PART
I
DEFINITIONS
In
this Annual Report on Form 10-K, the words “FTE”, the “Company”, the “Registrant”, “we”,
“our”, “ours” and “us” refer to FTE Networks, Inc. and, except as otherwise specified herein,
to our subsidiaries.
DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K includes certain statements that may be deemed “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
all of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof.
In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,”
“should,” “expect,” “plan,” “project,” “intend,” “anticipate,”
“believe,” “seek,” “estimate,” “predict,” “potential,” “pursue,”
“target,” “continue,” the negative of such terms or other comparable terminology. These statements involve
risks and uncertainties that could cause the Company’s actual future outcomes to differ materially from those set forth
in such statements. Such risks and uncertainties include, but are not limited to:
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We
have a history of net losses and expect to continue incurring losses for the foreseeable future;
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Our
ability to raise capital when needed and on acceptable terms and conditions;
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Uncertainties
relating to the impact of COVID-19 on our business, operations and employees;
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Our
ability to maintain sufficient liquidity;
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We
are past due in payment of our 2015 payroll taxes;
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A
significant slowdown or decline in economic conditions could adversely impact our results of operations;
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Interruption
or failure of our technology and communication systems could impair our ability to provide services;
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The
possibility that our current insurance coverage may not be adequate or that we may not be able to obtain a policy at acceptable
rates;
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Disagreements
with taxing authorities with regard to tax positions we have adopted;
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Interruptions
to our information systems and cyber security or data breaches;
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Liabilities
under laws and regulations protecting the environment;
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Loss
of key personnel and effective transition of new management;
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Our
ability to successfully implement our strategic initiatives and achieve their anticipated impact;
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The
impact of changes to the supply of value of and returns on single-family rental assets;
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Our
ability to successfully integrate newly acquired properties into our portfolio of single-family rental properties;
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Changes
in the market value of our single-family rental properties and real estate owned;
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Changes
in interest rates;
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The
impact of adverse real estate, mortgage or housing markets; and
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The
impact of adverse legislative, regulatory or tax changes.
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You
should understand that the foregoing, as well as other risk factors discussed in this document, including those listed in Part
I, Item 1A of this report under the heading “Risk Factors”, could cause future outcomes to differ materially
from those experienced previously or those expressed in such forward-looking statements. The Company undertakes no obligation
to publicly update or revise any information, including information concerning its net operating losses, borrowing availability
or cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this report.
Forward-looking statements are provided in this Annual Report on Form 10-K pursuant to the safe harbor established under the Private
Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties and
risks described herein.
Item
1. Business.
The
following historical business description should be read in conjunction with the Consolidated Financial Statements and related
notes appearing elsewhere in this Annual Report on Form 10-K.
Our
Corporate History
The
Company was originally incorporated in the state of Nevada in May 2000 as Galaxy Specialties, Inc. On March 13, 2014, following
a series of mergers, acquisitions and business combinations, the Company changed its name from Beacon Enterprise Solutions Group,
Inc. to FTE Networks, Inc. The Company is headquartered in New York, New York.
Prior
to October 2019, the Company was a provider of end-to-end design, construction management, build and support solutions for networks,
data centers, residential, and commercial properties and services at Fortune 100/500 companies (our “Historical Business”).
The Company’s primary activities included engineering, building, installation, maintenance and support solutions for state-of-the-art
networks and commercial properties, including the following services: data-center infrastructure, fiber optics, wireless integration,
network engineering, internet service provider, general contracting management and general contracting.
The
Company had three operating subsidiaries:
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(i)
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Benchmark
Builders, Inc. (“Benchmark”) was a leading full-service general construction management subsidiary that provided
general contracting and construction management services on interior commercial spaces in the New York City market. As the
primary operating subsidiary, Benchmark was spun out in October 2019 in connection with a strict foreclosure on the part of
the senior creditors in exchange for the cancellation of the senior secured debt and other debt (the “Benchmark Foreclosure”).
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(ii)
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CrossLayer,
Inc. (“CrossLayer”), the managed network provider subsidiary, was designed to equip commercial real estate property
owners and businesses with custom platforms that enabled them to introduce and deliver managed network service to their tenants,
while creating monetization opportunities previously available only to network operators. In an effort to stimulate revenue
growth and reduce operating expenses, and in connection with a reoriented corporate strategy, FTE sold CrossLayer on January
16, 2020.
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(iii)
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Jus-Com,
Inc. (dba “FTE Network Services”) is part of the core legacy business which
focused on telecommunications solutions in the wireline and wireless telecommunications
industry. Jus-Com provided outside plant solutions (“OSP”), that included
all forms and methods of connecting the nation’s telecommunications infrastructure,
and inside plant operations (“ISP”) which consisted of cable rack, wiring
build-outs, infrastructure build-outs and cable installation, among other things. Jus-Com
is still an operating subsidiary; however, its OSP component wound down in the first
half of 2019; the ISP component remains an operating subsidiary.
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Our
Current Business and Corporate Strategy
Following
a year of corporate and financial restructuring in response to the findings of an internal investigation (see Item 1. Business
“Recent Developments”) which examined the acts and omissions of certain former officers and directors,
and the loss of our principal operating subsidiary through a foreclosure by our former senior secured lenders, the Company
was presented with an opportunity to acquire a real estate portfolio consisting of approximately 3,200 rental homes across the
United States moving FTE into a new direction which current management believes offers substantial opportunity for the benefit
of shareholders. Accordingly, on December 30, 2019, FTE acquired nearly 3,200 real estate properties by and through its newest
subsidiary, US Home Rentals, LLC (the “Vision Transaction”).
RECENT
DEVELOPMENTS
Internal
Investigation
In
current reports on Form 8-K filed on March 11, 2019 and March 22, 2019, the Company disclosed that it had entered into certain
securities purchase agreements (the “Purchase Agreements”) with certain investors (the “Investors”), which
the Company sold an aggregate principal amount of $22,700,000 in convertible notes (the “Notes”) between January
2017 and January 2019. Approximately $9,800,000 of principal and interest had been converted into 5,186,306 shares of the
Company’s common stock through March 19, 2019. These issuances were not supported by a listing application with the
New York Stock Exchange (“Exchange’), which resulted
in the Company receiving a public reprimand letter from the NYSE Regulation Staff of the Exchange on March 25, 2019. On March
22, 2019, the Company announced the initiation of an independent investigation (the “Investigation”) of these issuances
and engaged K&L Gates LLP and Credibility International, LLC, an independent forensic accounting firm (together, the
“Team”) to conduct the Investigation.
Scope
of the Investigation
The
Investigation focused primarily on the following areas: (i) whether prior management, including former Chief Executive Officer
(“former CEO”), Michael Palleschi, and former Chief Financial Officer (“former CFO”), David Lethem, had
proper authorization to issue the Notes; (ii) whether the Company properly accounted for and disclosed certain expenses incurred
by prior management; (iii) the use of personal credit cards by employees to pay routine Company expenses; (iv) whether the Company
properly entered into and disclosed certain related party transactions (v) whether certain transactions were improperly reported
to increase revenue; (vi) the payment of certain wage and salary amounts to employees; (vii) the Company’s interactions
with its external auditors and (viii) issues related to Mr. Palleschi’s compensation.
In
connection with the Investigation, the Team visited the Company’s Naples, Florida office and collected hard copy documents,
created images of electronic equipment belonging to various members of the prior management team, copied many folders from the
Company’s SharePoint database, conducted interviews with sixteen individuals, and collected and processed over four hundred
thousand e-mails and documents.
Findings
of the Investigation
The
Team found the following:
1.
Issuances of the Notes.
In
numerous instances, prior FTE management, including Mr. Palleschi and Mr. Lethem, caused the Company to issue the Notes
as well as other financings without proper Board authorization. Specifically, the Team found: (i) several issuances for which
the supporting resolutions did not comply with Nevada state law and the Company’s bylaws; (ii) several issuances for which
there were no Board resolutions; and (iii) several issuances for which the supporting resolutions had been falsified. Moreover,
the prior management caused the Company to make incomplete disclosures about the Notes in its required SEC filings for fiscal
year 2017 and the first three quarters of fiscal year 2018. Notably, because of the prior management, the Company did not disclose
that each of the Notes contained a conversion feature that allowed the holders of the Notes to convert the debt into the Company’s
common stock.
2.
Reimbursement of Expenses and the Use of Personal Credit Cards for Business Expenses.
The
Investigation revealed that prior management misused Company funds for personal expenses, including charter flights and automobile
leases. The Team also found that prior management instructed FTE employees to charge FTE-related business expenses to their personal
credit cards from 2018 forward. However, the Team found that the expenses charged pursuant to such instruction were largely business-related.
3.
Related Party Transactions.
The
Team found that prior management caused the Company to engage in numerous related party transactions, some of which were implemented
to the Company’s detriment and were not disclosed properly or were not disclosed at all. Such transactions included loans
provided to the Company by former officers and directors, as well as instances of deferred salary or deferred bonus pay. The Team
identified transactions between the Company and former officers or directors, as well as between the Company and entities controlled
by former officers or directors.
4.
Revenue Recognition and Interaction with Auditors
The
Team found that prior management caused the Company to improperly recognize revenue in 2016 and 2017. The revenue was recorded
to unbilled Accounts Receivable and later written off in three separate transactions during 2018. The Team also found that members
of prior management provided inaccurate and incomplete statements to the Company’s former independent registered public
accounting firm, Marcum LLP (“Marcum”), regarding the basis for recognizing the revenue.
5.
Payment of Certain Wages, Salary Amounts, and Payroll Expenses
The
Team found that the Company’s former CEO, Mr. Palleschi, engaged in improper conduct in connection with his compensation
including the following: (i) Mr. Palleschi, without proper authorization, caused the Company to amend his employment agreement,
significantly increasing his salary and bonus pay; (ii) Mr. Palleschi, without proper authorization, caused the Company to grant
him deferred compensation and to issue “demand notes,” which characterized the deferred compensation as debt of the
Company owed to Mr. Palleschi, this mischaracterization resulted in the Company making three substantial wire transfers to Mr.
Palleschi to pay him the amounts he was owed on the “demand notes; and (iii) Mr. Palleschi, without proper authorization,
caused the Company to enter into a release agreement under which the Company agreed to pay amounts purportedly owed to Messrs.
Palleschi and Lethem, in exchange for a mutual release. The Team also found that each of the payments noted above were made without
the required withholding of income taxes. In addition, the Team identified multiple instances where Messrs. Palleschi and
Lethem made or attempted unsupported cash payments to themselves and certain family members, through direct wire transfers, PayPal
and other means. Furthermore, the Team identified three instances in which the Company paid each of its employees through direct
wire transfer rather than through its outside payroll processing firm. In each instance the Company wired the amount due, net
of income taxes, but failed to remit payroll taxes.
Further
to the findings of the investigation as noted above, the Company also has found that former management created and distributed
false and misleading documents to its internal accounting staff resulting in improper accounting for (i) convertible notes by
removing certain language regarding conversion features and registration rights, (ii) revenue recognition by falsifying support
for unbilled revenue, (iii) compensation and characterization of certain cash disbursements, (iv) related party transactions
and (v) equity issuances which were later determined to be improperly authorized, and other issues. The Company also found
that former management withheld requested documentation and similarly provided false and misleading documents to its former independent
registered public accounting firm.
Remediation
The
Company self-reported the matters raised in the Investigation to both the U.S. Securities and Exchange Commission (“SEC”)
and the New York County District Attorney’s Office (“NYCDA”), and kept both agencies, along with the U.S. Attorney’s
Office for the Southern District of New York (“SDNY”), updated on its progress throughout the Investigation. The Company
continues to cooperate with all three agencies.
The
Company has also taken numerous remedial actions in response to the findings of the Investigation. Most notably, the Company has
made dramatic changes to its management team, completely replacing senior management, including Messrs. Palleschi and Lethem as
well as a majority of the former Board of Directors. The Company has also restated its financial statements for fiscal
year 2017 and the periods ended March 31, June 30 and September 30, 2018 and 2017, as discussed below. Among other things,
the restatement corrects the improperly recognized revenue identified by the Investigation and accounts for
the convertible feature of the Notes. In addition, the Company has taken significant steps to improve its policies and procedures
and internal controls relating to, among other things, the following: (i) tracking, approving and disclosing all issuances of
equity and debt; (ii) its expense reimbursement policy; and (iii) tracking, approving and disclosing related party transactions.
See “Item 9A Controls and Procedures”.
Finally,
to remedy deficiencies in its equity issuances, the Board of Directors held a total of four special meetings on April 29, May
7, May 8, and May 13, 2019, respectively, at which it reviewed all equity issuances and decided which issuances were (i) valid;
(ii) noncompliant but should be ratified; (iii) noncompliant but would not be challenged; and (iv) noncompliant and should be
nullified. As a result, certain issuances to convertible noteholders, current and former personnel and related parties were nullified.
Additionally, the Company sent a letter to its shareholders, dated May 23, 2019, to notify them of noncompliant issuances that
were approved and validated during the Board’s review.
Departure
of Executive Officers
On
January 17, 2019, Lynn Martin, the Company’s then-Chief Operating Officer, resigned from the Company, effective January
25, 2019.
On
January 19, 2019, Michael Palleschi, was granted a temporary leave of absence by the Board. On May 11, 2019, Mr. Palleschi
notified the Company of his resignation from the Company’s Board and as the Company’s CEO. On May 13, the Board accepted
Mr. Palleschi’s resignation from the Board, without compensation and without a release, and terminated his employment
as the Company’s CEO on May 13, 2019.
On
January 19, 2019, Anthony Sirotka, the Company’s former Chief Administrative Officer, was appointed as the Company’s
Interim CEO. On June 27, 2019, Mr. Sirotka was placed on administrative leave. Mr. Sirotka resigned on October 2, 2019.
On
March 11, 2019, David Lethem, the former CFO, resigned from the Company, effective March 11, 2019.
Non-Reliance
on Previously Issued Financial Statements
The
Company announced on April 2, 2019 that the Audit Committee (“Audit Committee”) of FTE, following a communication
by Marcum, LLP, the Company’s former registered independent public accounting firm, concluded that previously issued
audited financial statements as of and for the year ended December 31, 2017, and interim reviews of the financial statements for
the periods ended March 31, June 30, and September 30, 2018 and 2017, should no longer be relied upon. The conclusion to prevent
future reliance on the aforementioned financial statements resulted from the determination that such financial statements failed
to properly account for certain convertible notes and other potentially dilutive securities. Specifically, the Company identified
a potential issue related to the accounting related to certain convertible notes and other potentially dilutive securities the
Company issued in 2017, 2018, and during January of 2019.
On
June 11, 2019, the Audit Committee, following a communication by Marcum, concluded that the Company’s previously issued
audited financial statements as of and for the years ended December 31, 2017 and 2016 and completed interim reviews for the periods
ended March 31, June 30, and September 30, 2018, 2017 and 2016 should no longer be relied upon. The conclusion on June 11, 2019
to add the aforementioned 2016 financial statements to those statements which should no longer be relied upon resulted from determinations
made as part of the Company’s ongoing restatement effort that certain items, including revenues originally recognized in
2016, should no longer be recognized.
Amendment
No. 4 to Lateral Credit Agreement
On
February 12, 2019, the Company and certain of its wholly-owned subsidiaries entered into Amendment No. 4 (the “Fourth Amendment”)
to the credit agreement dated October 28, 2015, by and among Jus-Com, Inc., certain other Company subsidiaries, Lateral Juscom
Feeder LLC (“Lateral”) and several lenders party thereto (together with Lateral, the “Lenders”) (as amended,
the “Credit Agreement”). The Fourth Amendment provided for, among other things, $12,632,000 in delayed draw loans
(the “Delayed Draw Term Loans”). The Delayed Draw Term Loans had a maturity date of March 31, 2019, and an interest
rate of 12% and 4% of paid in kind interest, payable quarterly in arrears according to the terms of the Credit Agreement. In addition,
the Company and the Lenders agreed to enter into a restructuring services agreement, in form and substance acceptable to the Lenders
in their sole discretion, on or prior to February 28, 2019, which date was extended on several occasions by the parties. Lateral
is controlled by Richard de Silva, who joined the Company’s Board of Directors on October 18, 2019.
The
Fourth Amendment also provided for (i) amendments to the employment agreements between Benchmark, our former principal operating
subsidiary, and Fred Sacramone and Brian McMahon, the founders of Benchmark who sold Benchmark to the Company in April of 2017
(the “Benchmark Sellers”); (ii) the issuance of a promissory note to Fred Sacramone for cash received in the principal
amount of $1,000,000 (the “Sacramone Bridge Note”), which note originally matured on March 31, 2019, and was subsequently
amended and restated on July 2, 2020 to extend the maturity date to September 30, 2020, and for which Mr. Sacramone was issued
356,513 shares of the Company’s common stock; (iii) the appointment of a finance transformation officer (who was acting
in the capacity of Chief Financial Officer from January 23, 2019 through July 15, 2019); and (iv) the issuance of an aggregate
of 1,698,580 shares of the Company’s common stock to the Lenders.
Restructuring
of Lateral Credit Agreement and Designation of Series H Preferred Stock
On
July 2, 2019, the Company completed the debt restructuring contemplated under the Fourth Amendment by entering into an amended
and restated credit agreement (the “Amended and Restated Credit Agreement”) among the Company, Lateral and several
Lenders. The Company also amended and restated the Series A convertible notes (as amended, the “Series A Notes”),
Series B promissory notes (as amended, the “Series B Notes”) issued to the Benchmark Sellers, and the Sacramone Bridge
Note (together with the Series A Notes and the Series B Notes, the “Benchmark Notes”).
Amended
and Restated Credit Agreement Summary
Pursuant
to the Amended and Restated Credit Agreement, the Delayed Draw Term Loans, which were continued as super senior term loans with
an aggregate outstanding balance of $12,900,000 (the “Super Senior Term Loans”) were amended to: (i) extend the maturity
to September 30, 2020; (ii) amend the interest rate to 12% per annum payable in cash; (iii) add a 4% extension fee to the principal
amount (subject to reduction); and (iv) provide for monthly amortization payments based on available cash flow. In addition, the
existing term loans under the Credit Agreement, with an aggregate balance of approximately $37,900,000 (“Lateral’s
Existing Term Loans”) were amended to: (i) extend the maturity to April 30, 2021; (ii) amend the interest rate to 12% per
annum payable in cash; (iii) add a 4% extension fee to the principal amount thereof (subject to reduction); and (iv) include monthly
amortization payments based on available cash flow.
As
consideration for the Amended and Restated Credit Amendment, the Company issued to the Lenders 1,500,000 shares of the Company’s
common stock and warrants (the “Warrants”) exercisable to purchase 3,173,731 shares of the Company’s common
stock (collectively, the “Lender Securities”) with an initial exercise price of $3.00 per share. Pursuant to the terms
of the Warrants, in the event the Super Senior Term Loans were not paid and satisfied by October 31, 2019, the exercise per share
of half of the Warrants would be automatically reset to $0.01 and in the event the Super Senior Term Loans were not paid by December
31, 2019, the exercise per share of the other half of the Warrants would be automatically reset to $0.01. The Company also agreed
that on December 31, 2019, the aggregate number of shares of the Company’s common stock issuable upon exercise of the Warrants
would be automatically adjusted on December 31, 2019 such that that Lateral and its affiliates would beneficially own, in the
aggregate, inclusive of all shares of the Company’s common stock previously issued, 25% of the outstanding shares of the
Company’s common stock on a fully-diluted basis, subject to certain exceptions.
As
additional consideration for the Amended and Restated Credit Agreement, the Company and Lateral entered into a registration rights
agreement (the “Registration Rights Agreement”) whereby the Company agreed to register the Company’s common
stock issued to Lateral. The Company and Lateral also entered into an investor rights agreement (the “Investor Rights Agreement”)
whereby the Company agreed that within sixty days of its execution, the Company would set the number of directors on its Board
of Directors at seven and Lateral would be entitled to nominate one of such seven directors.
Series
A Notes and Series B Notes & Designation of Series H Preferred Stock
The
Series A Notes and Series B Notes were also amended to extend the maturity date to July 30, 2021 and to amend the interest rate
to 8% per annum to be paid in kind until the borrowings under the Amended and Restated Credit Agreement were repaid in full. The
Sacramone Bridge Note was amended to extend the maturity date to September 30, 2020, to capitalize the accrued interest as of
July 2, 2019 and to provide for monthly cash interest payments. Additionally, all of the foregoing notes were amended to provide
for monthly amortization payments based on available cash flow.
As
consideration for amending and restating the Benchmark Notes, the Company entered into subscription agreements (the “Subscription
Agreements”) pursuant to which it issued to the Benchmark Sellers an aggregate of 1,951 shares of the Company’s Series
A Preferred Stock and 296 shares of the Company’s Series A-1 Preferred Stock (collectively, the “Series A Preferred”),
which the Benchmark Sellers immediately exchanged, pursuant to exchange agreements (the “Exchange Agreements”), for
an aggregate of 100 shares of a new series of preferred stock (the “Series H Preferred,” and together with the Series
A Preferred, the “Preferred Stock”). The Series H Preferred had no dividend rights, no liquidation preference, was
not convertible and had perpetual voting rights equivalent to 51% of the total number of votes that could be cast by all outstanding
shares of capital stock of the Company.
Foreclosure
by Senior Secured Lenders
During
July 2019, the Company was notified that judgments had been entered against the Company in favor of six holders of the Company’s
convertible notes in the state of New York. Certain of these convertible noteholders sought to levy against the bank account of
the Company’s former subsidiary, Benchmark, and filed an order directing the Company to turn over all of the Company’s
assets. The Company’s failure to satisfy, vacate
or stay these judgments constituted an event of default under the Credit Agreement.
As
a result, on October 10, 2019, the Company consented to a Proposal for Surrender of Collateral
and Strict Foreclosure (the “Foreclosure Proposal”), from Lateral, Lateral Builders LLC (“Lateral Builders”)
and Benchmark Holdings, LLC (“Benchmark Holdings” and together with Lateral Recovery LLC (“Lateral Recovery”),
the (“Foreclosing Lenders”)), pursuant to which the Lenders took possession and ownership of the Subject
Collateral (see below) by means of a strict foreclosure by the Foreclosing Lenders (the “Benchmark Foreclosure”).
Pursuant
to the Foreclosure Proposal, the Company transferred; (i) to Benchmark Holdings all of its (a) equity interests in Benchmark,
the Company’s principal operating subsidiary, and (b) cash on hand in excess of levels specified in the Foreclosure Proposal;
and (ii) to Lateral Recovery, all of the Credit Parties’ interests in certain commercial tort litigation claims,
fraud claims, and insurance claims as specified in the Foreclosure Proposal (collectively, the “Subject Collateral”).
Also
pursuant to the Foreclosure Proposal, Benchmark transferred $3,000,000 of cash to the Company. Additionally, Benchmark
agreed to make a monthly cash payment to the Company, in the amount of $300,000 per month (the “Working Capital Cash
Payments”), for purposes of funding certain of the Company’s remaining obligations related to accounts payable, indebtedness
for borrowed money, convertible note obligations and other matters specified in the Foreclosure Proposal (the “Remainder
Obligations”). Working Capital Cash Payments were to continue until the earlier of (i) October 10, 2021, (ii) the repayment
in full of the Remainder Obligations or (iii) the occurrence of a Working Capital Termination Event (as defined in the Foreclosure
Proposal). The cash infusion and Working Capital Cash Payments provided the opportunity for the Company to receive total
cash payments of up to $10,200,000 over the next 24 months. Benchmark
made a total of two Working Capital Cash Payments to the Company—one in each of the months of November and
December of 2019—for aggregate Working Capital Cash Payments of $600,000.
Benchmark
Holdings, as the holder of the following of the Company’s obligations, absolutely and unconditionally released and forever
discharged the Company and the other Credit Parties from certain indebtedness previously held by Niagara Nominee L.P. totaling
$4,900,000, Lateral’s Existing Term Loans totaling $42,300,000 and the Super Senior Term Loans totaling $13,500,000 as each
such term is defined in the Credit Agreement. Accordingly, Lateral’s Existing Term Loans and the Super Senior Term Loans
were deemed fully paid and satisfied.
Additionally,
pursuant to an Agreement Regarding Debt and Series H Preferred Stock (the “Debt and Series H Agreement”), dated October
10, 2019, entered into between the Company and Fred Sacramone and Brian McMahon, Messrs. Sacramone and McMahon released the Company
and its affiliates from (i) all obligations represented by the Sacramone Bridge Note per the Credit Agreement, which had
an outstanding amount equal to approximately $1,030,000 and (ii) indebtedness represented by the Series B Notes in the
amount of $19,000,000. As a result, the total amount remaining outstanding under the Series A Notes and Series B Notes
was $28,000,000 (the “Remaining Indebtedness”) with a due date of December 31, 2019.
The
total debt relief provided pursuant to the Foreclosure Proposal and the related agreements and arrangements equaled an
aggregate of $80,700,000.
In
accordance with the Debt and Series H Agreement, the Remaining Indebtedness was to be automatically released and discharged as
of December 31, 2019 unless (i) on or before November 10, 2019, the Company entered into a business combination transaction that
enabled the Company’s common stock to remain listed on the NYSE American Exchange or any other U.S. national securities
exchange and (ii) such business combination transaction was consummated on or before December 31, 2019 (such transaction, a “Qualified
Business Combination”). Additionally, the Debt and Series H Agreement also required Messrs. Sacramone and McMahon to sell
their shares of Series H Preferred Stock to the Company for a nominal price in the event an agreement for a Qualified Business
Combination was entered into on or before November 10, 2019, and such Qualified Business Combination was consummated on or before
December 31, 2019.
On
November 8, 2019, the Company and Messrs. Sacramone and McMahon entered into an amendment to the Debt and Series H Agreement,
pursuant to which the parties agreed to extend the date by which an agreement for a Qualified Business Combination must be entered
into from November 10, 2019 to December 31, 2019 and to extend the date by which a Qualified Business Combination must close from
December 31, 2019 to February 28, 2020.
On
December 23, 2019, the Company entered into a separate agreement with Messrs. Sacramone and McMahon pursuant to which the Company
repurchased all outstanding shares of its Series H Preferred Stock from Messrs. Sacramone and McMahon for a payment of $1.00 per
share, as a result of which no shares of Series H Preferred Stock remain outstanding.
The
Remaining Indebtedness remains an unpaid and outstanding Company liability. As of December 31, 2019, the outstanding balance of
the Remaining Indebtedness was $28,280,465, including principal of $28,000,000 and paid in kind interest of $280,465 (subject
to the adjustment described below).
In
order to facilitate the continued inflow of additional cash infusions from Benchmark and other agreements pertaining to the Remaining
Indebtedness, the Board also determined that, as result of the completion of the Vision Transaction, Benchmark would no longer
be obligated to continue making Working Capital Cash Payments to the Company. On January 10, 2020, Benchmark loaned $300,000 to
the Company with a maturity date of October 1, 2020 and an annual interest rate of 10%. Furthermore, on January 27, 2020, the
Company issued two senior promissory notes to Benchmark, one in the principal amount of $4,129,000 and the other in the principal
amount of $600,000 (collectively, the “Senior Notes”), each such note secured by all of the Company’s non-real
estate assets. The $4,129,000 note, which matures on December 1, 2020 and has an interest rate of 10%, obligates the Company to
repay all monies previously paid or transferred to the Company pursuant to the Foreclosure Proposal, including (i) $3,000,000
in cash; (ii) two Working Capital Cash Payments totaling $600,000; and (iii) approximately $500,000 in cash remaining in a Benchmark
bank account, was issued in consideration of a $6,000,000 reduction to the $28,000,000 Remaining Indebtedness. The $600,000 note,
which matures on December 1, 2020 and has an interest rate of 10%, was issued to evidence the loan received by Benchmark on January
10, 2020 in the principal amount of $300,000 and an additional $300,000 loan from Benchmark received on January 27, 2020. As of
the date of this filing the Remaining Indebtedness is $22,228,356 which includes $22,000,000 of principal, $155,106 of paid
in kind interest and accrued interest of $73,250.
On
May 1, 2020, the parties entered into a second amendment to the Debt and Series H Agreement (the “Second Amendment”)
pursuant to which Messrs. Sacramone and McMahon agreed to release and forever discharge the Remaining Indebtedness on
the date on which the NYSE American Exchange files a Form 25 with the Securities and Exchange Commission (the “SEC”),
delisting the Company’s common stock (the “Termination Date”), provided that in no event shall the Termination
Date be any sooner than July 1, 2020 or any later than October 1, 2020.
Appointment
of New Board and Committee Members
On
April 1, 2019, James E. Shiah was appointed to the Board, effective April 15, 2019. Mr. Shiah joined then-directors Luisa Ingargiola,
Christopher Ferguson, Patrick O’Hare, Brad Mitchell, and Fred Sacramone.
On
May 29, 2019, Ms. Ingargiola and Messrs. Ferguson, O’Hare, and Mitchell resigned from the Board.
Jeanne
Kingsley and Stephen Berini were appointed to the Board, effective June 10, 2019. Ms. Kingsley and Mr. James Shiah were appointed
to the Audit Committee, which committee Mr. Shiah chaired. Mr. Shiah was also appointed to the Company’s Compensation Committee
and its Nominating and Corporate Governance Committee. On June 24, 2019, Richard Omanoff was appointed to the Board and to be
chair of the Nominating and Corporate Governance Committee. Mr. Omanoff was joined by Irving Rothman, who was appointed to the
Board, effective June 25, 2019 and was appointed to the Company’s Audit, Compensation, and Nominating and Corporate Governance
Committee.
On
September 16, 2019, Irving Rothman resigned from the Board, followed by James Shiah, Jeanne Kingsley, and Stephen Berini who all
resigned from the Board effective October 9, 2019.
On
October 18, 2019, concurrent with the resignation of Fred Sacramone and Richard Omanoff, the Board appointed Michael P. Beys,
Joseph F. Cunningham, Jr., Richard de Silva and Peter Ghishan as directors. The Board determined that each of Messrs. Beys, Cunningham
and Ghishan is “independent” under NYSE American listing standards and other governing laws and applicable regulations,
including Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Accordingly, Messrs. Cunningham and Ghishan
were appointed to serve on the Audit Committee. Mr. Cunningham was appointed to serve as the chair of the Audit Committee and
the Board determined that he was financially sophisticated as defined in the NYSE American governance standards. Messrs. Beys
and Cunningham were appointed to serve on the Compensation Committee and Messrs. Beys and Ghishan were appointed to serve on the
Nominating and Corporate Governance Committee.
Appointment
of Interim CEO
On
June 13, 2019, the Board of Directors appointed Fred Sacramone as the Company’s Co-Interim Chief Executive Officer. On June
27, 2019, the Board of Directors appointed Mr. Sacramone as the Company’s Interim Chief Executive Officer. Mr. Sacramone
resigned on October 21, 2019, concurrent with the appointment of Stephen M. Goodwin.
Appointment
of Interim CEO
On
October 21, 2019, the Board of Directors appointed Stephen M. Goodwin as the Company’s Interim Chief Executive Officer.
Mr. Goodwin replaced Fred Sacramone, who resigned concurrent with Mr. Goodwin’s appointment.
Appointment
of Interim CEO
On
December 11, 2019, the Board of Directors appointed Michael
P. Beys as the Company’s Interim Chief Executive Officer. Mr. Beys replaced Stephen M. Goodwin, who resigned concurrent
with Mr. Beys appointment. The Board of Directors appointed Mr. Goodwin as the Company’s Executive Vice President of Operations.
Upon Mr. Beys’ appointment as Interim Chief Executive Officer, the Board of Directors determined that he no longer qualified
as “independent” under NYSE American listing standards and applicable regulations, including Rule 10A-3 under the
Securities Exchange Act of 1934, as amended. Accordingly, the Board of Directors replaced Mr. Beys on the Compensation Committee
with Mr. Ghishan and replaced Mr. Beys on the Nominating and Corporate Governance Committee with Mr. Cunningham.
Suspension
of Trading of Common Stock
During
March 2019, the Company received a series of letters from the NYSE American concerning its failure to comply with various continued
listing requirements under the NYSE American Company Guide. On December 17, 2019, the Company received a letter from the staff
of NYSE Regulation (the “Staff”), on behalf of the Exchange, stating that it had determined to commence proceedings
to delist the Company’s common stock from the Exchange because, according to the Exchange, the Company or its management
had engaged in operations that, in the opinion of the Exchange, were contrary to the public interest. On December 17, 2019 at
market close, the Company’s common stock was suspended from trading on the NYSE American Market. The Company appealed
this determination to the NYSE Listing Qualifications Panel (the “Panel”) of the Exchange’s Committee for Review,
and a hearing regarding the Company’s continued listing was held on February 13, 2020. On March 9, 2020, the NYSE Office
of General Counsel notified the Company that the Panel had determined to affirm the Staff’s decision to delist the Company’s
shares from NYSE. The Company has since initiated steps to seek review of and/or appeal the Panel’s determination.
As
of the date of the filing of this report, the Company’s common stock was listed on the NYSE American Market under
the symbol FTNW but continued to be suspended from trading. In the event the common stock is delisted from the NYSE American Market,
the Company intends to pursue other opportunities to have the common stock traded on a stock market, which may include one of
the trading platforms operated by OTC Markets Group or another stock market.
Acquisition
of Vision Property Assets
On
December 20, 2019, the Company entered into a purchase agreement (the “Vision Purchase Agreement”) with (i) US Home
Rentals LLC, a Delaware limited liability company and direct wholly owned subsidiary of FTE (“Acquisition Sub”), (ii)
the holders (the “Equity Sellers”) of 100% of the equity interests in entities owned by the Equity Sellers that collectively
hold a real estate asset portfolio consisting of 3,184 rental homes located across the United States (the “Entities”),
(iii) Vision Property Management, LLC, a South Carolina limited liability company (“Vision” and together with the
Equity Sellers, the “Sellers”), and (iv) Alexander Szkaradek, in his capacity as the representative of the Sellers
(the “Sellers’ Representative”). On December 30, 2019, the parties amended the Vision Purchase Agreement (the
“Amendment”) in order to address certain changes to the Vision Purchase Agreement, including, among other things,
to allow the $9,750,000 balance of the cash portion of the purchase price to be paid in cash or short-term promissory notes,
and to reduce the Sellers’ indemnification deductible to $100,000. On December 30, 2019, the Company completed the
acquisition of the Entities pursuant to the Vision Purchase Agreement, as amended.
Pursuant
to the Vision Purchase Agreement, as amended, Acquisition Sub purchased (a) all of the equity interests in the Entities and (b)
all of Vision’s assets that are related to its business, including certain assumed contracts and assumed intellectual property,
excluding certain specified assets for aggregate consideration of $350,000,000, consisting of (i) $250,000 of cash;
(ii) $9,750,000 in promissory notes payable on or before March 31, 2020 as extended by the forbearance period; (iii) the
amount of outstanding indebtedness of the Entities, which is approximately $80,000,000; (iv) 4,222,474 shares of the Company’s
common stock, par value $0.001, which the parties valued at $32,000,000; and (v) shares of a newly designated Series
I Non-Convertible Preferred Stock having an aggregate stated value equal to $228,000,000, which is subject to adjustment.
Divestiture
of CrossLayer, Inc.
On
January 16, 2020, the Company entered into an asset purchase agreement (the “CrossLayer Purchase Agreement”) with
CBFA Corporation, pursuant to which CBFA acquired approximately $73,000 in accounts payable and approximately $100,000
in long-term supplier contracts.
Appointment
of Interim CFO
On
May 5, 2020, the Board of Directors formally appointed Ernest J. Scheidemann as the Company’s interim CFO and principal
financial officer. In connection with his formal appointment, Mr. Scheidemann and the Company intend on entering into an Interim
CFO Services Agreement. Mr. Scheidemann is a Certified Public Accountant. He holds a Certified Global Management Accountant and
Certified Financial Forensics designation issued from the American Institute of CPAs. Mr. Scheidemann received a BA in Accounting
from William Paterson University and MBA in Finance and International Business from Seton Hall University.
Employees
As
of December 31, 2018, the Company, together with its subsidiaries, employed 289 full-time employees and 1 part-time employees.
The number of employees varied according to the level of the Company’s work in progress. The Company maintained a nucleus
of technical and managerial personnel to supervise all projects and added employees as needed to complete specific projects.
As
of May 1, 2020, the Company, together with its subsidiaries, has 44 full-time employees and contractor staff and no part-time
employees. The number of employees and job-site contractors varies according to the level of the Company’s work in progress.
The Company maintains a nucleus of technical and managerial personnel to supervise all projects and adds employees and job-site
contractors as needed to complete specific projects.
Intellectual
Property
The
Company has trademarks, trade names and licenses that it believes are necessary for the operation of its business as it is currently
conducted. The Company does not consider its trademarks, trade names or licenses to be material to the operation of the business.
Available
Information
The
Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). Accordingly, the
Company files periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other
information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE., Washington, D.C. 20549 or by
calling the SEC at 1-800-SEC-0330.
