Item
2.04
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Triggering
Events That Accelerate or Increase a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement.
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As
previously disclosed in the First Amendment, between January 2017 and January 2019, the Company entered into securities
purchase agreements (the “Purchase Agreements”) with certain investors (the “Investors”),
pursuant to which the Company sold convertible notes (collectively, the “Notes”) that are convertible into
shares of common stock, par value $0.001 per share (the “Common Stock”), of the Company. On March 22, 2019,
the Company announced that it would be commissioning an independent investigation to review whether the Company’s management
had the proper corporate authorization to issue and sell the Notes and to issue the related shares of Common Stock issuable upon
conversion of the Notes. At or about such time, the Company also acted to prevent the conversion of the Notes into Common Stock
by obtaining a temporary restraining order and a preliminary injunction in the State of Nevada against the Company’s transfer
agent, which continues to enjoin the Company’s transfer agent from processing conversion requests or issuing any shares
of Common Stock stemming from the purported conversion of any of the Notes. On June 13, 2019, the Company announced the preliminary
findings of the independent investigation previously commissioned by the Company’s board of directors, which determined
that proper board authorization was lacking for certain issuances of Common Stock and other equity-related securities of the Company,
including the Notes.
As
of the date of this Report, there remains approximately $5.5 million in aggregate principal amount of Notes outstanding,
plus an aggregate of approximately $2.7 million in accrued interest, including default interest and related fees, penalties and
liquidated damages.
On
April 4, 2019, the Company received a notice of default from Auctus Fund, LLC (“Auctus”), one of the holders
of the Notes, informing the Company that its Note was in default due to, among other potential breaches, the Company’s failure
to honor Auctus’ conversion request, the breach by the Company of certain other unspecified agreements and covenants in
its Note and the related securities purchase agreement and the unavailability to Auctus of the exemption from registration of
Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), for the sale of shares of Common
Stock. Auctus demanded immediate payment of the Note’s outstanding principal plus accrued interest, default interest,
and liquidated damages that aggregated $1,667,705 at the time of such notice. As of the date of this Second Amendment, the Company
has not made any payments to Auctus since the receipt of the notice and the amount demanded therein remains outstanding. The Company
intends to vigorously defend its position should a mutually amicable resolution prove unattainable.
With
the exception of the notice of default received on April 4, 2019, the Company has not received a written notice of default from
any of the other Investors; however, the Company acknowledged that the acceleration of the Note held by Auctus and the
occurrence of certain events, including some of those previously announced by the Company in the Company’s Current
Reports on Form 8-K since March 11, 2019, could potentially trigger defaults, cross-defaults, and/or accelerations under
the other outstanding Notes. Additionally, between July 31, 2019 and August 23, 2019, Investors filed ten purported
confessions of judgment with the Supreme Court of the State of New York, County of Kings, in respect of their Notes. To date,
judgements have been entered against the Company in favor of the following six Investors on the dates and in the
amounts indicated:
Name
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Date of Entry
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Amount of Judgements
|
|
|
|
|
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|
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Eagle Equities LLC (“Eagle”)
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July 31, 2019
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$
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1,206,116.27
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LG Capital Funding, LLC
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August 9, 2019
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$
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915,266.14
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Crossover Capital Fund
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August 13, 2019
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$
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231,469.07
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Adar Alef, LLC
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August 13, 2019
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$
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1,215,269.45
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Cerberus Finance Group, Ltd.
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August 15, 2019
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$
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366,661.76
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Jem Debt Fund I LLC
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August 19, 2019
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$
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349,402.64
|
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On
August 9, 2019, Eagle levied against the Company’s bank account in the amount of $529,287.56 and attempted to levy against
a bank account of the Company’s subsidiary, Benchmark Builders, Inc. (“Benchmark”), which attempted levy
has since been withdrawn. On August 23, 2019, Eagle filed a verified petition for turnover against the Company in the Supreme
Court of the State of New York, County of New York entitled Eagle Equities, LLC v. FTE Networks, Inc. and Benchmark Builders,
Inc. (Index No. 158196/2019) in which Eagle is seeking, among other remedies, an order directing the Company to turn over
to Eagle all of the assets of the Company to satisfy the judgement of Eagle against the Company and for the appointment of a receiver
to administer and collect Eagle’s interest in the Company’s assets. The Company’s response in such proceeding
is due on September 5, 2019.
On August 23, 2019,
another Investor, which had obtained a judgment by confession in the amount of $306,043.57 on its Note, levied against the Company’s
bank account and attempted to levy against a Benchmark bank account, which attempt has been withdrawn.
The
Company believes all of the outstanding Notes are void ab initio as the Company believes they were entered into fraudulently
by the Company’s prior management and without the knowledge or necessary authorization of the Company’s board
of directors. As a result, the Company intends to dispute the judgements and the claims of such holders and to vigorously defend
the litigations commenced by such Investors. In addition, the Company believes that holders of the Notes have violated
the NY Lien Law and have also engaged in other activities that are prohibited by the terms of the Notes themselves. That
conduct has injured the Company’s business and reputation and has adversely affected the Company’s common
stock, causing significant financial loss to the Company’s stockholders. The Company intends to hold such holders liable
for the full amount of such damages.
The
foregoing descriptions of the Notes held by Auctus and Eagle, respectively, does not purport to be complete and
are qualified in its entirety by reference to (i) the Convertible Note issued to Auctus, dated as of September 27, 2018,
which was filed as Exhibit 4.6 to the Company’s Current Report on Form 8-K filed on March 11, 2019; and (ii) the Convertible
Note, issued to Eagle, dated as of November 5, 2018, which was filed as Exhibit 4.11 to the Company’s Current Report on
Form 8-K filed on March 11, 2019, each of which is incorporated by reference herein.
The
foregoing contains forward-looking statements regarding certain purported events of default and the Company’s ability to
defend against the Investors’ assertions and demands. Statements regarding future events are based on the Company’s
current expectations and are necessarily subject to risks and uncertainty including risks related to, among other things, the
Company’s ability to successfully defend its position with respect to the Notes and its ability to prevail in the aforementioned
litigations. Actual results may differ materially from those in the forward-looking statements, including the potential liability
resulting from pending or future litigation which could adversely affect our business, financial condition and results of operation.
The Company undertakes no obligation to revise or update publicly any forward-looking statements.