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., 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 and its entities have operations in 17 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
Basis
of Presentation
The
unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the
audited consolidated financial statements included in the Company’s 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 June 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. The condensed consolidated financial statements includes results from Benchmark for the period
of April 21, 2017 through June 30, 2017, the period after closing date of acquisition of 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 June 30,
2017, the Company has an accumulated deficit of $28,113. In addition, the Company has negative working capital of $2,293
as of June 30, 2017. 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 extended 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 debt. With Benchmark’s significant annual revenue and its backlog as of June
30, 2017 of $195,417, 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 an acceptable installment
plan with the IRS, which is scheduled to be presented in the third quarter of 2017, or whether the Company’s anticipated
future profitability and positive operating cash 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 such measures as
extending payables, renegotiating debt facilities, extending debt maturities, and reducing overhead until sufficient additional
capital is raised to support further operations. There can be no assurance that such a plan will be successful. We have considerable
discretion over the extent of expenditures and have the ability 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 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 had no effect on previously reported results of operations, loss per 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 revenue recognition from construction contracts including estimating costs, and estimates of the value of intangible assets
acquired from Benchmark.
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,
revenue is recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (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)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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.
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.
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.
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 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.
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 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 two financial institutions that management believes are 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.
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 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)
(in
thousands, except share and per share information)
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements
In
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 and 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 earliest period
presented. The Company is currently evaluating the standard to determine the impact of the adoption on the financial statements.
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 June 30, 2017 and December 31, 2016, accrued expenses and other current liabilities were comprised of the following:
|
|
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 $300 of estimated penalties and interest associated with unpaid payroll taxes as of June 30,
2017 and December 31, 2016, respectively.
|
|
|
[2]
|
Accrued compensation
expense includes $1,869 and $1,863 of unpaid payroll taxes as of June 30, 2017 and December 31, 2016, respectively.
|
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
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Notes 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 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 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 EBITDA 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 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 was included in amortization of debt discount, and $237 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, with 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 incurred deferred financing cost of approximately $890 in amending the original credit agreement
with Lateral 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 June 30, 2017.
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 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.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in
thousands, except share and per share information)
8.
SENIOR DEBT, continued
|
|
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
required principal payments for all borrowings for each of the five years following the balance sheet date are as follows:
2017 (Remaining)
|
|
$
|
-
|
|
2018
|
|
|
-
|
|
2019
|
|
|
26,831
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
26,831
|
|
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in
thousands, except share and per share information)
9.
COMMITMENTS AND CONTINGENCIES
Property
Lease Obligations
Rental
expense, resulting from property lease agreements was $282 and $159 for the three months ending June 30, 2017 and
June 30, 2016, respectively, and $398 and $284 for the six months ending June 30, 2017, and June 30, 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 June 30, 2017:
2017(Remaining)
|
|
$
|
476
|
|
2018
|
|
|
888
|
|
2019
|
|
|
806
|
|
2020
|
|
|
778
|
|
2021
|
|
|
424
|
|
Thereafter
|
|
|
131
|
|
Total Lease
Obligations
|
|
$
|
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 December 31, 2016.
Related
Party Advances
Through
June 30, 2017, 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 was provided by the CEO. 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 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 $58 as of June 30, 2017.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in
thousands, except share and per share information)
10.
STOCKHOLDERS’ EQUITY
Dividends
Dividend
charges recorded during the three and six months ended June 30, 2017 and 2016 are as follows:
|
|
For
the Three Months Ended
|
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
13
|
|
|
$
|
13
|
|
A-1
|
|
|
7
|
|
|
|
7
|
|
Total
|
|
$
|
20
|
|
|
$
|
20
|
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
25
|
|
|
$
|
25
|
|
A-1
|
|
|
15
|
|
|
|
15
|
|
Total
|
|
$
|
40
|
|
|
$
|
40
|
|
Accrued
dividends payable at June 30, 2017 and December 31, 2016 are comprised of the following:
|
|
June
30,2017
|
|
|
December
31,2016
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
329
|
|
|
$
|
304
|
|
A-1
|
|
|
242
|
|
|
|
227
|
|
Total
|
|
$
|
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. 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 June 30, 2017, the following
warrants were outstanding:
Issued
to
|
|
Amount
|
|
|
Issue
Date
|
|
Expiration
Date
|
|
Exercise
Price
|
|
Term Note Lender(1)
|
|
|
2,344
|
|
|
9/30/2016
|
|
9/30/2021
|
|
|
0.80
|
|
Investment Bank
|
|
|
1,970
|
|
|
12/9/2012
|
|
12/9/2019
|
|
|
0.20
|
|
Investment Bank
|
|
|
2,435
|
|
|
10/31/2014
|
|
10/31/2021
|
|
|
0.20
|
|
Equity Investors
|
|
|
2,487
|
|
|
9/8/2016
|
|
9/8/2021
|
|
|
0.80
|
|
Equity Investors
|
|
|
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
|
|
|
|
|
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 six months ended June 30, 2017 is presented below:
|
|
|
|
|
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 loans discussed in Note 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 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
|
|
|
June
30, 2017
|
|
|
June
30, 2017
|
|
|
June
30, 2017
|
|
Risk
free rate
|
|
|
1.94
|
%
|
|
|
1.808
|
%
|
|
|
1.783
|
%
|
|
|
1.763
|
%
|
Volatility
|
|
|
37.46
|
%
|
|
|
37.37
|
%
|
|
|
37.63
|
%
|
|
|
37.79
|
%
|
Dividends
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Time
to maturity
|
|
|
5
years
|
|
|
|
4.52
years
|
|
|
|
4.37
years
|
|
|
|
4.25
years
|
|
Fair value per share
price
|
|
|
$0.15
|
|
|
|
$0.32
|
|
|
|
$0.31
|
|
|
|
$0.16
|
|
Fair value of warrants
|
|
|
$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 June 30, 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 six months ended June 30, 2017 the Company issued 4,017,011 shares of common stock that were subject to certain vesting requirements,
with a fair value of $3,795. As of December 31, 2016, shares that were previously issued to employees with a fair value of $2,829
remained 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.
During the six months ended, $1,970 of such amount vested and was reflected as stock compensation and $4,656 remained unvested
as of June 30, 2016.
FTE
NETWORKS, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in
thousands, except share and per share information)
10.
STOCKHOLDERS’ EQUITY, continued
Equity
Transactions
During
the six months ended June 30, 2017, the Company issued 20,892 shares of its common stock with a fair value of $14 for settlement
of a legal matter.
During
the six 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 Benchmark acquisition on April 20, 2017.
During
the six months ended June 30, 2017, the Company issued 326,283 shares of its common stock with a fair value of $264 to settle
debt having an approximate value.
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.
During
the six months ended June 30, 2017, the Company received $615 of proceeds subject to the issuance of shares.
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)
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
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 for services
provided, which has been reflected as shares to be issued as of June 30, 2017.
On
July 31, 2017, the Company issued 50,000 shares of its common stock with a fair value of $24 for consulting services.
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
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.