The
Company makes available, free of charge on its website, the Company’s Annual Report on Form 10-K, Quarterly Reports on Forms
10-Q, Current Reports on Forms 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as practicable after we electronically file these documents with, or furnish them to, the SEC. These documents
may be accessed through the Company’s website at www.ftenetwork.com under “Investor Relations.” The information
posted or linked on the website is not part of this report. The Company also makes its Annual Report available in printed form
upon request at no charge. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information
statements and other information regarding FTE Networks and other issuers that file electronically with the SEC.
The
Company also makes available on its website, as noted above, or in printed form free of charge upon request, the Company’s
Code of Ethics and the charters for the Audit, Compensation, and Nominating and Corporate Governance committees of the Board of
Directors.
ITEM
1A. RISK FACTORS.
The
following discussion identifies the most significant risks or uncertainties that could (i) materially and adversely affect our
business, financial condition, results of operations, liquidity or prospects or (ii) cause our actual results to differ materially
from our anticipated results or other expectations. The following information should be read in conjunction with the other portions
of this report, including “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.
Please note that the following discussion is not intended to comprehensively list all risks or uncertainties faced by us. Our
operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known
to us, that we currently deem to be immaterial, that may arise in the future or that are not specific to us, such as general economic
conditions. If any of the events or circumstances described in the following risks occurs, our business, financial condition or
results of operations could be materially adversely affected.
Risks
Related to Our Financial Results, Financing Plans and Indebtedness
We
have limited capital resources and business operations, and we will need additional funds in order to continue as a viable enterprise.
There is no guarantee that we will be able to generate those funds from our limited business operations.
As
previously disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2019,
the Company accepted a foreclosure proposal by the Company’s lenders under that certain Amended and Restated Credit Agreement,
dated as of July 2, 2019, which proposal included the strict foreclosure by the lenders of all of the Company’s equity interests
in Benchmark, which was our primary operating subsidiary, and certain other assets of the Company.
At
December 31, 2018, the Company had $95,502,000 in negative working capital and $12,170,000 in cash and cash equivalents. Following
the foreclosure, the Company has very limited capital resources and limited business operations, which only include our subsidiaries
Jus-Com, Inc. and US Home Rentals LLC.
As
of the date of this filing, our cash and cash equivalents are insufficient to sustain operations in the near term. We have substantial
cash requirements, which consist of payment obligations under existing indebtedness, settlement agreements for indebtedness incurred
by former management, payroll and other corporate expenses. Currently, our primary sources of cash have been from short-term borrowings
and financings, which prospects have been hampered as a result of the uncertainty as to the severity and duration of the COVID-19
pandemic (which has led to disruption and volatility in the financial and real estate markets). And even though we have already
taken measures to mitigate the effect of COVID-19 on our business, including negotiating extensions or deferrals on outstanding
debt and placing certain employees in impacted markets on furlough, there is no assurance that these efforts will be enough to
support our daily operations in the near term without additional financing.
In
addition to the above-mentioned mitigating strategies, we are considering and actively pursuing various types of financing alternatives,
including financings that leverage unencumbered properties in our real estate portfolio and have applied for a loan under the
Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan Program (“EIDL”) pursuant to
the recently enacted CARES Act through the U.S. Small Business Association programs. However, there is no assurance that we will
be able to obtain PPP or EIDL proceeds as a result of program limitations, our credit profile or other factors or that we will
be able to secure additional financing on terms that are favorable to us, or at all. We believe our debt and equity financing
prospects will improve once we are current in our Exchange Act filings and we are able to resume trading on a national stock exchange
or on an over-the-counter market, although no assurances can be provided in that regard either. And while we believe in the viability
of our strategy to increase revenues and raise additional funds, we are unable to predict the impact of COVID-19 on our operations
and liquidity, and depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.
Our
failure to successfully implement our growth plan may adversely affect our financial performance.
We
are prone to all of the risks inherent in growing a business. You should consider the likelihood of our future success to be highly
speculative in light of the limited resources, problems, expenses, risks and complications frequently encountered by entities
at our current stage of development. As our growth plan is pursued, we may encounter difficulties expanding and improving our
operating and financial systems to maintain pace with the increased complexity of the expanded operations and management responsibilities.
To
address these risks, we must, among other things:
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implement
and successfully execute our business and marketing strategy;
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continue
to develop new products and upgrade our existing products;
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respond
to industry and competitive developments;
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attract,
retain, and motivate qualified personnel; and
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obtain
equity or debt financing on satisfactory terms and in timely fashion in amounts adequate to implement our business plan and
meet our obligations.
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We
may not be successful in addressing these risks and if we do not, our business prospects, financial condition and results of operations
would be materially adversely affected.
Debt
financing agreements we enter into may contain a number of restrictive covenants which will limit our ability to finance future
operations, acquisitions or capital needs or engage in other business activities that may be in our interest.
If
the Company has the need for additional liquidity through debt financing, any related credit arrangements and indentures may contain
a number of significant covenants that could impose operating and other restrictions on us and our subsidiaries. Such restrictions
could affect, and in many respects could limit or prohibit, among other things, our ability and the ability of some of our subsidiaries
to:
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incur
additional indebtedness;
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create
liens;
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pay
dividends and make other distributions in respect of our equity securities;
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redeem
or repurchase our equity securities;
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distribute
excess cash flow from foreign to domestic subsidiaries;
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make
investments or other restricted payments;
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sell
assets; and
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effect
mergers or consolidations.
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These
restrictions could limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise
restrict our activities or business plans, and could adversely affect our ability to finance our operations, acquisitions, investments
or strategic alliances or other capital needs or to engage in other business activities that would be in our interest.
If
we are required to repay our outstanding notes, we would need to raise additional funds. Failure to repay our notes could
subject us to legal action, including, but not limited to, judgements being entered against us.
We
entered into settlement agreements with certain holders of convertible notes, whose notes were deemed to have been issued without
the requisite corporate authorization following the findings of our independent investigation announced on June 13, 2019 (See
Item 1 Business, Recent Development “Internal
Investigation”). Of the noteholders with whom we were unable to reach settlement
terms, six filed purported confessions of judgment. We have since entered into settlement agreements with all holders of judgments
previously entered against us, which require us to make monthly payments in accordance with respective payout schedules. To
date, we have requested and received several forbearances/deferrals on certain of the monthly payments owed in connection with
these settlements and may have to request additional forbearances and/or deferrals in the future. As of the date of this filing,
there is an aggregate balance owing of approximately $4,471,000 to these noteholders, exclusive of the convertible redeemable
note in the amount of $1,800,000 to GS Capital Partners, LLC (“GS Capital”) issued on March 10, 2020. If we
were unable to repay these notes when required, the noteholders could commence legal action against us to recover the amounts
due, including possibly filing confessions of judgment. Any such action would have an adverse effect on our financial condition
and results of operations. Additionally, we issued $9,750,000
of promissory notes as part of the of the purchase consideration for the Vision Transaction, which notes were payable in full
on March 31, 2020 (the “Vision Notes”). As of the date of this filing, we have made partial payments against the Vision
Notes but we were unable to repay the Vision Notes by their stated maturity date. We are currently negotiating forbearance agreements
and are actively pursuing multiple potential sources of additional debt and equity capital to fund repayment of the Vision Notes.
There is, however, no assurance that we will be successful in obtaining forbearance agreements or securing suitable financing.
If we are not able to obtain forbearance agreements and/or do not succeed in raising additional capital in a timely fashion, the
Vision noteholders may seek to enforce their rights under the Vision Notes through the judicial process, which could result in
a material adverse effect on our results of operations and financial condition.
Risks
Related to Ownership of Our Common Stock
Our
insiders and affiliated parties beneficially own a significant portion of the aggregate voting power of our capital stock.
As
of the date of hereof, our executive officers, directors, their affiliated parties and holders of 10% or more of our
common stock beneficially own approximately 41.1% of our common stock. As a result, our officers, directors, their
affiliated parties and holders of 10% or more of our common stock will have a controlling interest and the ability to:
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elect
or defeat the election of our directors;
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amend
or prevent amendment of our certificate of incorporation, as amended, or bylaws;
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effect
or prevent a merger, sale of assets or other corporate transaction; and
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affect
the outcome of any other matter submitted to the stockholders for vote.
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Affiliated
party stock ownership may discourage a potential acquirer
from making a tender offer or otherwise attempt to obtain control of us, which in turn could reduce the price of our common stock
or prevent our stockholders from realizing any gains from our common stock. In addition, any sale of a significant amount of our
common stock held by our directors, executive officers, and affiliated parties, or the possibility of such sales,
could adversely affect the market price of our common stock.
The
market for our common stock is limited and you may not be able to sell your common stock.
Our
common stock is currently listed on the New York Stock Exchange. The NYSE American has suspended the trading of our common stock
and commenced delisting proceedings of our common stock. We are appealing the NYSE American delisting proceedings, but
there can be no assurance our common stock will resume trading or that our common stock will continue to be listed. If we are
unsuccessful in our appeal of the NYSE American hearing panel’s decision to delist our common stock, or if our appeal is
successful and thereafter we are unable to meet the NYSE American continued listing requirements, the NYSE American may delist
our common stock, which could have an adverse impact on us and the liquidity and market price of our stock. Even if we remain
listed and trading of our common stock resumes, we expect the market for purchases and sales of our common stock will be limited
and therefore the sale of a relatively small number of shares could cause the price to fall sharply. Accordingly, it may be difficult
to sell shares quickly without significantly depressing the value of our common stock. Unless we are successful in developing
continued investor interest in our common stock, sales of our common stock could result in major fluctuations in the price of
our common stock.
The
price of our common stock is likely to be volatile and subject to fluctuations.
If
our revenues do not grow or grow more slowly than we anticipate, or, if operating or capital expenditures exceed our expectations
and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock could decline.
Fluctuations in our stock price may be influenced by, among other things, general economic and market conditions, conditions or
trends in our industry, changes in the market valuations of other telecommunications companies, announcements by us or our competitors
of significant acquisitions, strategic partnerships or other strategic initiatives, and trading volumes. Many of these factors
are beyond our control but may cause the market price of our common stock to decline, regardless of our operating performance.
Moreover, if the stock market in general experiences a loss in investor confidence or otherwise fails, the market price of our
common stock could fall for reasons unrelated to our business, results of operations and financial condition. The market price
of our common stock also might decline in reaction to events that affect other companies in our industry even if these events
do not directly affect us.
Investors
may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.
In
the future, we may issue additional authorized but previously unissued equity securities, resulting in the dilution of the ownership
interests of our present stockholders. We may also issue additional shares of our common stock or other securities that are convertible
into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our
securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of
common stock may create downward pressure on the trading price of the common stock. There can be no assurance that we will not
be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital
raising efforts.
Stockholders
who hold unregistered shares of our common stock may be subject to resale restrictions pursuant to Rule 144, due to the fact that
we are deemed to be a former “shell company.”
Pursuant
to Rule 144 of the Securities Act (“Rule 144”), a “shell company” is defined as a company that has no
or nominal operations and either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents or (iii)
assets consisting of any amount of cash and cash equivalents and nominal other assets. While we do not believe that we are currently
a “shell company,” we were previously a “shell company” and are deemed to be a former “shell company”
pursuant to Rule 144, and as such, sales of our securities pursuant to Rule 144 may not be able to be made unless we continue
to be subject to Section 13 or 15(d) of the Exchange Act, and have filed all of our required periodic reports for at least the
previous one year period prior to any sale pursuant to Rule 144. As a result, it may be harder for us to fund our operations and
pay our consultants with our securities instead of cash. Our status as a former “shell company” could prevent us from
raising additional funds, engaging consultants, and using our securities to pay for any acquisitions.
If
we are unsuccessful in our appeal of the NYSE American decision to delist our common stock, or if our appeal is successful and
we are thereafter unable to meet the NYSE American continued listing standards, our common stock may be delisted from the NYSE
American equities market, which would likely cause the liquidity and market price of our common stock to decline.
Our
common stock is currently listed on the NYSE American. The NYSE American has suspended the trading of our common stock and is
engaged in delisting proceedings of our common stock. We are appealing the NYSE American hearing panel’s determination to
delist our common stock, but there can be no assurance that our appeal will be successful, that our common stock will resume trading
or that our common stock will continue to be listed. If we are unsuccessful in our appeal of the NYSE American hearing panel’s
decision to delist our common stock, or if our appeal is successful and thereafter if we cannot meet the NYSE American continued
listing requirements, the NYSE American may delist our common stock, which could have an adverse impact on us and the liquidity
and market price of our stock.
Our
business has been and may continue to be affected by worldwide macroeconomic factors, which include uncertainties in the credit
and capital markets. External factors that affect our stock price, such as liquidity requirements of our investors, as well as
our performance, could impact our market capitalization, revenue and operating results, which, in turn, could affect our of the
NYSE American hearing panel’s decision to delist our common stock or, if our appeal is successful, our ability to meet the
NYSE American’s listing standards. The NYSE American has the ability to suspend trading in our common stock or remove our
common stock from listing on the NYSE American if in the opinion of the exchange: (a) the financial condition and/or operating
results of the Company appear to be unsatisfactory; or (b) it appears that the extent of public distribution or the aggregate
market value of our common stock has become so reduced as to make further dealings on the exchange inadvisable; or (c) we have
sold or otherwise disposed of our principal operating assets, or have ceased to be an operating company; or (d) we have failed
to comply with our listing agreements with the exchange (which include that we receive additional listing approval from the exchange
prior to us issuing any shares of common stock, something we have inadvertently failed to comply with in the past); or (e) any
other event shall occur or any condition shall exist which makes further dealings on the exchange unwarranted.
Commencing
in March 2019, we received a series of letters from the NYSE American concerning the failure to comply with various continued
listing requirements. On December 17, 2019, we received a letter from the NYSE American stating that it had determined to commence
proceedings to delist the Company’s common stock from the Exchange, and our common stock was suspended from trading on NYSE
American at market close on the same date. Additionally, we were out of compliance with the NYSE American’s continued listing
requirements under the timely filing criteria outlined in Section 1007 of the NYSE American Listed Company Guide as a result of
our failure to timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Additionally, in the past
we have been out of compliance with the NYSE American’s continued listing standards when, on each of October 9, 2019 and
May 30, 2019, certain members of the Board of Directors resigned and we received notification from the NYSE American that (1)
the Company’s Audit Committee was no longer compliant with Section 803B(2)(c) and Section 803B(2)(a)(iii) of the Company
Guide as it was no longer composed of two independent members and did not have a financially sophisticated audit committee member
and (2) and the Company’s Compensation Committee was no longer compliant with the requirements set forth in Section 805(a)
of the Company Guide. On May 30, 2019, we also received notification that the Company’s Nominating Committee was no longer
compliant with the requirements set forth in Section 804 of the Company Guide. In each instance, in order to regain compliance
with these listing requirements, the Board appointed additional members and made appropriate committee appointments.
A
delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our
common stock and reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our
ability to raise equity financing. In addition, delisting from the NYSE American might negatively impact our reputation and, as
a consequence, our business. Additionally, if we were delisted from the NYSE American and we are not able to list our common stock
on another national exchange we will no longer be eligible to use Form S-3 registration statements and will instead be required
to file a Form S-1 registration statement for any primary or secondary offerings of our common stock, which would delay our ability
to raise funds in the future, may limit the type of offerings of common stock we could undertake, and would increase the expenses
of any offering, as, among other things, registration statements on Form S-1 are subject to SEC review and comments whereas take
downs pursuant to a previously filed Form S-3 are not. Because of the lateness of certain of our filings with the SEC, we are
not currently eligible to use Form S-3, but if we file our periodic reports with the SEC in a timely manner for 12 months and
otherwise satisfy the eligibility requirements, we will be eligible to use Form S-3 for public offerings of our common stock.
If
shares of our common stock cease to be listed on a national exchange they may become subject to the “penny stock”
rules of the SEC and the trading market in our securities may become limited, which will make transactions in our stock cumbersome
and may reduce the value of an investment in the stock.
If
shares of our common stock cease to be listed on the NYSE American or another national exchange, they may be subject to regulation
as a “penny stock” under Rule 15g-9 under the Exchange Act. That rule establishes the definition of a “penny
stock,” for the purposes relevant to us, as any equity security that is no longer trading on a national exchange and has
a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions.
For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s
account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
Generally,
brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make
it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
If
shares of our common stock cease to be listed on a national exchange our securities will not be eligible for federal preemption
rights and be subject to state “blue sky” laws which may affect our capabilities of raising capital.
Each
state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s
residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the
reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state,
there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable
broker must be registered in that state. We do not know whether securities will be registered or exempt from registration under
the laws of any state. If our securities cease to be listed on the national exchange, a determination regarding registration will
be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. Registering or qualifying
shares with states can be time consuming. Compliance and regulatory costs may vary from state to state and may adversely affect
future financings and our ability to raise capital.
If
our common stock is delisted from a national exchange some institutional investors may not be allowed to purchase our shares and
may be required to liquidate their current positions in our stock which could negatively affect the price and volatility of our
shares.
Institutional
investors may be restricted by their investment policies from investing in shares of companies that are not listed on a national
exchange and may be required to liquidate their positions if our securities are delisted from a national exchange. Liquidations,
should they occur, may increase volatility and cause wide fluctuations and further declines in the prices of our securities.
If
securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or
if they change their recommendations regarding our common stock adversely, our share price and trading volume could decline.
The
trading market for our shares of common stock will be influenced by the research and reports that industry or securities analysts
may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation
regarding our common stock adversely, or provide more favorable relative recommendations about our competitors, our share price
would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us,
we could lose visibility in the financial markets, which in turn could cause our share price or trading volume to decline.
We
have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment
may be limited to potential future appreciation on the value of our common stock.
We
currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate
paying cash dividends on our shares of common stock in the foreseeable future. Our payment of any future dividends will be at
the discretion of our board of directors after taking into account various factors, including without limitation, our financial
condition, operating results, cash needs, growth plans and the terms of any credit agreements or other debt instruments that we
may be a party to at the time. To the extent we do not pay dividends, our shares of common stock may be less valuable because
a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors
must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price
of our common stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not
purchase our common stock.
Risks
Related to Our Industry and Business
The
current pandemic of the novel coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases,
could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.
Since
being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020,
the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency
with respect to COVID-19.
The
COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and
financial markets. The outbreak of COVID-19 in many countries has significantly adversely impacted global economic activity and
has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been
rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including
the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.
Certain
states and cities, including where we own rental homes, have also reacted by instituting quarantines, restrictions on travel,
“shelter in place” rules, restrictions on types of business that may continue to operate. As a result, the COVID-19
pandemic is negatively impacting almost every industry directly or indirectly. We expect that a significant number of our tenants
will suffer economic dislocation, such as through job furloughs or job loss, which will adversely impact their ability to pay
rent to the Company. Some of our tenants have already requested rent deferral or rent abatement during this pandemic. Many experts
predict that the outbreak will trigger, or even has already triggered, a period of global economic slowdown or a global recession,
which would further adversely impact the ability of our tenants to pay rent to the Company. The COVID-19 pandemic, or a future
pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results
of operations and cash flows due to, among other factors:
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a
complete or partial closure of, or other operational issues at, our corporate headquarters, rental and associated property
management business from government or tenant action;
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the
reduced economic activity severely impacts our tenants’ livelihoods, financial condition and liquidity and may cause
them to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
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difficulty
accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial
markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations
or address existing and anticipated liabilities on a timely basis;
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a
general decline in business activity and demand for real estate transactions could adversely affect our ability or desire
to grow our portfolio of properties;
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a
deterioration in our ability to operate in affected areas or delays in the supply of products or services to us from vendors
that are needed for our efficient operations could adversely affect our operations; and
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the
potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could
result in a deterioration in our ability to ensure business continuity during a disruption; and
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the
inability of our business to secure financing or grants through the U.S. Small Business Association programs, including the
Economic Injury Disaster Loan program, the Paycheck Protection Program, or other similar offerings, each as a result of program
limitations, our credit profile, or other factors; and
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the
inability of state or federal jurisdictions to mandate coverage business interruption insurance policies which contain pandemic
exclusions or our inability to otherwise secure recoveries from such insurance coverages should they become available.
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The
extent to which the COVID-19 pandemic impacts our operations and those of our tenants will depend on future developments, which
are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the
actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and
containment measures, among others. The inability of our tenants rent to us, and early terminations by our tenants of their leases,
could reduce our cash flows, which could have a material adverse impact on our performance, financial condition, results of operations,
cash flows and performance. The rapid development and fluidity of this situation precludes any prediction as to the full adverse
impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our
performance, financial condition, results of operations, cash flows and performance.
Our
results of operations will likely be diminished as a result of the foreclosure on the equity of Benchmark Builders, Inc., down-sizing
of Jus-Com and divestiture of CrossLayer as well as our reliance on other operating subsidiaries. We may not be able to effectively
manage the transition of our business.
As
discussed above, our lenders previously foreclosed on the equity in Benchmark, previously our primary operating subsidiary, as
well as other assets. Additionally, the Company restructured and down-sized the Jus-Com businesses in 2019, completed the acquisition
of entities that collectively hold a real estate asset portfolio consisting of 3,184 rental homes located across the United States
(the “Vision Properties”), and completed the divestiture of CrossLayer in January 2020. Due to the Benchmark foreclosure,
the down-sizing of the Jus-Com businesses and the divestiture of CrossLayer, the Company is now reliant on the businesses of our
remaining operating subsidiaries, primarily the U.S. Home Rental properties.
Moreover,
whereas our Historical Businesses operated in the construction management and general contracting industry and telecommunications
industry, our primary current business operates in the single-family residential property industry. As we are transitioning our
business to focus primarily on single-family residential properties, this business model transition may lead to fluctuations in
revenue that will make it more difficult to accurately project our operating results or plan for future growth. If we are unable
to effectively manage these changes, our growth and ability to achieve long-term projections may be negatively impacted, and our
business and operating results will be adversely affected.
Our
integration of the operations of Vision Properties may be more difficult, costly or time-consuming than expected, and the anticipated
benefits and cost savings of these acquisitions by the Company may not be realized.
During
2019, pursuant to the Vision Purchase Agreement, as amended, we completed the acquisition of the Vision Properties. The acquisition
of the Vision Properties represented the Company’s pivot to owning and managing a portfolio of single-family residential
properties. The success of the acquisition, including anticipated benefits, will depend, in part, on the Company’s ability
to successfully combine and integrate the businesses within the Company’s projected timeframe in a manner that permits growth
opportunities. A number of factors could affect the Company’s ability to successfully combine its business with acquired
businesses, including the following:
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the
potential for unexpected costs, delays and challenges that may arise in integrating the Vision Properties into the Company’s
business;
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unexpected
obstacles to the Company’s ability to realize the expected cost savings and synergies from the acquisition;
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the
Company’s ability to retain key employees and maintain relationships;
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diversion
of management’s attention and resources during integration efforts;
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challenges
related to operating a new business and in new states; and
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discovery
following the acquisition of previously unknown liabilities associated with the Vision Properties.
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If
the Company encounters significant difficulties in the integration process, the anticipated benefits of the acquisition may not
be realized fully, or at all, or may take longer to realize than expected. Failure to achieve the anticipated benefits of the
acquisition in the timeframe projected by the Company could result in increased costs and decreased revenues. This could have
a dilutive effect on the Company’s earnings per share. If the Company is unable to successfully integrate the business it
acquired, the Company’s business, financial condition and results of operations may be materially adversely affected.
Liabilities
and obligations assumed in connection with our acquisition of Vision Properties may result in a material adverse effect to our
business and financial condition.
Uncertainty
of Common Stock Value. Our common stock, par value $0.001 (the “Common Stock”)
was suspended from trading on the NYSE American exchange effective December 17, 2019 and continues to be suspended from trading
as of the date of the filing of the Form 10-K. As a result, there is currently no public market for our Common Stock and investors
in our Common Stock have limited liquidity. The aggregate value of the Common Stock Consideration issuable pursuant to the Amended
Purchase Agreement was determined through negotiations between the Company and the Sellers based on a number of factors, including
the estimated book value of the Company after giving effect to the Transaction. Due to its limited liquidity and lack of
a current active trading market, the fair value of our Common Stock is uncertain and may not be equal to the agreed-upon valuation
of the Common Stock Consideration. Although the Company is appealing its suspension from trading on the NYSE American exchange,
there can be no assurance that its appeal will be successful.
Risk
of Default under Entities’ Indebtedness. The entities that we acquired in the Vision
Properties transaction, which own all of the properties that were subject to the acquisition, are subject to substantial indebtedness
(the “Entities’ Indebtedness”), as described in “Item 1. Business – Recent Developments.”
The Entities’ Indebtedness is subject to certain conditions and covenants, including the requirement that the Entities obtain
the consent of the lender before taking certain actions. Any failure to comply with the conditions and covenants in the financing
agreements governing the Entities’ Indebtedness that is not consented to or waived by the lender or otherwise cured could
lead to a termination of such debt facilities, acceleration of all amounts due under such debt facilities, or other actions by
the lender. The consent of the lender may have been required with respect to the Transaction, and although the Sellers have engaged
in negotiations with the lender seeking to obtain such consent prior to the Closing, such consent has not been obtained as of
the date of filing of this Form 10-K. While the Company intends to continue to seek to obtain the consent from the lender regarding
the Transaction, we cannot guarantee that such consent will be received.
Existing
Default under Purchase Price Promissory Notes. The $9,750,000 of promissory notes issued as part of the purchase consideration
in the Vision Properties acquisition were payable in full on March 31, 2020, and while partial payments have been made against
the notes, we were unable to pay the notes in full by the maturity date. We are currently negotiating forbearance agreements
and are actively pursuing multiple potential sources of additional debt and equity capital to fund repayment of the amounts
due pursuant to the Notes and our ongoing operating expenses. We may not be successful in obtaining forbearance agreements
or securing suitable financing in the time period required. If we are not able to obtain forbearance agreements and/or
do not succeed in raising additional capital in a timely fashion, our resources will not be sufficient to fund the repayment
of the notes. The noteholders may seek to enforce their rights under the promissory notes through the judicial process, which
could result in a material adverse effect on our results of operations and financial condition.
We
could be harmed by security breaches or other significant disruptions or failures of networks, information technology infrastructure
or related systems owned or installed by us.
We
are materially reliant upon our networks, information technology infrastructure and related technology systems (including our
billing and provisioning systems) to manage our operations and affairs. We face the risk, as does any company, of a security breach
or significant disruption of our information technology infrastructure and related systems. Moreover, in connection with processing
and storing sensitive and confidential data on our networks, we face a risk that a security breach or disruption could result
in unauthorized access to our customers’ or their customers’ proprietary information.
We
strive to maintain the security and integrity of information and systems under our control and maintain contingency plans in the
event of security breaches or other system disruptions. Nonetheless, we cannot assure you that our security efforts and measures
will prevent unauthorized access to our systems, loss or destruction of data (including confidential customer information), account
takeovers, unavailability of service, computer viruses, malware, ransomware, distributed denial-of-service attacks, or other forms
of cyber-attacks or similar events. These threats may derive from human error, hardware or software vulnerabilities, aging equipment
or accidental technological failure. These threats may also stem from fraud, malice or sabotage on the part of employees, third
parties or foreign nations, including attempts by outside parties to fraudulently induce our employees or customers to disclose
or grant access to our data or our customers’ data, potentially including information subject to stringent domestic and
foreign data protection laws governing personally identifiable information, protected health information or other similar types
of sensitive data. These threats may also arise from failure or breaches of systems owned, operated or controlled by other unaffiliated
operators to the extent we rely on such other systems to deliver services to our customers. Each of these risks could further
intensify to the extent we maintain information in digital form stored on servers connected to the Internet.
Additional
risks to our network, infrastructure and related systems include, among others:
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capacity
or system configuration limitations, including those resulting from changes in usage patterns, the introduction of new technologies
or products, or incompatibilities between newer and older systems;
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theft
or failure of our equipment;
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software
or hardware obsolescence, defects or malfunctions;
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power
losses or power surges;
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physical
damage, whether caused by fire, flood, adverse weather conditions, terrorism, sabotage, vandalism or otherwise;
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deficiencies
in our processes or controls;
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our
inability to hire and retain personnel with the requisite skills to adequately design, install, maintain or improve our products;
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programming,
processing and other human error; and
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inadequate
building maintenance by third-party landlords or other service failures of our third-party vendors.
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Due
to these factors, from time to time in the ordinary course of our business we experience disruptions in our service and could
experience more significant disruptions in the future.
Disruptions,
security breaches and other significant failures of the above-described networks and systems could:
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disrupt
the proper functioning of these networks and systems;
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result
in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive,
classified or otherwise valuable information of ours;
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require
us to notify customers, regulatory agencies or the public of data breaches;
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subject
us to claims for damages, fines, penalties, termination or other remedies under our customer contracts or service standards
set by regulators, which in certain cases could exceed our insurance coverage;
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result
in a loss of business, damage our reputation among our customers and the public generally; or
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require
significant management attention or financial resources to remedy the resulting damages
or to change our systems, including expenses to repair systems, add new personnel or
develop additional protective systems.
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Any
or all of the foregoing developments could have a negative impact on our business, results of operations, financial condition
and cash flows.
Our
results of operations could be adversely affected by economic conditions and the effects of these conditions on our customers’
businesses.
Adverse
changes in economic conditions have in the past resulted and may in the future result in lower spending among our customers and
contribute to decreased sales. Further, our business may be adversely affected by factors such as downturns in economic activity
in specific geographic areas or in the telecommunications industry; social, political or labor conditions; trade restrictions
such as tariffs or changes imposed on international trade agreements; or adverse changes in the availability and cost of capital,
interest rates, tax rates, or regulations. These factors are beyond our control, but may result in decreases in spending among
customers and softening demand for our products and services. Declines in demand for our products and services will adversely
affect our sales. Further, challenging economic conditions also may impair the ability of our customers to pay for products and
services they have purchased. As a result, our cash flow may be negatively impacted and our allowance for doubtful accounts and
write-offs of accounts receivable may increase.
The
Company may experience interruptions to its business operations due to events beyond its control, and insurance may not cover
the full extent of damages.
A
catastrophic event beyond our control, such as a natural disaster, health pandemic, cyber-attack, adverse weather event or act
of terrorism, that results in the destruction or disruption of any of our critical business systems or operations could harm its
ability to conduct normal business operations and its operating results.
While
we maintain business continuity plans that are intended to allow us to continue operations or mitigate the effects of events that
could disrupt our business, we cannot provide assurances that our plans would fully protect us from all such events. In addition,
insurance maintained by us to protect against property damage, loss of business and other related consequences resulting from
catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be
sufficient to cover all of our damages or damages to others in the event of a catastrophe. In addition, insurance related to these
types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.
Due
to our size, we depend on key personnel and other skilled employees.
Our
employees are key to the growth and success of our business and our continued success depends to a large extent on our ability
to recruit, train, and retain skilled employees, particularly executive management and technical employees. If we are unable to
attract and retain key personnel, our operating results could be adversely affected.
Additionally,
the Company’s ability to retain skilled workforce and its success in attracting and hiring new skilled employees will be
a critical factor in determining whether the Company will be successful in the future. The Company faces competition for qualified
individuals and may be unable to attract and retain suitably qualified individuals. The Company’s failure to do so could
have an adverse effect on its ability to implement the business plan.
Future
litigation may impair our reputation or lead us to incur significant costs, and the costs of such litigation may exceed our insurance
coverage.
We
are currently party to several lawsuits and may become party to various lawsuits and claims arising in the normal course
of business, which may include lawsuits or claims relating to contracts, third party contract manufacturers, intellectual property,
product recalls, product liability, false or deceptive advertising, employment matters, environmental matters or other aspects
of our business. Negative publicity resulting from allegations made in lawsuits or claims asserted against us, whether or not
valid, may adversely affect our reputation. In addition, we may be required to pay damage awards or settlements or become subject
to injunctions or other equitable remedies, which could have a material adverse effect on our financial condition, results of
operations and cash flows. The outcome of litigation is often difficult to predict, and the outcome of pending or future litigation
may have a material adverse effect on our business, financial condition, results of operations and cash flows.
We
maintain general and excess liability, cyber security, workers’ compensation and medical insurance, all in amounts consistent
with industry practice and as part of our overall risk management strategy. Further, our policies are held with financially stable
coverage providers, often in a layered or quota share arrangement which reduces the likelihood of an interruption or impact to
operations. Although we have various insurance programs in place, the potential liabilities associated with potential litigation
matters, or those that could arise in the future, could be excluded from coverage or, if covered, could exceed the coverage provided
by such programs. In addition, insurance carriers may seek to rescind or deny coverage with respect to pending or future claims
or lawsuits. If we do not have sufficient coverage under our policies, or if coverage is denied, we may be required to make material
payments to settle litigation or satisfy any judgment. Any of these consequences could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
We
are operating in an emerging industry, and the long-term viability of our investment strategy on an institutional scale is unproven.
Large-scale
institutional investment in single-family residential (“SFR”) homes for rent is a relatively recent phenomenon that
has emerged out of the mortgage and housing crisis that began in late 2007. Prior to that time, SFR homes were generally not viewed
as viable assets for investment on a large scale by institutional investors. Consequently, the long-term viability of the SFR
property investment strategy on an institutional scale has not yet been proven. As a participant in this emerging industry, we
are subject to the risk that SFR properties may not prove to be a viable long-term investment strategy on an institutional scale
for a permanent capital vehicle. If it turns out that this investment strategy is not a viable one, we would be materially and
adversely affected, and we may not be able to sustain the growth of our assets and results from operations that we seek.
Our
failure to effectively perform property management functions or to effectively manage our portfolio and operations could materially
and adversely affect us.
We
have direct responsibility for the management of the properties in our SFR portfolio, including, without limitation, renovations,
maintenance and certain matters related to leasing, such as marketing and selection of tenants. If our internal property manager
is unable to effectively perform property management services at the level and/or the cost that we expect or if we fail to allocate
sufficient resources to meet our property management needs, it would adversely affect our performance. In addition, we will be
responsible for ensuring the compliance of our internal property manager with governmental laws, regulations and covenants that
are applicable to our homes, our tenants and our prospective tenants, including, without limitation, permitting, licensing and
zoning requirements and tenant relief laws, such as laws regulating evictions, rent control laws and other regulations that limit
our ability to increase rental rates.
Our
ability to perform the property management services will be affected by various factors, including, among other things, our ability
to maintain sufficient personnel and retain key personnel and the number of our SFR properties that we manage. No assurance can
be made that we will continue to be successful in attracting and retaining skilled personnel or in integrating any new personnel
into our organization.
Our
future success will depend, in part, upon our ability to successfully monitor our operations, costs, regulatory compliance and
service quality and maintain other necessary internal controls. Our inability to effectively perform the property management services
on the properties managed by us, or to effectively manage our portfolio and operations could materially adversely affect our business,
financial results and share price.
We
may incur significant costs in renovating our properties or turning vacant properties, and we may underestimate the costs or amount
of time necessary to complete restorations or unit turns.
While
a substantial portion of the SFR properties we have acquired to date meet our rental specifications at the time of acquisition,
properties frequently require additional renovations prior to renting. Beyond customary repairs, we may undertake improvements
designed to optimize the overall property appeal and increase the value of the property. Though we endeavor to conduct property
inspections and due diligence prior to acquiring new SFR portfolios, we expect that nearly all of our rental properties will require
some level of renovation immediately upon their acquisition or in the future following expiration of a lease or otherwise. We
may acquire properties that we plan to extensively renovate and restore. In addition, in order to reposition properties in the
rental market, we will be required to make ongoing capital improvements and may need to perform significant renovations and repairs
from time to time. Consequently, we are exposed to the risks inherent in property renovation, including potential cost overruns,
increases in labor and materials costs, delays by contractors in completing work, delays in the timing of receiving necessary
work permits and certificates of occupancy and poor workmanship. If our assumptions regarding the cost or timing of renovations
across our properties prove to be materially inaccurate, it may be more costly or take significantly more time than anticipated
to develop and grow our SFR portfolio, which could materially and adversely affect us.
In
addition, we anticipate a minimum level of effort will be required to prepare a newly vacant property to be made ready for occupancy
by a new tenant, and we are exposed to risks of cost overruns, increases in costs of materials or labor, delays in the completion
of work and other factors. If we are unable to perform unit turns efficiently or in a timely manner, we would experience decreased
revenue, increased expenses or both.
The
availability of portfolios of single-family residential properties for purchase on favorable terms may decline as market conditions
change, our industry matures and/or additional purchasers for such portfolios emerge, and the prices for such portfolios may increase,
any of which could materially and adversely affect us.
In
recent years, there has been an increase in supply of SFR property portfolios available for sale. Because we operate in an emerging
industry, market conditions may be volatile, and the prices at which portfolios of SFR properties can be acquired may increase
from time to time, or permanently, due to new market participants seeking such portfolios, a decrease in the supply of desirable
portfolios or other adverse changes in the geographic areas that we may target from time to time. For these reasons, the supply
of SFR properties that we may acquire may decline over time, which could materially and adversely affect us and our growth prospects.
Portfolios
of properties that we have acquired or may acquire may include properties that do not fit our investment criteria, and divestiture
of such properties may be costly or time consuming or both, which may adversely affect our operating results.
