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, build, and support 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.
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. 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 September 30,
2015 (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 and 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 its 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 requirement for the recognition 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, beginning
after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the adoption 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 aspects 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.
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 September 30, 2016, the Company has an accumulated deficit of $16 million. In addition, the Company has working capital
deficiencies of $2.6 million and $3.6 million as of September 30, 2016 and December 31, 2015, respectively. The Company recently
closed on an equity raise thru a private placement, resulting in net proceeds to the Company of $1.5 million as of September 30,
2016. Management plans to continue to raise additional funds through the sales of debt or equity securities until such time its
operations will begin to produce a positive cash flow. However, 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 or 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. There can be no assurance that such a plan will be successful. As of September
30, 2016, the Company has a backlog of approximately $32,500,000 of future orders to be fulfilled in the next twelve months.
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. These reclassifications
have no effect on previously reported results of operations or loss per share.
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, 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.
Due
to the 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’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 material 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.
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 d 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
|
|
[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 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)
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 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, and accounts payable
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.
3.
RESTRICTED CASH ACCOUNT
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.
4.
OTHER CURRENT ASSETS
Other
current assets consist of the following as of September 30, 2016 and December 31, 2015:
|
|
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
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As
of September 30, 2016 and December 31, 2015, Accrued Expenses and Other 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
|
|
[1]
|
Accrued
interest payable includes approximately $300,000 of estimated penalties and interest associated with the unpaid payroll taxes
as of September 30, 2016 and December 31, 2015, respectively.
|
|
|
[2]
|
Accrued
compensation expense includes $1,863,031 of unpaid payroll taxes for the period ended September 30, 2016 and December 31,
2015, respectively.
|
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
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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
were 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. (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
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 September 30, 2016, $164,018 was included in amortization
of debt discount, and $236,914 remained unamortized as of September 30, 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, 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. The Company is in compliance with its covenants as of
September 30, 2016.
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.
|
|
$
|
8,295,282
|
|
|
$
|
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)
8.
TERM LOAN
On
September 30, 2016, the Company and its senior lender modified certain bridge loans entered into from June 2016 through September
2016. The various bridge loans with an outstanding balance of $2.25 million were restructured into one term loan 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 terms of
the restructured debt instrument were substantially different from the original debt instrument. Under ASC 470-50 Modifications
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.
9.
COMMITMENTS AND CONTINGENCIES
Property
Lease Obligations
Rental
expense, resulting from property lease agreements was $158,469 and $56,265 for the three months ending September 30, 2016 and
September 30, 2015, respectively, and $442,848 and $147,239 for the nine months ending September 30, 2016, and September 30, 2015,
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 September 30, 2016:
2016 (Remaining)
|
|
$
|
142,584
|
|
2017
|
|
|
473,172
|
|
2018
|
|
|
452,189
|
|
2019
|
|
|
410,589
|
|
2020
|
|
|
381,252
|
|
Thereafter
|
|
|
508,398
|
|
Total Lease Obligations
|
|
$
|
2,368,184
|
|
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 September 30, 2015, at which time the Company
provided for an accrual of $1,840,891 to settle these claims. On November 20, 2015, the Company settled the Martin and Arey lawsuit
for $150,000 cash, a promissory note for $250,000, and 512,820 share of common stock, 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.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9.
COMMITMENTS AND CONTINGENCIES, continued
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 nine months ended September 30, 2016 and 2015 are as follows:
|
|
For the three Months Ended
|
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
12,510
|
|
|
|
12,510
|
|
A-1
|
|
|
7,380
|
|
|
|
7,381
|
|
Total
|
|
$
|
19,890
|
|
|
|
19,891
|
|
|
|
For the nine Months Ended
|
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
37,530
|
|
|
|
37,529
|
|
A-1
|
|
|
22,140
|
|
|
|
22,141
|
|
Total
|
|
$
|
59,670
|
|
|
|
59,670
|
|
Accrued
dividends payable at September 30, 2016 and December 31, 2015 are comprised of the following:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
297,176
|
|
|
$
|
259,646
|
|
A-1
|
|
|
213,628
|
|
|
|
191,487
|
|
Total
|
|
$
|
510,804
|
|
|
$
|
451,133
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 classify 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 September 30, 2016, the following warrants
are 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
|
|
|
|
|
11,658,814
|
|
|
|
|
|
|
|
|
|
|
(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 nine months ended September 30, 2016 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
|
|
|
$
|
-
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10.
STOCKHOLDERS’ EQUITY, continued
The
Company has assessed its outstanding equity-linked financial instruments issued with the term loan cited in Footnote 8 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 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 liability using the Lattice Model method
based on the following assumptions:
|
|
September
30, 2016
|
|
|
|
|
|
Risk free rate
|
|
|
1.14
|
%
|
Volatility
|
|
|
37.80
|
%
|
Dividends
|
|
|
0
|
|
Time to maturity
|
|
|
5
years
|
|
Fair value per share price
|
|
|
.0611
|
|
Fair value of warrants
|
|
$
|
143,200
|
|
These
warrants are Level 3 valuation which were issued and measured on September 30, 2016.
Subscription
Receivable
During
the nine months ended September 30, 2016 the Company issued 2,229,000 shares of common stock to employees that were subject to
certain vesting requirements. As of September 30, 2016
, 2,100,000 shares of such shares that with a grant date value of
$1,357,800 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 stockholder’s
equity.
Equity
Transactions
During
the nine 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 of such Redemption Rights would, in good faith, prevent
the Company from continuing 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 number 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:
●
|
At
a fixed or determinable price on a fixed or determinable date,
|
|
|
●
|
At
the option of the shareholder, or
|
|
|
●
|
Upon
the occurrence of an event that is not solely within the control of the reporting entity.
|
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, 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.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11.
SEGMENT DATA
The
Company’s reportable operating segments consist of its telecommunications segment and its staffing segment, which are organized,
managed and operated along key product and service lines.
The
following tables summarize financial information about the Company’s business segments for the three and nine months ended
September 30, 2016 and September 30, 2015.
|
|
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
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
|
|
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
|
|
12.
SUBSEQUENT EVENTS
On
October 12, 2016, the Company issued 2,423,687 shares of its common stock with a grant date value of $969,475 for proceeds from
an equity raise purchase, resulting in net proceeds to the Company of $848,138.
On
October 19, 2016, the Company issued 2,589,312 shares of its common stock with a grant date value of $1,035,725 for proceeds from
an equity raise purchase, resulting in net proceeds to the Company of $688,138.
On
October 19, 2016, the Company issued 2,000,000 shares of its common stock with a grant date value of $1,040,000 to several employees
resulting in incentive compensation expense of the grant date value.
On
October 12, 2016, FTE Networks, Inc. (the “
Company
”) concluded a private placement offering (the “
Offering
”)
of 7,500,000 units (each a “
Unit
” and collectively, the “
Units
”). Each Unit consisted of
(i) one (1) share of the Company’s common stock, par value $0.001 per share (the “
Common Stock
”), and
(ii) a warrant (each, a “
Warrant
”) to purchase one (1) share 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, the Company entered
into a Unit Purchase Agreement (the “
Purchase Agreement
”), by and among 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.
Pursuant
to the Purchase Agreement, 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 all
shares of Common Stock issued as part of the Units and all of the shares issued under the Warrants.
Each
of the Investors is an “accredited investor” as such term is defined in Rule 501 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.
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 as
Exhibit
10.1
, the Registration Rights Agreement, which is filed as
Exhibit 10.2
, and the Warrant, which is filed as
Exhibit
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.