NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, builds, and supports telecommunications and technology systems and infrastructure
services for Fortune 500 companies operating four (4) telecommunication segments; Data Center Infrastructure, Fiber Optics, Wireless
Integration, and Surveillance & Security. FTE Networks is headquartered in Naples, Florida, with offices throughout the United
States and Europe.
|
●
|
Jus-Com,
Inc., (dba FTE Network Services) specializes in the design, engineering, installation, and maintenance of all forms of telecommunications
infrastructure. Services include engineering consulting, design, installation, maintenance, and emergency response in various
categories including cabling, equipment installation and configuration, rack and stack, wiring build-outs, infrastructure
build-outs, DC power installation, OSP/ISP fiber placement, fiber cable splicing and testing.
|
|
|
|
|
●
|
FTE
Wireless, LLC, offers wireless solutions to major wireless carriers including equipment installation, fiber backhaul, antennae
installation and testing, small cell solutions, fiber-to-site and other turnkey solutions as needed by such clients.
|
|
|
|
|
●
|
Focus
Venture Partners, Inc. (dba FVP Worx) is a multifaceted employment firm offering full service staffing solutions, specializing
in the telecommunications, technology and construction services industries.
|
|
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 ASC 280 as the revenue, profit and
loss, and assets of the staffing segment are immaterial for both the three months ended March 31, 2017 and 2016.
|
Stock
Purchase Agreement
On
March 9, 2017, the Company, entered into a Stock Purchase Agreement (the “Purchase Agreement”) with (i) Benchmark
Builders, Inc. (“Benchmark”), and (ii) each of Benchmark’s stockholders. On April 20, 2017 (the “Closing
Date”), FTE Networks, Inc. (“FTE Networks”) acquired all of the issued and outstanding shares of common stock
(the “Benchmark Shares”) of Benchmark, a privately held New York corporation from each of its stockholders (collectively,
the “Sellers”), pursuant to the Stock Purchase Agreement, dated as of March 9, 2017, by and among FTE Networks, Benchmark,
and the Sellers (the “Purchase Agreement”), as amended by Amendment No. 1 to Stock Purchase Agreement, dated as of
the Closing Date (the “Purchase Agreement Amendment” and together with the Purchase Agreement, the “Amended
Purchase Agreement”). FTE Networks, Benchmark, and the Sellers, entered into the Purchase Agreement Amendment in order to
address certain changes in the purchase price as set forth in the Purchase Agreement. As described in FTE Networks’ Current
Report on Form 8-K filed with filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2017, the
Purchase Agreement provided that the consideration to the Sellers for the Benchmark Shares would consist of (i) $55,000,000 in
cash consideration, (ii) an aggregate of 17,825,350 shares of the Company’s common stock, and (iii) promissory notes in
the aggregate amount of $10,000,000 to the Sellers. The Purchase Agreement Amendment has, inter alia, modified the purchase price
set forth in the Purchase Agreement to consist of (i) cash consideration of approximately $17,250,000, subject to certain prospective
working capital adjustments (the “Cash Consideration”),approximately $10 million cash provided by Lateral and $7 million
provided by certain of the sellers, (ii) 26,738,445 shares of FTE Networks’ common stock (the “FTE Shares”),
(iii) convertible promissory notes in the aggregate principal amount of $12,500,000 to certain stockholders of Benchmark (the
“Series A Notes”, which mature on April 20, 2019), (iv) promissory notes in the aggregate principal amount of $30,000,000
to certain stockholders of Benchmark (the “Series B Notes”, which mature on April 20, 2020) and (v) promissory notes
in the aggregate principal amount of $7,500,000 to certain stockholders of Benchmark (the “Series C Notes”, which
mature on October 20, 2018, and together with the Series A Notes and the Series B Notes, the “Notes”) in the Amended
Purchase Agreement. Additionally, Lateral amended its existing credit facility to provide for the approximate $10 million cash
and to restructure the existing debt, which now has a maturity date of March 30, 2019.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
unaudited condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated
financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Annual
Report”). The condensed consolidated balance sheet data as of March 31, 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
.
