raise purchase, resulting in net proceeds to the Company of $688,138.consulting services.
On October 19, 2016,July 13, 2017, the Company issued 2,000,000158,644 shares of its common stock with a grant datefair value of $1,040,000 to several employees resulting in incentive compensation expense$87 for settlement of the grant date value.debt.
On October 12, 2016, FTE Networks, Inc. (the “July 19, 2017, the Company”) concluded a private placement offering (the “Offering”) issued 4,108,320 shares of 7,500,000 units (each a “Unit” and collectively, the “Units”). Each Unit consisted of (i) one (1) share of the Company’sits common stock parwith a fair value $0.001 per share (the “Common Stock”), and (ii) a warrant (each, a “Warrant”)of $2,136 to purchase one (1) sharean investment firm for services provided, which has been reflected as shares to be issued as of Common Stock, at a price per Unit of $0.40. The minimum investment amount that could be purchased was twenty five thousand (25,000) Units for an aggregate minimum purchase price of $10,000. Each Warrant has an initial exercise price of $0.80 per share, subject to adjustment, and is exercisable following the date of issuance for a period of five (5) years from the date of issuance. In connection with the Offering,June 30, 2017.
On July 31, 2017, the Company entered intoissued 50,000 shares of its common stock with a Unit Purchase Agreement (the “Purchase Agreement”), by and amongfair value of $24 for consulting services.
On July 26, 2017, the Company and selected accredited investors (each an “Investor” and collectively, the “Investors”). Laidlaw & Company (UK) Ltd. served as the placement agent in the Offering.issued 50,000 shares of its common stock with a fair value of $26 for settlement of debt.
Pursuant to the Purchase Agreement,On August 1, 2017, the Company also entered into a Registration Rights Agreement with the Investors. The Company will be required to file within 45 days of the termination date of the Offering a registration statement registering for resale allissued 78,000 shares of Common Stock issued as partits common stock with a fair value of the Units and all of the shares issued under the Warrants.$45 for consulting services.
EachOn August 3, 2017, the Company issued 250,000 shares of the Investors is an “accredited investor” as such term is defined in Rule 501its common stock with a fair value of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”), and the securities were sold to it in reliance on the exemption from registration provided by Rule 506 and Section 4(2) of the Act.$143 for consulting services.
The foregoing descriptions of each of the Purchase Agreement, Registration Right Agreement and Warrant do not purport to be complete and are qualified in their entirety by reference to the complete text of the Purchase Agreement, which is filed hereto asExhibit 10.1, the Registration Rights Agreement, which is filed asExhibit 10.2, and the Warrant, which is filed asExhibit 10.3.
The common shares issued as described above were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of that Act and Regulation D promulgated thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing these securities contain a legend stating the same.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements. We disclaim any obligation to update forward-looking statements.
Unless the context requires otherwise, references in this document to “FTE”, “we”, “our”, “us” or the “Company” are to FTE Networks, Inc. and its subsidiaries. References to “Benchmark” or “Predecessor” in this document refers to Benchmark Builders, Inc., FTE’s wholly owned subsidiary.Predecessor financial information has been provided since our operations before the acquisition of Benchmark were insignificant relative to the operations acquired. Unless otherwise noted, dollar amounts are presented in thousands.
Overview
We
FTE Networks, Inc., and its businesses provide end-to-end design, build, and support solutions for state-of-the-art network and commercial properties, creating the most advanced and transformative smart platforms and buildings. Working with some of the world’s leading Fortune 500 corporations and communications service providers, FTE’s businesses are predicated on smart design and consistent standards that reduce deployment costs and accelerate delivery of innovative projects and services. FTE Networks and its subsidiaries operate 8 Lines of Business, including: Data Center Infrastructure, Fiber Optics, Wireless Integration, Network Engineering, Internet Service Provider, Construction Management, General Contracting, & Pre-Construction Services. With approximately 200+ employees, FTE Networks and its entities have operations in 17 states and Europe. On April 20, 2017, FTE Networks expanded its product offering with the consummation of an acquisition of Benchmark Builders, Inc. (“Benchmark”). Benchmark is a U.S. based provider of internationalfull-service construction management and regional telecommunicationsgeneral contracting firm servicing both corporate and technology systems, specializingindividual clients primarily in the design, engineering, installation,New York metropolitan area. Benchmark was incorporated in 2008 as a New York State S-Corporation. Benchmark is a construction manager and maintenance ofgeneral contractor serving a diverse and sophisticated client base in the telecommunications, commercial, industrial, broadcast, technology, infrastructure, healthcare, and technology networks and infrastructure. We also offer managed information technology, telecommunications services, subscriber based services and staffing solutions through our wholly owned subsidiaries:education industries.