We
have acquired, and expect to continue to acquire, portfolios of SFR properties, many of which are, or will be, subject to existing
leases. We may be subject to a variety of risks, including risks relating to the condition of the properties, the credit quality
and employment stability of the tenants and compliance with applicable laws, among others. In addition, financial and other information
provided to us regarding such portfolios during our due diligence may be inaccurate, and we may not be able to obtain relief under
contractual remedies, if any. If we conclude that certain properties acquired as part of a portfolio do not fit our investment
criteria, we may decide to sell such properties and may be required to renovate the properties prior to sale, to hold the properties
for an extended marketing period and/or sell the property at an unfavorable price, any of which could materially and adversely
affect us.
Competition
in identifying and acquiring residential rental assets could adversely affect our ability to implement our business strategy,
which could materially and adversely affect us.
We
face competition from various sources for investment opportunities, including REITs, hedge funds, private equity funds, partnerships,
developers and others. Some third-party competitors have substantially greater financial resources and access to capital than
we do and may be able to accept more risk than we can. Competition from these companies may reduce the number of attractive investment
opportunities available to us or increase the bargaining power of asset owners seeking to sell, which would increase the prices
of assets. If such events occur, our ability to implement our business strategy could be adversely affected, which could materially
and adversely affect us. Given the existing competition, complexity of the market and requisite time needed to make such investments,
no assurance can be given that we will be successful in acquiring investments that generate attractive risk-adjusted returns.
Furthermore, there is no assurance that such investments, once acquired, will perform as expected.
We
may be materially and adversely affected by risks affecting the single-family rental properties in which our investments may be
concentrated at any given time as well as from unfavorable changes in the related geographic regions.
Our
assets are not subject to any geographic diversification requirements or concentration limitations, and, as a result, circumstances
or events that impact a geographic region in which we have a significant concentration of properties, including a downturn in
regional economic conditions or natural disasters, could materially and adversely affect us. Entities that sell residential rental
portfolios may group the portfolios by location or other metrics that could result in a concentration of our portfolio by geography,
SFR property characteristics and/or tenant demographics. Such concentration could increase the risk of loss to us if the particular
concentration in our portfolio is subject to greater risks or undergoing adverse developments. In addition, adverse conditions
in the areas where our properties or tenants are located (including business layoffs or downsizing, industry slowdowns, changing
demographics, oversupply, reduced demand and other factors) may have an adverse effect on the value of our investments. A material
decline in the demand for single-family housing or rentals in the areas where we own assets may materially and adversely affect
us. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments.
Short-term
leases of residential property expose us more quickly to the effects of declining market rents.
The
majority of our leases to tenants of SFR properties will be for a term of one year. As these leases permit the residents to leave
at the end of the lease term without penalty, we anticipate our rental revenues will be affected by declines in market rents more
quickly than if our leases were for longer terms. Short-term leases may result in high turnover, resulting in additional cost
to renovate and maintain the property and lower occupancy levels. Because we have a limited operating history, our tenant turnover
rate and related cost estimates may be less accurate than if we had more operating data upon which to base these estimates.
We
may be unable to secure funds for property restoration or other capital improvements, which could limit our ability to attract,
retain or replace tenants.
When
we acquire or otherwise take title to single-family properties or when tenants fail to renew their leases or otherwise vacate
their space, we may be required to expend funds for property restoration and leasing commissions in order to lease the property.
If we have not established reserves or set aside sufficient funds for such expenditures, we may have to obtain financing from
other sources, as to which no assurance can be given. We may also have future financing needs for other capital improvements to
restore our properties. If we need to secure financing for capital improvements in the future but are unable to secure such financing
on favorable terms or at all, we may be unable or unwilling to make capital improvements or may choose to defer such improvements.
If this happens, our properties may suffer from a greater risk of obsolescence or decreased marketability, a decline in value
or decreased cash flow as a result of fewer potential tenants being attracted to the property or existing tenants not renewing
their leases. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements
to our properties, and our properties’ ability to generate revenue may be significantly impaired.
Our
revenue and expenses are not directly correlated, and, because a large percentage of our costs and expenses are fixed and some
variable expenses may not decrease over time, we may not be able to adapt our cost structure to offset any declines in our revenue.
Many
of the expenses associated with our business, such as acquisition costs, restoration and maintenance costs, HOA fees, personal
and real property taxes, insurance, compensation and other general expenses are fixed and would not necessarily decrease proportionally
with any decrease in revenue. Our assets also will likely require a significant amount of ongoing capital expenditure. Our expenses,
including capital expenditures, will be affected by, among other things, any inflationary increases, and cost increases may exceed
the rate of inflation in any given period. Certain expenses, such as HOA fees, taxes, insurance and maintenance costs are recurring
in nature and may not decrease on a per-unit basis as our portfolio grows through additional property acquisitions. By contrast,
our revenue is affected by many factors beyond our control, such as the availability and price of alternative rental housing and
economic conditions in our markets. As a result, we may not be able to fully, or even partially, offset any increase in our expenses
with a corresponding increase in our revenues. In addition, state and local regulations may require us to maintain our properties,
even if the cost of maintenance is greater than the potential benefit.
Competition
could limit our ability to lease single-family rental properties or increase or maintain rents.
Our
SFR properties compete with other housing alternatives to attract residents, including rental apartments, condominiums and other
single- family homes available for rent as well as new and existing condominiums and single-family homes for sale. Our competitors’
properties may be of better quality, in a more desirable location or have leasing terms more favorable than we can provide. In
addition, our ability to compete and generate favorable returns depends upon, among other factors, trends of the national and
local economies, the financial condition and liquidity of current and prospective renters, availability and cost of capital, taxes
and governmental regulations. Given significant competition, we cannot assure you that we will be successful in acquiring or managing
SFR properties that generate favorable returns.
If
rents in our markets do not increase sufficiently to keep pace with potential rising costs of operations, our operating results
and cash available for distribution will decline.
The
success of our business model will substantially depend on conditions in the SFR property market in our geographic markets. Our
asset acquisitions are premised on assumptions about, among other things, occupancy and rent levels. If those assumptions prove
to be inaccurate, our operating results and cash available for distribution will be lower than expected, potentially materially.
Rental rates and occupancy levels have benefited in recent periods from macroeconomic trends affecting the U.S. economy and residential
real estate and mortgage markets in particular, including a tightening of credit and increases in interest rates that has made
it more difficult to finance a home purchase, combined with efforts by consumers generally to reduce their exposure to credit.
A decrease in rental rates would have a material adverse effect on the performance of our SFR portfolio or could cause a default
of our obligations under one or more financing agreements, and our business, results of operations and financial condition would
therefore be materially harmed.
If
the current trend favoring renting rather than homeownership reverses, the single-family rental market could decline.
The
SFR market is currently significantly larger than in historical periods. We do not expect the favorable trends in the SFR market
to continue indefinitely. Eventually, continued strengthening of the U.S. economy and job growth, together with the large supply
of foreclosed SFR properties, the current availability of low residential mortgage rates and government sponsored programs promoting
home ownership, may contribute to a stabilization or reversal of the current trend that favors renting rather than homeownership.
In addition, we expect that as investors increasingly seek to capitalize on opportunities to purchase undervalued housing properties
and convert them to productive uses, the supply of SFR properties will decrease and the competition for tenants will intensify.
A softening of the rental property market in our markets would adversely affect our operating results and cash available for distribution,
potentially materially.
Suboptimal
tenant underwriting and defaults by our tenants may materially and adversely affect us.
Our
success depends, in large part, upon our ability to attract and retain qualified tenants for our properties. This depends, in
turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We may make mistakes in
our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease
or HOA regulations could materially and adversely affect us. For example, tenants may default on payment of rent; make unreasonable
and repeated demands for service or improvements; make unsupported or unjustified complaints to regulatory or political authorities;
make use of our properties for illegal purposes; damage or make unauthorized structural changes to our properties that may not
be fully covered by security deposits; refuse to leave the property when the lease is terminated; engage in domestic violence
or similar disturbances; disturb nearby residents with noise, trash, odors or eyesores; fail to comply with HOA regulations; sub-let
to less desirable individuals in violation of our leases or permit unauthorized persons to live with them. The process of evicting
a defaulting tenant from a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction
may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive
repairs, reduce the rental revenue generated by the property or impair its value. In addition, we will incur turnover costs associated
with re-leasing the properties, such as marketing expenses and brokerage commissions, and will not collect revenue while the property
is vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be no assurance that
we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial objectives for the
properties in which they live, but may subject us to liability and may damage our reputation with our other tenants and in the
communities where we do business.
A
significant uninsured property or liability loss could have a material adverse effect on us.
We
carry commercial general liability insurance and property insurance with respect to our SFR properties on terms we considered
commercially reasonable. However, many of the policies covering casualty losses are subject to substantial deductibles and exclusions,
and we will be self-insured up to the amount of the deductibles and exclusions. For example, we may not always be fully insured
against losses arising from floods, windstorms, fires, earthquakes, acts of war or terrorism or civil unrest because they are
either uninsurable or the cost of insurance makes it economically impractical. If an uninsured property loss or a property loss
in excess of insured limits were to occur, we could lose our capital invested in a property or group of properties as well as
the anticipated future revenues from affected SFR properties or groups of properties. Further, inflation, changes in building
codes and ordinances, environmental considerations and other factors might also prevent us from using insurance proceeds to replace
or renovate a property after it has been damaged or destroyed.
In
the event that we incur a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the
amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these
properties and could potentially remain obligated under any recourse debt associated with the property. Further, if an uninsured
liability to a third party were to occur, we would incur the cost of defense and settlement with or court ordered damages to that
third party. A significant uninsured property or liability loss could adversely affect our financial condition, operating results,
cash flows and ability to make distributions on our common stock.
We
rely on information supplied by prospective tenants in managing our business.
We
rely on information supplied to us by prospective tenants in their rental applications as part of our due diligence process to
make leasing decisions, and we cannot be certain that this information is accurate. In particular, we rely on information submitted
by prospective tenants regarding household income, tenure at current job, number of children and size of household. Moreover,
these applications are submitted to us at the time we evaluate a prospective tenant, and we do not require tenants to provide
us with updated information during the terms of their leases, notwithstanding the fact that this information can, and frequently
does, change over time. Even though this information is not updated, we will use it to evaluate the overall average credit characteristics
of our portfolio over time. If tenant-supplied information is inaccurate or our tenants’ creditworthiness declines over
time, we may make poor leasing decisions, and our portfolio may contain more credit risk than we believe.
Our
single-family residential properties are not liquid assets, which could limit our ability to vary our portfolio or to realize
the value at which such assets are carried if we are required to dispose of them.
Our
SFR properties are not liquid assets, which could limit our ability to vary our portfolio or to realize the value at which such
assets are carried if we are required to dispose of them. Our inability to sell individual or portfolios of SFR properties on
acceptable terms and/or in accordance with our anticipated timing could materially and adversely affect our financial condition.
Changes
in global economic and capital market conditions, including periods of generally deteriorating occupancy and real estate industry
fundamentals, may materially and adversely affect us.
There
are risks to the ownership of real estate and real estate related assets, including decreases in residential property values,
changes in global, national, regional or local economic, demographic and real estate market conditions as well as other factors
particular to the locations of our investments. A prolonged recession and a slow recovery could materially and adversely affect
us as a result of, among other items, the following:
|
●
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joblessness
or unemployment rates that adversely affect the local economy;
|
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|
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●
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an
oversupply of or a reduced demand for SFR properties for rent;
|
|
|
|
|
●
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a
decline in employment or lack of employment growth;
|
|
|
|
|
●
|
the
inability or unwillingness of residents to pay rent increases or fulfill their lease obligations;
|
|
|
|
|
●
|
a
decline in rental rate, which may be accentuated since we expect to generally have rent terms of one year;
|
|
|
|
|
●
|
rent
control or rent stabilization laws or other laws regulating housing that could prevent us from raising rents to offset increases
in operating costs;
|
|
|
|
|
●
|
changes
in interest rates and availability and terms of debt financing; and
|
|
|
|
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●
|
economic
conditions that could cause an increase in our operating expenses such as increases in property taxes, utilities and routine
maintenance.
|
These
conditions could also adversely impact the financial condition and liquidity of the renters that will occupy our real estate properties
and, as a result, their ability to pay rent to us.
Residential
properties that are subject to eviction are subject to risks of theft, vandalism or other damage that could impair their value.
When
a residential property is subject to an eviction, it is possible that the tenant may cease to maintain the property adequately
or that the property may be abandoned by the tenant and become susceptible to theft or vandalism. Lack of maintenance, theft and
vandalism can substantially impair the value of the property. To the extent we initiate eviction proceedings, some of our properties
could be impaired.
Contingent
or unknown liabilities associated with respect to our prior acquisitions of portfolios of properties could adversely affect our
financial condition, cash flows and operating results.
Assets
and entities that we have acquired in connection with prior SFR portfolio or operating entity acquisitions may be subject to unknown
or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities
might include liabilities for or with respect to liens attached to properties; unpaid real estate tax, utilities or HOA charges
for which a subsequent owner remains liable; clean-up or remediation of environmental conditions or code violations; claims of
customers, vendors or other persons dealing with the acquired entities; or tax liabilities. Purchases of single-family properties
in portfolio purchases typically involve limited representations or warranties with respect to the properties and may allow us
limited or no recourse against the sellers. Such properties also often have unpaid tax, utility and HOA liabilities for which
we may be obligated but fail to anticipate. As a result, the total amount of costs and expenses that we may incur with respect
to liabilities associated with prior SFR property or entity acquisitions may exceed our expectations, which may adversely affect
our operating results and financial condition. Additionally, such prior SFR property acquisitions may be subject to covenants,
conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing. We may not
have discovered such restrictions during the acquisition process, and such restrictions may adversely affect our ability to operate
such properties as we intend.
The
costs and amount of time necessary to secure possession and control of certain properties may exceed our assumptions, which would
delay our receipt of revenue from, and return on, the property.
A
majority of the SFR properties we have acquired have had an existing tenant at the time of acquisition. However, certain SFR properties
require us to secure possession. In certain circumstances, we may have to evict occupants who are in unlawful possession before
we can secure possession and control of the property. The holdover occupants may be the former owners or tenants of a property,
or they may be squatters or others who are illegally in possession. Securing control and possession from these occupants can be
both costly and time consuming. If these costs and delays exceed our expectations, our financial performance may suffer because
of the increased expenses incurred or the unexpected delays in turning the properties into revenue-producing rental properties.
Eminent
domain could lead to material losses on our investments.
It
is possible that governmental authorities may exercise eminent domain to acquire land on which our properties are built in order
to build roads or other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the
affected properties, which we believe may be interpreted to be substantially less than the actual value of the property. Several
cities are also exploring proposals to use eminent domain to acquire residential loans to assist borrowers to remain in their
homes, potentially reducing the supply of single-family properties for sale in our markets. Any of these events can cause a material
loss to us.
We
likely will incur costs due to litigation, including but not limited to, class actions, tenant rights claims and consumer demands.
There
are numerous tenants’ rights and consumer rights organizations throughout the country. As we grow in scale, we may attract
attention from some of these organizations and become a target of legal demands or litigation. Many such consumer organizations
have become more active and better funded in connection with mortgage foreclosure-related issues and displaced home ownership.
Some of these organizations may shift their litigation, lobbying, fundraising and grass roots organizing activities to focus on
landlord-tenant issues as more entities engage in the SFR property market. Additional actions that may be targeted at us include
eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by
prior owners alleging wrongful foreclosure by their lender or servicer) and issues with local housing officials arising from the
condition or maintenance of an SFR property. While we intend to conduct our rental business lawfully and in compliance with applicable
landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or
multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate
what form such legal actions might take or what remedies they may seek. Any of such claims may result in a finding of liability
that may materially and adversely affect us.
Additionally,
these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation
against us or may lobby state and local legislatures to pass new laws and regulations to constrain our business operations. If
they are successful in any such endeavors, they could directly limit and constrain our business operations and impose on us significant
litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions. Any of the above-described
occurrences may materially and adversely affect us.
ITEM
1B. Unresolved Staff Comments.
None.
ITEM
2. Properties.
On
April 4, 2019, we moved our corporate headquarters to 237 W. 35th St., Suite 601, New York, NY 10001. Our current lease
expires on October 31, 2021 and has 4,340 square feet and is included in the 11,000 square foot New York, NY office lease noted
in the table below. Our subsidiaries leased five additional office/warehouse facilities throughout the United States, which is
summarized below.
Location:
|
|
Usage
|
|
|
Square
Footage
|
|
|
Lease
Start
Date
|
|
|
Lease
End
Date
|
|
|
Monthly
Obligation
|
|
Naples,
FL
|
|
|
Office
|
|
|
|
5,377
|
|
|
|
11/01/2015
|
|
|
|
11/30/2022
|
|
|
$
|
20,445
|
|
Naples,
FL
|
|
|
Warehouse
|
|
|
|
4,500
|
|
|
|
11/1/2018
|
|
|
|
10/31/2021
|
|
|
$
|
5,438
|
|
Indianapolis,
IN
|
|
|
Office
|
|
|
|
2,500
|
|
|
|
12/1/2018
|
|
|
|
2/28/2022
|
|
|
$
|
1,550
|
|
Boise,
ID
|
|
|
Office
|
|
|
|
1,500
|
|
|
|
7/1/2017
|
|
|
|
7/31/2020
|
|
|
$
|
2,668
|
|
New
York, NY
|
|
|
Office
|
|
|
|
11,000
|
|
|
|
10/1/2010
|
|
|
|
10/31/2021
|
|
|
$
|
38,665
|
|
Woodinville
WA
|
|
|
Office
|
|
|
|
1,480
|
|
|
|
1/1/2017
|
|
|
|
1/1/2020
|
|
|
$
|
6,250
|
|
Long
Island City, NY
|
|
|
Warehouse
|
|
|
|
1,000
|
|
|
|
2/1/2018
|
|
|
|
2/1/2019
|
|
|
$
|
2,850
|
|
As
of April 5, 2020, we have exited all office/warehouse facilities above with the exception of Indianapolis, IN and the above referenced
corporate headquarters in New York, NY. We believe our properties are suitable and adequate for our business needs.
ITEM
3. Legal Proceedings.
From
time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business, and we may
in the future be subject to additional legal proceedings and disputes.
The following is a summary of material legal proceedings as of December 31, 2018:
On
May 10, 2018, Vista Capital Investments, LLC (“Vista”) filed suit against the Company for breach of contract and breach
of the implied covenant of good faith and fair dealing arising out of a securities purchase agreement (the “SPA”)
and a convertible note in the principal amount of $275,000 in the Superior Court of California for the county of San Diego. Vista
alleges damages in excess of $9,000,000 stemming from the Company’s purported dilutive issuances of Company common stock.
Vista was the holder of a convertible note for which there was no prior Board authorization (See Item 1, Recent Developments “Internal
Investigation”). The Company and Vista are continuing to discuss terms of settlement.
Additionally,
see Part 1, Item 1 – Business, Recent Developments “Internal Investigation” for information regarding
the findings and status of our internal investigation.
The
following is a summary of material legal proceedings as of the date of this filing:
On
April 11, 2019, the Company received a demand for arbitration, which was filed with the American Arbitration Association (AAA),
Case No. 01-19-0001-0962,on behalf of Michael Palleschi, the former CEO, alleging a breach of his employment agreement and seeking
$11,300,000 in damages. The Company has asserted counterclaims and affirmative defenses to Mr. Palleschi’s claims and intends
to vigorously defend this matter. Discovery is pending.
On
June 26, 2019, Efraim Barenbaum filed a shareholder derivative suit in the United States District Court for the Southern District
of New York against certain of the Company’s former directors and executive officers, alleging claims for breaches of fiduciary
duties, unjust enrichment, waste, and violations of Section 14 of the Securities Exchange Act of 1934. The Company was named as
a nominal defendant only. The Company filed a motion to dismiss the complaint on September 23, 2019. In response to the motion,
the plaintiff filed an amended complaint on November 1, 2019, but the causes of action remained equally deficient. Having found
the claims in the amended complaint also to be baseless, the Company filed a motion to dismiss that pleading as well on January
27, 2020.
On
August 17, 2019, Auctus Fund, LLC (“Auctus”) filed suit against the Company alleging, among other things, breach of
contract and violations of state and federal securities laws, arising out of a securities purchase agreement and a convertible
note in the principal amount of $525,000. Auctus is the holder of a convertible note for which there was no prior Board authorization
(See Item 1, Recent Developments “Internal Investigation”). The Company denies any alleged wrongdoing and intends
to vigorously defend against these claims. The matter is pending in the United States District Court for the District of Massachusetts.
On
November 5, 2019, St. George Investments LLC (“St. George”) filed suit against the Company in the Third Judicial District
Court for Salt Lake County in the state of Utah to compel arbitration, alleging, among other things, breach of contract arising
out of a securities purchase agreement and convertible note in the principal amount of $2,315,000. St. George is the holder of
a convertible note for which there was no prior Board authorization (See Item 1, Recent Developments “Internal Investigation”).
The Company is vigorously defending its interests in this matter.
On
November 26, 2019, David Lethem (the Company’s former CFO) filed a complaint against the Company in the 20th
Judicial Circuit Court for Lee county in the State of Florida for breach of contract arising out of a transition,
separation and general release agreement. The Company filed a counterclaim to rescind the agreement based on fraudulent inducement.
Discovery is proceeding in this case and the Company intends to vigorously defend its interests in this matter.
On
January 3, 2020, CBRE, Inc. (“CBRE”) filed suit against the Company’s subsidiary, CrossLayer, Inc., for breach
of contract arising out of a program participation agreement in the Superior Court of the state of Delaware. CBRE is alleging
damages of $1,333,333. The Company considers CBRE’s claims to be without merit and has engaged counsel who is vigorously
disputing this matter.
ITEM
4. Mine Safety Disclosures.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
NOTE
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description
of Business
FTE
Networks, Inc. (collectively with its subsidiaries, “FTE” or the “Company”) is a leading provider of innovative
technology-oriented solutions for smart platforms, network infrastructure and buildings throughout the United States across a
range of industries. The Company’s primary activities include the engineering, building, installation, maintenance and support
solutions for state-of-the-art networks and commercial properties and the following services, data center infrastructure, fiber
optics, wireless integration, network engineering, internet service provider, general contracting management and general contracting.
On
April 20, 2017, FTE acquired Benchmark Builders, Inc. (“Benchmark” or “Predecessor”). Benchmark is a full-service
general contracting management and general contracting firm in the New York metropolitan area. See Note 5. The Company and Benchmark
operate in similar segments. Audited predecessor financial statements have been provided in these consolidated financial statements
since the operations of the company before the acquisition of Benchmark were insignificant relative to the operations acquired.
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements include all accounts of the Company and its wholly owned subsidiaries. The accompanying
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States of America (“US GAAP”). All significant intercompany balances and transactions have been eliminated
in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U. S. GAAP requires management 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. Key estimates
include: the recognition of revenue and project profit or loss (which the Company defines as project revenue less project costs
of revenue, including project-related depreciation), in particular, on construction contracts accounted for under the percentage-of-completion
method, for which the recorded amounts require estimates of costs to complete projects, ultimate project profit and the amount
of probable contract price adjustments as inputs; allowances for doubtful accounts; estimated fair values of acquired assets;
asset lives used in computing depreciation and amortization; share-based compensation; other reserves and accruals; accounting
for income taxes. While management believes that such estimates are reasonable when considered in conjunction with the Company’s
consolidated financial position and results of operations taken as a whole, actual results could differ materially from those
estimates.
Segments
The
Company operates in two segments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 280 “Segment Reporting”, (“ASC No. 280”). Operating segments
as defined in ASC No. 280, are components of public entities that engage in business activities from which they may earn revenues
and incur expenses for which separate financial information is available and which is evaluated regularly by the Company’s
chief operating decision maker in deciding how to assess performance and allocate resources. The two primary segments are the
infrastructure segment and technology segment. The Company is reporting as one segment per ASC No. 280 as the revenue, profit
and loss, and assets of the technology segment are immaterial.
Reverse
stock split
On
November 6, 2017, the Company’s board of directors approved, without action by the shareholders of the Company, a
Certificate of Amendment to the Company’s Certificate of Incorporation to implement a 25-for-1 reverse stock split of the
Company’s Common Stock with an effective date of November 6, 2017. On the effective date of the reverse split each 25 shares
of issued Common Stock were converted automatically into one share of Common Stock. The number of authorized shares of the Company’s
Common Stock was reduced from 200,000,000 shares to 8,000,000 shares. All Common Stock shares and per-share amounts have been
retroactively adjusted to give effect to the reverse split.
Liquidity
and Managements’ Plans
In
accordance with Accounting Standards Update, (“ASU”), 2014-15, Presentation of Financial Statements—Going
Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or
events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after
the date that the financial statements are issued. This evaluation requires management to perform two steps. First, management
must evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue
as a going concern. Second, if management concludes that substantial doubt is raised, management is required to consider whether
it has plans in place to alleviate that doubt. As required by ASC 205-40, this evaluation shall initially not take into consideration
the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued.
Disclosures in the notes to the consolidated financial statements are required if management concludes that substantial doubt
exists or that its plans alleviate the substantial doubt that was raised.
The
Company’s ultimate success is dependent on its ability to obtain additional financing and generate sufficient cash flow
to meet its obligations on a timely basis. The Company’s business will require significant amounts of capital to sustain
operations and the Company will need to make the investments it needs to execute its longer-term business plan. Absent generation
of sufficient revenue from the execution of the Company’s long-term business plan, the Company will need to obtain debt
or equity financing, especially if the Company experiences downturns in its business that are more severe or longer than anticipated,
or if the Company experiences significant increases in expense levels resulting from being a publicly-traded company or operations.
Such additional debt or equity financing may not be available to the Company on favorable terms, if at all.
At
December 31, 2018, the Company had $12,170 in cash and a working capital deficit of $95,501. The Company has classified
all amounts outstanding to the Senior Lender totaling $34,322 as current liabilities as they mature during 2019. See
Note 14. Also, the Company has reported aggregated net losses of $138,675 for the two-year period ended December 31, 2018.
Management
has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40. Management
believes the Company’s present cash flows from operations will not enable it to meet its obligations for the
twelve months from the date these financial statements are available to be issued. Management currently has available certain
bridge financing from a significant shareholder to fund its operations, but is actively seeking new sources
of financing at more favorable terms and conditions, that will enable the Company to meet its obligations for the twelve-month
period from the date the financial statements are available to be issued. The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern and do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets, or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
NOTE
2. RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
Overview
This
Annual Report on Form 10-K for the year ended December 31, 2018 contains our audited consolidated financial statements for the
years ended December 31, 2018 and 2017, of which the audited consolidated financial statements from December 31, 2018 have not
previously been filed, as well as restatements of the following previously filed consolidated financial statements: (i) our audited
consolidated financial statements for the year ended December 31, 2017; and (ii) our unaudited consolidated financial statements
for the quarters ended March 31, 2018 and 2017, June 30, 2018 and 2017 and September 30, 2018 and 2017, in Note 25.
We
have not filed and do not intend to file amendments to any of our previously filed Annual Reports on Form 10-K or Quarterly Reports
on Form 10-Q for the periods affected by the restatements of our consolidated financial statements. We have not timely filed our
Annual Report on Form 10-K for the year ended December 31, 2018 and the Fiscal Year 2019 Form 10-Qs as a result of the internal
investigation of the Audit Committee of the Company’s Board of Directors (the “Audit Committee”) and the subsequent
restatement of certain of our prior period financial statements as more fully described below.
Background
On
April 2, 2019, the Company announced that the Audit Committee following a communication with the Company’s former
independent registered public accounting firm concluded that previously issued audited financial statements as of and for
the year ended December 31, 2017, and interim reviews of the financial statements for the periods ended March 31, June 30, and
September 30, 2018 and 2017, should no longer be relied upon. The conclusion to prevent future reliance on the aforementioned
financial statements resulted from the determination that such financial statements failed to properly account for certain convertible
notes and other potentially dilutive securities. Specifically, the Company identified a potential issue related to the accounting
related to certain convertible notes and other potentially dilutive securities the Company issued in 2017, 2018, and 2019.
Further,
the independent investigation announced on March 22, 2019 is also focused on issues related to the accounting for and disclosure
of certain expenses incurred by management, as well as the appropriateness and disclosure of certain related party transactions.
To date, the investigation team has found what it believes are significant personal expenses incurred by former officers that
were charged to the Company, including: multiple trips on chartered jets to vacation destinations in the U.S., South America and
Europe, as well as to a family home; the use of Company vehicles largely if not solely for personal purposes; incidental personal
charges on Company credit cards; and Company payments for credit card bills in the names of former officers. The investigation
also found at least one large share issuance to a related party that was not reported timely. Further, the investigation team
also found instances in which cash transfers were made to former officers with little or no support. However, this work is ongoing,
and further findings may change our preliminary assessments described above. The investigation team is working with the Company
to ensure that its findings are appropriately reflected in the Company’s restatement and in its next Form 10-K.
On
June 11, 2019, the Audit Committee, following a communication by its former independent auditors, Marcum, concluded that
the Company’s previously issued audited financial statements as of and for the years ended December 31, 2017 and 2016 and
completed interim reviews for the periods ended March 31, June 30 and September 30, 2018, 2017 and 2016 should no longer be relied
upon. The conclusion on June 11, 2019 to add the aforementioned 2016 financial statements to those statements which should no
longer be relied upon resulted from determinations made as part of the Company’s ongoing restatement effort that certain
items, including revenues originally recognized in 2016, should no longer be recognized.
In
addition to the Audit Committee investigation matter described above, the Company also corrected for (i) out of period adjustments
and errors related to the Company’s acquisition and revenue and costs and (ii) out of period adjustments and errors identified
during management’s review of significant accounts and transactions.
The
significant account and transaction review adjustments referred to in (ii) above were made in the restatement and relate to revenue
recognition (Note 4), accounts receivable (Note 6), merchant account agreements (Note 11), convertible notes payable (Note 12),
notes payable (Note 13) debt derivative liabilities (Note 16), warrant liabilities (Note 16), stockholders’ equity (Note
20), stock awards (Note 21) and various other matters.
Effect
of Restatement on Previously Filed December 31, 2017 Form 10-K
The
restatement adjustments related to the year ended December 31, 2016 are reflected in the beginning accumulated deficit balance
in the consolidated financial statements for 2017. The cumulative impact of these adjustments increased accumulated deficit by
approximately $16,906 at the beginning of 2017. The 2016 adjustments principally related to $6,840 of unbilled revenue that was
unsubstantiated and subsequently reversed during 2017 and 2018, $8,767 of compensation expense for executive
management and certain employees, $614 for interest, fines and penalties for prior period unpaid payroll taxes, $476
of selling, general and administration expenses for professional fees and $165 for directors fees. The restatement
adjustments were tax effected and any tax adjustments reflected in the consolidated financial statements for 2017 relate entirely
to the tax effect on the restatement adjustments.
The
tables below present the effect of the financial statement adjustments related to the restatement discussed above of the Company’s
previously reported financial statements as of and for the year ended December 31, 2017.
The
effect of the restatement on the previously filed consolidated balance sheet as of December 31, 2017 is as follows:
|
|
As
of December 31, 2017
|
|
(dollars
in thousands,
except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
15,642
|
|
|
$
|
—
|
|
|
$
|
15,642
|
|
Accounts
receivable, net
|
|
|
62,199
|
|
|
|
(500
|
)
|
|
|
61,699
|
|
Costs
and estimated earnings in excess of billings on uncompleted contract
|
|
|
11,226
|
|
|
|
(5,940
|
)
|
|
|
5,286
|
|
Other
current assets
|
|
|
7,256
|
|
|
|
(973
|
)
|
|
|
6,283
|
|
Total
current assets
|
|
|
96,323
|
|
|
|
(7,413
|
)
|
|
|
88,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
7,955
|
|
|
|
(873
|
)
|
|
|
7,082
|
|
Intangible
assets, net
|
|
|
27,696
|
|
|
|
—
|
|
|
|
27,696
|
|
Goodwill
|
|
|
35,672
|
|
|
|
9,335
|
|
|
|
45,007
|
|
Total
assets
|
|
$
|
167,646
|
|
|
$
|
1,049
|
|
|
$
|
168,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
35,134
|
|
|
$
|
8,760
|
|
|
$
|
43,894
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
30,304
|
|
|
|
7,227
|
|
|
|
37,531
|
|
Accrued
expenses and other current liabilities
|
|
|
9,973
|
|
|
|
215
|
|
|
|
10,188
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
2,391
|
|
|
|
2,391
|
|
Merchant
credit agreements
|
|
|
—
|
|
|
|
4,239
|
|
|
|
4,239
|
|
Notes
payable, current portion, net of original issue discount and deferred financing costs
|
|
|
10,488
|
|
|
|
(6,819
|
)
|
|
|
3,669
|
|
Notes
payable, related parties, current portion
|
|
|
8,526
|
|
|
|
50
|
|
|
|
8,576
|
|
Debt
derivative liabilities
|
|
|
—
|
|
|
|
48,195
|
|
|
|
48,195
|
|
Warrant
derivative liabilities
|
|
|
—
|
|
|
|
16,492
|
|
|
|
16,492
|
|
Total
current liabilities
|
|
|
94,425
|
|
|
|
80,750
|
|
|
|
175,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
1,955
|
|
|
|
(125
|
)
|
|
|
1,830
|
|
Notes
payable, related parties, non-current, net of debt discount
|
|
|
38,530
|
|
|
|
—
|
|
|
|
38,530
|
|
Senior
note payable, non-current portion, net of original issue discount and deferred financing costs
|
|
|
24,143
|
|
|
|
(738
|
)
|
|
|
23,405
|
|
Deferred
tax liability
|
|
|
560
|
|
|
|
—
|
|
|
|
560
|
|
Total
liabilities
|
|
|
159,613
|
|
|
|
79,887
|
|
|
|
239,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 18)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at December
31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at December
31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
G convertible preferred stock, $0.001 stated value, 1,780 shares designated and 1,780 shares issued and outstanding at December
31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 5,620,281 shares issued and outstanding at December
31, 2017
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Additional
paid-in capital
|
|
|
49,381
|
|
|
|
7,598
|
|
|
|
56,979
|
|
Shares
to be issued
|
|
|
625
|
|
|
|
(375
|
)
|
|
|
250
|
|
Subscriptions
receivable
|
|
|
(3,675
|
)
|
|
|
3,675
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(38,304
|
)
|
|
|
(89,736
|
)
|
|
|
(128,040
|
)
|
Total
stockholders’ equity (deficit)
|
|
|
8,033
|
|
|
|
(78,838
|
)
|
|
|
(70,805
|
)
|
Total
liabilities and stockholders’ equity (deficit)
|
|
$
|
167,646
|
|
|
$
|
1,049
|
|
|
$
|
168,695
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the year ended December 31, 2017 is
as follows:
|
|
Year
ended December 31, 2017
|
|
(dollars
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Revenues,
net of discounts
|
|
$
|
243,409
|
|
|
$
|
(27,900
|
)
|
|
$
|
215,509
|
|
Cost
of revenues
|
|
|
206,394
|
|
|
|
(21,242
|
)
|
|
|
185,152
|
|
Gross
profit
|
|
|
37,015
|
|
|
|
(6,658
|
)
|
|
|
30,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
19,413
|
|
|
|
4,560
|
|
|
|
23,973
|
|
Selling,
general and administrative expenses
|
|
|
14,934
|
|
|
|
(1,416
|
)
|
|
|
13,518
|
|
Amortization
of intangible assets
|
|
|
2,597
|
|
|
|
—
|
|
|
|
2,597
|
|
Loss
on sale of asset
|
|
|
31
|
|
|
|
—
|
|
|
|
31
|
|
Transaction
expenses
|
|
|
1,666
|
|
|
|
(965
|
)
|
|
|
701
|
|
Total
operating expenses
|
|
|
38,641
|
|
|
|
2,179
|
|
|
|
40,820
|
|
Operating
loss
|
|
|
(1,626
|
)
|
|
|
(8,837
|
)
|
|
|
(10,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(5,819
|
)
|
|
|
(490
|
)
|
|
|
(6,309
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(6,349
|
)
|
|
|
(8,730
|
)
|
|
|
(15,079
|
)
|
Loss
on conversion derivative liability
|
|
|
—
|
|
|
|
(35,012
|
)
|
|
|
(35,012
|
)
|
Loss
on warrant derivative liability
|
|
|
—
|
|
|
|
(357
|
)
|
|
|
(357
|
)
|
Other
expense, net
|
|
|
(123
|
)
|
|
|
(584
|
)
|
|
|
(707
|
)
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(24,262
|
)
|
|
|
(24,262
|
)
|
Extinguishment
gain
|
|
|
—
|
|
|
|
666
|
|
|
|
666
|
|
Financing
costs
|
|
|
(5,552
|
)
|
|
|
5,552
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(17,843
|
)
|
|
|
(63,217
|
)
|
|
|
(81,060
|
)
|
Loss
before provision for income taxes
|
|
|
(19,469
|
)
|
|
|
(72,054
|
)
|
|
|
(91,523
|
)
|
Provision
for income taxes
|
|
|
560
|
|
|
|
—
|
|
|
|
560
|
|
Net
loss
|
|
|
(20,029
|
)
|
|
|
(72,054
|
)
|
|
|
(92,083
|
)
|
Preferred
stock dividends
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
(80
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(20,109
|
)
|
|
$
|
(72,054
|
)
|
|
$
|
(92,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(4.23
|
)
|
|
$
|
(15.15
|
)
|
|
$
|
(19.38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,748,563
|
|
|
|
4,756,049
|
|
|
|
4,756,049
|
|
The
effect of the restatement on the previously filed consolidated statement of cash flows for the year ended December 31, 2017 is
as follows:
|
|
Year
ended December 31, 2017
|
|
(dollars
in thousands)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(20,029
|
)
|
|
$
|
(72,054
|
)
|
|
$
|
(92,083
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
870
|
|
|
|
(110
|
)
|
|
|
760
|
|
Amortization
of intangible assets
|
|
|
8,976
|
|
|
|
—
|
|
|
|
8,976
|
|
Amortization
of debt discount and deferred financing costs
|
|
|
8,010
|
|
|
|
4,904
|
|
|
|
12,914
|
|
Provision
for bad debts
|
|
|
551
|
|
|
|
—
|
|
|
|
551
|
|
Loss
(gain) on sale of asset
|
|
|
31
|
|
|
|
(62
|
)
|
|
|
(31
|
)
|
Late
fee on senior debt
|
|
|
541
|
|
|
|
—
|
|
|
|
541
|
|
Payment
in kind interest-debt on notes payable
|
|
|
934
|
|
|
|
661
|
|
|
|
1,595
|
|
Payment
in kind interest on related party notes payable
|
|
|
1,310
|
|
|
|
—
|
|
|
|
1,310
|
|
Share-based
compensation
|
|
|
1,681
|
|
|
|
2,662
|
|
|
|
4,343
|
|
Common
shares issued for convertible notes modifications, amendments, redemption agreements and settlements
|
|
|
—
|
|
|
|
103
|
|
|
|
103
|
|
Convertible
note issued for consulting expenses
|
|
|
—
|
|
|
|
400
|
|
|
|
400
|
|
Loss
on issuance of convertible debt
|
|
|
—
|
|
|
|
24,262
|
|
|
|
24,262
|
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
|
(666
|
)
|
|
|
(666
|
)
|
Loss
on warrant derivative liabilities
|
|
|
—
|
|
|
|
357
|
|
|
|
357
|
|
Loss
on convertible derivative liabilities
|
|
|
—
|
|
|
|
35,012
|
|
|
|
35,012
|
|
Debt
financing expense
|
|
|
531
|
|
|
|
(531
|
)
|
|
|
—
|
|
Accrued
dividends, preferred stock
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
(80
|
)
|
Benefit
from deferred income taxes
|
|
|
(599
|
)
|
|
|
1,159
|
|
|
|
560
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(41,106
|
)
|
|
|
(5,302
|
)
|
|
|
(46,408
|
)
|
Cost
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
19,078
|
|
|
|
1,982
|
|
|
|
21,060
|
|
Other
current assets
|
|
|
5,888
|
|
|
|
(6,356
|
)
|
|
|
(468
|
)
|
Accounts
payable and accrued liabilities
|
|
|
17,463
|
|
|
|
13,598
|
|
|
|
31,061
|
|
Due
to related party
|
|
|
—
|
|
|
|
(109
|
)
|
|
|
(109
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
4,130
|
|
|
|
(170
|
)
|
|
|
3,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities :
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash paid for Benchmark Builders, Inc. acquisition
|
|
|
(14,834
|
)
|
|
|
—
|
|
|
|
(14,834
|
)
|
Purchase
of property and equipment
|
|
|
(5,208
|
)
|
|
|
1,472
|
|
|
|
(3,736
|
)
|
Net
cash (used in) provided by investing activities
|
|
|
(20,042
|
)
|
|
|
1,472
|
|
|
|
(18,570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities :
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of convertible notes
|
|
|
—
|
|
|
|
4,095
|
|
|
|
4,095
|
|
Payments
on convertible notes
|
|
|
—
|
|
|
|
(1,426
|
)
|
|
|
(1,426
|
)
|
Proceeds
from issuance of merchant credit agreements
|
|
|
—
|
|
|
|
5,718
|
|
|
|
5,718
|
|
Payments
on merchant credit agreements
|
|
|
—
|
|
|
|
(2,624
|
)
|
|
|
(2,624
|
)
|
Proceeds
from issuance of notes payable, net
|
|
|
12,158
|
|
|
|
(10,758
|
)
|
|
|
1,400
|
|
Payments
on notes payable
|
|
|
(5,342
|
)
|
|
|
4,007
|
|
|
|
(1,335
|
)
|
Proceeds
from issuance of senior note payable, net
|
|
|
13,210
|
|
|
|
(515
|
)
|
|
|
12,695
|
|
Proceeds
from issuance of Series C notes
|
|
|
7,500
|
|
|
|
—
|
|
|
|
7,500
|
|
Payments
on notes payable – related parties
|
|
|
(112
|
)
|
|
|
112
|
|
|
|
—
|
|
Proceeds
from sale of common stock
|
|
|
3,338
|
|
|
|
—
|
|
|
|
3,338
|
|
Payment
of deferred financing costs
|
|
|
(610
|
)
|
|
|
89
|
|
|
|
(521
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
30,142
|
|
|
|
(1,302
|
)
|
|
|
28,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
14,230
|
|
|
|
—
|
|
|
|
14,230
|
|
Cash,
beginning of period
|
|
|
1,412
|
|
|
|
—
|
|
|
|
1,412
|
|
Cash,
end of period
|
|
$
|
15,642
|
|
|
$
|
—
|
|
|
$
|
15,642
|
|
NOTE
3. SUMMARY OF SIGNIFICANT POLICIES
Revenue
and Cost of Goods Sold Recognition
On
January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, (“ASC 606”). Under
ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements
that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s)
with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate
the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer
and is the unit of account in ASC 606. At contract inception, once the contract is determined to be within the scope of ASC 606,
the Company assesses the goods or services promised within each contract and determines those that are performance obligations
and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction
price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company
does not collect sales, value add, and other taxes collected on behalf of third parties.