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 March 31, 2017, the Company has an accumulated deficit of $23 million. In addition, the Company has negative working capital
of $2 million as of March 31, 2017. On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral amended its existing
credit facility to provide for approximately $10.1 million towards the cash purchase price, and extended the maturity date of
the existing credit facility to March 31, 2019. Additionally, the Company, in conjunction with the Benchmark acquisition, took
on approximately $50 million dollars of debt, $12,500,000 which matures on April 20, 2019, $30,000,000 which matures on April
20, 2020, and $7,500,000 which matures on October 20, 2018. With Benchmark’s 2016 annual revenues of $386 million and a
backlog as of March 31, 2017 of $216 million, combined with the Company’s backlog as of March 31, 2017 of $32.5 million,
the Company believes that it has the ability to support this additional debt and fund all current operations, thereby mitigating
this uncertainty. However, if needed, there is no assurance that additional financing will be available or that management will
be able to obtain and close financing on terms acceptable to the Company, enter into 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 profitable and generate positive
operating cash flow. If the Company is unable to raise sufficient additional funds or generate positive operating cash flow, 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. There can be no assurance that such a plan will be successful.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 March 31, 2019. At
the time of filing its Annual Report, the Company inadvertently did not reclassify approximately $4,168,000 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 had no effect on previously reported results of operations
or loss per share or total liabilities.
|
|
As
Reported
|
|
|
As
Restated
|
|
Current
Liabilities
|
|
$
|
14,655,792
|
|
|
$
|
10,488,019
|
|
Long
Term Liabilities
|
|
$
|
9,938,702
|
|
|
$
|
14,106,475
|
|
Total
Liabilities
|
|
$
|
24,594,494
|
|
|
$
|
24,594,494
|
|
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
and equity issuances.
Revenue
and Cost of Goods Sold Recognition
- Generally, including for the staffing business, revenue is recognized when all of the
following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been
rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.
Revenue
in the telecommunication segment 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 March 31, 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.
For
short term 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 Network’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.
Changes
in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, changes
in raw materials 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.
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 warrants and preferred stock. The number of potential common shares outstanding relating
to 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 Three Months Ended
|
|
|
|
March
31,
|
|
|
|
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]
|
|
|
-
|
|
|
|
39,883,500
|
|
Convertible preferred
stock, Series F [1]
|
|
|
-
|
|
|
|
19,415,460
|
Warrants
|
|
|
20,498,126
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
potentially dilutive shares
|
|
|
21,558,940
|
|
|
|
60,359,774
|
|
[1]
|
The
Series D and Series F 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 one financial institution that management believes
is 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 March 31, 2017, the Company’s largest customer, an innovative communications service
provider, Customer M, represented 70%, of accounts receivable. As of December 31, 2016, the Company’s largest customer,
Customer M, represented 66%, of accounts receivable.
Revenue
may significantly decline if the Company were to lose one or more of its significant customers. During the three months ended
March 31, 2017 the Company generated revenue by one major customer, Customer M representing 78% of revenue. For the three months
ended March 31, 2016, the Company generated revenue from three customers, customers K, J, and L representing 18%, 18% and 16%
of revenue, respectively.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 accounts receivable, other current assets, accounts payable, accrued expenses,
and notes payable. The recorded values of accounts receivable, other 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
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3.