Recent Business Developments
On December 23, 2015,We completed the Board unanimously authorizedacquisition of privately held Benchmark, a leading provider of construction management services based in New York for $81,408 on April 20, 2017. The transaction allows us to begin offering services to each other’s clients and approved an amendmentexpanding their offerings nationally. As a wholly owned subsidiary of ours, Benchmark will continue to operate under its current successful model while also offering our Articles of Incorporation“compute to effect a reverse stock split of our Common Stock at a 1-for-20 ratio (the “Reverse Split”). On December 30, 2015, stockholders holding a majority of our voting power approved by written consent the amendment to our Articles of Incorporation, which would affect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. On March 9, 2016, the Company filed a Form Pre-14C with the SEC concerning the 1 for 20 reverse stock splitedge” technology in New York City and the increase ofsurrounding region. The transaction enables us to expand infrastructure services for ISP through current and future Benchmark client base. Benchmark gives us access to major developers including REITs as potential CrossLayer technology clients. Additionally, the authorized shares of common stocktransaction strengthens the opportunity to win contracts from 70,000,000Fortune 100/500 companies and enables Benchmark to 200,000,000. On March 18, 2016 the Company receivedaccess more clients as a comment letter from the SEC regarding the Form Pre-14C. The Company filed a responsepublic company. It also provides an immediate platform to the SEC on April 8, 2016. The Company received correspondence from the SEC on April 15, 2016, and had no objections to the response letter. On April 18, 2016, the Company filed its Definitive Form 14-C with the SEC. On May 25, 2016 “FINRA” approved the Reverse Split, which was effectuated on May 26, 2016.
On January 4, 2016, the Company entered into an employment agreement with Kirstin Gooldy to serve as the Company’s Chief Compliance Officer in consideration of a salary of $112,500 per year, with standard employee insurance and other benefits. The employment agreement commenced on January 4, 2016 and ends on January 4, 2018, after which it is renewable for twelve months, until terminated by either party with 90 days written notice
On February 8, 2016, Mr. Brad Mitchell was appointed to the Board of Directors as an independent director. Mr. Mitchell (56) currently serves as President of TelePacific Communications - Texas, and is responsible for TelePacific’s operations across the state of Texas. Mr. Mitchell brings a unique combination of knowledge and wide-ranging telecommunications industry experience gained in both the venture capital and established industry leader arenas. Mitchell returned to TelePacific after previously serving as Senior Vice President - Field Operations, and was instrumental in creating TelePacific’s customer-centric structure by leading the TelePacific’s sales operations during TelePacific’s early years. Prior to TelePacific, Mr. Mitchell served as Area Vice President at Sprint PCS, where he launched and operated several markets in the southeast, including New Orleans and Atlanta. More recently, he served as Executive Vice President of Cable & Wireless’ International Accounts and also built a highly successful retail franchise operation. Mitchell earned a degree in Business Administration from Oglethorpe University in Atlanta.
On February 11, 2016, Mr. Chris Ferguson was appointed to the Board of Directors as an independent director. Mr. Ferguson (47) currently serves as the Managing Director of Tern Capital Partners, LLC, a private equity investment firm founded by Mr. Ferguson in 2013. In 2010, Mr. Ferguson co-founded a company in the fiber network industry, and he served as CEO of the company until June 2013. In August 2001, Mr. Ferguson co-founded Mercer, a provider of innovative workforce management solutions“uplist” to a variety of industries including transportation and engineering, with co-founder, Michael Traina. Prior to founding Mercer, Mr. Ferguson and former New Jersey Governor, James J. Florio, co-founded The Florio Group, a private equity investment company. In addition, Mr. Ferguson served as Chief Financial Officer for Cabot Marsh Corporation in 1995 and remained as a director for the company until 1999. Mr. Ferguson has been a member of the New Jersey and Pennsylvania Bars since 1994. He graduated from Widener University School of Law in May of 1994 and received a Bachelor of Arts Degree from Villanova University in May of 1990.
On February 16, 2016, Ms. Luisa Ingargiola was appointed to the Board of Directors as an independent director. Mrs. Ingargiola is the Chief Financial Officer for Magne Gas, a NASDAQ listed technology company, which produces a plasma based system for the gasification and sterilization of liquid waste. Mrs. Ingargiola currently serves as a Board Director for The JBF Foundation Worldwide and CES Synergies, Inc., where she also serves as the Audit Committee Chair. Prior to joining Magne Gas, Mrs. Ingargiola worked as a Budget and Expense Manager for MetLife Insurance Company. In this capacity she managed a $30-million-dollar annual budget. Her responsibilities included budget implementation, expense and variance analysis and financial reporting. Luisa previously served as a Board Director, Audit Committee Chair for CBD Energy Limited in 2014. Mrs. Ingargiola received her Bachelor’s Degree from Boston University and her Master’s Degree from the University of South Florida.
On March 31, 2016, Mr. Carlie Ancor (45) was appointed to the Board of Directors and serves as a non-independent director. Mr. Ancor is currently the Company’s Chief Technology Officer. Mr. Ancor began his tenure as the Chief Marketing Officer for FTE Networks Inc. in January 2015. Mr. Ancor is responsible for global marketing, product management and the customer experience. From 2008-2014, Mr. Ancor was managing director at Emerge Technology Solutions for Europe, the Middle East and Africa based in the United Arab Emirates where he was responsible for business development and growth, technology optimization, operational execution and quality of customer experience. Prior to that, he was an Executive Vice President for core IP and optical network development at Level 3 Communications in North America and Western Europe. Mr. Ancor attended Texas A&M University.