Revenues
derived from construction services at Benchmark are derived from short-term construction projects ranging from 6 to 12 months
in duration under fixed-price contracts. The Company has determined that these short-term construction projects provide a distinct
service and, therefore, qualify as one performance obligation as the promise to transfer the individual goods or services is not
separately identifiable from other promises in the contracts and, therefore, not distinct. Revenue from fixed-price contracts
provide for a fixed amount of revenue for the entire project, subject to certain additions for modified scope or specifications
to the original project. Revenue is recognized over time, because of the continuous transfer of control to the customer as all
the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed.
This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to
unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any
work in process.
Under
ASC 606, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which
occurs as we incur costs. Contract costs include labor, material, and other direct costs. Contract modifications are routine in
the performance of the contracts. Contracts are often modified to account for changes in the contract specifications or requirements.
In most instances, contract modifications are for goods or services that are not distinct, therefore, accounted for as part of
the existing contract. Cost to obtain contracts (pre-contract costs) are generally charged to expense as incurred and included
in operating expenses on the consolidated statements of operations.
Certain
construction contracts include retention provisions to provide assurance to the customers that the Company will perform in accordance
with the contract terms and, therefore, not considered a financing benefit. The balances billed but not paid by customers pursuant
to these provisions generally become due upon completion and acceptance of the project work or products by the customer. The Company
has determined that there are no significant financing components in its contracts during the year ended December 31, 2018.
Costs
to mobilize equipment and labor to a job site prior to substantive work beginning are capitalized as incurred and amortized over
the expected duration of the contract. On December 31, 2018 and January 1, 2018, the Company had no material capitalized mobilization
costs.
Revenue
from telecommunication services are derived from short-term projects performed under master and other service agreements as well
as from contracts for specific projects or jobs requiring the installation of an entire infrastructure system or specified units
within an entire infrastructure system. The Company has determined that these short-term projects provide a distinct service and,
therefore, qualify as one performance obligation. 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.
The
Company also derives service revenues by managing wireless networks for customers to offer to their tenants and bills monthly
in advance for the month’s services. The Company determined the wireless service contracts cover a single performance obligation
and transfer control of access to the wireless service continuously as the customer simultaneously receives and consumes the benefits.
Therefore, the revenue for the monthly wireless service is considered to be recognized over time.
Costs
and estimated earnings in excess of billings on uncompleted contracts and Billings in excess of costs and estimated earnings on
uncompleted contracts
In
accordance with normal practice in the construction industry, the Company 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 year ended December 31, 2018 and 2017, the Company has included retainage payable as part of accounts payable.
Retainage payable is anticipated to be paid within the next twelve months. The Company has also included any unbilled retainage
receivable as part of accounts receivable and such amounts are also expected to be billed and collected within the next twelve
months.
Cash
and Cash Equivalents
Cash
consisting of interest-bearing demand deposits is carried at cost, which approximates fair value. The Company considers cash in
banks and holdings of highly liquid investments with original maturities of three months or less when purchased to be cash or
cash equivalents. At various times throughout the year, and as of December 31, 2018, some accounts held at financial institutions
were in excess of the federally insured limit of $250. The Company reduces its exposure to credit risk by maintaining its cash
deposits with major financial institutions and monitoring their credit ratings. The Company has not experienced any losses on
these accounts and believes credit risk to be minimal.
Allowance
for Doubtful Accounts
The
Company maintains an allowance for doubtful accounts for estimated losses due to the inability of its customers to make the required
payments. Management analyzes the collectability of trade accounts and other receivables and the adequacy of the allowance for
doubtful accounts on a regular basis taking into consideration the aging of the account balances, historical bad debt experience,
customer concentration, customer credit-worthiness, customer financial condition and credit report and the current economic environment.
In addition, an allowance is established when it is probable that a specific receivable is not collectible and the loss can be
reasonably estimated. Amounts are written off against the allowance when they are considered to be uncollectible.
If
estimates of collectability of trade accounts and other receivables change or should customers experience unanticipated financial
difficulties, additional allowances may be required. Management monitors and evaluates the allowance for doubtful accounts quarterly
and is adjusted to maintain the allowance at a level considered adequate to provide for uncollectible amounts. The allowance for
doubtful accounts is included in general and administrative expenses in the Consolidated Statements of Operations.
Deferred
Financing Costs and Amortization of Deferred Financing Cost
Deferred
financing costs relate to the Company’s debt instruments, the short and long-term portions of which are reflected
as a deduction from the carrying amount of the related debt instruments, including the Company’s senior debt. Deferred financing
costs are amortized using the straight-line method over the term of the related debt instrument which approximates the effective
interest method.
Long-Lived
Assets
The
Company’s long-lived assets consist primarily of property and equipment and finite-lived intangible assets. Property and
equipment are stated at cost or if acquired in a business combination, at the acquisition date fair value. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets.
Property
and equipment under capital leases are depreciated over their estimated useful lives. Expenditures for repairs and maintenance
are charged to expense as incurred. The carrying amount of assets sold or retired and the related accumulated depreciation are
eliminated in the year of disposal, with resulting gains or losses on disposition of property and equipment included in other
income or expense. When the Company identifies assets to be sold, those assets are valued based on their estimated fair value
less costs to sell, classified as held-for-sale and depreciation is no longer recorded. Estimated losses on disposals are included
within operating expenses.
Finite-lived
intangible assets are amortized over their estimated useful lives on a straight-line basis, which are generally based on contractual
terms or legal rights. 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 long-lived assets are periodically reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value of these assets may not be recoverable.
Goodwill
and Indefinite-Lived Intangible Assets
The
Company has goodwill and certain indefinite-lived intangible assets that have been recorded in connection with the acquisition
of a business. Goodwill and indefinite-lived assets are not amortized, but instead are tested for impairment at least annually.
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 currently 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 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.
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.
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.
Stock-Based
Compensation
Compensation
expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated
in accordance with the provisions of ASC Topic 718, Stock Compensation. The Company recognizes these compensation costs
on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms
vary based on the individual grant terms. These costs are recorded in selling, general and administrative expenses.
The
Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton option
pricing model. This method considers among other factors, the expected term of the award and the expected volatility of the Company’s
stock price. Expected terms are calculated using the Simplifies Method, volatility is determined based on the Company’s
historical stock price and the discount rate is based upon treasure tares with instruments of similar expected terms.
Fair
Value of Financial Instruments
Under
ASC Topic 820, Fair Value Measurement (“ASC 820”), the Company uses inputs from the three levels of the fair
value hierarchy to measure its financial assets and liabilities. The three levels are as follows:
Level
1- Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability
to access at the measurement date.
Level
2- Inputs are other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical
or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs).
Level
3- Inputs are unobservable and reflect the Company’s assumptions that market participants would use in pricing the asset
or liability. The Company develops these inputs based on the best information available.
Derivatives
The
Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”)
and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet.
The
Company uses estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset
or transfer a liability in an orderly transaction between willing and able market participants. In general, The Company’s
policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets,
where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments,
yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for The Company’s liabilities),
relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit,
bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair
value. When possible, The Company seeks to validate the model’s output to market transactions. Depending on the availability
of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values
presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in
accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in
measuring financial instruments at fair value as discussed above.
Warrant
Liability
The
Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants
issued by the Company has been estimated using Monte Carlo simulation and or a Black Scholes model.
Embedded
Conversion Features
The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s)
should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded
in the Statement of Operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible
debt instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition.
When the Company record a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective
debt instrument (offset to additional paid-in capital) and amortized to interest expense over the life of the debt.
Sequencing
As
of October 13, 2016, the Company adopted a sequencing policy whereby all future instruments may be classified as a derivative
liability with the exception of instruments related to share-based compensation issued to employees or directors and convertible
preferred stock.
Equity
Preferred Stock
The
Company applies the classification and measurement principles enumerated in ASC 815 with respect to accounting for its issuance
of preferred stock. The Company evaluates convertible preferred stock at each reporting date for appropriate balance sheet classification.
Advertising
Advertising
costs, if any, are expensed as incurred. For the years ended December 31, 2018 and 2017, the Company spending on advertising was
not material.
Concentration
of Labor
Approximately
21% and 17% of the Company’s labor force is covered under union agreements in the United States at December 31, 2018 and
2017, respectively. These agreements are renegotiated when their terms expire between 2020 and 2021.
Net
Loss Per Common Share
Basic
net loss per share is computed by dividing net loss attributable to common stockholders (the numerator) by the weighted average
number of common shares outstanding for the period (the denominator). Diluted net loss per common share attributable to common
shareholders is computed by dividing net loss by the weighted average number of common shares outstanding during the period adjusted
for the dilutive effects of common stock equivalents. In periods when losses are reported, the weighted-average number of common
shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. For the years ended December
31, 2018 and 2017 no effect for common stock was considered in the calculation of diluted loss per share as their effect was anti-dilutive.
The
Company had the following common stock equivalents at December 31, 2018 and 2017.
|
|
2018
|
|
|
2017
|
|
Convertible
preferred stock, Series A
|
|
|
2,395,830
|
|
|
|
1,146,797
|
|
Convertible
preferred stock, Series A-1
|
|
|
767,040
|
|
|
|
727,703
|
|
Convertible
preferred stock, Series G
|
|
|
—
|
|
|
|
178,000
|
|
Convertible
notes
|
|
|
21,303,158
|
|
|
|
1,847,057
|
|
Common
stock warrants
|
|
|
287,484
|
|
|
|
330,856
|
|
Options
|
|
|
19,010
|
|
|
|
1,318
|
|
Total
potentially dilutive shares
|
|
|
24,772,522
|
|
|
|
4,231,731
|
|
The
above table excludes any common shares related to the convertible debt for the Series A and Series B since such debt is only convertible
at the then prevailing market price upon default.
Recent
Accounting Pronouncements
Accounting
Pronouncements Adopted
In
January 2017, the FASB issued ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment (“ASU 2017-04”), which removes Step 2 from the goodwill impairment test. Goodwill impairment
would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying
value of goodwill. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted
for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company does not anticipate
that this standard will have a material impact on its financial statements. We early adopted ASU 2017-4 for impairment tests to
be performed on testing dates after June 30, 2018, which did not impact our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01 Business Combinations (Topic 805): Clarifying the Definition of a Business, which
clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions
or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business
and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be
considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods
within that reporting period. The impact of this standard will be limited to future business acquisitions.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments. ASU 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are
not currently addressed in U.S. GAAP and will thereby reduce the current diversity in practice. ASU 2016-15 is effective for public
business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017,
with early application permitted. The Company adopted the new standard on January 1, 2018, without a material impact on its
consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting ASU 2016-09. The standard is intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective
for fiscal years and interim periods within those years, beginning after December 15, 2016, with different methodologies for each
aspect of the standard. The Company adopted the new standard on January 1, 2017, without a material impact on its consolidated
financial statements.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“the New Standard”).
The New Standard provides a single model for entities to use in accounting for revenue arising from contracts with customers and
will supersede most current revenue recognition guidance. The New Standard also requires expanded qualitative and quantitative
disclosures about the nature, timing and uncertainty of revenue and cash flows rising from contracts with customers. The Company
adopted the New Standard on January 1, 2018, using the modified retrospective method applied to those contracts which were not
completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while
prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic revenue recognition
methodology under ASC 605. See Note 4.
Accounting
Pronouncements Issued
The
Company is evaluating whether the effects of the following recent accounting pronouncements, or any other recently issued but
not yet effective accounting standards, will have a material effect on the Company’s consolidated financial position, results
of operations or cash flows.
In
July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. These amendments provide clarifications and corrections
to certain ASC subtopics including Compensation – Stock Compensation – Income Taxes (Topic 718-740), Business
Combinations – Income Taxes (Topic 805-740) and Fair Value Measurement – Overall (Topic 820-10). The majority
of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15, 2018. The Company is currently
evaluating and assessing the impact this guidance will have on its consolidated financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee
Share-Based Payment Accounting. The standard simplifies the accounting for share-based payments granted to nonemployees for
goods and services. Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements
for share-based payments granted to employees. The changes take effect for public companies for fiscal years starting after December
15, 2018, including interim periods within that fiscal year. The Company expects that the adoption of this ASU will not have a
material impact on the Company’s consolidated financial statements.
In
July 2017, the FASB issued ASU 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. ASU 2017-11 is intended to reduce the complexity associated
with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically,
the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument
(or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized
in current earnings. ASU 2017-11 is effective for fiscal years, and interim periods within fiscal years beginning after beginning
after December 15, 2018. The Company expects that the adoption of this ASU will not have a material impact on the Company’s
consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326). The new guidance requires
entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience,
current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable
to the measurement of credit losses on financial assets measured at amortized cost. This pronouncement will be effective for fiscal
years beginning after December 15, 2019. The Company is currently evaluating and assessing the impact this guidance will have
on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which will require, among other items, lessees to recognize
a right of use asset and a related lease liability for most leases on the balance sheet. Qualitative and quantitative disclosures
will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. The Company adopted
this new guidance on January 1, 2019, using the optional modified retrospective transition method. The Company expects the adoption
to result in gross up on its consolidated balance sheets from the recognition of assets and liabilities arising out of operating
leases. The Company will recognize assets for the right to use the underlying leased property during the lease term and will recognize
liabilities for the corresponding financial obligation to make lease payments to the lessor.
The
Company plans to elect the transition package of practical expedients permitted within the standard, which eliminates the requirements
to reassess prior conclusions about lease identification, lease classification, and initial direct costs. The Company’s
operating leases primarily comprise of office facilities, with the most significant leases relating to corporate headquarters
in Malvern, Pennsylvania and an office in San Francisco, California. The Company is in the process of finalizing changes to its
systems and processes in conjunction with its review of lease agreements and will disclose the actual impact of adopting ASU 2016-02
in its interim report on Form 10-Q for the quarter ended March 31, 2019.
NOTE
4. REVENUE RECOGNITION
On
January 1, 2018, the Company adopted ASC 606. Under ASC 606, revenue is recognized when a customer obtains control of promised
goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods
or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the
Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations
in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in
the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. A performance obligation is
a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. At contract
inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised
within each contract and determines those that are performance obligations and assesses whether each promised good or service
is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance
obligation when (or as) the performance obligation is satisfied. The Company does not collect sales, value add, and other taxes
collected on behalf of third parties.
Disaggregation
of Revenue
The
following table details the revenue from customers disaggregated by source of revenue.
|
|
December
31, 2018
|
|
Major
Sources of Revenue
|
|
|
|
|
Infrastructure
|
|
$
|
383,778
|
|
Technology
|
|
|
977
|
|
Total
|
|
$
|
384,755
|
|
Infrastructure
revenue
Revenues
in the Infrastructure segment are derived from construction services, which in Benchmark are derived from short-term construction
projects ranging from 6 to 12 months in duration under fixed-price contracts. The Company has determined that these short-term
construction projects provide a distinct service and, therefore, qualify as one performance obligation as the promise to transfer
the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct.
Revenue from fixed-price contracts provide for a fixed amount of revenue for the entire project, subject to certain additions
for modified scope or specifications to the original project. Revenue is recognized over time, because of the continuous transfer
of control to the customer as all the work is performed at the customer’s site and, therefore, the customer controls the
asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract
that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit
and take control of any work in process.
Under
ASC 606, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which
occurs as we incur costs. Contract costs include labor, material, and other direct costs. Contract modifications are routine in
the performance of the contracts. Contracts are often modified to account for changes in the contract specifications or requirements.
In most instances, contact modifications are for goods or services that are not distinct, therefore, accounted for as part of
the existing contract. Cost to obtain contracts (pre-contract costs) are generally charged to expense as incurred and included
in operating expenses on the consolidated statements of operations.
Certain
construction contracts include retention provisions to provide assurance to the customers that the Company will perform in accordance
with the contract terms and, therefore, not considered a financing benefit. The balances billed but not paid by customers pursuant
to these provisions generally become due upon completion and acceptance of the project work or products by the customer. The Company
has determined that there are no significant financing components in its contracts during the year ended December 31, 2018.
Costs
to mobilize equipment and labor to a job site prior to substantive work beginning are capitalized as incurred and amortized over
the expected duration of the contract. As of December 31, 2018, and January 1, 2018, the Company had no material capitalized mobilization
costs.
Revenue
from telecommunication services from FTE Network Services are derived from short-term projects performed under master and other
service agreements as well as from contracts for specific projects or jobs requiring the installation of an entire infrastructure
system or specified units within an entire infrastructure system. The Company has determined that these short-term projects provide
a distinct service and, therefore, qualify as one performance obligation. 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.
Technology
revenue
The
Company also derives service revenues by installing and managing wireless networks for customers to offer to their tenants and
bills monthly in advance for the month’s services. The Company determined the wireless service contracts cover a single
performance obligation and transfer control of access to the wireless service continuously as the customer simultaneously receives
and consumes the benefits. Therefore, the revenue for the monthly wireless service, is considered to be recognized over time.
Contract
Assets and Liabilities
The
timing of revenue recognition, billings and cash collections results in billed accounts receivable, retainage receivable and costs
and estimated earning in excess of billings on uncompleted contracts (contract assets) on the consolidated balance sheet. In the
infrastructure segment, amounts are billed as work in progress in accordance with agreed-upon contractual terms at periodic intervals.
Sometimes, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company generally
receives advances or deposits from its customers, before revenue is recognized, resulting in billings in excess of costs and
estimated earnings on uncompleted contracts (contract liabilities). These assets and liabilities are reported on the consolidated
balance sheet on a contract-by-contract basis at the end of the reporting period. Changes in the contract asset and liability
balances for the year ended December 31, 2018, were not materially impacted by any other factors.
The
following table provides information about receivables, contract assets and contract liabilities from contracts with customers:
|
|
January
1, 2018
|
|
|
December
31, 2018
|
|
Trade
receivables
|
|
$
|
61,699
|
|
|
$
|
74,048
|
|
Contract
assets
|
|
$
|
5,286
|
|
|
$
|
5,974
|
|
Contract
liabilities
|
|
$
|
46,254
|
|
|
$
|
45,166
|
|
As
of January 1, 2018, and December 31, 2018, contract liabilities consisted of accrued subcontract costs, therefore, no amounts
were recognized in revenue during the year ended December 31, 2018, related to its contract liabilities.
Contract
Acquisition Costs
The
Company does not have material commission programs or incur other contract fulfilment costs in obtaining new contracts. All personnel
costs were expensed as current period costs.
Contract
Estimates
Accounting
for long-term contracts and programs involves the use of techniques to estimate total contract revenue and costs. Transaction
price for contracts may include variable consideration, which includes increases to transaction price for approved and change
orders, claims and other contract provisions. The Company includes variable consideration in the estimated transaction price to
the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty
associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to
include estimated amounts in transaction price are based largely on an assessment of the anticipated performance and all information
(historical, current and forecasted) that is reasonably available to the Company. The effect of variable consideration on the
transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the
extent unapproved change orders and claims reflected in transaction price are not resolved in the Company’s favor, or to
the extent other contract provisions reflected in the transaction price are not earned, there could be reductions in or reversals
of, previously recognized revenue. No adjustment on any one contract was material to the consolidated financial statements for
the years ended December 31, 2018 and 2017.
Transaction
Price Allocated to the Remaining Performance Obligations
On
December 31, 2018, the Company had approximately $132,523 of estimated revenue expected to be recognized in the future
related to performance obligations that are unsatisfied (or partially unsatisfied).
NOTE
5. ACQUISITIONS
2017
Acquisition
On
April 20, 2017, FTE acquired all of the issued and outstanding shares of common stock of Benchmark Builders, Inc. (“Benchmark”),
The purchase price consisted of (i) cash consideration of approximately $17,250 (ii) 1,069,538 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, the Company’s senior lender, amended the original credit agreement to provide for approximately $10,100
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. See Note 14. In addition, certain sellers of Benchmark provided approximately
$7,500 towards the cash purchase price for which they received promissory notes (the “Series C Notes”, which mature
on October 20, 2018). The acquisition has been accounted for as a business combination in accordance with ASC Topic 805. Benchmark
is a full-service general contracting management and general contracting firm, significantly expanding the Company’s presence
in the New York area.
The
following table summarizes the consideration transferred for the acquisition of Benchmark:
Cash
consideration
|
|
$
|
17,250
|
|
Shares
of common stock
|
|
|
21,658
|
|
Series
A notes*
|
|
|
11,263
|
|
Series
B notes*
|
|
|
24,574
|
|
Less:
Receivable from Benchmark
|
|
|
(500
|
)
|
Merger
consideration
|
|
$
|
74,245
|
|
*:
Series A and B notes were recorded at fair value.
The
following table summarizes the acquisition date fair value of the purchase price allocation assigned to each major class of assets
acquired and liabilities assumed as of April 20, 2017, the closing date for Benchmark:
ASSETS
ACQUIRED
|
|
|
|
Cash
|
|
$
|
2,416
|
|
Accounts
receivable
|
|
|
20,577
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
3,870
|
|
Other
current assets
|
|
|
4,235
|
|
Property
and equipment
|
|
|
47
|
|
Total
identifiable assets acquired
|
|
|
31,145
|
|
Fair
value of intangible assets acquired:
|
|
|
|
|
Contracts
in progress
|
|
|
10,632
|
|
Trademarks
and tradenames
|
|
|
2,749
|
|
Customer
relationships
|
|
|
22,743
|
|
Non-compete
|
|
|
548
|
|
Total
fair value of intangible assets acquired
|
|
|
36,672
|
|
|
|
|
|
|
Goodwill
|
|
|
45,007
|
|
Total
Assets Acquired
|
|
|
112,824
|
|
|
|
|
|
|
LIABILITIES
ASSUMED
|
|
|
|
|
Accounts
payable
|
|
|
20,098
|
|
Billings
in excess of costs and estimated earnings on uncompleted contract
|
|
|
16,303
|
|
Accrued
expenses and other current liabilities
|
|
|
2,178
|
|
Total
Liabilities Assumed
|
|
|
38,579
|
|
|
|
|
|
|
Total
consideration transferred
|
|
$
|
74,245
|
|
Goodwill
of $45,007 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 expanding the business. As of April 20, 2017, goodwill is expected to be fully
deductible for tax purposes and will be amortized over 15 years.
The
operating results of Benchmark for the period from April 21, 2017 to December 31, 2017 included revenues of $201,681 and net income
of $15,315 and are included in the consolidated statements of operations for the year ended December 31, 2017. The net income
in the Company’s Consolidated Statements of Operations reflects $8,976 of amortization expense for the year ended December
31, 2017, in connection with Benchmark’s intangible assets. The Company incurred a total of $701 in transaction costs in
connection with the acquisition, which are included in the consolidated statement of operations for the year ended December 31,
2017, respectively. See Note 9. Goodwill and Intangible Assets, for information regarding the goodwill and intangible assets
of the Benchmark acquisition.
Unaudited
Supplemental Pro Forma Information
The
pro forma results presented below include the effects of the Company’s 2017 acquisition of Benchmark as if the acquisition
occurred on January 1, 2017. The pro forma net loss for the year ended December 31, 2017 includes the additional depreciation
and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase
accounting and elimination of transaction costs. The pro forma results also include interest expense associated with debt used
to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions.
The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results
that might have been achieved had the acquisitions been consummated as of January 1, 2017.
The
unaudited pro forma combined results, which assumes the transaction was completed on January 1 are as follows for the twelve months
ended December 31, 2017:
|
|
Revenue
|
|
|
Net
Loss
|
|
|
Loss
per Share
|
|
|
Weighted
Average
Shares
|
|
2017
supplemental pro forma from January 1, 2017 through December 31, 2017
|
|
$
|
250,700
|
|
|
|
(103,596
|
)
|
|
|
(21.77
|
)
|
|
|
4,756,049
|
|
NOTE
6. ACCOUNTS RECEIVABLE
The
following table presents accounts receivable, net for the years ended December 31, 2018 and 2017:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
Uncompleted
contracts
|
|
$
|
44,227
|
|
|
$
|
36,464
|
|
Completed
contracts
|
|
|
13,184
|
|
|
|
13,865
|
|
Unbilled
receivable
|
|
|
16,957
|
|
|
|
12,040
|
|
Allowance
for doubtful accounts
|
|
|
(320
|
)
|
|
|
(670
|
)
|
Accounts
receivable, net
|
|
$
|
74,048
|
|
|
$
|
61,699
|
|
Accounts
receivable from customers are generated from revenues earned after the installation or service for a job has been completed, inspected
and approval has been obtained by its customer. The Company segments some of its large contracts into smaller more manageable
contracts which allows for certain jobs to be completed, inspected and approved for payment by the customer in less time than
non-segmentation. Unbilled Accounts Receivable are generally invoiced when authorized by the service provider typically within
90 to 180 days after the Company completes its performance obligation. The payment terms are generally 30 days.
NOTE
7. OTHER CURRENT ASSETS
Other
current assets consist of the following:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Notes
receivables, promissory note
|
|
$
|
885
|
|
|
$
|
—
|
|
Prepaid
insurance
|
|
|
625
|
|
|
|
1,398
|
|
Prepaid
city and state taxes
|
|
|
1,858
|
|
|
|
2,318
|
|
Prepaid
contract costs for work in process
|
|
|
—
|
|
|
|
84
|
|
Prepaid
operating expenses
|
|
|
626
|
|
|
|
2,483
|
|
Other
current assets
|
|
$
|
3,994
|
|
|
$
|
6,283
|
|
NOTE
8. PROPERTY AND EQUIPMENT, NET
Property
and equipment, net consist of the following:
|
|
Estimated
|
|
December
31
|
|
|
|
Life
|
|
|
|
|
|
|
|
|
(in
years)
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
6-8
|
|
$
|
1,598
|
|
|
$
|
1,686
|
|
Vehicles
and trailers
|
|
7-10
|
|
|
2,276
|
|
|
|
2,276
|
|
Network
services platform
|
|
5
|
|
|
—
|
|
|
|
3,438
|
|
Computer
equipment and software
|
|
2-5
years
|
|
|
1,281
|
|
|
|
1,150
|
|
Leasehold
improvements
|
|
2-5
years
|
|
|
647
|
|
|
|
183
|
|
Furniture
and fixtures
|
|
2-5
years
|
|
|
56
|
|
|
|
33
|
|
|
|
|
|
|
5,858
|
|
|
|
8,766
|
|
Less:
accumulated depreciation
|
|
|
|
|
(2,453
|
)
|
|
|
(1,684
|
)
|
Property
and equipment, net
|
|
|
|
$
|
3,405
|
|
|
$
|
7,082
|
|
The
Company completed the development of the new network infrastructure services platform on October 11, 2017, due to market conditions
during 2018 this platform was determined to be obsolete and was written off to selling, general and administration costs for the
year ended December 31, 2018.
Depreciation
expense for the years ended December 31, 2018 and 2017, was $934 and $760, respectively.
The
Company leases various equipment under capital leases. Assets held under capital leases are included in property and equipment
as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery
& equipment
|
|
$
|
1,375
|
|
|
$
|
1,548
|
|
Less:
accumulated depreciation
|
|
|
(575
|
)
|
|
|
(438
|
)
|
|
|
$
|
800
|
|
|
$
|
1,110
|
|
NOTE
9. INTANGIBLE ASSETS AND GOODWILL
As
of December 31, 2018 and 2017, goodwill was $45,007, and the activity within those years was as follows:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
45,007
|
|
|
$
|
—
|
|
Acquisition
|
|
|
—
|
|
|
|
45,007
|
|
Ending
balance
|
|
$
|
45,007
|
|
|
$
|
45,007
|
|
The
goodwill is assessed for impairment on an annual basis and also on an interim basis when indicators of impairment exist. The Company
completed its goodwill assessment on March 1, 2018, and determined the goodwill was not impaired.
The
fair value of identifiable intangible assets consisted of the following at December 31, 2018:
|
|
Weighted
average
remaining useful
life (months)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Definite-
Lived Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
63.7
|
|
|
|
2,749
|
|
|
|
665
|
|
|
|
2,084
|
|
Customer
relationships
|
|
|
63.7
|
|
|
|
22,743
|
|
|
|
5,497
|
|
|
|
17,246
|
|
Contracts
in progress
|
|
|
—
|
|
|
|
10,632
|
|
|
|
10,632
|
|
|
|
—
|
|
Non-compete
|
|
|
39.7
|
|
|
|
548
|
|
|
|
186
|
|
|
|
362
|
|
Total
Intangible Assets
|
|
|
|
|
|
$
|
36,672
|
|
|
$
|
16,980
|
|
|
$
|
19,692
|
|
The
fair value of identifiable intangible assets consisted of the following at December 31, 2017:
|
|
Weighted
average
remaining useful
life (months)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Definite-
Lived Intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
75.7
|
|
|
|
2,749
|
|
|
|
272
|
|
|
|
2,477
|
|
Customer
relationships
|
|
|
75.7
|
|
|
|
22,743
|
|
|
|
2,247
|
|
|
|
20,496
|
|
Contracts
in progress
|
|
|
9.7
|
|
|
|
10,632
|
|
|
|
6,379
|
|
|
|
4,253
|
|
Non-compete
|
|
|
51.7
|
|
|
|
548
|
|
|
|
78
|
|
|
|
470
|
|
Total
Intangible Assets
|
|
|
|
|
|
$
|
36,672
|
|
|
$
|
8,976
|
|
|
$
|
27,696
|
|
Amortization
expense for the years ended December 31, 2018 and 2017 was $8,004 and $8,976, respectively. For the year ended December 31, 2018,
amortization expense of $3,751 was charged to operating expenses and $4,253 was charged to cost of revenues. For the year ended
December 31, 2017, amortization expense of $2,597 was charged to operating expenses and $6,379 was charged to cost of revenues.
Expected
future amortization expense consists of the following for each of the following years ended December 31:
2019
|
|
$
|
3,751
|
|
2020
|
|
|
3,751
|
|
2021
|
|
|
3,751
|
|
2022
|
|
|
3,675
|
|
2023
|
|
|
3,642
|
|
Thereafter
|
|
|
1,122
|
|
Total
|
|
$
|
19,692
|
|
NOTE
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued
interest payable [1]
|
|
$
|
1,673
|
|
|
$
|
2,456
|
|
Accrued
dividends payable
|
|
|
690
|
|
|
|
610
|
|
Accrued
compensation expense [2]
|
|
|
3,942
|
|
|
|
4,264
|
|
Accrued
bonuses
|
|
|
3,939
|
|
|
|
2,587
|
|
Accrued
taxes payable
|
|
|
76
|
|
|
|
182
|
|
Other
accrued expense
|
|
|
30
|
|
|
|
89
|
|
Accrued
expenses, current
|
|
$
|
10,350
|
|
|
$
|
10,188
|
|
[1]
|
Accrued
interest payable as of December 31, 2018 and 2017 includes $1,461 and $1,188, respectively, of estimated penalties
and interest associated with prior period unpaid payroll taxes.
|
|
|
[2]
|
Accrued
compensation includes $1,868 in both December 31, 2018 and 2017, associated with prior period unpaid payroll taxes.
|
NOTE
11: MERCHANT ACCOUNT AGREEMENTS
2018
During
the year ended December 31, 2018, the Company entered into 65 merchant account agreements, whereby the Company agreed to borrow
an aggregate of $70,947, net of $25,126 in original issue discounts and $6,914 in deferred financing costs, in exchange for daily
repayment funded through the Company’s future receivables. The merchant account agreements are collateralized by the assets
of the Company and are due in terms between one and six months. As of December 31, 2018, there were 18 merchant account agreements
with an aggregate balance of $11,228, net of original issue discount of $6,746 and deferred financing costs of $2,380.