OTHER CURRENT ASSETS
Other
current assets consist of the following as of March 31, 2017 and December 31, 2016:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
Other receivables,
net of reserve of $150,000 as of March 31, 2017 and December 31, 2016
|
|
$
|
1,232,554
|
|
|
$
|
1,232,555
|
|
Prepaid contract costs for work
in process
|
|
|
322,816
|
|
|
|
409,038
|
|
Prepaid
consulting fees
|
|
|
331,619
|
|
|
|
-
|
|
Prepaid
operating expenses
|
|
|
1,762,058
|
|
|
|
1,191,718
|
|
TOTAL
|
|
$
|
3,649,047
|
|
|
$
|
2,833,311
|
|
5.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As
of March 31, 2017 and December 31, 2016, Accrued Expenses and Other Current Liabilities were comprised of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Accrued
interest payable[1]
|
|
$
|
439,817
|
|
|
|
364,805
|
|
Accrued
dividends payable
|
|
|
550,585
|
|
|
|
530,694
|
|
Accrued
compensation expense[2]
|
|
|
2,490,527
|
|
|
|
2,299,738
|
|
Other
accrued expense
|
|
|
26,964
|
|
|
|
6,868
|
|
Accrued
expenses, current
|
|
$
|
3,507,893
|
|
|
|
3,202,105
|
|
[1]
|
Accrued
interest payable includes approximately $300,000 of estimated penalties and interest associated with the unpaid payroll taxes
as of March 31, 2017 and December 31, 2016, respectively.
|
|
|
[2]
|
Accrued
compensation expense includes $1,863,031 of unpaid payroll taxes for the period ended March 31, 2017 and December 31,
2016, respectively.
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6.
NOTES PAYABLE
|
|
March
31, 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.
|
|
$
|
1,231,100
|
|
|
|
1,336,517
|
|
|
|
|
|
|
|
|
|
|
Other
Notes Payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
were refinanced in conjunction with the senior debt and Benchmark acquisition.
|
|
|
5,894,619
|
|
|
|
5,094,116
|
|
Less
deferred financing costs
|
|
|
(723,586
|
)
|
|
|
(926,343
|
)
|
Total
other note payable, net
|
|
|
5,171,033
|
|
|
|
4,167,773
|
|
|
|
|
|
|
|
|
|
|
Notes
payable bearing interest at a stated rate between 10% and 12% per annum. Terms range from 1 to 12 months.
|
|
|
4,078,276
|
|
|
|
2,000,000
|
|
Less:
Original Issue Discount
|
|
|
(57,500
|
)
|
|
|
-
|
|
Total
Notes Payable
|
|
$
|
4,020,776
|
|
|
$
|
2,000,000
|
|
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.
|
|
|
868,680
|
|
|
|
960,549
|
|
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.
|
|
|
1,439,308
|
|
|
|
1,508,758
|
|
Total Notes payables
|
|
$
|
12,730,897
|
|
|
$
|
9,973,597
|
|
Less:
Current portion
|
|
$
|
(5,430,565
|
)
|
|
$
|
(3,443,562
|
)
|
Total
Notes non-current portion
|
|
$
|
7,300,332
|
|
|
$
|
6,530,035
|
|
7.
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
are 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 to be held for future
advances. 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 EDITDA 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 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 December 31, 2016, $249,018 was included in amortization of debt discount, and
$236,914 remained unamortized as of 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 company from time to time during the second and third quarter of 2016 into a $2.5
million loan, which matures on 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 Builders Inc, Lateral amended its existing credit facility to provide for approximately $10.1
million 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.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Senior
Debt Disclosure
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.
|
|
$
|
8,462,577
|
|
|
|
8,378,512
|
|
Less:
Original issue discount
|
|
|
(127,569
|
)
|
|
|
(182,242
|
)
|
Less:
Deferred financing cost
|
|
|
(3,253,374
|
)
|
|
|
(619,830
|
)
|
Total
Senior Debt, non-current portion
|
|
$
|
5,081,634
|
|
|
|
7,576,440
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8
.
COMMITMENTS AND CONTINGENCIES
Property
Lease Obligations
Rental
expense, resulting from property lease agreements was $115,110 and $125,777 for the three months ending March 31, 2017
and March 31, 2016, respectively.
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 March 31, 2017:
2017 (Remaining)
|
|
$
|
355,700
|
|
2018
|
|
|
450,103
|
|
2019
|
|
|
367,380
|
|
2020
|
|
|
328,757
|
|
2021
|
|
|
334,134
|
|
Thereafter
|
|
|
131,195
|
|
Total
Lease Obligations
|
|
$
|
1,967,269
|
|
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 December 31, 2016.