On March 31, 2016, Mr. Patrick O’Hare (48) was appointed to the Board of Directors and serves as an independent director. Mr. O’Hare has over 25 years experience in the telecommunications industry and is currently the Senior Vice President of Operations at ZenFi Networks, Inc. where he is responsible for network planning, engineering, operations, and service delivery. Prior to ZenFi, Mr. O’Hare was the Senior Vice President of Operations and Engineering at Sidera Networks where he led all operations, service delivery and engineering functions and was instrumental in the company’s acquisition by Berkshire Partners. Mr. O’Hare was also the Senior Vice President of Operations and Engineering at RCN Metro, Sidera’s predecessor company, and was integral to the company’s acquisition by ABRY Partners and the successful separation of assets from the RCN Cable parent company. Previously, he was Vice President of Field Operations for Zayo Bandwidth, where he was responsible for all aspects of field operations and the company’s fiber to the tower deployments. Prior to that, Patrick was Vice President for Field Operations for Level 3 Communications, where he was responsible for field operations, outside plant, colocation and facilities for the East region of North America. During his tenure at Level 3, Mr. O’Hare also held responsibility nationally for the company’s Customer Program Management organization. Before joining Level 3 in 1999, he held several management positions of increasing responsibility in corporate communications, customer service and operations at Verizon’s predecessor companies; New York Telephone, NYNEX and Bell Atlantic. Mr. O’Hare holds an MBA from Long Island University and a BA from the State University of New York - University at Albany.
On July 28, 2016, the Board of Directors of FTE Networks, Inc. (the “Company”) approved the appointment of Michael Bonewitz as the Company’s Chief Technology Officer commencing on August 24, 2016 and has replaced Carlie Ancor who will transition into a new role supporting the Company’s major account sales strategy. Mr. Bonewitz has over 20 years ofmore senior management experience in communications network engineering and information technology industries developing cutting edge capabilities via advanced IT automation and data analytics driving operational and financial performance. Prior to FTE, he was VP of Strategy and Product Development for Cloud services, Fiber engineering and construction at Nexius where he developed and launched the company’s first fiber deployment program supporting multiple Tier 1 service providers in the US. He also led the company strategy and participation into Open Compute Project (OCP) as a Platinum member and as an original member of Facebook’s Telcom Infra Project (TIP). He has held previous technology and engineering leadership positions with Ericsson, Zayo and Level 3.
On September 27, 2016, the Board of Directors appointed Mr. Lynn Martin as Chief Operating Officer. As COO, Lynn Martin will be responsible for the prioritization and alignment of company initiatives overseeing, developing, and setting the strategic direction for the day-to-day operations of FTE Networks and ensuring operational excellence across the company. Prior to joining FTE, Lynn was head of the communications, software, and technology division of Nexius where he was responsible for growing the business by delivering end-to-end network solutions for emerging technologies, such as Open Source/NFV/SDN and infrastructure services that provided relevant value to customers and helped them to optimize their businesses. In addition to leading the software and technology teams, he created several new business offerings in Engineering, Fiber and Open Source development where he joined efforts with Open Compute Project and Telecom Infra Project communities both founded by Facebook to provide new network architectures and solutions with greater simplicity and efficiency. Before Nexius, Martin served as Executive Director of Telcordia Technologies, where he ran the company’s next generation software product line, was a senior strategist in Accenture’s Network Practice, and spent over a decade at Level 3 Communications at VP of Operational Integration and Process Management.exchange.
Critical Accounting Policies
The following critical accounting policy was adopted for Benchmark’s revenue recognition. There arewere no other material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report 10-K filed with the Securities and Exchange Commission (“SEC”) on January 13, 2016.May 12, 2017. Please refer to that document for disclosures regarding theother critical accounting policies related to our business.
Segment Reporting
Revenue recognition:We operaterecognize revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimated costs, it is at least reasonably possible that the estimates used will change within the near term. Contract cost of sales include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the telecommunications infrastructure services industryperiod in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the staffing industry.period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. The following table summarizes financial information regarding our business segments during three monthsasset, “Costs and nine months ended September 30, 2016estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and September 30, 2015.estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.
| For the Three Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 3,795,306 | 32,547 | 3,827,853 | ||||||||
| Income (Loss) from Operations | $ | 23,000 | 4,918 | 27,918 | ||||||||
| Depreciation and Amortization | $ | (247,512 | ) | - | (247,512 | ) | ||||||
| Interest Expense | $ | 485,926 | 4,310 | 490,236 | ||||||||
| For the Three Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 1,729,915 | 2,296,293 | 4,026,208 | ||||||||
| Income (Loss) from Operations | $ | (1,563,759 | ) | 9,783 | (1,553,976 | ) | ||||||
| Depreciation and Amortization | $ | (45,714 | ) | - | (45,714 | ) | ||||||
| Interest Expense | $ | 326,649 | 304,310 | 630,959 | ||||||||
| For the Nine Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 9,017,652 | 66,307 | 9,083,959 | ||||||||
| Income (Loss) from Operations | $ | (1,009,788 | ) | 50,015 | (959,773 | ) | ||||||
| Depreciation and Amortization | $ | (702,878 | ) | - | (702,878 | ) | ||||||
| Interest Expense | $ | 1,439,425 | 12,929 | 1,452,354 | ||||||||
| For the Nine Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 5,822,267 | 5,622,380 | 11,444,647 | ||||||||
| Income (Loss) from Operations | $ | (2,382,750 | ) | 24,529 | (2,358,221 | ) | ||||||
| Depreciation and Amortization | $ | (98,762 | ) | - | (98,762 | ) | ||||||
| Interest Expense | $ | 728,732 | 316,147 | 1,044,879 | ||||||||
Discussion of Operation Results for the Three and NineSix Months ended SeptemberJune 30, 20162017 and 20152016
Overview
For the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, we reported consolidated net losses attributable to common shareholders of $1,051,878$5,113 and $1,564,140,$1,079, reflecting a decreasean increase in net losses of $512,262 or 33%. A decrease$4,034. The increase in operating lossnet losses was attributable to several factors, including an increase in transaction expenses of $1,409 in relation to the acquisition cost of Benchmark, an increase in interest expense of $1,317 from additional notes payable, an increase in amortization expense of intangible assets of $2,310, of which $1,721 was charged to cost of revenues, related to intangible assets acquired in the Benchmark acquisition, and an increase in amortization expense of our deferred financing costs of $1,825, which is due to an increase in deferred financing costs capitalized during the three months ended June 30, 2017.