During
the years ended December 31, 2018 and 2017, the Company recognized $30,008 and $401, respectively, in amortization of deferred
financing costs and debt discounts from the amortization of original issuance discounts and deferred debt issuance costs on the
straight-line method over the term of the related merchant account agreement, which approximates the effective interest method.
2017
During
the year ended December 31, 2017, the Company entered into 24 merchant account agreements, whereby the Company agreed to borrow
an aggregate of $11,632, net of $3,549 in original issue discounts and $672 in deferred financing costs, in exchange for daily
repayment funded through the Company’s future receivables. The merchant account agreements are collateralized by the assets
of the Company and are due in terms between one and six months. As of December 31, 2017, there were 12 merchant account agreements
outstanding with an aggregate balance of $7,315, net of original issue discount of $2,576 and deferred financing costs of $500.
NOTE
12: CONVERTIBLE NOTES PAYABLE
2018
During
the year ended December 31, 2018, the Company entered into 39 convertible notes payable, borrowing an aggregate of $17,307, net
of original issuance discounts of $1,556 and deferred financing costs of $526. Additionally, as inducement, the Company issued
a total of 198,746 shares of the Company’s common stock valued at $2,563. During the year ended December 31, 2018, the Company
repaid $5,231 of the convertible notes in cash and issued a total of 1,889,144 shares of the Company’s common stock for
the conversion of $6,668 in convertible debt principal and $242 in accrued interest.
As
of December 31, 2018, the Company had 25 outstanding convertible notes payable totaling $9,042, net of unamortized original
issuance discounts and deferred financing costs of $4,544. The outstanding convertible notes of the Company are unsecured,
bear interest between 4% and 12% per annum or require a one-time payment of 4% of principal in the form of shares of the Company’s
common stock. The convertible notes have original maturity terms between six months and one year and are convertible at variable
rates between 50% and 75% of the quoted market price of the Company’s common stock. All notes that contained convertible
terms during the year ended December 31, 2018 were evaluated for derivative accounting (see Note 16). Aggregate amortization of
the debt discounts and deferred financing costs on convertible debt for the year ended December 31, 2018 was $17,304.
During
February 2018, the
Company entered into an amendment to extend two past due convertible promissory notes held by one holder with an outstanding principal
balance of $900. The amendment extended the maturity date and provided a conversion standstill for 72 days in exchange for a principal
payment of $150. During February 2018, the Company entered into a second amendment to the convertible promissory notes extending
the maturity date another 89 days in exchange for imposing a floor price of no less than 50% of the closing trade price of the
Company’s common stock and a cash payment right to elect to pay conversion notices in cash, for a 10% cash payment premium.
During
August 2018, the Company entered into a settlement agreement with a holder of a convertible promissory note in the amount of $556,
whereby, the Company agreed to a $44 increase in the principal balance and allowing immediate conversion by the holder in the
exchange for waivers of certain events of default and a leak-out provision, limiting the holder’s sale of the Company’s
common stock to 10% of the average daily share trading volume. As a result of the modification, the Company recognized a derivative
liability of $99 as a result of the conversion allowance and a loss on debt modification of $408.
2017
During
the year ended December 31, 2017, the Company entered into 29 convertible notes payable, borrowing an aggregate of $5,153, net
of original issuance discounts of $543 and deferred financing costs of $115. Additionally, as inducement, the Company granted
a total of 250,771 warrants to purchase common stock with an aggregate issuance value of $11,642 and issued a total of 27,970
shares of the Company’s common stock valued at $418. During the year ended December 31, 2017, the Company repaid $1,426
of the convertible notes in cash and issued a total of 250,771 shares of the Company’s common stock for the conversion of
$643 in convertible debt principal and $11 in accrued interest.
As
of December 31, 2017, the Company had 14 outstanding convertible notes payable totaling $3,205, net of unamortized original issuance
discounts and deferred financing costs of $814. The outstanding convertible notes of the Company are unsecured, bear interest
between 4% and 12% per annum or require a one-time payment of 4% of principal in the form of shares of the Company’s common
stock. The convertible notes have original maturity terms between three months and three years and are convertible at variable
rates between 50% and 80% of the quoted market price of the Company’s common stock. All notes that contained convertible
terms during the year ended December 31, 2017 were evaluated for derivative accounting (see Note 16). Aggregate amortization of
the debt discounts and deferred financing costs on convertible debt for the year ended December 31, 2017 was $564.
During
February 2017, the Company entered into an amendment to a convertible promissory note whereby, in exchange for the issuance of
2,000 shares of the Company’s common stock valued at $35, the holder agreed to waive certain events of default under the
note. The value of the issued common stock was accounted for as additional debt discount on the convertible promissory note.
During
May 2017, the Company entered into a second amendment to the above mentioned convertible promissory note, whereby, in exchange
for the payment of $50 in cash, a $50 principal addition and the issuance of 2,000 shares of the Company’s common stock
valued at $42, the holder agreed to waive certain events of default under the note. The amendment was accounted for as a debt
modification, resulting in the recognition of a $137 increase in note principal value, $11 increase in debt discount and the recognition
of $199 loss on extinguishment of debt.
Outstanding
convertible notes payable consist of the following at December 31, 2018 and 2017:
|
|
December
31,
|
|
Name
|
|
2018
|
|
|
2017
|
|
Note
1
|
|
$
|
365
|
|
|
$
|
—
|
|
Note 2
|
|
|
800
|
|
|
|
—
|
|
Note 3
|
|
|
310
|
|
|
|
—
|
|
Note 4
|
|
|
211
|
|
|
|
—
|
|
Note 5
|
|
|
165
|
|
|
|
—
|
|
Note 6
|
|
|
263
|
|
|
|
—
|
|
Note 7
|
|
|
525
|
|
|
|
—
|
|
Note 8
|
|
|
315
|
|
|
|
—
|
|
Note 9
|
|
|
211
|
|
|
|
—
|
|
Note 10
|
|
|
660
|
|
|
|
—
|
|
Note 11
|
|
|
525
|
|
|
|
—
|
|
Note 12
|
|
|
525
|
|
|
|
—
|
|
Note 13
|
|
|
158
|
|
|
|
—
|
|
Note 14
|
|
|
130
|
|
|
|
—
|
|
Note 15
|
|
|
211
|
|
|
|
—
|
|
Note 16
|
|
|
100
|
|
|
|
—
|
|
Note 17
|
|
|
1,070
|
|
|
|
—
|
|
Note 18
|
|
|
1,070
|
|
|
|
—
|
|
Note 19
|
|
|
281
|
|
|
|
—
|
|
Note 20
|
|
|
168
|
|
|
|
—
|
|
Note 21
|
|
|
168
|
|
|
|
—
|
|
Note 22
|
|
|
281
|
|
|
|
—
|
|
Note 23
|
|
|
168
|
|
|
|
—
|
|
Note 24
|
|
|
321
|
|
|
|
—
|
|
Note 25
|
|
|
41
|
|
|
|
—
|
|
Note 26
|
|
|
—
|
|
|
|
448
|
|
Note 27
|
|
|
—
|
|
|
|
316
|
|
Note 28
|
|
|
—
|
|
|
|
95
|
|
Note 29
|
|
|
—
|
|
|
|
805
|
|
Note 30
|
|
|
—
|
|
|
|
585
|
|
Note 31
|
|
|
—
|
|
|
|
113
|
|
Note 32
|
|
|
—
|
|
|
|
144
|
|
Note 33
|
|
|
—
|
|
|
|
144
|
|
Note 34
|
|
|
—
|
|
|
|
83
|
|
Note 35
|
|
|
—
|
|
|
|
56
|
|
Note 36
|
|
|
—
|
|
|
|
125
|
|
Note 37
|
|
|
—
|
|
|
|
128
|
|
Note 38
|
|
|
—
|
|
|
|
110
|
|
Note
39
|
|
|
—
|
|
|
|
53
|
|
Total
|
|
|
9,042
|
|
|
|
3,205
|
|
Less:
Unamortized discount
|
|
|
(4,544
|
)
|
|
|
(814
|
)
|
Net
|
|
$
|
4,498
|
|
|
$
|
2,391
|
|
NOTE
13: NOTES AND CAPITAL LEASES PAYABLE
Outstanding
promissory notes, obligations under capital leases and other notes payable consist of the following:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Notes
payable bearing interest at stated rates between 4% and 12% per annum. Terms range from 3 to 36 months
|
|
$
|
3,019
|
|
|
$
|
3,404
|
|
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.
|
|
|
320
|
|
|
|
695
|
|
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 30 to 72 months
|
|
|
1,189
|
|
|
|
1,425
|
|
Total
Notes Payables
|
|
|
4,528
|
|
|
|
5,524
|
|
Less:
Original issue discount and deferred financing costs
|
|
|
—
|
|
|
|
(25
|
)
|
Notes
payable, net of original issue discount and deferred financing costs
|
|
|
4,528
|
|
|
|
5,499
|
|
Less:
Current portion
|
|
|
(3,260
|
)
|
|
|
(3,669
|
)
|
Total
Notes non-current portion
|
|
$
|
1,268
|
|
|
$
|
1,830
|
|
The
required principal payments for all borrowings for each of the five years following the balance sheet date are as follows:
2019
|
|
|
3,260
|
|
2020
|
|
|
776
|
|
2021
|
|
|
352
|
|
2022
|
|
|
133
|
|
2023
|
|
|
7
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
4,528
|
|
NOTE
14. SENIOR DEBT
On
October 28, 2015, the Company entered into an $8,000 senior credit facility (“Facility”). The Facility had a two-year
term, and interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a PIK provision providing
a 4% per annum increase in the principal balance monthly. The Facility is secured by all assets of the Company. 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. A market valuation was performed on this transaction by a qualified third-party valuation firm, an original
issue discount of $437 was recorded and is being amortized on a straight-line method, approximating the interest rate method,
over twenty-four months to Interest Expense on the Consolidated Statement of Operations. During the years ended December 31, 2018
and 2017, $0 and $182, respectively, was included in amortization of debt discount, and none remained unamortized.
On
April 5, 2016, the Company entered into an amendment agreement (“Amendment No.1”) to the Facility, amending 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 (“Amendment No. 2”) to consolidate a
series of short-term bridge loans which were granted to the Company from time to time during the second and third quarters of
2016 into a $5,000 loan, with a maturity date of April 30, 2017 bearing interest at 12% and a PIK provision of 4%. Amendment No.
2 also amended certain covenants.
In
conjunction with Amendment No. 2, the Company issued warrants to purchase 93,750 shares of the Company’s common stock at
any time for five years at an initial exercise price of $20 per share. The $322 value of the warrants was recorded as debt discount
and is being amortized on a straight-line basis over the remaining life of the Facility.
During
November 2016, the Company borrowed a total of $1,000 under the terms of the Facility and issued warrants to purchase 100,000
shares of the Company’s common stock at any time for five years at an initial exercise price of $10 per share. The $430
value of the warrants was recorded as debt discount and is being amortized on a straight-line basis over the remaining life of
the Facility.
During
December 2016, the Company borrowed a total of $1,500 under the terms of the Facility and issued warrants to purchase 150,000
shares of the Company’s common stock at any time for five years at an initial exercise price of $10 per share. The $519
value of the warrants was recorded as debt discount and is being amortized on a straight-line basis over the remaining life of
the Facility.
During
March 2017, the Company borrowed an additional $1,500 under the terms of the Facility, originally due April 30, 2017, but subsequently
extended to March 31, 2019.
On
April 20, 2017, as part of the Benchmark acquisition, the Facility was amended (“Amendment No. 3”) to provide for
an additional $11,480, extend the maturity date of the Facility to March 31, 2019 and add certain covenants regarding debt coverage,
EBITDA and revenue. Approximately $10,100 was applied to the cash purchase price and extended the maturity date of the Facility
to March 31, 2019. The Company issued 256,801 shares of Common Stock to the senior lender with a fair value of $5,649 as a term
of Amendment No. 3. The value of the shares was recorded as a debt discount.
During
April 2017, the Company incurred a $480 extension fee to extend the Facility to March 31, 2019. This amount was added to the principal
amount of the Facility and incurs interest under the terms of the Facility.
The
Company’s senior lender became a greater than 5% beneficial owner of the Company’s common stock on May 15, 2017.
During
October and November 2017, the Company borrowed a total of $1,600 under the terms of the Facility, due March 31, 2019.
During
December 2017, the Company incurred a $42 penalty related to loan non-compliance, which was added to the principal amount of the
Facility and incurs interest under the terms of the Facility, due March 31, 2019.
During
the year ended December 31, 2017, the Company reclassified 444,275 shares of Common Stock held by its senior lender with a fair
value of $438 from temporary equity to permanent equity which is included in the Stockholders’ Equity section of the Consolidated
Balance Sheet as of December 31, 2017. The temporary equity was reclassified due to the put provision included in the original
Facility being removed upon the execution of Amendment No. 3 resulting from the Benchmark acquisition on April 20, 2017.
During
January 2018, the Company received cash of $23 for a note under the terms of the facility and converted $867 in PIK interest and
$110 in debt discount into principal, all due March 31, 2019.
During
April 2018, the Company borrowed a total of $1,025 under the terms of the Facility, due March 31, 2019. The Company recognized
an original issuance discount of $103 and deferred finance costs of $10 on the note.
During
September 2018, the Company borrowed a total of $2,188 under the terms of the Facility, due March 31, 2019. The borrowing consisted
of $1,949 in accrued interest conversion, an original issuance discount of $219 and fees of $20.
During
October 2018, the Company borrowed $1,300 under the terms of the Facility, due March 31, 2019. The borrowing consisted of $1,170
in cash and an original issuance discount of $130.
During
the years ended December 31, 2018 and 2017, the Company recognized $4,540 and $2,678 in original issuance discounts and deferred
finance costs on related senior debt issuances, respectively. During the years ended December 31, 2018 and 2017, the Company recognized
$8,492 and $548 in amortization expense on the straight-line method over the term of the Facility, respectively, which approximates
the effective interest method. The unamortized original issuance discount and deferred finance costs balance was $2,118 and $3,452
as of December 31, 2018 and 2017, respectively.
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Senior
note payable
|
|
$
|
36,441
|
|
|
$
|
29,475
|
|
Less:
Original issue discount
|
|
|
(1,768
|
)
|
|
|
(4,715
|
)
|
Less:
Deferred financing cost
|
|
|
(351
|
)
|
|
|
(1,355
|
)
|
Total
Senior Debt
|
|
$
|
34,322
|
|
|
$
|
23,405
|
|
The
Senior Notes payments all come due in 2019, the outstanding balance is reflected as current on the consolidated financial statements
at December 31, 2018. See Note 26.
NOTE
15. RELATED PARTY
Guarantees/Related
Party Advances
The
former CEO, Michael Palleschi, provided cash advances witnessed by interest-bearing notes totaling $0 and $536, for the years
ended December 31, 2018 and 2017, respectively. Additionally, the former CEO provided a personal credit card account for
the purchase of goods and services by FTE. While the credit card balances are reflected in the Company’s books and records,
the former CEO is personally liable for the payment of the entire amount of the open credit obligation, which was $0 and
$18 as of December 31, 2018 and 2017, respectively.
Additionally,
the Company entered into several secured equipment financing arrangements with total obligations of approximately $79 and $132
as of December 31, 2018 and 2017, respectively, that required the guaranty of a Company officer, which was provided by Mr. Palleschi.
The
former CFO, David Lethem, provided an unsecured, interest-bearing note totaling $150 during the year ended December 31, 2017.
Additionally, the former CFO personally guaranteed several secured equipment financing arrangements with total obligations
of approximately $291 and $371 as of December 31, 2018 and 2017, respectively.
The
former CFO also provided a personal credit card account for the purchase of goods and services by FTE. While the credit
card balances are reflected in the Company’s books and records, the former CFO is personally liable for the payment
of the entire amount of the open credit obligation, which was $14 as of December 31, 2017. There was no balance outstanding at
December 31, 2018.
The
Company issued two promissory notes to TBK327 Partners, LLC, an entity controlled by a former member of the Company’s Board
of Directors, Christopher Ferguson. The first note was issued in or around January 23, 2014 in the principal amount of $177 and
the second note was issued in or around May 16, 2014 in the principal amount of $80 (collectively the “TBK Notes”).
As of December 31, 2018 and 2017, the Company had an outstanding principal balance of $237 for the TBK Notes.
The
Company issued two promissory notes SRM Entertainment Group, LLC, an entity controlled by a former member of our Board of Directors,
Christopher Ferguson. The first note was issued in or around May 5, 2017 in the principal amount of $50 (the “May SRM Note”)
and the second note was issued in or around July 11, 2017 in the principal amount of $137 (the “July SRM Note”). As
of December 31, 2018, the May SRM Note had been repaid in full and the July SRM Note had an outstanding principal balance of $137.
Related
Party Commissions
The
Predecessor used the services of HKSE Inc. (“HKSE”) as a consulting firm. HKSE is a company wholly owned and operated
by a stockholder of Benchmark and current stockholder of the Company. HKSE is paid commissions computed as a percent of the total
annual billings of Benchmark to its clients. This agreement was cancelled in April 2017. For the period from January 1, 2017 through
April 20, 2017 (Predecessor), HKSE received commissions totaling $285.
Mr.
Christopher Ferguson, a member of the Board of Directors, was owed Board of Directors’ fees in the amount of $5 for each
of the years ended December 31, 2018 and December 31, 2017.
As
noted above in the discussion of the Internal Investigation, prior management caused the Company to engage in these related party
transactions, some of which were implemented to the Company’s detriment and were not disclosed properly or were not disclosed
at all.
Common
Stock
During
the year ended December 31, 2018 and 2017, the Company issued a total of 33,000 and 800 shares of common stock to members of the
Company’s Board of Directors having a fair value of $533 and $8, respectively, to satisfy accrued directors’ fees.
Benchmark
Acquisition
On
April 20, 2017, the Company issued 1,069,538 shares of the Company’s common stock to the former owners for the acquisition
of Benchmark. The shares were valued at $21,658 and were part of the purchase price consideration. See Note 5.
On
April 20, 2017, the Company issued Series A convertible promissory notes, in the aggregate principal amount of $12,500 to the
former owners of Benchmark and to significant shareholders stockholders of the Company, which matured on April 20, 2019. Interest
is computed at the rate of 5% percent per annum on the outstanding principal. Interest expense was $695 and $442 for the year
ended December 31, 2018 and 2017, respectively. These notes shall be convertible into conversion shares, at the holder’s
option, upon an event of default at a conversion price per share of $11.88.
On
April 20, 2017, the Company issued Series B Notes in the aggregate principal amount of $30,000 to the former owners of Benchmark
and to significant shareholders of the Company, which mature on April 20, 2020. Interest is computed at the rate of 3% per annum
on the outstanding principal. Interest expense was $929 and $633 for the year ended December 31, 2018 and 2017, respectively.
On
April 20, 2017, the Company issued Series C Notes in the aggregate principal amount of $7,500 to the former owners of Benchmark
and to significant shareholders of the Company, which matured on October 20, 2018. Interest is computed at the rate of 3% per
annum on the outstanding principal. Interest expense was $138 and $153 for the year ended December 31, 2018 and 2017, respectively.
The
following is a summary of the balance of related party notes as of December 31, 2018 and 2017:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
Former
CEO and board member cash advance
|
|
$
|
380
|
|
|
$
|
1,093
|
|
Former
CFO cash advance
|
|
|
—
|
|
|
|
80
|
|
Series
A notes
|
|
|
13,603
|
|
|
|
12,942
|
|
Series
B notes
|
|
|
31,564
|
|
|
|
30,633
|
|
Series
C notes
|
|
|
—
|
|
|
|
7,403
|
|
Total
notes payable, related party
|
|
|
45,547
|
|
|
|
52,151
|
|
Less:
discount on notes payable, related party
|
|
|
(2,618
|
)
|
|
|
(5,045
|
)
|
Notes
payable, net of discount
|
|
|
42,929
|
|
|
|
47,106
|
|
Less:
current portion
|
|
|
(13,776
|
)
|
|
|
(8,576
|
)
|
Total
non-current notes, related party
|
|
$
|
29,153
|
|
|
$
|
38,530
|
|
During
October 2018, the Company paid the remaining principal and accumulated in-kind interest balance totaling $4,891 on its Series
C Notes in the aggregate principal amount of $7,500 to the former owners of Benchmark.
The
required principal payments for all borrowings for each of the five years following the balance sheet date are as follows:
2019
|
|
$
|
13,603
|
|
2020
|
|
|
31,564
|
|
2021
|
|
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
45,547
|
|
NOTE
16. FAIR VALUE MEASUREMENTS
In
accordance with ASC No. 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding
warrants and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value
of the liability. ASC No. 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose
fair value. The hierarchy gives the highest priority to quoted prices available in active markets and the lowest priority to unobservable
inputs. An explanation of each level in the hierarchy is described below:
Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date
Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable
Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company
The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of December 31, 2018 and 2017:
|
|
December
31, 2018
|
|
|
|
Fair
value at December 31, 2018
|
|
|
Quoted
prices in active markets
(Level 1)
|
|
|
Significant
other observable inputs (Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Warrant
derivative liability
|
|
$
|
3,558
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,558
|
|
Debt
derivative liability
|
|
|
8,038
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,038
|
|
Total
fair value
|
|
$
|
11,596
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11,596
|
|
|
|
December
31, 2017
|
|
|
|
Fair
value at December 31, 2017
|
|
|
Quoted
prices in active markets
(Level 1)
|
|
|
Significant
other observable inputs (Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
Warrant
derivative liability
|
|
$
|
16,492
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,492
|
|
Debt
derivative liability
|
|
|
48,195
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,195
|
|
Total
fair value
|
|
$
|
64,687
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,687
|
|
There
were no transfers between Level 1, 2 or 3 during the years ended December 31, 2018 and 2017.
The
following table presents changes in Level 3 liabilities measured at fair value for the years ended December 31, 2018 and 2017.
Both observable and unobservable inputs were used to determine the fair value of positions that the Company has classified within
the Level 3 category. Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair
value that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable
long- dated volatilities) inputs.
|
|
Warrant
Liability
|
|
|
Debt
Derivative Liability
|
|
|
Total
|
|
Balance
– December 31, 2016
|
|
$
|
1,437
|
|
|
$
|
—
|
|
|
$
|
1,437
|
|
Additional
warrant liability
|
|
|
14,698
|
|
|
|
—
|
|
|
|
14,698
|
|
Additional
derivative liability from issuance of convertible notes
|
|
|
—
|
|
|
|
15,817
|
|
|
|
15,817
|
|
Extinguishment
of derivative liabilities related to debt conversion and repayment
|
|
|
—
|
|
|
|
(2,634
|
)
|
|
|
(2,634
|
)
|
Change
in fair value
|
|
|
357
|
|
|
|
35,012
|
|
|
|
35,369
|
|
Balance
– December 31, 2017
|
|
|
16,492
|
|
|
|
48,195
|
|
|
|
64,687
|
|
Additional
derivative liability from issuance of convertible notes
|
|
|
—
|
|
|
|
17,882
|
|
|
|
17,882
|
|
Extinguishment
of warrant liabilities related to warrants exercise
|
|
|
(1,256
|
)
|
|
|
—
|
|
|
|
(1,256
|
)
|
Extinguishment
of derivative liabilities related to debt conversion and repayment
|
|
|
—
|
|
|
|
(40,862
|
)
|
|
|
(40,862
|
)
|
Change
in fair value
|
|
|
(11,678
|
)
|
|
|
(17,177
|
)
|
|
|
(28,855
|
)
|
Balance
– December 31, 2018
|
|
|
3,558
|
|
|
|
8,038
|
|
|
|
11,596
|
|
A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of December
31, 2018 and 2017 is as follows:
|
|
As
of December 31, 2018
|
|
|
As
of December 31, 2017
|
|
|
|
|
|
|
Embedded
|
|
|
|
|
|
Embedded
|
|
|
|
Warrant
Liability
|
|
|
Conversion
Feature
|
|
|
Warrant
Liability
|
|
|
Conversion
Feature
|
|
Strike
price
|
|
$
|
7.80
|
|
|
$
|
2.61
|
|
|
$
|
5.93
|
|
|
$
|
3.47
|
|
Contractual
term (years)
|
|
|
2.7
|
|
|
|
0.6
|
|
|
|
3.2
|
|
|
|
0.8
|
|
Volatility
(annual)
|
|
|
91.2
|
%
|
|
|
91.2
|
%
|
|
|
135.5
|
%
|
|
|
135.5
|
%
|
Risk-free
rate
|
|
|
2.24
|
%
|
|
|
2.36
|
%
|
|
|
1.98
|
%
|
|
|
1.55
|
%
|
Dividend yield
(per share)
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE
17. BENEFIT PLANS
Defined
Contribution Plan
The
Company has a defined contribution plan covering all full-time employees qualified under Section 401(k) of the Internal Revenue
Code, in which the Company matches a portion of an employee’s salary deferral. The Company’s contributions to this
plan were $78 and $50, for the years ended December 31, 2018 and 2017, respectively.
The
Predecessor has a defined contribution plan covering all full-time employees qualified under Section 401(k) of the Internal Revenue
Code, in which the Predecessor matches a portion of an employee’s salary deferral. The Company’s contributions to
this plan were $721 for the year ended December 31, 2017. The Predecessor instituted a cash balance for its employees in 2016,
the cash balance plan expense totaled $808 for the year ended December 31, 2017.
The
Company and the Predecessor combined their defined contributions plans as of November 1, 2018.
NOTE
18. COMMITMENTS AND CONTINGENCIES
Property
Lease Obligations
Rental
expense, resulting from property lease agreements, for the year ended December 31, 2018 and 2017, was approximately $1,373 and
$1,167, respectively.
The
remaining aggregate commitment for lease payments under the operating lease for the facilities as of December 31, 2018 are as
follows:
2019
|
|
|
402
|
|
2020
|
|
|
280
|
|
2021
|
|
|
269
|
|
2022
|
|
|
239
|
|
2023
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
Lease Obligations
|
|
$
|
1,190
|
|
Legal
Matters
The
Company is involved in litigation claims arising in the ordinary course of business. Legal fees and other costs associated with
such actions are expensed as incurred. In addition, the Company assesses, in conjunction with its legal counsel, the need to record
a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable
and the amount can be reasonably estimated.
On
May 10, 2018, Vista Capital Investments, LLC (“Vista”) filed suit against the Company for breach of contract and breach
of the implied covenant of good faith and fair dealing arising out of a securities purchase agreement (the “SPA”)
and a convertible note in the principal amount of $275 in the Superior Court of California for the county of San Diego. Vista
alleges damages in excess of $9,000 stemming from the Company’s purported dilutive issuances of Company common stock. Vista
was the holder of a convertible note for which there was no prior Board authorization See Note 2.)The Company and Vista are continuing
to discuss terms of settlement.
On
April 11, 2019, the Company received a demand for arbitration, which was filed with the American Arbitration Association (AAA),
Case No. 01-19-0001-0962,on behalf of Michael Palleschi, the Company’s former CEO, alleging a breach of his employment agreement
and seeking $11,300 in damages. The Company has asserted counterclaims and affirmative defenses to Mr. Palleschi’s claims
and intends to vigorously defend this matter. Discovery is pending.
On
June 26, 2019, Efraim Barenbaum filed a shareholder derivative suit in the United States District Court for the Southern District
of New York against certain of the Company’s former directors and executive officers, alleging claims for breaches of fiduciary
duties, unjust enrichment, waste, and violations of Section 14 of the Securities Exchange Act of 1934. The Company was named as
a nominal defendant only. The Company filed a motion to dismiss the complaint on September 23, 2019. In response to the motion,
the plaintiff filed an amended complaint on November 1, 2019, but the causes of action remained equally deficient. Having found
the claims in the amended complaint also to be baseless, the Company filed a motion to dismiss that pleading as well on January
27, 2020.
On
August 17, 2019, Auctus Fund, LLC (“Auctus”) filed suit against the Company alleging, among other things, breach of
contract and violations of state and federal securities laws, arising out of a securities purchase agreement and a convertible
note in the principal amount of $525. Auctus is the holder of a convertible note for which there was no prior Board authorization.
See Note 26. The Company denies any alleged wrongdoing and intends to vigorously defend against these claims. The matter is pending
in the United States District Court for the District of Massachusetts.
On
November 5, 2019, St. George Investments LLC (“St. George”) filed suit against the Company in the Third Judicial District
Court for Salt Lake County in the state of Utah to compel arbitration, alleging, among other things, breach of contract arising
out of a securities purchase agreement and convertible note in the principal amount of $2,315. St. George is the holder of a convertible
note for which there was no prior Board authorization. See Note 26.. The Company is vigorously defending its interests in this
matter.
On
November 26, 2019, David Lethem, the Company’s former CFO, filed a complaint against the Company in the 20th
Judicial Circuit Court for Lee county in the State of Florida for breach of contract arising out of a transition, separation and
general release agreement. The Company filed a counterclaim to rescind the agreement based on fraudulent inducement. Discovery
is proceeding in this case and the Company intends to vigorously defend its interests in this matter.
On
January 3, 2020, CBRE, Inc. (“CBRE”) filed suit against the Company’s subsidiary, CrossLayer, Inc., for breach
of contract arising out of a program participation agreement in the Superior Court of the state of Delaware. CBRE is alleging
damages of $1,333. The Company considers CBRE’s claims to be without merit and has engaged counsel who is vigorously disputing
this matter.
NOTE
19. INCOME TAXES
The
Company is required to file a consolidated U.S. federal income tax return and various state tax returns.
The
components of income tax expense (benefit) are as follows:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
and local
|
|
|
82
|
|
|
|
—
|
|
|
|
|
82
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
731
|
|
|
|
356
|
|
State
and local
|
|
|
273
|
|
|
|
204
|
|
|
|
|
1,004
|
|
|
|
560
|
|
Change
in valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Income
tax provision (benefit)
|
|
$
|
1,086
|
|
|
$
|
560
|
|
The
Company recorded a deferred tax liability of $1,641 and $560 as of December 31, 2018 and 2017, respectively, related to the acquisition
of Benchmark Builders, Inc. This deferred tax liability was recorded to account for the book vs. tax basis difference related
to the goodwill intangible asset, which was recorded in connection with the acquisition. This deferred tax liability was excluded
from sources of future taxable income, as the timing of its reversal cannot be predicted due to the indefinite life of the goodwill.
As such, this deferred tax liability cannot be used to offset the valuation allowance.
Deferred
income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The Company’s deferred tax assets relate primarily to its
net operating loss carryforwards and other balance sheet basis differences. In accordance with ASC 740, “Income Taxes,”
the Company recorded a valuation allowance to fully offset the gross deferred tax asset, because it is not more likely than not
that the Company will realize future benefits associated with these deferred tax assets at December 31, 2018 and 2017.
On
December 22, 2017, new legislation was signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other
things, a provision to reduce the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment
of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities
and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further
change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross
deferred tax assets have been revalued from 34% to 21% with a corresponding offset to the valuation allowance and any potential
other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance.
The reduction of the corporate tax rate resulted in a write-down of the gross deferred tax asset of approximately $4,700, and
a corresponding write-down of the valuation allowance. Upon completion of our 2017 U.S. income tax return in 2018 the Company
may identify additional remeasurement adjustments to our recorded deferred tax liabilities. We will continue to assess our provision
for income taxes as future guidance is issued, but do not currently anticipate significant revisions will be necessary. Any such
revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
At
December 31, 2018 and 2017, the Company had net deferred tax assets of $39,500 and $22,125, respectively, against which a valuation
allowance of $41,100 and $21,700, respectively, had been recorded. The determination of this valuation allowance did not take
into account the Company’s deferred tax liability for goodwill assigned an indefinite life for book purposes, also known
as a “naked credit” in the amount of $1,640 and $560 at December 31, 2018 and 2017, respectively. The change in the
valuation allowance for the year ended December 31, 2018 was an increase of $19,400. The increase in the valuation allowance for
the year ended December 31, 2018 was mainly attributable to increases in net operating losses and accrued liabilities. The increase
in the valuation allowance for the year ended December 31, 2017 was mainly attributable to increases in net operating losses and
accrued liabilities, partially offset by a decrease in the gross deferred tax assets caused by the decrease in the corporate tax
rate.
Significant
components of the Company’s deferred tax assets at December 31, 2017 and 2016 are as follows:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
39,996
|
|
|
$
|
18,587
|
|
Interest
expense limitation
|
|
|
1,983
|
|
|
|
—
|
|
Accrued
liabilities
|
|
|
1,442
|
|
|
|
1,139
|
|
Intangible
assets
|
|
|
1,201
|
|
|
|
1,119
|
|
Stock-based
compensation
|
|
|
1,395
|
|
|
|
1,061
|
|
Reserves
|
|
|
95
|
|
|
|
219
|
|
Gross
deferred tax assets
|
|
|
46,112
|
|
|
|
22,125
|
|
Valuation
allowance
|
|
|
(41,121
|
)
|
|
|
(21,682
|
)
|
Gross
deferred tax assets after valuation allowance
|
|
|
4,991
|
|
|
|
443
|
|
Deferred
tax liability – unrealized gains
|
|
|
(4,557
|
)
|
|
|
—
|
|
Deferred
tax liability – goodwill
|
|
|
(1,641
|
)
|
|
|
(560
|
)
|
Deferred
tax liability – property and equipment
|
|
|
(434
|
)
|
|
|
(443
|
)
|
Net
deferred tax liability
|
|
$
|
(1,641
|
)
|
|
$
|
(560
|
)
|
A
reconciliation of the federal statutory tax rate and the effective tax rates for the years ended December 31, 2018 and 2017 is
as follows:
|
|
December
31
|
|
|
|
2018
|
|
|
2017
|
|
U.S
federal statutory rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
State
income taxes, net of federal benefit
|
|
|
6.5
|
%
|
|
|
1.7
|
%
|
Nondeductible
– meals & entertainment
|
|
|
(0.1
|
)%
|
|
|
(0.1
|
)%
|
Warrant
derivative gains or losses
|
|
|
4.2
|
%
|
|
|
(0.1
|
)%
|
Impact
of tax law change
|
|
|
—
|
%
|
|
|
(15.5
|
)%
|
Change
in valuation allowance
|
|
|
(32.9
|
)%
|
|
|
(20.9
|
)%
|
Other
|
|
|
(0.6
|
)
|
|
|
0.2
|
%
|
Effective
tax rate
|
|
|
(1.9
|
)%
|
|
|
(0.7
|
)%
|
The
Company had approximately $166,300 and $83,700 of available gross net operating loss (“NOL”) carryforwards (federal
and state) as of December 31, 2018 and 2017, respectively, which begin to expire in 2032. However, the Company has not yet filed
its tax returns for its fiscal years ended September 30, 2013, September 30, 2014, September 30, 2015, September 30, 2016, December
31, 2016, December 31, 2017 or December 31, 2018. Therefore, the Company’s NOLs will not be available to offset future taxable
income, if any, until the returns are filed.
Sections
382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards
available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership
interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period,
the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. Beacon had generated approximately
$25,000 of NOLs prior to the Beacon Merger, which the Company’s preliminary analysis indicates would be subject to significant
limitations pursuant to Internal Revenue Code Section 382, such that no deferred tax asset has been reflected herein related to
the Beacon NOLs.
The
Company has not yet assessed whether an ownership change under Section 382 occurred during the years ended December 31, 2018 and
2017. If an ownership change occurred, there is a potential that a portion of the Company’s NOLs could be limited. However,
since there is a full valuation allowance offsetting the deferred tax asset related to the NOL, a limitation should not have a
material impact on the Company’s financial statements. The Company will continue to monitor its ownership changes for purposes
of Section 382.
During
the period of September 30, 2014 through December 31, 2017, the Company operated primarily in Florida, Indiana, Nevada, North
Carolina, Colorado, Texas, Iowa, Washington, Missouri, Georgia, and New York. If the Company is required to pay income taxes or
penalties in the future, penalties will be recorded in general and administrative expenses and interest will be separately stated
as interest expense. The Company has not yet filed its tax returns for its fiscal years ended September 30, 2012, September 30,
2013, September 30, 2014, September 30, 2015, September 30, 2016, December 31, 2016, December 31, 2017 or December 31, 2018, but
has engaged an accounting firm to begin to compile the past due returns. The Company’s tax returns for the periods from
October 1, 2012 through December 31, 2018 remain subject to examination and may be subject to penalties for late filing.
The
Company does not have any uncertain tax positions for which it is reasonably possible that the total amount of gross unrecognized
tax benefits will increase or decrease within 12 months as of December 31, 2018. The unrecognized tax benefits may increase or
change during the next year for items that arise in the ordinary course of business.