Related
Party Advances
Through March 31, 2017, the
Chief Executive Officer (CEO) provided cash advances witnessed by an interest bearing note, these advances totaled 310,159 as
of March 31, 2017 and December 31, 2016, and are included as part of notes payable-related party. In addition, from time to time,
advances for the Company’s benefit on credit cards for which the CEO is personally liable for, aggregating $533,856. The
Company entered into several secured equipment financing arrangements with total obligations of approximately $265,000 as of March
31, 2017 that required the guaranty of a Company officer, which was provided by the CEO.
The Chief Financial Officer
personally guaranteed several secured equipment financing arrangements with total obligations of approximately $298,000 as of
March 31, 2017. Additionally, the Chief Financial Officer provided $150,000 cash, which is included as part of due to related
parties as of March 31, 2017. and a personal credit card account for the purchase of goods and services by FTE. While these credit
card balances are reflected in the Company’s books and records, the CFO is personally liable for the payment of the entire
amount of the open credit obligation, which was approximately $57,525 as of March 31, 2017.
9
.
STOCKHOLDERS’ EQUITY
Dividends
Dividend
charges recorded during the three months ended March 31, 2017 and 2016 are as follows:
|
|
For
the three Months Ended
|
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
12,510
|
|
|
$
|
12,510
|
|
A-1
|
|
|
7,381
|
|
|
|
7,380
|
|
Total
|
|
$
|
19,891
|
|
|
$
|
19,890
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accrued
dividends payable at March 31, 2017 and December 31, 2016 are comprised of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
322,200
|
|
|
$
|
304,129
|
|
A-1
|
|
|
228,385
|
|
|
|
226,565
|
|
Total
|
|
$
|
550,585
|
|
|
$
|
530,694
|
|
9
.
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. The 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 March 31, 2017, the following warrants were outstanding:
Issued
to
|
|
Amount
|
|
|
Issue
Date
|
|
Expiration
Date
|
|
Exercise
Price
|
|
Term
Note Lender(1)
|
|
|
2,343,750
|
|
|
9/30/2016
|
|
9/30/2021
|
|
|
0.80
|
|
Investment
Bank
|
|
|
1,969,837
|
|
|
12/9/2012
|
|
12/9/2019
|
|
|
0.20
|
|
Investment
Bank
|
|
|
2,434,539
|
|
|
10/31/2014
|
|
10/31/2021
|
|
|
0.20
|
|
Equity
Investors
|
|
|
2,487,000
|
|
|
9/8/2016
|
|
9/8/2021
|
|
|
0.80
|
|
Equity
Investors
|
|
|
2,423,688
|
|
|
9/29/2016
|
|
9/29/2021
|
|
|
0.80
|
|
Equity
Investors
|
|
|
2,589,312
|
|
|
10/12/2016
|
|
10/12/2021
|
|
|
0.80
|
|
Term
Note Lender (1)
|
|
|
2,500,000
|
|
|
11/11/2016
|
|
11/11/2021
|
|
|
0.40
|
|
Term
Note Lender (1)
|
|
|
3,750,000
|
|
|
1/3/2017
|
|
1/3/2012
|
|
|
0.40
|
|
|
|
|
20,498,126
|
|
|
|
|
|
|
|
|
|
|
(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 three months ended March 31, 2017 is presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
in Years
|
|
|
Value
|
|
Outstanding,
December 31, 2016
|
|
|
16,748,126
|
|
|
$
|
0.55
|
|
|
|
4.6
|
|
|
$
|
3,435,494
|
|
Issued
|
|
|
3,750,000
|
|
|
|
0.40
|
|
|
|
4.8
|
|
|
|
1,387,500
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding,
March 31, 2017
|
|
|
20,498,126
|
|
|
$
|
.55
|
|
|
|
4.4
|
|
|
$
|
4,822,994
|
|
Exercisable,
March 31, 2017
|
|
|
20,498,126
|
|
|
$
|
.55
|
|
|
|
4.4
|
|
|
$
|
4,822,994
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9
.