The net income of the Predecessor for the three monthmonths ended June 30, 2016 totaled $10,430. The change from net income in the Predecessor period from Septemberto net income of $251 for the three months ended June 30, 20152017 was primarily due to the completion of a few larger projects during 2016. In the first half of 2017, the Predecessor’s revenue and net income was lower as Benchmark completed older projects while building its backlog of newly awarded projects awaiting to commence. Such recently awarded projects could reasonably be expected to result in significantly improved performance in the second half of 2017. The Predecessor financials for the three months ended June 30, 2016 also did not reflect transaction costs, interest costs, amortization of deferred financing costs or amortization of intangible assets noted above.
For the six months ended June 30, 2017 and 2016, respectively, of $1,581,894 was offset primarily by an increase of $138,416 in occupancy costs.
Wewe reported consolidated net losses attributable to common shareholders of $3,249,742$9,103 and $3,834,241 during the nine months ended September 30, 2016 and 2015, respectively,$2,198, reflecting a decreasean increase in net losses of $584,499 or 15%. An$6,905. For the six months ended June 30, 2017, we reported operating losses of $2,296, compared to an operating loss of $988 for the six months ended June 30, 2016. The net loss attributable to common shareholders was attributable to several factors, including an increase in gross profit fortransaction expenses of $1,419 in relation to the nine months ended September 30, 2016 and 2015acquisition of $1,344,186 or 64% was offset primarily by a same periodBenchmark, an increase of $111,340 in compensation expense, $395,804 in occupancy expense, $407,475 in interest expense $313,900of $1,565 from additional notes payables, an increase in a one time expense due to fair value analysis of our term loan, and $327,945 of amortization expense of debt discount.intangible assets of $2,310, of which $1,721 was charged to cost of revenues, related to intangible assets acquired in the Benchmark acquisition, and to an increase in amortization expense of our deferred financing costs of $2,112, which is due to an increase in deferred financing costs capitalized during the six months ended June 30, 2017.
The net income of the Predecessor for the six months ended June 30, 2016 totaled $16,396. The change from net income from the Predecessor period to net income of $1,984 for the six months ended June 30, 2017 was primarily due to the completion of a few larger projects during 2016. In the first half of 2017, the Predecessor’s revenue and net income was lower as Benchmark completed older projects while building its backlog of newly awarded projects awaiting to commence. Such recently awarded projects could reasonably be expected to result in significantly improved performance in the second half of 2017. The Predecessor financials for the six months ended June 30, 2016 also did not reflect transaction costs, interest costs, amortization of deferred financing costs or amortization of intangible assets noted above.
Revenues and Gross Profit
We had overall revenues of $3,827,853$50,697 for the three months ended SeptemberJune 30, 2016,2017, as compared to revenues of $4,026,208$3,163 for the three months ended SeptemberJune 30, 2015,2016, resulting in an increase in revenues of $47,534. The increase in revenues is attributable to revenue recognized by Benchmark of $44,538 for the period April 21, 2017 through to June 30, 2017 and an increase in revenue by FTE Networks of $2,996. The increase in cost of revenue of $40,443 resulted in a decrease in revenues of $198,355 or 5%. The decrease in revenues is primarily attributable to the staffing segment. In order to dedicate Company resources and capital to the telecommunications segment’s new business and to increase gross profit margin management significantly reduced its focus in the staffing segment. As a result,from 39% to 16% for the three months ended SeptemberJune 30, 2016 staffingand June 30, 2017, respectively. Benchmark’s gross profit margins were traditionally lower than those of the Company. Predecessor revenue was $32,547 compared to $2,296,293 for the three months ended SeptemberJune 30, 2015, resulting2016 totaled $133,260. The change in a decrease in staffing revenue of $2,263,746 or 99%. Telecommunications revenues increased $2,065,391 or 119%from the Predecessor results to the results for the three months ended SeptemberJune 30, 2016 compared2017 was primarily due to the three months ended September 30, 2015. Telecommunicationscompletion of a few larger projects during 2016. In the first half of 2017, the Predecessor’s revenue was lower as Benchmark completed older projects while building its backlog of newly awarded projects awaiting to commence. Such recently awarded projects could reasonably be expected to result in significantly improved performance in the second half of 2017. Margins for those periodsthe Predecessor were $3,795,306 and $1,729,915, respectively. This shift in revenue mix resulted in an increase in gross profit margin from 14% to 37%approximately 16%. In addition, the Predecessor’s results for the three months ended September 30, 2015 and SeptemberJune 30, 2016 respectively.included the comparable 20 days (April 1, 2017 through April 20, 2017) which were not included in the consolidated 2017 results.