Income
Taxes (Predecessor)
The
Predecessor was taxed as a Sub Chapter S-Corporation in 2016 and the period from January 1, 2017 through April 20, 2017 which
is a non-taxing entity for Federal income tax purposes. With the exception of the New York State minimum tax, the shareholders
of Benchmark include their respective share of the income or loss in their personal income tax returns accordingly. New York City
does not acknowledge S-Corp status and assesses taxes at the corporate level. Local income taxes incurred amounted to $240 for
the period from January 1, 2017 through April 20, 2017.
Benchmark
is current with respect to its Federal, State and City income tax filing requirements. Management is not aware of any issues or
circumstances that would unfavorably impact its tax status. Management has determined that Benchmark had no uncertain tax positions
that would require financial statement recognition. The Company is a non-taxing entity for both Federal and State income tax purposes
and its temporary differences between financial statement carrying amount and income tax bases are not material. Therefore, no
deferred tax was calculated. The Company’s effective local tax rate was 7.5% and 48.6% for the year ended December 31, 2016
and the period from January 1, 2017 through April 20, 2017, respectively. The effective rate is less than the statutory rate for
the year ended December 31, 2016 due to an immaterial under accrual of local taxes and more than the statutory rate for the period
from January 1, 2017 through April 20, 2017 due to an immaterial over accrual of local taxes which the effective rate is also
impacted due to the short tax period.
NOTE
20. STOCKHOLDERS’ EQUITY
Authorized
Capital
The
Company is currently authorized to issue up to 100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares
of convertible preferred stock, par value $0.01 per share, of which the following series have been designated: 4,500 shares of
Series A, 1,000 shares of Series A-1, 4,000 shares of Series B, 400 shares of Series C-1, 2,000 shares of Series C-2, 110 shares
of Series C-3, and 2,000,000 shares of Series D, 1,980,000 of Series F and 1,780 shares of Series G.
Common
Stock
The
Company is presently authorized to issue up to 100,000,000 shares of common stock, $0.001 par value per share, of which 12,286,847
and 5,798,281 shares of common stock were issued and outstanding as of December 31, 2018 and 2017, respectively. The holders
of the Company’s common stock are entitled to receive dividends equally when, as and if declared by the Board of Directors,
out of funds legally available.
The
holders of the Company’s common stock have sole voting rights, one vote for each share held of record, and are entitled
upon liquidation of the Company to share ratably in the net assets of the Company available for distribution after payment of
all obligations of the Company and after provision has been made with respect to each class of stock, if any, having preference
over the common stock, currently including the Company’s preferred stock. The shares of common stock are not redeemable
and have no preemptive or similar rights.
Equity
Transactions (in whole dollars)
Settlement
of Legal Matters
During
the year ended December 31, 2018, the Company issued 58,083 shares of its common stock with a fair value of $553 for settlement
of legal matters.
During
the year ended December 31, 2017, the Company issued 836 shares of its common stock with a fair value of $8 for settlement of
legal matters.
Investors
During
the year ended December 31, 2018, the Company issued 902,784 shares of its common stock to individual investors, which resulted
in net proceeds to the Company of $6,232.
During
the year ended December 31, 2017, the Company issued 211,511 shares of its common stock to individual investors, which resulted
in net proceeds to the Company of $577.
Consultants
During
the year ended December 31, 2018, the Company issued 810,106 shares of its common stock with a fair value of $8,686 pursuant to
consulting agreements.
During
the year ended December 31, 2017, the Company issued 93,959 shares of its common stock with a fair value of $1,321 pursuant to
consulting agreements.
Share-Based
Compensation
During
the year ended December 31, 2018, the Company issued 1,328,663 shares of its common stock with a fair value of $16,606 to employees.
Board
of Directors
During
the year ended December 31, 2018, the Company issued 33,000 shares of its common stock with a fair value of $533 to board of directors.
During
the year ended December 31, 2017, the Company issued 800 shares of its common stock with a fair value of $9 to board of directors.
Senior
Lender
During
the year ended December 31, 2018, the Company issued 854,599 shares of its common stock with a fair value of $1,097 to its Senior
Lender.
During
the year ended December 31, 2017, the Company issued 256,801 shares of its common stock with a fair value of $5,650 to its Senior
Lender.
Settlement
of Debt and Related Costs
During
the year ended December 31, 2018, the Company issued 40,000 shares of its common stock with a fair value of $919 to settle debt
having an approximate value.
During
the year ended December 31, 2017, the Company issued 170,765 shares of its common stock with a fair value of $1,587 to settle
debt having an approximate value.
Convertible
Notes – Conversions, Inducements and Related Costs
During
the year ended December 31, 2018, the Company issued 1,901,520 shares of its common stock with a fair value of $16,338 to its
convertible note holders upon conversion of outstanding convertible notes to common shares.
During
the year ended December 31, 2018, the Company issued 199,376 shares of its common stock with a fair value of $2,156 to its convertible
note holders as an inducement upon the funding of the respective convertible note
During
the year ended December 31, 2018, the Company issued 11,519 shares of its common stock with a fair value of $185 to its convertible
note holders as certain financing, settlement and prepayment costs.
During
the year ended December 31, 2017, the Company issued 200,470 shares of its common stock with a fair value of $1,925 to its convertible
note holders upon conversion of outstanding convertible notes to common shares.
During
the year ended December 31, 2017, the Company issued 27,970 shares of its common stock with a fair value of $347 to its convertible
note holders as an inducement upon the funding of the respective convertible note
During
the year ended December 31, 2017, the Company issued 6,800 shares of its common stock with a fair value of $114 to its convertible
note holders as certain financing, settlement and prepayment costs.
Exercise
of Warrant Shares
During
the year ended December 31, 2018, the Company issued 429,027 shares of its common stock with a fair value of $1,818 for the exercise
of warrant shares.
During
the year ended December 31, 2017, the Company issued 6,346 shares of its common stock with a fair value of $94 for the exercise
of warrant shares.
Shares
Returned
During
the year ended December 31, 2018, 80,114 shares of its common stock was returned to the Company with a fair value of $75.
Benchmark
Acquisition
During
the year ended December 31, 2017, the Company issued 1,069,538 shares of its common stock with a fair value of $21,658 to the
former owners for the acquisition of Benchmark. See additional details in Note 5 Acquisitions.
Employees
During
the year ended December 31, 2017, the Company issued 164,610 shares of its common stock with a fair value of $3,780 to employees.
Investor
Relations Firm
During
the year ended December 31, 2017, the Company issued 12,346 shares of its common stock with a fair value of $211 to an investor
relations firm for services rendered.
Preferred
Stock
The
Company is authorized to issue a total of 5,000,000 shares of convertible preferred stock with such designations, rights, preferences
and/or limitations as may be determined by the Board, and as expressed in a resolution thereof.
The
following table presents the convertible preferred stock activity for the years ended December 31, 2018 and 2017.
|
|
Series
A
|
|
|
Series
A-1
|
|
|
Series
G
|
|
|
Total
Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
12/31/2016
Balance
|
|
|
500
|
|
|
$
|
—
|
|
|
|
295
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
795
|
|
|
$
|
—
|
|
2017
Grant
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,780
|
|
|
|
—
|
|
|
|
1,780
|
|
|
|
—
|
|
12/31/2017
Balance
|
|
|
500
|
|
|
$
|
—
|
|
|
|
295
|
|
|
$
|
—
|
|
|
|
1,780
|
|
|
$
|
—
|
|
|
|
2,575
|
|
|
$
|
—
|
|
Exchange
to common shares
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,780
|
)
|
|
$
|
—
|
|
|
|
(1,780
|
)
|
|
|
—
|
|
12/31/2018
Balance
|
|
|
500
|
|
|
$
|
—
|
|
|
|
295
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
795
|
|
|
$
|
—
|
|
Dividend
charges recorded during the years ended December 31, 2018 and 2017 are as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
50
|
|
|
$
|
50
|
|
A-1
|
|
|
30
|
|
|
|
30
|
|
Total
|
|
$
|
80
|
|
|
$
|
80
|
|
Accrued
dividends payable in accrued expenses at December 31, 2018 and 2017 are as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Series
|
|
|
|
|
|
|
|
|
A
|
|
$
|
410
|
|
|
$
|
360
|
|
A-1
|
|
|
280
|
|
|
|
250
|
|
Total
|
|
$
|
690
|
|
|
$
|
610
|
|
Series
A and Series A-1 Convertible Preferred Stock
The
Company has designated 4,500 shares of Series A Convertible Preferred Stock (“Series A”) and 1,000 shares of Series
A-1 Convertible Preferred Stock (“Series A-1”), of which 500 and 295 shares, respectively, are currently issued and
outstanding. Holders of the Series A and Series A-1 are entitled to receive contractual cumulative dividends in preference to
any dividend on the common stock at the rate of 10% per annum on the initial investment amount commencing on the date of issue.
Such dividends are payable on January 1, April 1, July 1 and October 1 of each year, upon the declaration of payment by the Board
of Directors.
The
Series A and Series A-1 shares also contain a right of redemption in the event of liquidation or a change in control. The redemption
feature provides for payment of a liquidation fee of 110% of the face value of the Series A shares and 125% of the face value
of the series A-1 shares plus any accrued unpaid dividends in the event of bankruptcy, change of control, or any actions to take
the Company private.
Series
B Convertible Preferred Stock
The
Company previously designated 4,000 shares of Series B Convertible Preferred Stock (“Series B”), of which no
shares are currently issued and outstanding.
Series
C-1, Series C-2 and Series C-3 Convertible Preferred Stock
The
Company previously designated 400, 2,000 and 110 shares of Series C-1 Convertible Preferred Stock (“Series C-1”),
Series C-2 Convertible Preferred Stock (“Series C-2”) and SeriesC-3 Convertible Preferred Stock (“Series C-3),
respectively. There are no shares of Series C-1, Series C-2 or Series C-3 currently issued or outstanding.
Series
D Convertible Preferred Stock
The
Company previously designated 2,000,000 shares of Series D Convertible Preferred Stock (“Series D”), of which
no shares are currently issued and outstanding as of December 31, 2018 and 2017.
Series
F Convertible Preferred Stock
The
Company previously designated 1,980,000 shares of Series F Convertible Preferred Stock (“Series F”), of which
none were issued and outstanding as of December 31, 2018 and 2019, respectively.
Series
G Convertible Preferred Stock
The
Board of Directors of the Company authorized the designation of a new series of preferred stock, the Series G Convertible Preferred
Stock, out of its available “blank check preferred stock” and authorized the issuance of up to 1,780 shares of the
Series G Convertible Preferred Stock. A Certificate of Designation was filed with the Secretary of State of the State of Nevada
on December 4, 2017. The Series G Convertible Preferred Stock had various rights, privileges and preferences, including
conversion into 100 shares of Common Stock (subject to adjustments) upon the filing of an amendment to the Company’s Articles
of Incorporation incorporating a reverse stock split and the rights are junior and subordinate to any shares of Preferred Stock
issued prior to this issuance.
On
December 4, 2017, an Agreement to Exchange Common Stock for Series G Convertible Preferred Stock (“Exchange Agreement”)
was entered in between the Company and an affiliate. The Company and the affiliate agreed to the exchange of 178,000 shares of
the Company’s common stock for 1,780 shares of the Company’s Series G Convertible Preferred Stock, par value $0.01
per share (“Series G Preferred Stock”). The affiliate transferred and assigned 178,000 shares of the Company’s
common stock and the Company issued the affiliate 1,780 shares of the Company Series G Preferred Stock.
On
September 13, 2018, the affiliate converted 1,780 shares of the Series G Preferred Stock into 178,000 shares of the Company’s
common stock. As of December 31, 2018, no shares of the Series G Preferred Stock were outstanding.
Preferred
Stock Transactions
During
each of the years ended December 31, 2018 and 2017, the Company accrued an additional $80 of preferred stock dividends, respectively.
NOTE
21. STOCK-BASED AWARDS
Stock
Options
Stock
options are granted at exercise prices equal to the fair value of the Company’s common stock at the date of grant. The options
typically vest over a three-year period and each option, if not exercised or terminated, expires on the seventh anniversary of
the grant date.
The
Company estimates the grant date fair value of the stock options it grants using a Black-Scholes valuation model. The Company’s
assumption for expected volatility is based on its historical volatility data related to market trading of its own common stock.
The Company bases its assumptions for expected life of the new stock option grants on the life of the option granted, and if relevant,
its analysis of the historical exercise patterns of its stock options. The dividend yield assumption is based on dividends expected
to be paid over the expected life of the stock option. The risk-free interest rate assumption is determined by using the U.S.
Treasury rates of the same period as the expected option term of each stock option.
The
fair value of the options granted during the years ended December 31, 2018 and 2017 was determined using the following assumptions:
|
|
For
the year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Stock
option assumptions:
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.41
|
%
|
|
|
1.5%-1.98
|
%
|
Expected
life (years)
|
|
|
10
|
|
|
|
5
|
|
Expected
volatility
|
|
|
328
|
%
|
|
|
330%-379
|
%
|
Expected
dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
The
following tables provide information about outstanding options for the years ended December 31, 2018 and 2017:
|
|
Stock
Options
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual
Life(In years)
|
|
|
Intrinsic
Value
(In
thousands)
|
|
Outstanding
as of December 31, 2016
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Granted
|
|
|
94,666
|
|
|
$
|
16.55
|
|
|
|
—
|
|
|
|
—
|
|
Options
exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
as of December 31, 2017
|
|
|
94,666
|
|
|
|
16.55
|
|
|
|
9.57
|
|
|
|
64
|
|
Granted
|
|
|
250,000
|
|
|
|
15.84
|
|
|
|
—
|
|
|
|
—
|
|
Options
exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(2,573
|
)
|
|
|
8.75
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
as of December 31, 2018
|
|
|
342,093
|
|
|
|
15.79
|
|
|
|
9.17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
options as of December 31, 2018
|
|
|
111,404
|
|
|
$
|
16.05
|
|
|
|
9.07
|
|
|
|
—
|
|
Stock
compensation expense related to the options totaled approximately $1,808 and $563 for the years ended December 31, 2018 and 2017,
respectively.
At
December 31, 2018 and 2017, the Company had unrecognized compensation expense related to stock options, of $2,692 and $556, respectively.
This expense will be recognized over a weighted-average number of years of 1.6, based on the average remaining service periods
for the awards.
The
aggregate intrinsic values presented above represent the total pre-tax intrinsic values (the difference between the Company’s
closing stock price of $2.34 and $9.92 on the last trading day of 2018 and 2017, respectively, and the exercise price, multiplied
by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their
options on the last trading day during 2018 and 2017. The amount of aggregate intrinsic value will change based on the price of
the Company’s Common Stock.
The
weighted average grant date fair value per share of Company’s stock options granted during the years ended December 31,
2018 and 2017 was $15.84 and $12.50, respectively. The total fair value of options vested during the years ended December 31,
2018 and 2017 was $1,276 and -0- , respectively.
As
of December 31, 2018, there were 2,657,907 common shares available for issuance under the 2017 Plan.
Warrants
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 the 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.
All
warrants outstanding as of December 31, 2018 were exercisable. The following table shows exercise prices and expiration dates
for warrants outstanding as of December 31, 2018:
Issued
to
|
|
Amount
|
|
|
Issue
Date
|
|
Expiration
Date
|
|
Exercise
Price
|
|
Investment
Bank
|
|
|
97
|
|
|
10/31/2014
|
|
10/31/2021
|
|
$
|
5.00
|
|
Equity
Investors
|
|
|
60
|
|
|
9/1/2016
|
|
9/1/2021
|
|
$
|
10.00
|
|
Equity
Investors
|
|
|
6
|
|
|
3/29/2017
|
|
3/29/2022
|
|
$
|
10.00
|
|
Equity
Investors
|
|
|
99
|
|
|
9/8/2016
|
|
9/8/2021
|
|
$
|
20.00
|
|
Equity
Investors
|
|
|
97
|
|
|
9/29/2016
|
|
9/29/2021
|
|
$
|
20.00
|
|
Equity
Investor
|
|
|
94
|
|
|
9/30/2016
|
|
9/30/2021
|
|
$
|
20.00
|
|
Equity
Investors
|
|
|
104
|
|
|
10/12/2016
|
|
10/12/2021
|
|
$
|
20.00
|
|
Term
Note Lender (1)
|
|
|
100
|
|
|
11/11/2016
|
|
11/11/2021
|
|
$
|
10.00
|
|
Term
Note Lender (1)
|
|
|
150
|
|
|
12/23/2016
|
|
12/23/2021
|
|
$
|
10.00
|
|
Convertible
Note Holder (1)
|
|
|
5
|
|
|
1/17/2017
|
|
1/17/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
5
|
|
|
1/18/2017
|
|
1/18/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
4
|
|
|
2/17/2017
|
|
2/17/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (5)
|
|
|
4
|
|
|
2/17/2017
|
|
2/17/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
5
|
|
|
2/23/2017
|
|
2/23/2020
|
|
$
|
62.50
|
|
Term
Note Lender (1)
|
|
|
150
|
|
|
3/28/2017
|
|
3/28/2022
|
|
$
|
10.00
|
|
Convertible
Note Holder (1)
|
|
|
5
|
|
|
5/19/2017
|
|
5/19/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
4
|
|
|
5/17/2017
|
|
5/17/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
4
|
|
|
5/17/2017
|
|
5/17/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
90
|
|
|
6/1/2017
|
|
6/1/2022
|
|
$
|
25.00
|
|
Convertible
Note Holder (1)
|
|
|
160
|
|
|
6/2/2017
|
|
6/30/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
483
|
|
|
6/8/2017
|
|
6/30/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
2
|
|
|
6/21/2017
|
|
6/21/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
3
|
|
|
6/21/2017
|
|
6/21/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
3
|
|
|
6/21/2017
|
|
6/21/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
11
|
|
|
8/2/2017
|
|
8/2/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
11
|
|
|
8/2/2017
|
|
8/2/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
2
|
|
|
8/14/2017
|
|
8/14/2020
|
|
$
|
62.50
|
|
Convertible
Note Holder (1)
|
|
|
2
|
|
|
8/14/2017
|
|
8/14/2020
|
|
$
|
62.50
|
|
Equity
Investor
|
|
|
14
|
|
|
8/27/2017
|
|
8/27/2020
|
|
$
|
16.50
|
|
Term
Note Lender (1)
|
|
|
20
|
|
|
11/8/2017
|
|
11/8/2022
|
|
$
|
10.00
|
|
Term
Note Lender (1)
|
|
|
140
|
|
|
11/8/2017
|
|
11/8/2022
|
|
$
|
10.00
|
|
Equity
Investors
|
|
|
41
|
|
|
4/1/2018
|
|
4/1/2023
|
|
$
|
15.00
|
|
Equity
Investors
|
|
|
41
|
|
|
4/1/2018
|
|
4/1/2023
|
|
$
|
15.00
|
|
Equity
Investors
|
|
|
90
|
|
|
10/25/2018
|
|
10/25/2019
|
|
$
|
6.00
|
|
Term
Note Lender (1)
|
|
|
108
|
|
|
10/30/2018
|
|
10/30/2023
|
|
$
|
6.00
|
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Warrant
was determined to be a derivative subject to fair value accounting and is recorded as
a warrant liability.
|
A
summary of the warrant activity the years ended December 31, 2018 and 2017 is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Life
in Years
|
|
Outstanding,
December 31, 2016
|
|
|
1,020
|
|
|
$
|
18.04
|
|
|
|
4.45
|
|
Issued
|
|
|
1,348
|
|
|
|
27.84
|
|
|
|
—
|
|
Exercised
|
|
|
(125
|
)
|
|
|
62.50
|
|
|
|
—
|
|
Outstanding,
December 31, 2017
|
|
|
2,243
|
|
|
|
29.52
|
|
|
|
3.32
|
|
Issued
|
|
|
416
|
|
|
|
4.68
|
|
|
|
|
|
Exercised
|
|
|
(445
|
)
|
|
|
13.95
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
2,214
|
|
|
$
|
28.93
|
|
|
|
2.59
|
|
The
Company has assessed its outstanding equity-linked financial statements issued with the term loans, see Note 14 and the convertible
notes, see Note 12 and has concluded that the warrants are subject to derivative accounting as a result of certain anti-dilution
provisions contained in the warrant agreements. The value of these warrants at issuance are classified as a fee and are being
amortized over the life of the respective loan or convertible note. 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.
See Note 16.
NOTE
22. CUSTOMER CONCENTRATION
Accounts
receivable and revenue from the Company’s major customers as of December 31, 2018 and 2017 are as follows:
(in
thousands)
|
|
Revenues
|
|
|
%
of Total Revenue
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Customer
A
|
|
$
|
47,664
|
|
|
$
|
—
|
|
|
|
12
|
%
|
|
|
—
|
%
|
Customer
B
|
|
$
|
—
|
|
|
$
|
49,307
|
|
|
|
—
|
%
|
|
|
21
|
%
|
Customer
C
|
|
$
|
31,512
|
|
|
$
|
29,972
|
|
|
|
8
|
%
|
|
|
14
|
%
|
(in
thousands)
|
|
Revenues
(Predecessor)
|
|
|
%
of Total Revenue
|
|
|
|
For
the period Ended April 21, 2017
|
|
|
For
the period
Ended April 21, 2017
|
|
Customer
D
|
|
$
|
7,382
|
|
|
|
21
|
%
|
Customer
E
|
|
$
|
6,752
|
|
|
|
19
|
%
|
Customer
F
|
|
$
|
4,048
|
|
|
|
12
|
%
|
(in
thousands)
|
|
Accounts
Receivable
|
|
|
%
of Accounts Receivable
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Customer
B
|
|
$
|
—
|
|
|
$
|
18,477
|
|
|
|
—
|
%
|
|
|
30
|
%
|
Customer
G
|
|
$
|
7,724
|
|
|
$
|
—
|
|
|
|
10
|
%
|
|
|
—
|
%
|
Customer
C
|
|
$
|
—
|
|
|
$
|
7,513
|
|
|
|
—
|
%
|
|
|
12
|
%
|
Customer
D
|
|
$
|
8,334
|
|
|
$
|
—
|
|
|
|
11
|
%
|
|
|
—
|
%
|
The
Company’s customer base is highly concentrated. Revenues are non-recurring, project-based revenues, therefore, it is not
unusual for 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.
NOTE
23. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
Costs
and estimated earnings in excess of billings on uncompleted contracts are as follows:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Costs
incurred on uncompleted contracts
|
|
|
283,833
|
|
|
$
|
101,785
|
|
Estimated
earnings
|
|
|
16,568
|
|
|
|
5,916
|
|
|
|
|
300,401
|
|
|
|
107,701
|
|
Billings
to date
|
|
|
(329,117
|
)
|
|
|
(139,946
|
)
|
|
|
|
(28,716
|
)
|
|
$
|
(32,245
|
)
|
Included
in the accompanying balance sheets:
|
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings
|
|
|
5,974
|
|
|
|
5,286
|
|
Billings
in excess of costs and estimated earnings
|
|
|
(34,690
|
)
|
|
|
(37,531
|
)
|
Total
|
|
|
(28,716
|
)
|
|
$
|
(32,245
|
)
|
NOTE
24. BACKLOG (UNAUDITED)
The
following is a reconciliation of backlog representing signed contracts in progress at December 31, 2018:
Balance
– December 31, 2017
|
|
$
|
244,645
|
|
New
contracts and adjustments
|
|
|
257,529
|
|
|
|
|
502,174
|
|
Less
contract revenues earned for the year ended December 31, 2018
|
|
|
(369,651
|
)
|
Balance
– December 31, 2018
|
|
$
|
132,523
|
|
NOTE
25. UNAUDITED QUARTERLY DATA
|
|
Three
months ended
|
|
($
in thousands, except per share data)
|
|
March
31, 2018
(As Restated)
|
|
|
June
30, 2018
(As Restated)
|
|
|
September
30, 2018
(As Restated)
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
90,453
|
|
|
$
|
83,525
|
|
|
$
|
88,837
|
|
|
$
|
121,940
|
|
Gross
profit
|
|
$
|
12,230
|
|
|
$
|
13,076
|
|
|
$
|
18,696
|
|
|
$
|
8,885
|
|
Operating
loss
|
|
$
|
(149
|
)
|
|
$
|
(2,358
|
)
|
|
$
|
(12,264
|
)
|
|
$
|
(23,522
|
)
|
Net
(loss) income
|
|
$
|
(1,087
|
)
|
|
$
|
7,501
|
|
|
$
|
(12,987
|
)
|
|
$
|
(40,019
|
)
|
Cumulative
preferred dividends
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
Net
(loss) income applicable to common shares
|
|
$
|
(1,107
|
)
|
|
$
|
7,481
|
|
|
$
|
(13,007
|
)
|
|
$
|
(40,039
|
)
|
Net
(loss) income per common share – basic
|
|
$
|
(0.19
|
)
|
|
$
|
1.13
|
|
|
$
|
(1.68
|
)
|
|
$
|
(3.79
|
)
|
Net
(loss) income per common share – diluted
|
|
$
|
(0.19
|
)
|
|
$
|
0.50
|
|
|
$
|
(1.68
|
)
|
|
$
|
(3.79
|
)
|
Weighted average
number of common shares outstanding – basic
|
|
|
5,851,288
|
|
|
|
6,601,685
|
|
|
|
7,745,537
|
|
|
|
10,577,376
|
|
Weighted
average number of common shares outstanding – diluted
|
|
|
5,851,288
|
|
|
|
14,996,607
|
|
|
|
7,745,537
|
|
|
|
10,577,376
|
|
|
|
Three
months ended
|
|
($
in thousands, except per share data)
|
|
March
31, 2017
(As Restated)
|
|
|
June
30, 2017
(As Restated)
|
|
|
September
30, 2017
(As Restated)
|
|
|
December
31, 2017
(As Restated)
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
5,443
|
|
|
$
|
42,581
|
|
|
$
|
96,827
|
|
|
$
|
70,658
|
|
Gross
profit (loss)
|
|
$
|
2,750
|
|
|
$
|
9,255
|
|
|
$
|
23,776
|
|
|
$
|
(5,424
|
)
|
Operating
(loss) income
|
|
$
|
(2,658
|
)
|
|
$
|
220
|
|
|
$
|
14,161
|
|
|
$
|
(22,185
|
)
|
Net
loss
|
|
$
|
(12,351
|
)
|
|
$
|
(34,524
|
)
|
|
$
|
(1,748
|
)
|
|
$
|
(43,460
|
)
|
Cumulative
preferred dividends
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
|
$
|
(20
|
)
|
Net
loss applicable to common shares
|
|
$
|
(12,371
|
)
|
|
$
|
(34,544
|
)
|
|
$
|
(1,768
|
)
|
|
$
|
(43,480
|
)
|
Net
loss per common share – basic and diluted
|
|
$
|
(3.73
|
)
|
|
$
|
(7.22
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(7.83
|
)
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
3,312,373
|
|
|
|
4,787,556
|
|
|
|
5,367,966
|
|
|
|
5,552,429
|
|
Explanatory
Note:
The
Company is providing restated quarterly and year-to-date unaudited consolidated financial information for interim periods occurring
within years ended December 31, 2018 and 2017 in order to comply with SEC requirements. See Note 2 for further background
concerning the events preceding the restatement of financial information in this Form 10-K.
As
discussed in Note 2, the Audit Committee and the Company identified certain errors that are corrected through adjustments made
as part of the restatement. These adjustments include corrections related to the investigation of convertible notes that was conducted,
as well as (i) corrections related to the Company’s convertible notes and (ii) corrections resulting from management’s
review of significant accounts and transactions.