STOCKHOLDERS’ EQUITY, continued
The
Company has assessed its outstanding equity-linked financial instruments issued with the term loans cited in Footnote 6 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 liabilities using the Lattice Model
method based on the following assumptions:
|
|
January 2017
|
|
|
January 2017
|
|
|
November 2016
|
|
|
September 2016
|
|
|
|
Warrants at
|
|
|
Warrants as of
|
|
|
Warrants as of
|
|
|
Warrants as of
|
|
|
|
Inception
|
|
|
March 31, 2017
|
|
|
March 31, 2017
|
|
|
March 31, 2017
|
|
Risk free rate
|
|
|
1.94
|
%
|
|
|
1.913
|
%
|
|
|
1.907
|
%
|
|
|
1.904
|
%
|
Volatility
|
|
|
37.46
|
%
|
|
|
37.31
|
%
|
|
|
37.37
|
%
|
|
|
37.08
|
%
|
Dividends
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time to maturity
|
|
|
5 years
|
|
|
|
4.76 years
|
|
|
|
4.62 years
|
|
|
|
4.50 years
|
|
Fair value per share price
|
|
|
.1502
|
|
|
|
.4448
|
|
|
|
.4427
|
|
|
|
.2484
|
|
Fair value of warrants
|
|
|
563,300
|
|
|
|
1,668,000
|
|
|
|
1,106,800
|
|
|
|
582,200
|
|
Market price on date of issuance
|
|
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These
warrants are Level 3 valuation which were issued and measured on March 31, 2017.
The
following table summarizes the change in fair value of the warrants from December 31, 2016 through March 31, 2017.
|
|
Fair
value
|
|
|
|
|
|
|
|
|
Fair
value
|
|
|
|
as
of
|
|
|
New
|
|
|
Change
in Fair Value
|
|
|
as
of
|
|
|
|
12/31/2016
|
|
|
Issuances
|
|
|
gain
(loss)
|
|
|
3/31/2017
|
|
Investor
warrants (9/30/16)
|
|
$
|
(169,700
|
)
|
|
$
|
-
|
|
|
$
|
(412,500
|
)
|
|
$
|
(582,200
|
)
|
Investor
warrants (11/11/16)
|
|
$
|
(424,300
|
)
|
|
$
|
-
|
|
|
$
|
(682,500
|
)
|
|
$
|
(1,106,800
|
)
|
Investor
warrants (1/3/17)
|
|
$
|
-
|
|
|
$
|
(563,300
|
)
|
|
$
|
(1,104,700
|
)
|
|
$
|
(1,668.000
|
)
|
Totals
|
|
$
|
(594,000
|
)
|
|
$
|
(563,300
|
)
|
|
$
|
(2,199,700
|
)
|
|
$
|
(3,357,000
|
)
|
Subscription
Receivable
During the three months ended March 31, 2017
the Company issued 3,083,017 shares of common stock that were subject to certain vesting requirements, with a fair value of $3,043,642.
As of March 31, 2017, 2,768,867 shares of such shares that were issued to employees with a fair value of $2,829,492 remain
unvested. Because these common shares are subject to forfeiture if the employees are no longer employed with the company at the
end of their employment agreements, their unvested value is carried in subscriptions receivable within stockholders equity.
Equity
Transactions
During
the three months ended March 31, 2017, the Company issued 20,892 shares of its common stock with a fair value of $12,535
for settlement of a legal matter.
During
the three months ended March 31, 2017, the Company issued 44,166 shares of its common stock to individual investors, which resulted
in net proceeds to the Company of $19,000.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During
the three months ended March 31, 2017, the Company issued 726,119 shares of its common stock with a fair value of $331,619
pursuant to consulting agreements.
During
the three months ended March 31, 2017, the company received $615,000 of proceeds subject to the issuance of shares.