We had overall revenues of $9,083,959$55,783 for the ninesix months ended SeptemberJune 30, 2016,2017, as compared to revenues of $11,444,647$5,256 for the ninesix months ended SeptemberJune 30, 2015,2016, resulting in a decreasean increase in revenues of $2,360,688 or 21%.$50,527. The decreaseincrease in revenues is primarily attributable to the staffing segment as described above. For the nine months ended September 30, 2016, staffing revenue was $66,307 compared to $5,622,380recognized from Benchmark of $44,538 for the nine months ended Septemberperiod April 21, 2017 through to June 30, 2015, resulting2017 and an increase in revenue by FTE Networks of $5,989. The increase in cost of revenue of $41,809 resulted in a decrease in staffing revenue of $5,556,073 or 99%. Telecommunications revenues increased $3,195,385 or 54% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2105. Telecommunications revenue for those periods were $9,017,652 and $5,822,267, respectively. This shift in revenue mix resulted in an increase in gross profit margin from 18%38% to 37%19% for the ninesix months ended September 30, 2015 and SeptemberJune 30, 2016 and June 30, 2017, respectively. Benchmark’s gross profit margin were traditionally lower than those of the Company. Predecessor revenue for the six months ended June 30, 2016 totaled $226,973. The change in revenue from the Predecessor results to the results for the six months ended June 30, 2017 was primarily due to the completion of a few larger projects during 2016. In the first half of 2017, the Predecessor’s revenue was lower as Benchmark completed older projects while building its backlog of newly awarded projects awaiting to commence. Such recently awarded projects could reasonably be expected to result in significantly improved performance in the second half of 2017. Margins for the Predecessor were approximately 18%. In addition, the Predecessor’s results for the six months ended June 30, 2016 included the comparable 20 days (April 1, 2017 through April 20, 2017) which were not included in the consolidated 2017 results.
Operating Expenses
We reported operating expenses of $1,397,330$10,596 and $2,104,995$1,664 for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, representing a decreasean increase of $707,665 or 34%. Selling,$8,932. The increase in operating expenses relate primarily to: i) an increase of selling, general and administrative expenses decreased $676,102,of $2,715, which includes the addition of $1,959 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through June 30, 2017 which were not represented in the corresponding pre-acquisition period in 2016; ii) an increase of compensation expense of $3,603, which includes the addition of $3,218 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through June 30, 2017 which were not represented in the corresponding pre-acquisition period in 2016; iii) transaction expenses of $1,409 incurred by us during the acquisition of Benchmark and iv) due primarily to a decreasean increase in legal, accounting, and share based compensation expense. Compensationamortization expense was $605,491 and $645,245of intangible assets of $589, related to intangible assets acquired in the Benchmark acquisition. Operating expenses for the Predecessor totaled $13,878 for the three months ended SeptemberJune 30, 2016. The change in operating expenses from the Predecessor results for the three months ended June 30, 2016 to the results for the three months ended June 30, 2017, reflects overall reductions in compensation expenses and 2015, respectively, representing a decrease of $39,744.other selling, general and administrative items.
We reported operating expenses of $4,394,764$13,024 and $4,449,027$2,998 for the ninesix months ended SeptemberJune 30, 20162017 and 2015, respectively, representing a decrease of $54,263 or 1%. Selling, general, and administrative expenses decreased $398,421 due primarily to decreases in audit, legal, and stock based compensation expense, which was offset by $395,804 increase in occupancy costs. Compensation expense was $1,705,892 and $1,594,552 for the nine months ended September 30, 2016, and 2015, respectively, representing an increase of $111,340. This$10,026. The increase is attributablein operating expenses relates primarily toto: i) an increase in salary expense and related ancillary expenses due to the addition of key personnel for our business development team.
Operating Income and Loss
Operating loss decreased by $1,581,894 or 102% to operating income of $27,918 for the three months ended September 30, 2016 compared to a loss of $1,553,976 for the three months ended September 30, 2015. This was primarily attributable to an increase in gross profit as described above, with a decrease in selling, general and administrative expenses andof $3,131, which includes the addition of $2,175 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through June 30, 2017 which were not represented in the corresponding pre-acquisition period in 2016; ii) an increase of compensation expense of $4,256, which includes the addition of $3,218 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through June 30, 2017 which were not represented in occupancy costs.
Operating loss decreasedthe corresponding pre-acquisition period in 2016; iii) transaction expenses of $1,419 incurred by $1,398,448 from a lossus during the acquisition of $959,773 for the nine months ended September 30, 2016 compared to a loss of $2,358,221 for the nine months ended September 30, 2015. This was primarily attributableBenchmark and iv) due to an increase in gross profit as described above, with a decreaseamortization expense of intangible assets of $589 related to intangible assets acquired in the Benchmark acquisition. Operating expenses for the Predecessor totaled $24,988 for the six three months ended June 30, 2016. The change in operating expenses from the Predecessor results to the results for the six months ended June 30, 2017, reflects overall reductions in compensation expenses and other selling, general and administrative expenses, partially offset by increases in occupancy expense.
items.
Other Income and Expense
Other income and expense increased by $1,069,633$2,072 during the three months ended SeptemberJune 30, 2016,2017, when compared to the same period in the previous year, primarily due to a $971,956 decrease in forbearance expense, offset by increases inan increase amortization expense transaction fees, a one time fair value expense on the term loan,of deferred financing cost and incentive expense. The increase in amortizationdebt discounts of $1,825 and interest expense is mainly attributable to the senior credit facility effective October 28, 2015.