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended March 31, 2018 is as follows:
|
|
As
of March 31, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,638
|
|
|
$
|
24
|
|
|
$
|
9,662
|
|
Accounts
receivable, net
|
|
|
78,251
|
|
|
|
(17,166
|
)
|
|
|
61,085
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
|
4,552
|
|
|
|
(1,107
|
)
|
|
|
3,445
|
|
Other
current assets
|
|
|
9,782
|
|
|
|
(273
|
)
|
|
|
9,509
|
|
Total
current assets
|
|
|
102,223
|
|
|
|
(18,522
|
)
|
|
|
83,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
8,121
|
|
|
|
(1,466
|
)
|
|
|
6,655
|
|
Intangible
assets, net
|
|
|
25,443
|
|
|
|
—
|
|
|
|
25,443
|
|
Goodwill
|
|
|
35,672
|
|
|
|
9,335
|
|
|
|
45,007
|
|
Total
assets
|
|
|
171,459
|
|
|
|
(10,653
|
)
|
|
|
160,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
46,095
|
|
|
|
(366
|
)
|
|
|
45,729
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
18,516
|
|
|
|
8,588
|
|
|
|
27,104
|
|
Due
to related party
|
|
|
28
|
|
|
|
—
|
|
|
|
28
|
|
Accrued
expenses and other current liabilities
|
|
|
7,259
|
|
|
|
282
|
|
|
|
7,541
|
|
Senior
notes payable, current portion net of original discount and deferred financing costs
|
|
|
—
|
|
|
|
25,807
|
|
|
|
25,807
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
3,548
|
|
|
|
3,548
|
|
Merchant
credit agreements, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
2,369
|
|
|
|
2,369
|
|
Notes
payable, current portion, net of original issue discount and deferred financing costs
|
|
|
10,182
|
|
|
|
(6,910
|
)
|
|
|
3,272
|
|
Notes
payable, related parties, current portion
|
|
|
7,603
|
|
|
|
—
|
|
|
|
7,603
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
22,077
|
|
|
|
22,077
|
|
Warrant
liability
|
|
|
—
|
|
|
|
29,897
|
|
|
|
29,897
|
|
Total
current liabilities
|
|
|
89,683
|
|
|
|
85,292
|
|
|
|
174,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
1,934
|
|
|
|
(125
|
)
|
|
|
1,809
|
|
Notes
payable, related parties, non-current net of debt discount
|
|
|
39,523
|
|
|
|
—
|
|
|
|
39,523
|
|
Senior
note payable, non-current portion, net of original issue discount and deferred financing costs
|
|
|
26,408
|
|
|
|
(26,408
|
)
|
|
|
—
|
|
Deferred
tax liability
|
|
|
1,122
|
|
|
|
(39
|
)
|
|
|
1,083
|
|
Total
liabilities
|
|
|
158,670
|
|
|
|
58,720
|
|
|
|
217,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at March
31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at March
31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
G convertible preferred stock, $0.001 stated value, 1,780 shares designated and 1,780 shares issued and outstanding at March
31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized 6,136,059 shares issued and outstanding at March 31,
2018, respectively
|
|
|
6
|
|
|
|
—
|
|
|
|
6
|
|
Additional
paid-in capital
|
|
|
57,792
|
|
|
|
8,436
|
|
|
|
66,228
|
|
Shares
to be issued
|
|
|
6,681
|
|
|
|
(375
|
)
|
|
|
6,306
|
|
Subscriptions
receivable
|
|
|
(3,222
|
)
|
|
|
3,222
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(48,468
|
)
|
|
|
(80,656
|
)
|
|
|
(129,124
|
)
|
Total
stockholders’ deficit
|
|
|
12,789
|
|
|
|
(69,373
|
)
|
|
|
(56,584
|
)
|
Total
liabilities and stockholders’ deficit
|
|
|
171,459
|
|
|
|
(10,653
|
)
|
|
|
160,806
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended March 31, 2018
is as follows:
|
|
Three
Months ended March 31, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net of discounts
|
|
$
|
85,145
|
|
|
$
|
5,308
|
|
|
$
|
90,453
|
|
Cost
of revenues
|
|
|
73,654
|
|
|
|
4,569
|
|
|
|
78,223
|
|
Gross
profit
|
|
|
11,491
|
|
|
|
739
|
|
|
|
12,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
5,638
|
|
|
|
224
|
|
|
|
5,862
|
|
Selling,
general and administrative expenses
|
|
|
4,639
|
|
|
|
907
|
|
|
|
5,546
|
|
Amortization
expense
|
|
|
938
|
|
|
|
—
|
|
|
|
938
|
|
Loss
on sale of asset
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
Transaction
expenses
|
|
|
93
|
|
|
|
(93
|
)
|
|
|
—
|
|
Total
operating expenses
|
|
|
11,341
|
|
|
|
1,038
|
|
|
|
12,379
|
|
Operating
income (loss)
|
|
|
150
|
|
|
|
(299
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(913
|
)
|
|
|
(122
|
)
|
|
|
(1,035
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(5,912
|
)
|
|
|
(2,215
|
)
|
|
|
(8,127
|
)
|
Gain
on debt derivative liability
|
|
|
—
|
|
|
|
11,759
|
|
|
|
11,759
|
|
Loss
on warrant liability
|
|
|
—
|
|
|
|
(13,821
|
)
|
|
|
(13,821
|
)
|
Other
(expense) income, net
|
|
|
(597
|
)
|
|
|
(190
|
)
|
|
|
(787
|
)
|
Extinguishment
loss
|
|
|
(322
|
)
|
|
|
14,823
|
|
|
|
14,501
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(2,860
|
)
|
|
|
(2,860
|
)
|
Financing
costs
|
|
|
(2,002
|
)
|
|
|
2,002
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(9,746
|
)
|
|
|
9,376
|
|
|
|
(370
|
)
|
Loss
before provision for income taxes
|
|
|
(9,596
|
)
|
|
|
9,077
|
|
|
|
(519
|
)
|
Provision
for income taxes
|
|
|
568
|
|
|
|
—
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(10,164
|
)
|
|
|
9,077
|
|
|
|
(1,087
|
)
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(10,184
|
)
|
|
$
|
9,077
|
|
|
$
|
(1,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(2.09
|
)
|
|
$
|
1.55
|
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,876,131
|
|
|
|
5,851,288
|
|
|
|
5,851,288
|
|
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended June 30, 2018 is as follows:
|
|
As
of June 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
12,884
|
|
|
$
|
2
|
|
|
$
|
12,886
|
|
Accounts
receivable, net
|
|
|
72,693
|
|
|
|
(12,779
|
)
|
|
|
59,914
|
|
Costs
and estimated earnings in excess of billings on uncompleted contract
|
|
|
2,206
|
|
|
|
1,023
|
|
|
|
3,229
|
|
Other
current assets
|
|
|
8,814
|
|
|
|
(1,796
|
)
|
|
|
7,018
|
|
Total
current assets
|
|
|
96,597
|
|
|
|
(13,550
|
)
|
|
|
83,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,165
|
|
|
|
(2,367
|
)
|
|
|
6,798
|
|
Intangible
assets, net
|
|
|
23,190
|
|
|
|
—
|
|
|
|
23,190
|
|
Goodwill
|
|
|
35,672
|
|
|
|
9,335
|
|
|
|
45,007
|
|
Total
assets
|
|
|
164,624
|
|
|
|
(6,582
|
)
|
|
|
158,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
40,175
|
|
|
|
(477
|
)
|
|
|
39,698
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
21,754
|
|
|
|
10,498
|
|
|
|
32,252
|
|
Due
to related parties
|
|
|
89
|
|
|
|
—
|
|
|
|
89
|
|
Accrued
expenses and other current liabilities
|
|
|
7,141
|
|
|
|
1,651
|
|
|
|
8,792
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
4,591
|
|
|
|
4,591
|
|
Merchant
credit agreements, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
2,668
|
|
|
|
2,668
|
|
Senior
notes payable, current portion, net of original issue discount and deferred financing costs
|
|
|
28,661
|
|
|
|
(451
|
)
|
|
|
28,210
|
|
Notes
payable and capital leases, current portion, net of original issue discount and deferred financing costs
|
|
|
14,343
|
|
|
|
(11,466
|
)
|
|
|
2,877
|
|
Notes
payable, related party
|
|
|
19,173
|
|
|
|
(850
|
)
|
|
|
18,323
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
8,416
|
|
|
|
8,416
|
|
Warrant
liability
|
|
|
—
|
|
|
|
26,793
|
|
|
|
26,793
|
|
Total
current liabilities
|
|
|
131,336
|
|
|
|
41,373
|
|
|
|
172,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
1,617
|
|
|
|
—
|
|
|
|
1,617
|
|
Notes
payable, non-current portion, related parties net of debt discount
|
|
|
27,775
|
|
|
|
—
|
|
|
|
27,775
|
|
Deferred
tax liability
|
|
|
1,007
|
|
|
|
—
|
|
|
|
1,007
|
|
Total
liabilities
|
|
|
161,735
|
|
|
|
41,373
|
|
|
|
203,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at June
30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at June
30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
G convertible preferred stock, $0.001 stated value, 1,780 shares designated and 1,780 shares issued and outstanding at June
30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 7,225,158 shares issued and outstanding at June 30,
2018
|
|
|
7
|
|
|
|
—
|
|
|
|
7
|
|
Additional
paid-in capital
|
|
|
67,677
|
|
|
|
8,876
|
|
|
|
76,553
|
|
Subscriptions
receivable
|
|
|
(2,769
|
)
|
|
|
2,769
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(62,026
|
)
|
|
|
(59,600
|
)
|
|
|
(121,626
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
2,889
|
|
|
|
(47,955
|
)
|
|
|
(45,066
|
)
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
164,624
|
|
|
$
|
(6,582
|
)
|
|
$
|
158,042
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended June 30, 2018
is as follows:
|
|
Three
Months ended June 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
86,367
|
|
|
$
|
(2,842
|
)
|
|
$
|
83,525
|
|
Cost
of revenues
|
|
|
72,415
|
|
|
|
(1,966
|
)
|
|
|
70,449
|
|
Gross
profit
|
|
|
13,952
|
|
|
|
(876
|
)
|
|
|
13,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
6,856
|
|
|
|
757
|
|
|
|
7,613
|
|
Selling,
general and administrative expenses
|
|
|
5,855
|
|
|
|
1,075
|
|
|
|
6,930
|
|
Amortization
of intangible assets
|
|
|
938
|
|
|
|
—
|
|
|
|
938
|
|
Loss
on sale of asset
|
|
|
(47
|
)
|
|
|
—
|
|
|
|
(47
|
)
|
Transaction
expenses
|
|
|
33
|
|
|
|
(33
|
)
|
|
|
—
|
|
Total
operating expenses
|
|
|
13,635
|
|
|
|
1,799
|
|
|
|
15,434
|
|
Operating
income (loss)
|
|
|
317
|
|
|
|
(2,675
|
)
|
|
|
(2,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,889
|
)
|
|
|
(71
|
)
|
|
|
(2,960
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(3,458
|
)
|
|
|
(3,685
|
)
|
|
|
(7,143
|
)
|
Gain
on debt derivative liability
|
|
|
—
|
|
|
|
6,313
|
|
|
|
6,313
|
|
Gain
on warrant liability
|
|
|
—
|
|
|
|
2,748
|
|
|
|
2,748
|
|
Other
income, net
|
|
|
(1,421
|
)
|
|
|
2,191
|
|
|
|
770
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(1,591
|
)
|
|
|
(1,591
|
)
|
Gain
on extinguishment of debt
|
|
|
—
|
|
|
|
11,607
|
|
|
|
11,607
|
|
Financing
costs
|
|
|
(6,214
|
)
|
|
|
6,214
|
|
|
|
—
|
|
Total
other (expenses) income, net
|
|
|
(13,982
|
)
|
|
|
23,726
|
|
|
|
9,744
|
|
(Loss)
income before provision
for income taxes
|
|
|
(13,665
|
)
|
|
|
21,051
|
|
|
|
7,386
|
|
(Benefit)
for income taxes
|
|
|
(107
|
)
|
|
|
(8
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
|
(13,558
|
)
|
|
|
21,059
|
|
|
|
7,501
|
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
(loss) income attributable to common shareholders
|
|
$
|
(13,578
|
)
|
|
$
|
21,059
|
|
|
$
|
7,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.26
|
)
|
|
$
|
3.19
|
|
|
$
|
1.13
|
|
Diluted
|
|
$
|
(2.26
|
)
|
|
$
|
1.40
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,997,856
|
|
|
|
6,601,685
|
|
|
|
6,601,685
|
|
Diluted
|
|
|
5,997,856
|
|
|
|
14,996,607
|
|
|
|
14,996,607
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the six months ended June 30, 2018
is as follows:
|
|
Six
Months ended June 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
171,511
|
|
|
$
|
2,467
|
|
|
$
|
173,978
|
|
Cost
of revenues
|
|
|
146,069
|
|
|
|
2,603
|
|
|
|
148,672
|
|
Gross
profit
|
|
|
25,442
|
|
|
|
(136
|
)
|
|
|
25,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
12,494
|
|
|
|
981
|
|
|
|
13,475
|
|
Selling,
general and administrative expenses
|
|
|
10,494
|
|
|
|
1,982
|
|
|
|
12,476
|
|
Amortization
of intangible assets
|
|
|
1,876
|
|
|
|
—
|
|
|
|
1,876
|
|
Loss
on sale of asset
|
|
|
(13
|
)
|
|
|
(1
|
)
|
|
|
(14
|
)
|
Transaction
expenses
|
|
|
125
|
|
|
|
(125
|
)
|
|
|
—
|
|
Total
operating expenses
|
|
|
24,976
|
|
|
|
2,837
|
|
|
|
27,813
|
|
Operating
loss
|
|
|
466
|
|
|
|
(2,973
|
)
|
|
|
(2,507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(3,802
|
)
|
|
|
(193
|
)
|
|
|
(3,995
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(9,370
|
)
|
|
|
(5,900
|
)
|
|
|
(15,270
|
)
|
Gain
on conversion derivative liability
|
|
|
—
|
|
|
|
18,072
|
|
|
|
18,072
|
|
Loss
on warrant derivative liability
|
|
|
—
|
|
|
|
(11,073
|
)
|
|
|
(11,073
|
)
|
Other
expense, net
|
|
|
(1,744
|
)
|
|
|
1,727
|
|
|
|
(17
|
)
|
Loss
on issuance of debt
|
|
|
—
|
|
|
|
(4,451
|
)
|
|
|
(4,451
|
)
|
Extinguishment
gain
|
|
|
—
|
|
|
|
26,108
|
|
|
|
26,108
|
|
Financing
costs
|
|
|
(8,812
|
)
|
|
|
8,812
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(23,728
|
)
|
|
|
33,102
|
|
|
|
9,374
|
|
Loss
before provision for income taxes
|
|
|
(23,262
|
)
|
|
|
30,129
|
|
|
|
6,867
|
|
Provision
for income taxes
|
|
|
460
|
|
|
|
(7
|
)
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(23,722
|
)
|
|
|
30,136
|
|
|
|
6,414
|
|
Preferred
stock dividends
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
(40
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(23,762
|
)
|
|
$
|
30,136
|
|
|
$
|
6,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(4.53
|
)
|
|
$
|
4.84
|
|
|
$
|
1.02
|
|
Diluted
|
|
$
|
(4.53
|
)
|
|
$
|
2.06
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,249,808
|
|
|
|
6,228,559
|
|
|
|
6,228,559
|
|
Diluted
|
|
|
5,249,808
|
|
|
|
14,632,985
|
|
|
|
14,632,985
|
|
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended September 30, 2018 is as follows:
|
|
As
of September 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,722
|
|
|
$
|
2
|
|
|
$
|
5,724
|
|
Accounts
receivable, net
|
|
|
75,812
|
|
|
|
(10,179
|
)
|
|
|
65,633
|
|
Costs
and estimated earnings in excess of billings on uncompleted contract
|
|
|
4,362
|
|
|
|
(1,434
|
)
|
|
|
2,928
|
|
Other
current assets
|
|
|
6,416
|
|
|
|
(173
|
)
|
|
|
6,243
|
|
Total
current assets
|
|
|
92,312
|
|
|
|
(11,784
|
)
|
|
|
80,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,956
|
|
|
|
(3,353
|
)
|
|
|
6,603
|
|
Intangible
assets, net
|
|
|
20,937
|
|
|
|
—
|
|
|
|
20,937
|
|
Goodwill
|
|
|
35,672
|
|
|
|
9,335
|
|
|
|
45,007
|
|
Total
assets
|
|
|
158,877
|
|
|
|
(5,802
|
)
|
|
|
153,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
29,307
|
|
|
|
(389
|
)
|
|
|
28,918
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
27,984
|
|
|
|
7,881
|
|
|
|
35,865
|
|
Due
to related parties
|
|
|
56
|
|
|
|
—
|
|
|
|
56
|
|
Accrued
expenses and other current liabilities
|
|
|
9,160
|
|
|
|
778
|
|
|
|
9,938
|
|
Senior
notes payable, current, net of original issue discount and deferred financing costs
|
|
|
31,122
|
|
|
|
(264
|
)
|
|
|
30,858
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
8,186
|
|
|
|
8,186
|
|
Merchant
credit agreements, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
4,821
|
|
|
|
4,821
|
|
Notes
payable and capital leases, current portion, net of original issue discount and deferred financing costs
|
|
|
17,474
|
|
|
|
(14,347
|
)
|
|
|
3,127
|
|
Notes
payable, current portion, related parties
|
|
|
18,334
|
|
|
|
—
|
|
|
|
18,334
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
11,885
|
|
|
|
11,885
|
|
Warrant
liability
|
|
|
—
|
|
|
|
11,522
|
|
|
|
11,522
|
|
Total
current liabilities
|
|
|
133,437
|
|
|
|
30,073
|
|
|
|
163,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
1,414
|
|
|
|
—
|
|
|
|
1,414
|
|
Notes
payable, non-current portion, related parties net of debt discount
|
|
|
28,463
|
|
|
|
—
|
|
|
|
28,463
|
|
Deferred
tax liability
|
|
|
1,128
|
|
|
|
513
|
|
|
|
1,641
|
|
Total
liabilities
|
|
|
164,442
|
|
|
|
30,586
|
|
|
|
195,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at September
30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at September
30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 8,605,021 shares issued and outstanding at September
30, 2018
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
Additional
paid-in capital
|
|
|
71,421
|
|
|
|
21,231
|
|
|
|
92,652
|
|
Shares
to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subscriptions
receivable
|
|
|
(2,941
|
)
|
|
|
2,941
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(74,053
|
)
|
|
|
(60,560
|
)
|
|
|
(134,613
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
(5,565
|
)
|
|
|
(36,388
|
)
|
|
|
(41,953
|
)
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
158,877
|
|
|
$
|
(5,802
|
)
|
|
$
|
153,075
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended September 30,
2018 is as follows:
|
|
Three
Months ended September 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
92,224
|
|
|
$
|
(3,387
|
)
|
|
$
|
88,837
|
|
Cost
of revenues
|
|
|
76,311
|
|
|
|
(6,170
|
)
|
|
|
70,141
|
|
Gross
profit
|
|
|
15,913
|
|
|
|
2,783
|
|
|
|
18,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
9,283
|
|
|
|
11,038
|
|
|
|
20,321
|
|
Selling,
general and administrative expenses
|
|
|
9,045
|
|
|
|
656
|
|
|
|
9,701
|
|
Amortization
of intangible assets
|
|
|
938
|
|
|
|
—
|
|
|
|
938
|
|
Transaction
expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
19,266
|
|
|
|
11,694
|
|
|
|
30,960
|
|
Operating
loss
|
|
|
(3,353
|
)
|
|
|
(8,911
|
)
|
|
|
(12,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,140
|
)
|
|
|
(74
|
)
|
|
|
(2,214
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(4,318
|
)
|
|
|
(4,059
|
)
|
|
|
(8,377
|
)
|
(Loss)
on debt derivative
liability
|
|
|
—
|
|
|
|
(2,627
|
)
|
|
|
(2,627
|
)
|
Gain
on warrant liability
|
|
|
—
|
|
|
|
14,787
|
|
|
|
14,787
|
|
Other
(expense) income, net
|
|
|
(572
|
)
|
|
|
602
|
|
|
|
30
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(203
|
)
|
|
|
(203
|
)
|
Extinguishment
loss
|
|
|
—
|
|
|
|
(1,485
|
)
|
|
|
(1,485
|
)
|
Financing
costs
|
|
|
(1,374
|
)
|
|
|
1,374
|
|
|
|
—
|
|
Total
other (expenses) income, net
|
|
|
(8,404
|
)
|
|
|
8,315
|
|
|
|
(89
|
)
|
Loss
before provision for income taxes
|
|
|
(11,757
|
)
|
|
|
(596
|
)
|
|
|
(12,353
|
)
|
Provision
for income taxes
|
|
|
268
|
|
|
|
366
|
|
|
|
634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(12,025
|
)
|
|
|
(962
|
)
|
|
|
(12,987
|
)
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(12,045
|
)
|
|
$
|
(962
|
)
|
|
$
|
(13,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.89
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(1.68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
6,372,775
|
|
|
|
7,745,537
|
|
|
|
7,745,537
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the nine months ended September 30,
2018 is as follows:
|
|
Nine
Months ended September 30, 2018
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
263,735
|
|
|
$
|
(920
|
)
|
|
$
|
262,815
|
|
Cost
of revenues
|
|
|
222,380
|
|
|
|
(3,567
|
)
|
|
|
218,813
|
|
Gross
profit
|
|
|
41,355
|
|
|
|
2,647
|
|
|
|
44,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense -selling general and administrative
|
|
|
21,777
|
|
|
|
12,019
|
|
|
|
33,796
|
|
Selling,
general and administrative expenses
|
|
|
19,653
|
|
|
|
2,524
|
|
|
|
22,177
|
|
Amortization
of intangible assets
|
|
|
2,813
|
|
|
|
1
|
|
|
|
2,814
|
|
Loss
on sale of asset
|
|
|
—
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Transaction
expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
operating expenses
|
|
|
44,243
|
|
|
|
14,530
|
|
|
|
58,773
|
|
Operating
loss
|
|
|
(2,888
|
)
|
|
|
(11,883
|
)
|
|
|
(14,771
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(5,942
|
)
|
|
|
(267
|
)
|
|
|
(6,209
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(13,688
|
)
|
|
|
(9,959
|
)
|
|
|
(23,647
|
)
|
Gain
on debt derivative liability
|
|
|
—
|
|
|
|
15,445
|
|
|
|
15,445
|
|
Gain
on warrant liability
|
|
|
—
|
|
|
|
3,714
|
|
|
|
3,714
|
|
Other
(expense) income, net
|
|
|
(2,316
|
)
|
|
|
2,329
|
|
|
|
13
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(4,654
|
)
|
|
|
(4,654
|
)
|
Extinguishment
gain
|
|
|
—
|
|
|
|
24,623
|
|
|
|
24,623
|
|
Financing
costs
|
|
|
(10,187
|
)
|
|
|
10,187
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(32,133
|
)
|
|
|
41,418
|
|
|
|
9,285
|
|
Loss
before provision for income taxes
|
|
|
(35,021
|
)
|
|
|
29,535
|
|
|
|
(5,486
|
)
|
Provision
for income taxes
|
|
|
728
|
|
|
|
359
|
|
|
|
1,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(35,749
|
)
|
|
|
29,176
|
|
|
|
(6,573
|
)
|
Preferred
stock dividends
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
(60
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(35,809
|
)
|
|
$
|
29,176
|
|
|
$
|
(6,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(6.36
|
)
|
|
$
|
4.33
|
|
|
$
|
(0.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,630,556
|
|
|
|
6,739,775
|
|
|
|
6,739,775
|
|
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended March 31, 2017 is as follows:
|
|
As
of March 31, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Accounts
receivable, net
|
|
|
9,985
|
|
|
|
(5,446
|
)
|
|
|
4,539
|
|
Other
current assets
|
|
|
3,649
|
|
|
|
(1,443
|
)
|
|
|
2,206
|
|
Total
current assets
|
|
|
13,636
|
|
|
|
(6,889
|
)
|
|
|
6,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,300
|
|
|
|
(25
|
)
|
|
|
4,275
|
|
Total
assets
|
|
|
17,936
|
|
|
|
(6,914
|
)
|
|
|
11,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
2,332
|
|
|
|
(148
|
)
|
|
|
2,184
|
|
Due
to related party
|
|
|
190
|
|
|
|
(35
|
)
|
|
|
155
|
|
Accrued
expenses and other current liabilities
|
|
|
3,508
|
|
|
|
784
|
|
|
|
4,292
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
175
|
|
|
|
175
|
|
Merchant
credit agreements, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
36
|
|
|
|
36
|
|
Notes
payable, current portion, net of original issue discount and deferred financing costs
|
|
|
5,431
|
|
|
|
3,754
|
|
|
|
9,185
|
|
Notes
payable, related parties, current portion
|
|
|
791
|
|
|
|
35
|
|
|
|
826
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
2,773
|
|
|
|
2,773
|
|
Warrant
liability
|
|
|
3,357
|
|
|
|
5,060
|
|
|
|
8,417
|
|
Total
current liabilities
|
|
|
15,609
|
|
|
|
12,434
|
|
|
|
28,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
7,300
|
|
|
|
(5,171
|
)
|
|
|
2,129
|
|
Senior
note payable, non-current portion, net of original issue discount and deferred financing costs
|
|
|
5,082
|
|
|
|
(1,113
|
)
|
|
|
3,969
|
|
Total
liabilities
|
|
|
27,991
|
|
|
|
6,150
|
|
|
|
34,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock; $0.001 par value, subject to put provision, 100,000,000 shares authorized and 444,275 shares issued and outstanding
at March 31, 2017
|
|
|
437
|
|
|
|
—
|
|
|
|
437
|
|
Total
temporary equity
|
|
|
437
|
|
|
|
—
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at March
31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at March
31, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized 3,536,096 shares issued and outstanding at March 31, 2017
|
|
|
88
|
|
|
|
(85
|
)
|
|
|
3
|
|
Additional
paid-in capital
|
|
|
17,484
|
|
|
|
6,648
|
|
|
|
24,132
|
|
Shares
to be issued
|
|
|
615
|
|
|
|
—
|
|
|
|
615
|
|
Subscriptions
receivable
|
|
|
(5,658
|
)
|
|
|
5,658
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(23,021
|
)
|
|
|
(25,285
|
)
|
|
|
(48,306
|
)
|
Total
stockholders’ deficit
|
|
|
(10,492
|
)
|
|
|
(13,064
|
)
|
|
|
(23,556
|
)
|
Total
liabilities and stockholders’ deficit
|
|
$
|
17,936
|
|
|
$
|
(6,914
|
)
|
|
$
|
11,022
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended March 31, 2017
is as follows:
|
|
Three
Months ended March 31, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
5,086
|
|
|
$
|
357
|
|
|
$
|
5,443
|
|
Cost
of revenues
|
|
|
2,678
|
|
|
|
15
|
|
|
|
2,693
|
|
Gross
profit
|
|
|
2,408
|
|
|
|
342
|
|
|
|
2,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
1,187
|
|
|
|
3,040
|
|
|
|
4,227
|
|
Selling,
general and administrative expenses
|
|
|
1,187
|
|
|
|
(198
|
)
|
|
|
989
|
|
Loss
on sale of asset
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Transaction
expenses
|
|
|
11
|
|
|
|
189
|
|
|
|
200
|
|
Total
operating expenses
|
|
|
2,385
|
|
|
|
3,023
|
|
|
|
5,408
|
|
Operating
income (loss)
|
|
|
23
|
|
|
|
(2,681
|
)
|
|
|
(2,658
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(734
|
)
|
|
|
(123
|
)
|
|
|
(857
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(397
|
)
|
|
|
(857
|
)
|
|
|
(1,254
|
)
|
Gain
on debt derivative liability
|
|
|
—
|
|
|
|
97
|
|
|
|
97
|
|
Loss
on warrant liability
|
|
|
(2,200
|
)
|
|
|
(2,450
|
)
|
|
|
(4,650
|
)
|
Other
(expense) income, net
|
|
|
(100
|
)
|
|
|
156
|
|
|
|
56
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(3,085
|
)
|
|
|
(3,085
|
)
|
Financing
costs
|
|
|
(563
|
)
|
|
|
563
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(3,994
|
)
|
|
|
(5,699
|
)
|
|
|
(9,693
|
)
|
Loss
before provision for income taxes
|
|
|
(3,971
|
)
|
|
|
(8,380
|
)
|
|
|
(12,351
|
)
|
Provision
for income taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(3,971
|
)
|
|
|
(8,380
|
)
|
|
|
(12,351
|
)
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(3,991
|
)
|
|
$
|
(8,380
|
)
|
|
$
|
(12,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.09
|
)
|
|
$
|
(2.53
|
)
|
|
$
|
(3.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
3,677,614
|
|
|
|
3,312,373
|
|
|
|
3,312,373
|
|
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended June 30, 2017 is as follows:
|
|
As
of June 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,835
|
|
|
$
|
—
|
|
|
$
|
7,835
|
|
Accounts
receivable, net
|
|
|
36,707
|
|
|
|
(1,705
|
)
|
|
|
35,002
|
|
Costs
and estimated earnings in excess of billings on uncompleted contract
|
|
|
5,966
|
|
|
|
(1,313
|
)
|
|
|
4,653
|
|
Other
current assets
|
|
|
6,736
|
|
|
|
(1,224
|
)
|
|
|
5,512
|
|
Total
current assets
|
|
|
57,244
|
|
|
|
(4,242
|
)
|
|
|
53,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
5,556
|
|
|
|
(106
|
)
|
|
|
5,450
|
|
Intangible
assets, net
|
|
|
29,320
|
|
|
|
—
|
|
|
|
29,320
|
|
Goodwill
|
|
|
46,922
|
|
|
|
9,790
|
|
|
|
56,712
|
|
Total
assets
|
|
|
139,042
|
|
|
|
5,442
|
|
|
|
144,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
22,255
|
|
|
|
4,005
|
|
|
|
26,260
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
15,380
|
|
|
|
7,209
|
|
|
|
22,589
|
|
Due
to related parties
|
|
|
154
|
|
|
|
(43
|
)
|
|
|
111
|
|
Accrued
expenses and other current liabilities
|
|
|
6,609
|
|
|
|
750
|
|
|
|
7,359
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
813
|
|
|
|
813
|
|
Merchant
credit agreement, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
57
|
|
|
|
57
|
|
Notes
payable and capital leases, current portion, net of original issue discount and deferred financing costs
|
|
|
12,012
|
|
|
|
(7,753
|
)
|
|
|
4,259
|
|
Notes
payable, current portion, related party
|
|
|
791
|
|
|
|
7,293
|
|
|
|
8,084
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
13,467
|
|
|
|
13,467
|
|
Warrant
liability
|
|
|
2,336
|
|
|
|
24,874
|
|
|
|
27,210
|
|
Total
current liabilities
|
|
|
59,537
|
|
|
|
50,672
|
|
|
|
110,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
46,981
|
|
|
|
(44,959
|
)
|
|
|
2,022
|
|
Notes
payable, non-current portion, related party
|
|
|
—
|
|
|
|
42,500
|
|
|
|
42,500
|
|
Senior
note payable, non-current portion, net of original issue discount and deferred financing costs
|
|
|
19,951
|
|
|
|
(238
|
)
|
|
|
19,713
|
|
Total
liabilities
|
|
|
126,469
|
|
|
|
47,975
|
|
|
|
174,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at June
30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at June
30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 5,208,185 shares issued and outstanding at June 30, 2017
|
|
|
130
|
|
|
|
(115
|
)
|
|
|
15
|
|
Additional
paid-in capital
|
|
|
43,011
|
|
|
|
7,104
|
|
|
|
50,115
|
|
Shares
to be issued
|
|
|
2,201
|
|
|
|
550
|
|
|
|
2,751
|
|
Subscriptions
receivable
|
|
|
(4,656
|
)
|
|
|
4,656
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(28,113
|
)
|
|
|
(54,728
|
)
|
|
|
(82,841
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
12,573
|
|
|
|
(42,533
|
)
|
|
|
(29,960
|
)
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
139,042
|
|
|
$
|
5,442
|
|
|
$
|
144,484
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended June 30, 2017
is as follows:
|
|
Three
Months ended June 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
50,697
|
|
|
$
|
(8,116
|
)
|
|
$
|
42,581
|
|
Cost
of revenues
|
|
|
42,377
|
|
|
|
(9,051
|
)
|
|
|
33,326
|
|
Gross
profit
|
|
|
8,320
|
|
|
|
935
|
|
|
|
9,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
4,169
|
|
|
|
380
|
|
|
|
4,549
|
|
Selling,
general and administrative expenses
|
|
|
4,000
|
|
|
|
14
|
|
|
|
4,014
|
|
Amortization
of intangible assets
|
|
|
589
|
|
|
|
—
|
|
|
|
589
|
|
Loss
on sale of asset
|
|
|
429
|
|
|
|
(801
|
)
|
|
|
(372
|
)
|
Transaction
expenses
|
|
|
1,409
|
|
|
|
(1,154
|
)
|
|
|
255
|
|
Total
operating expenses
|
|
|
10,596
|
|
|
|
(1,561
|
)
|
|
|
9,035
|
|
Operating
(loss) income
|
|
|
(2,276
|
)
|
|
|
2,496
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,793
|
)
|
|
|
(131
|
)
|
|
|
(1,924
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(1,934
|
)
|
|
|
(1,743
|
)
|
|
|
(3,677
|
)
|
Gain
on debt derivative liability
|
|
|
—
|
|
|
|
498
|
|
|
|
498
|
|
Gain
(loss) on warrant liability
|
|
|
1,021
|
|
|
|
(8,684
|
)
|
|
|
(7,663
|
)
|
Other
income, net
|
|
|
10
|
|
|
|
(1,390
|
)
|
|
|
(1,380
|
)
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(23,350
|
)
|
|
|
(23,350
|
)
|
Extinguishment
gain
|
|
|
—
|
|
|
|
2,873
|
|
|
|
2,873
|
|
Total
other expenses, net
|
|
|
(2,696
|
)
|
|
|
(31,927
|
)
|
|
|
(34,623
|
)
|
Loss
before provision for income taxes
|
|
|
(4,972
|
)
|
|
|
(29,431
|
)
|
|
|
(34,403
|
)
|
Provision
for income taxes
|
|
|
121
|
|
|
|
—
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(5,093
|
)
|
|
|
(29,431
|
)
|
|
|
(34,524
|
)
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(5,113
|
)
|
|
$
|
(29,431
|
)
|
|
$
|
(34,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.02
|
)
|
|
$
|
(6.15
|
)
|
|
$
|
(7.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,989,451
|
|
|
|
4,787,556
|
|
|
|
4,787,556
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the six months ended June 30, 2017
is as follows:
|
|
Six
Months ended June 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
55,783
|
|
|
$
|
(7,759
|
)
|
|
$
|
48,024
|
|
Cost
of revenues
|
|
|
45,055
|
|
|
|
(9,036
|
)
|
|
|
36,019
|
|
Gross
profit
|
|
|
10,728
|
|
|
|
1,277
|
|
|
|
12,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
5,356
|
|
|
|
3,420
|
|
|
|
8,776
|
|
Selling,
general and administrative expenses
|
|
|
5,188
|
|
|
|
(185
|
)
|
|
|
5,003
|
|
Amortization
of intangible assets
|
|
|
589
|
|
|
|
—
|
|
|
|
589
|
|
Loss
on sale of asset
|
|
|
472
|
|
|
|
(852
|
)
|
|
|
(380
|
)
|
Transaction
expenses
|
|
|
1,419
|
|
|
|
(964
|
)
|
|
|
455
|
|
Total
operating expenses
|
|
|
13,024
|
|
|
|
1,419
|
|
|
|
14,443
|
|
Operating
loss
|
|
|
(2,296
|
)
|
|
|
(142
|
)
|
|
|
(2,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,527
|
)
|
|
|
(254
|
)
|
|
|
(2,781
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(2,331
|
)
|
|
|
(2,600
|
)
|
|
|
(4,931
|
)
|
Gain
on conversion derivative liability
|
|
|
—
|
|
|
|
595
|
|
|
|
595
|
|
Loss
on warrant derivative liability
|
|
|
(1,179
|
)
|
|
|
(11,134
|
)
|
|
|
(12,313
|
)
|
Other
expense, net
|
|
|
(46
|
)
|
|
|
(1,278
|
)
|
|
|
(1,324
|
)
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(23,350
|
)
|
|
|
(23,350
|
)
|
Extinguishment
loss
|
|
|
—
|
|
|
|
(212
|
)
|
|
|
(212
|
)
|
Financing
costs
|
|
|
(563
|
)
|
|
|
563
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(6,646
|
)
|
|
|
(37,670
|
)
|
|
|
(44,316
|
)
|
Loss
before provision for income taxes
|
|
|
(8,942
|
)
|
|
|
(37,812
|
)
|
|
|
(46,754
|
)
|
Provision
for income taxes
|
|
|
121
|
|
|
|
—
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(9,063
|
)
|
|
|
(38,812
|
)
|
|
|
(46,875
|
)
|
Preferred
stock dividends
|
|
|
(40
|
)
|
|
|
—
|
|
|
|
(40
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(9,103
|
)
|
|
$
|
(38,812
|
)
|
|
$
|
(46,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(2.11
|
)
|
|
$
|
(9.33
|
)
|
|
$
|
(11.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,305,814
|
|
|
|
4,054,039
|
|
|
|
4,054,039
|
|
The
effect of the restatement on the previously filed consolidated balance sheet for the period ended September 30, 2017 is as follows:
|
|
As
of September 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,154
|
|
|
$
|
—
|
|
|
$
|
3,154
|
|
Accounts
receivable, net
|
|
|
51,791
|
|
|
|
212
|
|
|
|
52,003
|
|
Costs
and estimated earnings in excess of billings on uncompleted contract
|
|
|
6,773
|
|
|
|
1,035
|
|
|
|
7,808
|
|
Other
current assets
|
|
|
7,727
|
|
|
|
(1,270
|
)
|
|
|
6,457
|
|
Total
current assets
|
|
|
69,445
|
|
|
|
(23
|
)
|
|
|
69,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
7,101
|
|
|
|
(130
|
)
|
|
|
6,971
|
|
Intangible
assets, net
|
|
|
26,306
|
|
|
|
—
|
|
|
|
26,306
|
|
Goodwill
|
|
|
46,922
|
|
|
|
9,790
|
|
|
|
56,712
|
|
Total
assets
|
|
|
149,774
|
|
|
|
9,637
|
|
|
|
159,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
33,531
|
|
|
|
6,103
|
|
|
|
39,634
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
7,378
|
|
|
|
512
|
|
|
|
7,890
|
|
Due
to related parties
|
|
|
343
|
|
|
|
(254
|
)
|
|
|
89
|
|
Accrued
expenses and other current liabilities
|
|
|
9,931
|
|
|
|
704
|
|
|
|
10,635
|
|
Convertible
notes payable, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
1,818
|
|
|
|
1,818
|
|
Merchant
credit agreement, net of original issue discount and deferred financing cost
|
|
|
—
|
|
|
|
482
|
|
|
|
482
|
|
Notes
payable and capital leases, current portion, net of original issue discount and deferred financing costs
|
|
|
14,022
|
|
|
|
(9,713
|
)
|
|
|
4,309
|
|
Notes
payable, current portion, related parties
|
|
|
791
|
|
|
|
5,087
|
|
|
|
5,878
|
|
Debt
derivative liability
|
|
|
—
|
|
|
|
36,482
|
|
|
|
36,482
|
|
Warrant
liability
|
|
|
303
|
|
|
|
14,543
|
|
|
|
14,846
|
|
Total
current liabilities
|
|
|
66,299
|
|
|
|
55,764
|
|
|
|
122,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, non-current portion
|
|
|
46,899
|
|
|
|
(45,013
|
)
|
|
|
1,886
|
|
Notes
payable, non-current portion, related party
|
|
|
—
|
|
|
|
42,500
|
|
|
|
42,500
|
|
Senior
note payable, non-current portion, net of original issue discount and deferred financing costs
|
|
|
20,022
|
|
|
|
3,539
|
|
|
|
23,561
|
|
Total
liabilities
|
|
|
133,220
|
|
|
|
56,790
|
|
|
|
190,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity (Deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock; $0.01 par value, 5,000,000 shares authorized:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at September
30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Series
A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at September
30, 2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized and 5,435,083 shares issued and outstanding at September 30,
2017
|
|
|
5
|
|
|
|
—
|
|
|
|
5
|
|
Additional
paid-in capital
|
|
|
45,625
|
|
|
|
8,101
|
|
|
|
53,726
|
|
Shares
to be issued
|
|
|
75
|
|
|
|
175
|
|
|
|
250
|
|
Subscriptions
receivable
|
|
|
(3,588
|
)
|
|
|
3,588
|
|
|
|
—
|
|
Accumulated
deficit
|
|
|
(25,563
|
)
|
|
|
(59,017
|
)
|
|
|
(84,580
|
)
|
Total
stockholders’ (deficit) equity
|
|
|
16,554
|
|
|
|
(47,153
|
)
|
|
|
(30,599
|
)
|
Total
liabilities and stockholders’ (deficit) equity
|
|
$
|
149,774
|
|
|
$
|
9,637
|
|
|
$
|
159,411
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the three months ended September 30,
2017 is as follows:
|
|
Three
Months ended September 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
79,083
|
|
|
$
|
17,744
|
|
|
$
|
96,827
|
|
Cost
of revenues
|
|
|
63,553
|
|
|
|
9,498
|
|
|
|
73,051
|
|
Gross
profit
|
|
|
15,530
|
|
|
|
8,246
|
|
|
|
23,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense
|
|
|
5,312
|
|
|
|
716
|
|
|
|
6,028
|
|
Selling,
general and administrative expenses
|
|
|
4,414
|
|
|
|
(1,605
|
)
|
|
|
2,809
|
|
Amortization
of intangible assets
|
|
|
768
|
|
|
|
—
|
|
|
|
768
|
|
Gain
on sale of assets
|
|
|
—
|
|
|
|
(236
|
)
|
|
|
(236
|
)
|
Transaction
expenses
|
|
|
246
|
|
|
|
—
|
|
|
|
246
|
|
Total
operating expenses
|
|
|
10,740
|
|
|
|
(1,125
|
)
|
|
|
9,615
|
|
Operating
income
|
|
|
4,790
|
|
|
|
9,371
|
|
|
|
14,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expenses) income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,824
|
)
|
|
|
(82
|
)
|
|
|
(1,906
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(1,332
|
)
|
|
|
(1,569
|
)
|
|
|
(2,901
|
)
|
Loss
on debt derivative liability
|
|
|
—
|
|
|
|
(22,133
|
)
|
|
|
(22,133
|
)
|
Gain
on warrant liability
|
|
|
2,033
|
|
|
|
10,398
|
|
|
|
12,431
|
|
Other
(expense) income, net
|
|
|
(7
|
)
|
|
|
301
|
|
|
|
294
|
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(911
|
)
|
|
|
(911
|
)
|
Extinguishment
gain
|
|
|
—
|
|
|
|
190
|
|
|
|
190
|
|
Financing
costs
|
|
|
(139
|
)
|
|
|
139
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(1,269
|
)
|
|
|
(13,667
|
)
|
|
|
(14,936
|
)
|
Loss
before provision for income taxes
|
|
|
3,521
|
|
|
|
(4,296
|
)
|
|
|
(775
|
)
|
Provision
for income taxes
|
|
|
972
|
|
|
|
1
|
|
|
|
973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
2,549
|
|
|
|
(4,297
|
)
|
|
|
(1,748
|
)
|
Preferred
stock dividends
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
(20
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
2,529
|
|
|
$
|
(4,297
|
)
|
|
$
|
(1,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
0.47
|
|
|
$
|
(0.80
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
5,367,208
|
|
|
|
5,367,966
|
|
|
|
5,367,966
|
|
The
effect of the restatement on the previously filed consolidated statement of operations for the nine months ended September 30,
2017 is as follows:
|
|
Nine
Months ended September 30, 2017
|
|
($
in thousands, except per share data)
|
|
As
Previously Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues,
net of discounts
|
|
$
|
134,866
|
|
|
$
|
9,985
|
|
|
$
|
144,851
|
|
Cost
of revenues
|
|
|
108,608
|
|
|
|
462
|
|
|
|
109,070
|
|
Gross
profit
|
|
|
26,258
|
|
|
|
9,523
|
|
|
|
35,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
expense -selling general and administrative
|
|
|
10,668
|
|
|
|
4,136
|
|
|
|
14,804
|
|
Selling,
general and administrative expenses
|
|
|
9,696
|
|
|
|
(1,884
|
)
|
|
|
7,812
|
|
Amortization
of intangible assets
|
|
|
1,358
|
|
|
|
—
|
|
|
|
1,358
|
|
Loss
on sale of asset
|
|
|
376
|
|
|
|
(992
|
)
|
|
|
(616
|
)
|
Transaction
expenses
|
|
|
1,666
|
|
|
|
(965
|
)
|
|
|
701
|
|
Total
operating expenses
|
|
|
23,764
|
|
|
|
295
|
|
|
|
24,059
|
|
Operating
loss
|
|
|
2,494
|
|
|
|
9,228
|
|
|
|
11,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(4,351
|
)
|
|
|
(335
|
)
|
|
|
(4,686
|
)
|
Amortization
of deferred financing costs and debt discount
|
|
|
(3,663
|
)
|
|
|
(4,169
|
)
|
|
|
(7,832
|
)
|
Loss
on debt derivative liability
|
|
|
—
|
|
|
|
(21,539
|
)
|
|
|
(21,539
|
)
|
Gain
(loss) on warrant liability
|
|
|
854
|
|
|
|
(736
|
)
|
|
|
118
|
|
Other
(expense) income, net
|
|
|
(52
|
)
|
|
|
(977
|
)
|
|
|
(1,029
|
)
|
Loss
on issuance of notes
|
|
|
—
|
|
|
|
(24,262
|
)
|
|
|
(24,262
|
)
|
Extinguishment
loss
|
|
|
—
|
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Financing
costs
|
|
|
(702
|
)
|
|
|
702
|
|
|
|
—
|
|
Total
other expenses, net
|
|
|
(7,914
|
)
|
|
|
(51,337
|
)
|
|
|
(59,251
|
)
|
Loss
before provision for income taxes
|
|
|
(5,420
|
)
|
|
|
(42,109
|
)
|
|
|
(47,529
|
)
|
Provision
for income taxes
|
|
|
1,093
|
|
|
|
1
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(6,513
|
)
|
|
|
(42,110
|
)
|
|
|
(48,623
|
)
|
Preferred
stock dividends
|
|
|
(60
|
)
|
|
|
—
|
|
|
|
(60
|
)
|
Net
loss attributable to common shareholders
|
|
$
|
(6,573
|
)
|
|
$
|
(42,110
|
)
|
|
$
|
(48,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.40
|
)
|
|
$
|
(9.36
|
)
|
|
$
|
(10.83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
4,699,369
|
|
|
|
4,496,828
|
|
|
|
4,496,828
|
|
NOTE
26. SUBSEQUENT EVENTS
Internal
Investigation
In
current reports on Form 8-K filed on March 11, 2019 and March 22, 2019, the Company disclosed that it had entered into certain
securities purchase agreements (the “Purchase Agreements”) with certain investors (the “Investors”), which
the Company sold an aggregate principal amount of $22,700 in convertible notes (the “Notes”) between January 2017
and January 2019. Approximately $9,800 of principal and interest had been converted into 5,186,306 shares of the Company’s
Common Stock through March 19, 2019. These issuances were not supported by a listing application with the New York Stock Exchange
(“Exchange’), which resulted in the Company receiving a public reprimand letter from the NYSE Regulation Staff of
the Exchange on March 25, 2019. On March 22, 2019, the Company announced the initiation of an independent investigation (the “Investigation”)
of these issuances and engaged K&L Gates LLP and Credibility International, LLC, an independent forensic accounting firm
(together, the “Team”) to conduct the Investigation.