During
the three months ended March 31, 2017, the Company issued 6,420,020 shares of its common stock with a fair value of $2,568,008
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
three months ended March 31, 2017, the Company issued 88,283 shares of its common stock with a fair value of $38,639 to
settle debt.
10
.
SUBSEQUENT EVENTS
Benchmark
Builders, Inc. Acquisition
On
March 9, 2017, the Company, entered into a Stock Purchase Agreement (the “Purchase Agreement”) with (i) Benchmark,
and (ii) each of Benchmark’s stockholders. On April 20, 2017 (the “Closing Date”), FTE Networks, Inc. (“FTE
Networks”) acquired all of the issued and outstanding shares of common stock (the “Benchmark Shares”) of Benchmark
Builders, Inc., a privately held New York corporation (“Benchmark”) from each of its stockholders (collectively, the
“Sellers”), pursuant to the Stock Purchase Agreement, dated as of March 9, 2017, by and among FTE Networks, Benchmark,
and the Sellers (the “Purchase Agreement”), as amended by Amendment No. 1 to Stock Purchase Agreement, dated as of
the Closing Date (the “Purchase Agreement Amendment” and together with the Purchase Agreement, the “Amended
Purchase Agreement”). FTE Networks, Benchmark, and the Sellers, entered into the Purchase Agreement Amendment in order to
address certain changes in the purchase price as set forth in the Purchase Agreement. As described in FTE Networks’ Current
Report on Form 8-K filed with filed with the Securities and Exchange Commission (the “SEC”) on March 9, 2017, the
Purchase Agreement provided that the consideration to the Sellers for the Benchmark Shares would consist of (i) $55,000,000 in
cash consideration, (ii) an aggregate of 17,825,350 shares of the Company’s common stock, and (iii) promissory notes in
the aggregate amount of $10,000,000 to the Sellers. The Purchase Agreement Amendment has, inter alia, modified the purchase price
set forth in the Purchase Agreement to consist of (i) cash consideration of approximately $17,250,000, subject to certain prospective
working capital adjustments (the “Cash Consideration”),approximately $10 million cash provided by Lateral and $7 million
provided by certain of the sellers, (ii) 26,738,445 shares of FTE Networks’ common stock (the “FTE Shares”),
(iii) convertible promissory notes in the aggregate principal amount of $12,500,000 to certain stockholders of Benchmark (the
“Series A Notes”, which mature on April 20, 2019), (iv) promissory notes in the aggregate principal amount of $30,000,000
to certain stockholders of Benchmark (the “Series B Notes”, which mature on April 20, 2020) and (v) promissory notes
in the aggregate principal amount of $7,500,000 to certain stockholders of Benchmark (the “Series C Notes”, which
mature on October 20, 2018, and together with the Series A Notes and the Series B Notes, the “Notes”) in the Amended
Purchase Agreement. On April 20, 2017, in conjunction with the acquisition of Benchmark Builders Inc, Lateral amended the original
credit agreement to provide for approximately $10.1 million towards the cash purchase price of the Benchmark acquisition, refinancing
this new advance with the existing debt, extending the maturity date of the facility to March 31, 2019. In conjunction with
the Benchmark acquisition, on April 28, 2017, the Board of Directors elected Fred Sacrimone to the Board until the Company’s
next annual stockholder’s meeting or until his earlier resignation or removal.
On
April 21, 2017, the Company issued 26,738,445 shares of its common stock with a fair value of $14,975,935 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 $500,000 for settlement of debt.
On
May 9, 2017, the Company issued 29,605 shares of its common stock with a fair value of $11,250 for consulting services.
On
May 9, 2017, the Company issued 50,000 shares of its common stock with a fair value of $25,000 for settlement of debt.
On
May 16, 2017, the Company issued 66,000 shares of its common stock with a fair value of $49,500 for consulting services.
On
May 16, 2017, the Company issued 10,280 shares of its common stock with a fair value of $5,140 for consulting services.
On
May 16, 2017, the Company issued 9,298 shares of its common stock with a fair value of $3,998 for consulting services.