For the nine months ended September 30, 2016 and 2015, other income and expense increased by $813,950 primarily due to an increase in interest expense of $1,317. These increase were partially offset by a decrease in the value of our warrant liability of $1,021.
Other expense increased by $5,476 during the six months ended June 30, 2017, when compared to the same period in the previous year, primarily due to the following: i) an increase in amortization expense of deferred financing cost and debt discounts of $2,112; ii) an increase in interest expense of $1,565; iii) a one time$1,179 increase in the fair market value expense.of our warrant liability; and iv) financing costs of $563.
Liquidity and Capital Resources
Overview
As of SeptemberJune 30, 2016,2017, the Company had an accumulated deficit of approximately $16 million.$28,113. In addition, the Company has anegative working capital deficiency of $2.6 million$2,293, which includes approximately $15,380 of billings in excess of costs and estimated earnings on uncompleted contracts, notes payable of $12,803, and accounts payable of $22,255 of which approximately $18,242 incurred by Benchmark. In addition, during the six months ended June 30, 2017, cash provided from financing activities was $22,564 and cash provided by operating activities was $790.
Cash Flows for the Six months ended June 30, 2017 and 2016
Cash Flows from Operating Activities
Net cash provided by operating activities was $1,084 during the six months ended June 30, 2017 as compared to cash used by operating activities of $3,616 during the six months ended June 30, 2016. For the six months ended June 30, 2017, cash used in operating activities was primarily attributable to the net loss, amortization of intangible assets due to Benchmark acquisition, accounts receivable and other current assets, partially offset by accounts payable and the change in warrant valuation.
Cash Flows from Investing Activities
We used cash of $17,225 during the six months ended June 30, 2017, as compared to cash provided of $2,759 during the six months ended June 30, 2016. During the six months ended June 30, 2017, cash used by investing activities consisted of the purchase of property and equipment of $2,391, and $14,834 of cash consideration for acquisition of Benchmark. During the six months ended June 30, 2016, cash provided was derived from primarily the restricted cash account.
Cash Flows from Financing Activities
Cash provided by financing activities was $22,564 during the six months ended June 30, 2017, as compared to $727 during the six months ended June 30, 2016. During the six months ended June 30, 2017, cash provided by financing activities consisted principally of issuance of notes payable, net of repayments. During the six months ended June 30, 2016, cash provided by financing activities was primarily from proceeds from the sale of preferred stock.
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Management’s Liquidity Plans
On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral amended its existing credit facility to provide for approximately $10,110 towards the cash purchase price, and extended the maturity date of the existing credit facility to June 30, 2019. Additionally, in conjunction with the Benchmark acquisition, we took on approximately $50,000 of debt. With Benchmark’s significant annual revenue and its backlog as of SeptemberJune 30, 2016.
Management’s plans are2017 of $195,417, we believe that we have the ability to continue to raisesupport this additional funds through the sales of debt and equity.
Therefund all current operations, thereby mitigating this uncertainty over the next two quarters. However, if needed, there is no assurance that additional financing will be available when needed or that management will be able to obtain and close financing including the aforementioned transactions, on terms acceptable to us, enter into an acceptable installment plan with the Company andIRS, which is scheduled to be presented in the third quarter of 2017, or whether the Company will become profitableCompany’s anticipated future profitability and generate positive operating cash flow.flow generated through its backlog will coincide with its debt service requirements and debt maturity schedule. If the Company is unable to raise sufficient additional funds or generate positive operating cash flow when required, it will have to develop and implement a plan which may include but may not be limited to further extendsuch measures as extending payables, renegotiating debt facilities, extending debt maturities, and reducereducing overhead, until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
Cash Flows for the Nine months ended September 30, 2016 and 2015
Cash Provided by/Used in Operating Activities
Net cash used in operating activities was $6,834,114 during the nine months ended September 30, 2016 as compared to cash provided by operating activities of $934,399 during the nine months ended September 30, 2015. For the nine months ended September 30, 2016, cash used in operating activities was primarily attributable to accounts receivable and other current assets, partially offset by accounts payable. For the nine months ended September 30, 2015, cash provided by operating activities was attributable to forbearance expense and accounts payable.
Cash Provided by/Used in Investing Activities
We provided $2,694,319 cash from investing activities during the nine months ended September 30, 2016, as compared to cash provided of $28,320 during the same period of the previous year. Cash provided by investing activities in the current period was primarily related to proceeds received from the restricted cash account.
Cash Provided by/Used in Financing Activities
Cash provided by financing activities was $3,943,248 during the nine months ended September 30, 2016, as compared to cash used of $796,351 during the nine months ended September 30, 2015. During the nine months ended September 30, 2016, cash provided by financing activities consisted principally of issuance of notes payable and restricted cash account drawdowns. During the nine months ended September 30, 2015, cash used was derived from primarily payments on our factoring line of credit and payments made on notes payable.
Management’s Liquidity Plans
Management’s plans are to continue to raise additional funds through the sales of debt or equity securities. However, there is no assurance that additional funding will be available when needed or that management will be able to obtain and close financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations.