Scope
of the Investigation
The
Investigation focused primarily on the following areas: (i) whether prior management, including former Chief Executive Officer,
(“former CEO”), Michael Palleschi, and former Chief Financial Officer (“former CFO”), David Lethem, had
proper authorization to issue the Notes; (ii) whether the Company properly accounted for and disclosed certain expenses incurred
by prior management; (iii) the use of personal credit cards by employees to pay routine Company expenses; (iv) whether the Company
properly entered into and disclosed certain related party transactions (v) whether certain transactions were improperly reported
to increase revenue; (vi) the payment of certain wage and salary amounts to employees; (vii) the Company’s interactions
with its external auditors; and (viii) issues related to Mr. Palleschi’s compensation.
In
connection with the Investigation, the Team visited the Company’s Naples, Florida office and collected hard copy documents,
created images of electronic equipment belonging to various members of the prior management team, copied many folders from
the Company’s SharePoint database, conducted multiple interviews with sixteen individuals, and collected and processed over
four hundred thousand e-mails and documents.
Findings
of the Investigation
The
Team found the following:
1.
Issuances of the Notes.
In
numerous instances, prior FTE management, including Mr. Palleschi and Mr. Lethem, caused the Company to issue the Notes as well
as other financings without proper Board authorization. Specifically, the Team found: (i) several issuances for which the supporting
resolutions did not comply with Nevada state law and the Company’s bylaws; (ii) several issuances for which there were no
Board resolutions; and (iii) several issuances for which the supporting resolutions had been falsified. Moreover, the prior management
caused the Company to make incomplete disclosures about the Notes in its required SEC filings for fiscal year 2017 and the first
three quarters of fiscal year 2018. Notably, because of the prior management, the Company did not disclose that each of the Notes
contained a conversion feature that allowed the holders of the Notes to convert the debt into the Company’s Common Stock.
2.
Reimbursement of Expenses and the Use of Personal Credit Cards for Business Expenses.
The
Investigation revealed that prior management misused Company funds for personal expenses, including charter flights and automobile
leases. The Team also found that prior management instructed FTE employees to charge FTE-related business expenses to their personal
credit cards from 2018 forward. However, the Team found that the expenses charged pursuant to such instruction were largely business-related.
3.
Related Party Transactions.
The
Team found that prior management caused the Company to engage in numerous related party transactions, some of which were implemented
to the Company’s detriment and were not disclosed properly or were not disclosed at all. Such transactions included loans
provided to the Company by former officers and directors, as well as instances of deferred salary or deferred bonus pay. The Team
identified transactions between the Company and former officers or directors, as well as between the Company and entities controlled
by former officers or directors.
4.
Revenue Recognition and Interaction with Auditors
The
Team found that prior management caused the Company to improperly recognize revenue in 2016 and 2017. The revenue was recorded
to unbilled Accounts Receivable and later written off in three separate transactions during 2018. The Team also found that members
of prior management provided inaccurate and incomplete statements to the Company’s former independent registered public
accounting firm, Marcum LLP, (“Marcum”) regarding the basis for recognizing the revenue.
5.
Payment of Certain Wages, Salary Amounts and Payroll Expenses
The
Team found that the Company’s former CEO, Mr. Palleschi, engaged in improper conduct in connection with his compensation
including the following: (i) Mr. Palleschi, without proper authorization, caused the Company to amend his employment agreement,
significantly increasing his salary and bonus pay; (ii) Mr. Palleschi, without proper authorization, caused the Company to grant
him deferred compensation and to issue “demand notes,” which characterized the deferred compensation as debt of the
Company owed to Mr. Palleschi, this mischaracterization resulted in the Company making three substantial wire transfers to Mr.
Palleschi to pay him the amounts he was owed on the “demand notes; and (iii) Mr. Palleschi, without proper authorization,
caused the Company to enter into a release agreement under which the Company agreed to pay amounts purportedly owed to Messrs.
Palleschi and Lethem, in exchange for a mutual release. The Team also found that each of the payments noted above were made without
the withholding of income taxes. In addition, the Team identified multiple instances where Messrs. Palleschi and Lethem made or
attempted unsupported cash payments to themselves and certain family members, through direct wire transfers, PayPal and other
means. Furthermore, the Team identified three instances in which the Company paid each of its employees through direct wire transfer
rather than through its outside payroll processing firm. In each instance the Company wired the amount due, net of income taxes,
but failed to remit payroll taxes.
Further
to the findings of the Investigation as noted above, the Company also has found that former management created and
distributed false and misleading documents to its internal accounting staff resulting in improper accounting for (i) convertible
notes by removing certain language regarding conversion features and registration rights, (ii) revenue recognition by falsifying
support for unbilled revenue, (iii) compensation and characterization of certain cash disbursements, (iv) related party
transactions and (v) equity issuances which were later determined to be improperly authorized, and other issues. The Company
also found that former management withheld requested documentation and similarly provided false and misleading documents to its
former independent registered public accounting firm.
Remediation
The
Company self-reported the matters raised in the Investigation to both the U.S. Securities and Exchange Commission (“SEC”)
and the New York County District Attorney’s Office (“NYCDA”), and kept both agencies, along with the U.S. Attorney’s
Office for the Southern District of New York (“SDNY”), updated on its progress throughout the Investigation. The Company
continues to cooperate with all three agencies.
The
Company has also taken numerous remedial actions in response to the findings of the Investigation. Most notably, the Company has
made dramatic changes to its management team, completely replacing senior management, including Messrs. Palleschi and Lethem as
well as the majority of its former Board of Directors. The Company has also restated its financial statements for fiscal year
2017 and the periods ended March 31, June 30 and September 30, 2018 and 2017, as discussed below. Among other things, the restatement
corrects the improperly recognized revenue identified by the Investigation and account for the convertible feature of the Notes.
In addition, the Company has taken significant steps to improve its policies and procedures and internal controls relating to,
among other things, the following: (i) tracking, approving and disclosing all issuances of equity and debt; (ii) its expense reimbursement
policy; and (iii) tracking, approving and disclosing related party transactions. See “Item 9A Controls and Procedures”.
Finally,
to remedy deficiencies in its equity issuances, the Board of Directors held a total of four special meetings on April 29, May
7, May 8, and May 13, 2019, respectively, at which it reviewed all equity issuances and decided which issuances were (i) valid;
(ii) noncompliant but should be ratified; (iii) noncompliant but would not be challenged; and (iv) noncompliant and should be
nullified. As a result, certain issuances to convertible noteholders, current and former personnel and related parties were nullified.
Additionally, the Company sent a letter to its shareholders, dated May 23, 2019, to notify them of noncompliant issuances that
were approved and validated during the Board’s review.
Departure
of Executive Officers
On
January 17, 2019, Lynn Martin, the Company’s then-Chief Operating Officer, resigned from the Company, effective January
25, 2019.
On
January 19, 2019, Michael Palleschi, was granted a temporary leave of absence by the Board. On May 11, 2019, Mr. Palleschi notified
the Company of his resignation from the Company’s Board and as the Company’s CEO. On May 13, the Board accepted Mr.
Palleschi’s resignation from the Board, without compensation and without a release, and terminated his employment
as the Company’s CEO on May 13, 2019.
On
January 19, 2019, Anthony Sirotka, the Company’s former Chief Administrative Officer, was appointed as the Company’s
Interim CEO. On June 27, 2019, Mr. Sirotka was placed on administrative leave. Mr. Sirotka resigned on October 2, 2019.
On
March 11, 2019, David Lethem, the former CFO, resigned from the Company, effective March 11, 2019.
Non-Reliance
on Previously Issued Financial Statements
The
Company announced on April 2, 2019, that the Audit Committee (“Audit Committee”) of FTE, following a communication
by Marcum, LLP, the Company’s former registered independent public accounting firm, concluded that previously issued
audited financial statements as of and for the year ended December 31, 2017, and interim reviews of the financial statements for
the periods ended March 31, June 30, and September 30, 2018 and 2017, should no longer be relied upon. The conclusion to prevent
future reliance on the aforementioned financial statements resulted from the determination that such financial statements failed
to properly account for certain convertible notes and other potentially dilutive securities. Specifically, the Company identified
a potential issue related to the accounting related to certain convertible notes and other potentially dilutive securities the
Company issued in 2017, 2018, and during January of 2019.
On
June 11, 2019, the Audit Committee, following a communication by Marcum, concluded that the Company’s previously issued
audited financial statements as of and for the years ended December 31, 2017 and 2016 and completed interim reviews for the periods
ended March 31, June 30, and September 30, 2018, 2017 and 2016 should no longer be relied upon. The conclusion on June 11, 2019
to add the aforementioned 2016 financial statements to those statements which should no longer be relied upon resulted from determinations
made as part of the Company’s ongoing restatement effort that certain items, including revenues originally recognized in
2016, should no longer be recognized.
See
Note 2 and Note 25 for the impacts on the financial statements for the years ended December 31, 2017 and 2016 as well as the impacts
on the quarterly financial statements for the years ended December 31, 2018 and 2017.
Amendment
No. 4 to Lateral Credit Agreement
On
February 12, 2019, the Company and certain of its wholly-owned subsidiaries entered into Amendment No. 4 (the “Fourth Amendment”)
to the credit agreement dated October 28, 2015, by and among Jus-Com, Inc., certain other Company subsidiaries, Lateral Juscom
Feeder LLC (“Lateral”) and several lenders party thereto (together with Lateral, the “Lenders”) (as amended,
the “Credit Agreement”). The Fourth Amendment provided for, among other things, $12,632 in delayed draw loans (the
“Delayed Draw Term Loans”). The Delayed Draw Term Loans had a maturity date of March 31, 2019, and an interest rate
of 12% and 4% of paid in kind interest, payable quarterly in arrears according to the terms of the Credit Agreement. In addition,
the Company and the Lenders agreed to enter into a restructuring services agreement, in form and substance acceptable to the Lenders
in their sole discretion, on or prior to February 28, 2019, which date was extended on several occasions by the parties. Lateral
is controlled by Richard de Silva, who joined the Company’s Board of Directors on October 18, 2019
The
Fourth Amendment also provided for (i) amendments to the employment agreements between Benchmark, our former principal operating
subsidiary, and Fred Sacramone and Brian McMahon, the founders of Benchmark who sold Benchmark to the Company in April of 2017
(the “Benchmark Sellers”); (ii) the issuance of a promissory note to Fred Sacramone for cash received in the principal
amount of $1,000 (the “Sacramone Bridge Note”), which note originally matured on March 31, 2019, and was subsequently
amended and restated on July 2, 2020 to extend the maturity date to September 30, 2020, and for which Mr. Sacramone was issued
356,513 shares of Common Stock; (iii) the appointment of a finance transformation officer (who was acting in the capacity of Chief
Financial Officer from January 23, 2019 through July 15, 2019); and (iv) the issuance of an aggregate of 1,698,580 shares of the
Company’s Common Stock to the Lenders.
Restructuring
of Lateral Credit Agreement and Designation of Series H Preferred Stock
On
July 2, 2019, the Company completed the debt restructuring contemplated under the Fourth Amendment by entering into an amended
and restated credit agreement (the “Amended and Restated Credit Agreement”) among the Company, Lateral and several
Lenders. The Company also amended and restated the Series A convertible notes (as amended, the “Series A Notes”),
Series B promissory notes (as amended, the “Series B Notes”) issued to the Benchmark Sellers, and the Sacramone Bridge
Note (together with the Series A Notes and the Series B Notes, the “Benchmark Notes”).
Amended
and Restated Credit Agreement Summary
Pursuant
to the Amended and Restated Credit Agreement, the Delayed Draw Term Loans, which were continued as super senior term loans with
an aggregate outstanding balance of $12,900 (the “Super Senior Term Loans”) were amended to: (i) extend the maturity
to September 30, 2020; (ii) amend the interest rate to 12% per annum payable in cash; (iii) add a 4% extension fee to the principal
amount (subject to reduction); and (iv) provide for monthly amortization payments based on available cash flow. In addition, the
existing term loans under the Credit Agreement, with an aggregate balance of approximately $37,900 (“Lateral’s Existing
Term Loans”) were amended to: (i) extend the maturity to April 30, 2021; (ii) amend the interest rate to 12% per annum payable
in cash; (iii) add a 4% extension fee to the principal amount thereof (subject to reduction); and (iv) include monthly amortization
payments based on available cash flow.
As
consideration for the Amended and Restated Credit Amendment, the Company issued to the Lenders 1,500,000 shares of the Company’s
common stock and warrants (the “Warrants”) exercisable to purchase 3,173,731 shares of the Company’s common
stock (collectively, the “Lender Securities”) with an initial exercise price of $3.00 per share. Pursuant to the terms
of the Warrants, in the event the Super Senior Term Loans were not paid and satisfied by October 31, 2019, the exercise per share
of half of the Warrants would be automatically reset to $0.01 and in the event the Super Senior Term Loans were not paid by December
31, 2019, the exercise per share of the other half of the Warrants would be automatically reset to $0.01. The Company also agreed
that on December 31, 2019, the aggregate number of shares of the Company’s common stock issuable upon exercise of the Warrants
would be automatically adjusted on December 31, 2019 such that that Lateral and its affiliates would beneficially own, in the
aggregate, inclusive of all shares of common stock previously issued, 25% of the outstanding shares of the Company’s common
stock on a fully-diluted basis, subject to certain exceptions.
As
additional consideration for the Amended and Restated Credit Agreement, the Company and Lateral entered into a registration rights
agreement (the “Registration Rights Agreement”) whereby the Company agreed to register the common stock issued to
Lateral. The Company and Lateral also entered into an investor rights agreement (the “Investor Rights Agreement”)
whereby the Company agreed that within sixty days of its execution, the Company would set the number of directors on its Board
of Directors at seven and Lateral would be entitled to nominate one of such seven directors.
Series
A Notes and Series B Notes & Designation of Series H Preferred Stock
The
Series A Notes and Series B Notes were also amended to extend the maturity date to July 30, 2021 and to amend the interest rate
to 8% per annum to be paid in kind until the borrowings under the Amended and Restated Credit Agreement were repaid in full. The
Sacramone Bridge Note was amended to extend the maturity date to September 30, 2020, to capitalize the accrued interest as of
July 2, 2019 and to provide for monthly cash interest payments. Additionally, all of the foregoing notes were amended to provide
for monthly amortization payments based on available cash flow.
As
consideration for amending and restating the Benchmark Notes, the Company entered into subscription agreements (the “Subscription
Agreements”) pursuant to which it issued to the Benchmark Sellers an aggregate of 1,951 shares of the Company’s Series
A Preferred Stock and 296 shares of the Company’s Series A-1 Preferred Stock (collectively, the “Series A Preferred”),
which the Benchmark Sellers immediately exchanged, pursuant to exchange agreements (the “Exchange Agreements”), for
an aggregate of 100 shares of a new series of preferred stock (the “Series H Preferred,” and together with the Series
A Preferred, the “Preferred Stock”). The Series H Preferred had no dividend rights, no liquidation preference, was
not convertible and had perpetual voting rights equivalent to 51% of the total number of votes that could be cast by all outstanding
shares of capital stock of the Company.
Foreclosure
by Senior Secured Lenders
During
July 2019, the Company was notified that judgments had been entered against the Company in favor of six holders of the Company’s
convertible notes in the state of New York. Certain of these convertible noteholders sought to levy against the bank account of
the Company’s former subsidiary, Benchmark, and filed an order directing the Company to turn over all of the Company’s
assets. The Company’s failure to satisfy, vacate or stay these judgments constituted an event of default under the Credit
Agreement.
As
a result, on October 10, 2019, the Company consented to a Proposal for Surrender of Collateral
and Strict Foreclosure (the “Foreclosure Proposal”), from Lateral, Lateral Builders LLC (“Lateral Builders”)
and Benchmark Holdings, LLC (“Benchmark Holdings” and together with Lateral Recovery LLC (“Lateral Recovery”),
the (“Foreclosing Lenders”)), pursuant to which the Lenders took possession and ownership of the Subject Collateral
(see below) by means of a strict foreclosure by the Foreclosing Lenders (the “Benchmark Foreclosure”).
Pursuant
to the Foreclosure Proposal, the Company transferred; (i) to Benchmark Holdings all of its (a) equity interests in Benchmark,
the Company’s principal operating subsidiary, and (b) cash on hand in excess of levels specified in the Foreclosure Proposal;
and (ii) to Lateral Recovery, all of the Credit Parties’ interests in certain commercial tort litigation claims, fraud claims,
and insurance claims as specified in the Foreclosure Proposal (collectively, the “Subject Collateral”).
Also
pursuant to the Foreclosure Proposal, Benchmark transferred $3,000 of cash to the Company. Additionally, Benchmark agreed to make
a monthly cash payment to the Company, in the amount of $300 per month (the “Working Capital Cash Payments”), for
purposes of funding certain of the Company’s remaining obligations related to accounts payable, indebtedness for borrowed
money, convertible note obligations and other matters specified in the Foreclosure Proposal (the “Remainder Obligations”).
Working Capital Cash Payments were to continue until the earlier of (i) October 10, 2021, (ii) the repayment in full of the Remainder
Obligations or (iii) the occurrence of a Working Capital Termination Event (as defined in the Foreclosure Proposal). The cash
infusion and Working Capital Cash Payments provided the opportunity for the Company to receive total cash payments of up to $10,200
over the next 24 months. Benchmark made a total of two
Working Capital Cash Payments to the Company—one in each of the months of November and December of 2019—for aggregate
Working Capital Cash Payments of $600.
Benchmark
Holdings, as the holder of the following of the Company’s obligations, absolutely and unconditionally released and forever
discharged the Company and the other Credit Parties from certain indebtedness previously held by Niagara Nominee L.P. totaling
$4,900, the Lateral’s Existing Term Loans totaling $42,300 and the Super Senior Term Loans totaling $13,500 as each such
term is defined in the Credit Agreement. Accordingly, Lateral’s Existing Term Loans and the Super Senior Term Loans were
deemed fully paid and satisfied.
Additionally,
pursuant to an Agreement Regarding Debt and Series H Preferred Stock (the “Debt and Series H Agreement”), dated October
10, 2019, entered into between the Company and Fred Sacramone and Brian McMahon, Messrs. Sacramone and McMahon released the Company
and its affiliates from (i) all obligations represented by the Sacramone Bridge Note per the Credit Agreement, which had an outstanding
amount equal to approximately $1,000 and (ii) indebtedness represented by the Series B Notes in the amount of $19,000. As a result,
the total amount remaining outstanding under the Series A Notes and Series B Notes was $28,000 (the “Remaining Indebtedness”)
with a due date of December 31, 2019.
The
total debt relief provided pursuant to the Foreclosure Proposal and the related agreements and arrangements equaled an aggregate
of $80,700.
In
accordance with the Debt and Series H Agreement, the Remaining Indebtedness was to be automatically released and discharged as
of December 31, 2019 unless (i) on or before November 10, 2019, the Company entered into a business combination transaction that
enabled the Company’s common stock to remain listed on the NYSE American Exchange or any other U.S. national securities
exchange and (ii) such business combination transaction was consummated on or before December 31, 2019 (such transaction, a “Qualified
Business Combination”). Additionally, the Debt and Series H Agreement also required Messrs. Sacramone and McMahon to sell
their shares of Series H Preferred Stock to the Company for a nominal price in the event an agreement for a Qualified Business
Combination was entered into on or before November 10, 2019, and such Qualified Business Combination was consummated on or before
December 31, 2019.
On
November 8, 2019, the Company and Messrs. Sacramone and McMahon entered into an amendment to the Debt and Series H Agreement,
pursuant to which the parties agreed to extend the date by which an agreement for a Qualified Business Combination must be entered
into from November 10, 2019 to December 31, 2019 and to extend the date by which a Qualified Business Combination must close from
December 31, 2019 to February 28, 2020.
On
December 23, 2019, the Company entered into a separate agreement with Messrs. Sacramone and McMahon pursuant to which the Company
repurchased all outstanding shares of its Series H Preferred Stock from Messrs. Sacramone and McMahon for a payment of $1.00 per
share, as a result of which no shares of Series H Preferred Stock remain outstanding.
The
Remaining Indebtedness remains an unpaid and outstanding Company liability. As of December 31, 2019, the outstanding balance of
the Remaining Indebtedness was $28,000 (subject to the adjustment described below).
In
order to facilitate the continued inflow of additional cash infusions from Benchmark and other agreements pertaining to the Remaining
Indebtedness, the Board also determined that, as result of the completion of the Vision Transaction, Benchmark would no longer
be obligated to continue making Working Capital Cash Payments to the Company. On January 10, 2020, Benchmark loaned $300 to the
Company with a maturity date of October 1, 2020 and an annual interest rate of 10%. Furthermore, on January 27, 2020, the Company
issued two senior promissory notes to Benchmark, one in the principal amount of $4,129 and the other in the principal amount of
$600 (collectively, the “Senior Notes”), each such note secured by all of the Company’s non-real estate assets.
The $4,129 note, which matures on December 1, 2020 and has an interest rate of 10%, obligates the Company to repay all monies
previously paid or transferred to the Company pursuant to the Foreclosure Proposal, including (i) $3,000 in cash; (ii) two Working
Capital Cash Payments totaling $600; and (iii) approximately $500 in cash remaining in a Benchmark bank account, was issued in
consideration of a $6,000 reduction to the $28,000 Remaining Indebtedness. The $600 note, which matures on December 1, 2020 and
has an interest rate of 10%, was issued to evidence the loan received by Benchmark on January 10, 2020 in the principal amount
of $300 and an additional $300 loan from Benchmark received on January 27, 2020. As of the date of this filing the Remaining Indebtedness
is $22,000.
On
May 1, 2020, the parties entered into a second amendment to the Debt and Series H Agreement (the “Second Amendment”)
pursuant to which Messrs. Sacramone and McMahon agreed to release and forever discharge the Remaining Indebtedness on the date
on which the NYSE American Exchange files a Form 25 with the Securities and Exchange Commission (the “SEC”), delisting
the Company’s common stock (the “Termination Date”), provided that in no event shall the Termination Date be
any sooner than July 1, 2020 or any later than October 1, 2020.
Appointment
of New Board and Committee Members
On
April 1, 2019, James E. Shiah was appointed to the Board, effective April 15, 2019. Mr. Shiah joined then-directors Luisa Ingargiola,
Christopher Ferguson, Patrick O’Hare, Brad Mitchell, and Fred Sacramone.
On
May 29, 2019, Ms. Ingargiola and Messrs. Ferguson, O’Hare, and Mitchell resigned from the Board.
Jeanne
Kingsley and Stephen Berini were appointed to the Board, effective June 10, 2019. Ms. Kingsley and Mr. James Shiah were appointed
to the Audit Committee, which committee Mr. Shiah chaired. Mr. Shiah was also appointed to the Company’s Compensation Committee
and its Nominating and Corporate Governance Committee. On June 24, 2019, Richard Omanoff was appointed to the Board and to be
chair of the Nominating and Corporate Governance Committee. Mr. Omanoff was joined by Irving Rothman, who was appointed to the
Board, effective June 25, 2019 and was appointed to the Company’s Audit, Compensation, and Nominating and Corporate Governance
Committee.
On
September 16, 2019, Irving Rothman resigned from the Board, followed by James Shiah, Jeanne Kingsley, and Stephen Berini who all
resigned from the Board effective October 9, 2019.
On
October 18, 2019, concurrent with the resignation of Fred Sacramone and Richard Omanoff, the Board appointed Michael P. Beys,
Joseph F. Cunningham, Jr., Richard de Silva and Peter Ghishan as directors. The Board determined that each of Messrs. Beys, Cunningham
and Ghishan is “independent” under NYSE American listing standards and other governing laws and applicable regulations,
including Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Accordingly, Messrs. Cunningham and Ghishan were appointed
to serve on the Audit Committee. Mr. Cunningham was appointed to serve as the chair of the Audit Committee and the Board determined
that he was financially sophisticated as defined in the NYSE American governance standards. Messrs. Beys and Cunningham were appointed
to serve on the Compensation Committee and Messrs. Beys and Ghishan were appointed to serve on the Nominating and Corporate Governance
Committee.
Appointment
of Interim CEO
On
June 13, 2019, the Board of Directors appointed Fred Sacramone as the Company’s Co-Interim Chief Executive Officer. On June
27, 2019, the Board of Directors appointed Mr. Sacramone as the Company’s Interim Chief Executive Officer. Mr. Sacramone
resigned on October 21, 2019, concurrent with the appointment of Stephen M. Goodwin.
Appointment
of Interim CEO
On
October 21, 2019, the Board of Directors appointed Stephen M. Goodwin as the Company’s Interim Chief Executive Officer.
Mr. Goodwin replaced Fred Sacramone, who resigned concurrent with Mr. Goodwin’s appointment.
Appointment
of Interim CEO
On
December 11, 2019, the Board of Directors appointed Michael P. Beys as the Company’s Interim Chief Executive Officer. Mr.
Beys replaced Stephen M. Goodwin, who resigned concurrent with Mr. Beys’s appointment. The Board of Directors appointed
Mr. Goodwin as the Company’s Executive Vice President of Operations. Upon Mr. Beys’ appointment as Interim Chief Executive
Officer, the Board of Directors determined that he no longer qualified as “independent” under NYSE American listing
standards and applicable regulations, including Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Accordingly,
the Board of Directors replaced Mr. Beys on the Compensation Committee with Mr. Ghishan and replaced Mr. Beys on the Nominating
and Corporate Governance Committee with Mr. Cunningham.
Suspension
of Trading of Common Stock
During
March 2019, the Company received a series of letters from the NYSE American concerning its failure to comply with various continued
listing requirements under the NYSE American Company Guide. On December 17, 2019, the Company received a letter from the staff
of NYSE Regulation (the “Staff”), on behalf of the Exchange, stating that it had determined to commence proceedings
to delist the Company’s Common Stock from the Exchange because, according to the Exchange, the Company or its management
had engaged in operations that, in the opinion of the Exchange, were contrary to the public interest. On December 17, 2019 at
market close, the Company’s Common Stock was suspended from trading on the NYSE American Market. The Company appealed this
determination to the NYSE Listing Qualifications Panel (the “Panel”) of the Exchange’s Committee for Review,
and a hearing regarding the Company’s continued listing was held on February 13, 2020. On March 9, 2020, the NYSE Office
of General Counsel notified the Company that the Panel had determined to affirm the Staff’s decision to delist the Company’s
shares from NYSE. The Company has since initiated steps to seek review of and/or appeal the Panel’s determination.
As
of the date of the filing of this report, the Company’s Common Stock was listed on the NYSE American Market under the symbol
FTNW but continued to be suspended from trading. In the event the common stock is delisted from the NYSE American Market, the
Company intends to pursue other opportunities to have the common stock traded on a stock market, which may include one of the
trading platforms operated by OTC Markets Group or the over-the-counter market.
Acquisition
of Vision Property Assets
On
December 20, 2019, the Company entered into a purchase agreement (the “Vision Purchase Agreement”) with (i) US Home
Rentals LLC, a Delaware limited liability company and direct wholly owned subsidiary of FTE (“Acquisition Sub”), (ii)
the holders (the “Equity Sellers”) of 100% of the equity interests in entities owned by the Equity Sellers that collectively
hold a real estate asset portfolio consisting of 3,184 rental homes located across the United States (the “Entities”),
(iii) Vision Property Management, LLC, a South Carolina limited liability company (“Vision” and together with the
Equity Sellers, the “Sellers”), and (iv) Alexander Szkaradek, in his capacity as the representative of the Sellers
(the “Sellers’ Representative”). On December 30, 2019, the parties amended the Vision Purchase Agreement (the
“Amendment”) in order to address certain changes to the Vision Purchase Agreement, including, among other things,
to allow the $9,750 balance of the cash portion of the purchase price to be paid in cash or short-term promissory notes, and to
reduce the Sellers’ indemnification deductible to $100. On December 30, 2019, the Company completed the acquisition of the
Entities pursuant to the Vision Purchase Agreement, as amended.
Pursuant
to the Vision Purchase Agreement, as amended, Acquisition Sub purchased (a) all of the equity interests in the Entities and (b)
all of Vision’s assets that are related to its business, including certain assumed contracts and assumed intellectual property,
excluding certain specified assets for aggregate consideration of $350,000, consisting of (i) $250 of cash; (ii) $9,750 in promissory
notes payable on or before March 31, 2020 as extended by the forbearance period; (iii) the amount of outstanding indebtedness
of the Entities, which is approximately $80,000, (iv) 4,222,474 shares of the Company’s Common Stock, par value $0.001,
which the parties valued at $32,000 which the Company is obligated to issue, and (v) shares of a newly designated Series
I Non-Convertible Preferred Stock having an aggregate stated value equal to $228,000 which the Company is obligated to issue.
Divestiture
of CrossLayer, Inc.
On
January 16, 2020, the Company entered into an asset purchase agreement (the “CrossLayer Purchase Agreement”) with
CBFA Corporation, pursuant to which CBFA acquired approximately $73 in accounts payable and approximately $100 in long-term
supplier contracts.
Appointment
of Interim CFO
On
May 5, 2020, the Board of Directors appointed Ernest J. Scheidemann as the Company’s Interim CFO and Principal Financial
Officer. In connection with his appointment, Mr. Scheidemann and the Company intend to enter into an Interim CFO Services Agreement.
Mr. Scheidemann is a Certified Public Accountant. He holds a Certified Global Management Accountant and Certified Financial Forensics
designation issued from the American Institute of CPAs. Mr. Scheidemann received a BA in Accounting from William Paterson University
and MBA in Finance and International Business from Seton Hall University.
Subsequent
Debt and Equity Transactions
Merchant
Account Agreements
During
January to March 2019, the Company paid $8,804 in principal payments, $2,005 in debt settlement payments and recognized a $419
gain on debt settlement on the remaining eighteen merchant account agreements with outstanding principal balances of $11,228 as
of December 31, 2018.
Convertible
Notes Payable
During
January 2019, the Company entered into three convertible notes payable, borrowing an aggregate of $618, net of original issuance
discounts of $40 and deferred financing costs of $28. Additionally, as inducement, the Company issued a total of 35,056 shares
of the Company’s common stock with a market value of $113,042 on the date of issuance.
On
March 10, 2020, the Company entered into a Securities Purchase Agreement with GS Capital Partners, LLC (“GS Capital”),
to purchase an aggregate of $1,800 principal amount of a 6% Convertible Redeemable Note (“Note”), with a $125 original
issue discount for a net purchase price of $1,675. Additionally, the Company issued 185,000 shares of its common stock as debt
commitment shares. Interest may be paid in cash or shares at the option of the Company and GS Capital at its option may convert
any or all of the principal face amount of Note outstanding into shares of the Company’s common stock.
Between
January 2019 and April 2020, the Company repaid $6,292 of convertible note principal in cash and issued a total of 3,123,548
shares of the Company’s common stock for the conversion of $3,036 in convertible debt principal and $57 in accrued interest.
Between
April 2019 and October 2019, the Company entered into settlement agreements with 9 holders of 14 individual convertible notes
with outstanding principal balances of $5,010 as of December 31, 2018. The agreements provide for various settlement terms to
consolidate outstanding principal and interest, add interest and penalties, remove conversion features and set new repayment schedules,
the last of which ends January 2021. As part of four of the convertible note settlement agreements, the Company issued a total
of 353,202 shares of FTE common stock with a market value of $378,416 on the date of issuance.
Notes
and Capital Leases Payable
During
April 2019, The Company entered into an Agreement to Participate in Sales Proceeds in regard to a sale of certain equipment with
underlying notes payable and capital lease obligations totaling $837, with a total net book value of $1,926 as of December 31,
2018. As a result of the agreement, the Company received cash of $276, repaid debt totaling $752 and recognized a loss on sale
of assets of $390.
On
February 20, 2019, Company signed a 22 -month
term note (“Term Note”) with LeoGroup Private Investment Access, LLC (the “Noteholder”). The Term Note
was for $5,000, payable in monthly installments over twenty- two months bearing interest at a rate of 22% per annum. The Term
Note was personally guaranteed by Anthony Sirotka, the Company’s former interim Chief Executive Officer, and is secured
by the assets of the Company, subject to any senior rights or claims by the Company’s senior secured lender.
In
connection with the Term Note, the Company also agreed to issue 1,005,751 shares of the Company’s common stock to Niagara
Nominee, LP (“Niagara”). Niagara was issued the Shares for its role as co-guarantor of the Term Note to the investors
of the Noteholder. Niagara is an affiliate of Lateral, the Company’s senior secured lender.
Related
Party Notes
On
February 12, 2020, the Company issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $800, consisting
of approximately $550 in expenses and advances previously made by Lateral on behalf of the Company and an additional $250 loan
from Lateral. The $800 note is secured by all of the Company’s non-real estate assets pursuant to a security agreement of
even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%.
On
February 27, 2020, the Company issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $75 for working
capital purposes. The note is secured by all of the Company’s non-real estate assets pursuant to a security agreement of
even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%.
On
March 4, 2020, Cobblestone Ventures, Inc., an entity controlled by Michael Beys, the Company’s interim CEO and a member
the Board, loaned the Company $100 for working capital purposes, pursuant to a demand note at 5% per annum. The note, together
with accrued interest, was repaid on March 16, 2020.
On
March 5, 2020, Mr. Ghishan, a member of the Board, loaned the Company $30 for working capital purposes, pursuant to a demand note
at 5% per annum. The note, together with accrued interest, was repaid on March 16, 2020.
On
April 16, 2020, Cobblestone Ventures, Inc. an entity controlled by Michael Beys, the Company’s interim CEO and a member
the Board, loaned the Company loaned the Company $100 for working capital purposes, pursuant to a demand note at 10% per annum.
The note, together with accrued interest, was repaid on May 8, 2020.
On
April 29, 2020, we issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $200 for working capital
purposes. The note is secured by all of the Company’s non-real estate assets pursuant to a security agreement and has a
maturity date of November 15, 2020 and an annual interest rate of 10%. The note, together with accrued interest, was repaid on
May 8, 2020.
Stock
Issuances 2019
The
Company issued 35,056 shares of common stock with a market value of $113 for inducement shares to certain convertible note holders.
The
Company issued 3,123,548 shares of common stock with a market value of $6,534 for conversion shares to certain convertible note
holders.
The
Company issued 353,202 shares of common stock with a market value of $378 in settlements with certain convertible note holder
The
Company issued shares 62,839 of common stock with a market value of $218 to employees.
The
Company issued 356,513 shares of common stock with a market value of $613 to an employee for providing the Company with $1,000
bridge note on February 12, 2019.
The
Company issued 1,698,580 shares of common stock with a market value of $2,922 to it Senior Lender in accordance with Amendment
No. 4 to the Lateral Credit Agreement dated February 12, 2019.
The
Company issued 1,005,751 shares of common stock with a market value of $1,960, to a co-guarantor on a term note issued on February
20, 2019.
The
Company issued 1,500,000 shares of common stock with a market value of $1,588 to its Senior Lender in accordance with the Credit
Agreement dated July 2, 2019.
The
Company issued 505,724 shares of common stock with a market value of $534 to a co-guarantor in accordance with the Credit Agreement
dated July 2, 2019.
The
Company issued 160,000 shares of common stock to individual investors, which resulted in net proceeds to the Company of $1,138.
The
Company issued 250,000 shares of common stock with a market value of $248 as settlement with our former board of directors.
119,593
shares of the Company’s common stock were returned to outstanding as part of a settlement agreement.
Stock
Issuances 2020
The
Company issued 4,193,684 shares of common stock as part of the Note Exchange with TTP8, see Item 13. Certain Relationship with
Related Parties.
The
Company issued 185,000 shares of common stock with market value of $278 to Convertible Note holder as debt commitment shares.