Backlog
As of SeptemberJune 30, 2016,2017, we had a backlog of unfilled contracts and master service agreements of approximately $32,500,000.$346,749, which includes $195,417 of Benchmark’s backlog and FTE Networks master service agreements of $151,332. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We may experience variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.
Off-Balance Sheet Arrangements
None.
Contractual Obligations
As a smaller reporting company, we are not required to provide the information requested by paragraph (a)(5) of this Item.
Item 3. Quantitative and Qualitative DisclosureDisclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of SeptemberJune 30, 2016,2017, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of SeptemberJune 30, 2016.2017.
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”PCAOB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that as of SeptemberJune 30, 20162017 our internal controls over financial reporting were not effective at the reasonable assurance level:level.
1. We doAs of June 30, 2017, management has not have written documentationcompleted an effective assessment of our internal control policies and procedures. Written documentation of keythe Company’s internal controls over financial reporting is a requirementbased on the 2013 Committee of Section 404Sponsoring Organizations (COSO) framework. Management has concluded that, during the period covered by this report, our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. Management identified the Sarbanes-Oxley Act.
2. We do not have sufficient resourcesfollowing material weaknesses set forth below in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.
3. We do not have personnel with sufficient experience with generally accepted accounting principles in the United States to address complex transactions.
4. We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible forinternal control over financial reporting.
| 1. | We lack the necessary corporate accounting resources to maintain adequate segregation of duties. |
| 2. | We did not perform an effective risk assessment or monitor internal controls over financial reporting. |
| 3. | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the year ended December 31, 2016. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. |
| 4. | We lack the appropriate resources to ensure all required reports are timely filed. |
5. We have determined that oversight over our external
During 2016, the Company made progress to remedy these weaknesses through the hiring of a VP of Finance and as of April 10, 2017, has hired a financial reporting and internal control over our financial reporting by our audit committeecontroller. The Company is ineffective. The audit committee has not provided adequate review of the Company’s SEC’s filings and consolidated financial statements and has not provided adequate supervision and review of the Company’s accounting personnel or oversight of the independent registered accounting firm’s audit of the Company’s consolidated financial statement.continuing to further remediate these weaknesses as resources permit.
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Changes in Internal Control over Financial Reporting
During the quartersix months ended SeptemberJune 30, 2016,2017, there were no changes, other than those described above, in our internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations of Controls
Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Legal Matters - The Company is involved in litigation claims arising in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. On November 20, 2015, the Company settled the Martin and Arey lawsuit for $150,000 cash, a promissory note for $250,000, and common stock of 512,820, having a value of $5,120. On November 24, 2015, the Company settled the Daniel Fournier lawsuit for $100,000 in cash. On December 14, 2015, the Company settled the RoadSafe lawsuit for $130,000, payable in 13 monthly installments of $10,000 in cash. There have been no material developments in any legal proceedings since the disclosures contained in the Company’s Form 10-K for the year ended September 30, 2015,December 31, 2016, at which time the Company provided for an accrual of $1,840,891 to settle these claims.$0.
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. However, our current risk factors are set forth in our Annual Report 10-K, filed with the SEC on January 13, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 18th, 2016, the Company issued 100,000 Shares of common stock with a grant date value of $60,000 for settlement of debt.
On July 19th 2016, the Company issued 50,000 shares of common stock with a grant date value of $124,000 as incentive compensation.
On August 8th, 2016, the Company issued 197,000 Shares of common stock with a grant date value of $118,200 for a settlement of debt.
On August 9th, 2016, the Company issued 50,000 Shares of Common stock with a grant date value of $14,000 for a settlement of debt.
On August 18th, 2016, the Company issued 25,000 shares of common stock with a grant date value of $15,500 for services performed for the company.
On August 18th, 2016, the Company issued 200,000 shares of common stock with a grant date value of $124,000 for services performed for the company.
On August 18th, 2016, the Company issued 2,190,000 shares of common stock with a grant date value of $1,357,800 as incentive compensation.
On August 23rd, 2016, the Company issued 450,000 Shares of Common stock with a grant date value of $203,850 for a settlement of debt.
On September 7, 2016,January 12, 2017, the Company issued 2,487,000 shares of common stock with a grant date value of $994,800 for an equity raise.
On October 12, 2016, the Company issued 2,423,68720,892 shares of its common stock with a grant datefair value of $969,475$12.5 for an equity raise purchase.settlement of a legal matter.
On October 19, 2016,January 12, 2017, the Company issued 2,589,31237,500 shares of its common stock to an individual investor, which resulted in net proceeds to the Company of $15.
On January 18, 2017, the Company issued 300,000 shares of its common stock with a grant datefair value of $1,035,725 for an equity raise purchase.$123 pursuant to a consulting agreement.
On OctoberJanuary 19, 2016,2017, the Company issued 2,000,000100,000 shares of its common stock with a grant datefair value of $1,040,000$46 pursuant to severala consulting agreement.
On January 20, 2017, the Company issued 50,000 shares of its common stock with a fair value of $25 pursuant to a consulting agreement.
On February 2, 2017, the Company issued 12,500 shares of its common stock with a fair value of $5 pursuant to a consulting agreement.
On February 7, 2017, the Company issued 70,000 shares of its common stock with a fair value of $35 pursuant to a consulting agreement.
On February 9, 2017, the Company issued 62,500 shares of its common stock with a fair value of $31 to an employee as part of his compensation.
On February 17, 2017, the Company issued 40,000 shares of its common stock with a fair value of $28 pursuant to a consulting agreement.
On February 24, 2017, the Company issued 25,000 shares of its common stock with a fair value of $12.5 pursuant to a consulting agreement.
On March 1, 2017, the Company issued 50,000 shares of its common stock with a fair value of $25 pursuant to a consulting agreement
On March 3, 2017, the Company issued 6,420,020 shares of its common stock with a fair value of $5,650 to its senior lender.
On March 7, 2017, the Company issued 83,143 shares of its common stock with a fair value of $37 to settle debt.
On March 7, 2017, the Company issued 6,666 shares of its common stock to an individual investor, resulting in net proceeds to the Company of $4.
On March 9, 2017, the Company issued 5,140 shares of its common stock with a fair value of $2 for settlement of debt.
On March 27, 2017, the Company issued 2,983,017 shares of its common stock to various employees with a fair value of $2,994 per their employment agreements.
On March 27, 2017, the Company issued 78,619 shares of its common stock with a fair value of $32 for consulting services.
On March 28, 2017, the Company issued 37,500 shares of its common stock with a fair value of $19 to an employee per his employment agreement.
On April 21, 2017, the Company issued 26,738,445 shares of its common stock with a fair value of $14,976 to certain Benchmark Builders Inc. shareholders in conjunction with the acquisition of Benchmark.
On April 21, 2017, the Company issued 877,194 shares of its common stock with a fair value of $500 for settlement of debt.
On May 9, 2017, the Company issued 29,605 shares of its common stock with a fair value of $11 for consulting services.
On May 9, 2017, the Company issued 50,000 shares of its common stock with a fair value of $25 for settlement of debt.
On May 16, 2017, the Company issued 66,000 shares of its common stock with a fair value of $50 for consulting services.
On May 16, 2017, the Company issued 5,140 shares of its common stock with a fair value of $3 for consulting services.
On May 16, 2017, the Company issued 5,140 shares of its common stock with a fair value of $3 for consulting services.
On May 16, 2017, the Company issued 9,298 shares of its common stock with a fair value of $4 for consulting services.
On May 19, 2017, the Company issued 20,000 shares of its common stock with a fair value of $14 for consulting services.
On May 19, 2017, the Company issued 20,000 shares of its common stock with a fair value of $14 for consulting services.
On May 19, 2017, the Company issued 25,000 shares of its common stock with a fair value of $13 for consulting services.
On June 1, 2017, the Company issued 1,375,000 shares of its common stock with a fair value of $977 to an investment bank, resulting in net proceeds to the Company of $550.
On June 1, 2017, the Company issued 600,000 shares of its common stock with a fair value of $390 for consulting services.
On June 1, 2017, the Company issued 56,800 shares of its common stock with a fair value of $50 to an employee per his employment agreement.
On June 2, 2017, the Company issued 20,000 shares of its common stock with a fair value of $10 for consulting services.
On June 9, 2017, the Company issued 110,000 shares of its common stock with a fair value of $55 for consulting services.
On June 9, 2017, the Company issued 124,691 shares of its common stock with a fair value of $100 to an investor relations firm for investor services.
On June 9, 2017, the Company issued 40,000 shares of its common stock with a fair value of $23 for consulting services.
On June 9, 2017, the Company issued 238,000 shares of its common stock with a fair value of $143 for settlement of debt.
On June 30, 2017, the Company issued 20,000 shares of its common stock with a fair value of $14 for consulting services.
On June 30, 2017, the Company issued 60,000 shares of its common stock with a fair value of $38 for consulting services.
On June 30, 2017, the Company issued 80,000 shares of its common stock with a fair value of $58 for consulting services.
On June 30, 2017, the Company issued 60,000 shares of its common stock with a fair value of $43 for consulting services.
On June 30, 2017, the Company issued 11,106,880 shares of its common stock with a fair value of $437 to its senior lender.
On July 5, 2017, the Company issued 50,000 shares of its common stock with a fair value of $31 for consulting services.
On July 10, 2017, the Company issued 15,000 shares of its common stock with a fair value of $9 for consulting services.
On July 13, 2017, the Company issued 158,644 shares of its common stock with a fair value of $87 for settlement of debt.
On July 19, 2017, the Company issued 4,108,320 shares of its common stock with a fair value of $2,136 to an investment firm as incentivepart of an agreement for the investment firm to raise equity.
On July 26, 2017, the Company issued 50,000 shares of its common stock with a fair value of $26 for settlement of debt.
On July 31, 2017, the Company issued 50,000 shares of its common stock with a fair value of $24 to an employee as part of his compensation.
On August 1, 2017, the Company issued 78,000 shares of its common stock with a fair value of $45 for consulting services.
On August 3, 2017, the Company issued 250,000 shares of its common stock with a fair value of $143 for consulting services.
The common shares issued as described above were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of that Act and Regulation D promulgated thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing these securities contain a legend stating the same.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine and Safety Disclosure
Not applicable.
None.
| 44 |
The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.
| Exhibit | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.* | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.* | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* | |
| * | Filed herewith |
| 45 |
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| FTE Networks, Inc. | ||
| Date: | By: | /s/ Michael Palleschi |
| Michael Palleschi | ||
| Chief Executive Officer | ||
| Date: | By: | /s/ David Lethem |
| David Lethem | ||
| Chief Financial Officer | ||