UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

¨ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

x TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from October 1, 2015 to December 31, 2015.

Commission file number: 000-31355

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).        Yes ¨ No x

As of April 11, 2016, there were 46,586,220 shares of FTE Networks, Inc. common stock, $0.01 par value issued outstanding.

FTE NETWORKS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE TRANSITION QUARTERLY PERIOD ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q may be “forward-looking statements.” Forward-looking statements are not historical facts but include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict.

Forward-looking statements can be identified by the use of terminology such as "estimates," "projects," "plans," "believes," "expects," "anticipates," "intends," or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements which are contained in this Annual Report on Form 10-K because they reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. 

All written and oral forward-looking statements made in connection with this Quarterly Report on Form 10-Q that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Any forward looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these condensed consolidated financial statements.

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY

FOR THE THREE MONTHS ENDED DECEMBER 31, 2015

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

Overview

FTE Networks, Inc. (FTNW), and its wholly owned subsidiaries, is a leading international networking infrastructure service solutions company. The Company designs, build, and support telecommunications and technology systems and infrastructure services for Fortune 500 companies operating four (4) industry segments; Data Center Infrastructure, Fiber Optics, Wireless Integration, and Surveillance & Security.  FTE Networks is headquartered in Naples, Florida, with offices throughout the United States and Europe.

FTE Network Services and FTE Wireless Service, LLC are reported in the Company’s telecommunications segment. FVP Worx represents the Company’s staffing segment. 

The unaudited condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (the “Annual Report”). The condensed consolidated balance sheet data as of September 30, 2015 included herein was derived from the audited consolidated financial statements included in the Annual Report, but such condensed data does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. The unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures, including critical and significant accounting policies, normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Results of operations and cash flows for interim periods presented in the unaudited condensed consolidated financial statements are not necessarily indicative of results of operations and cash flows for the full fiscal year. Effective January 27, 2016, the Company changed it’s fiscal year end from September 30 to December 31. The accompanying unaudited condensed consolidated financial statements cover the transition period from October 1, 2015 to December 31, 2015. The Company’s 2016 fiscal year will cover the period from January 1, 2016 to December 31, 2016.

On April 7, 2015, FASB issued Accounting Standards Update (ASU) No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, as part of its simplification initiative. The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The ASU specifies that “issue costs shall be reported in the balance sheet as a direct deduction from the face amount of the note” and that amortization of debt issue costs shall also be reported as interest expense. According to the ASU’s Basis for Conclusions, debt issuance costs should be reported on the balance sheet as deferred charges until that debt liability amount is recorded. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The Company has analyzed the impact of this update and has adopted the provisions in this report.

During September 2015, the FASB issued ASU 2015-16, Business Combination – Simplifying the Measurement-Period Adjustments. The update, which applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs, requires an acquirer to recognize adjustments to provisional amount that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in the Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Company is currently in the process of evaluating the impact of this new pronouncement on its consolidated financial position and results of operations.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Furthermore, equity investments without readily determinable fair values are to be assessed for impairment using a quantitative approach. The amendments in ASU 2016-01 should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, with other amendments related specifically to equity securities without readily determinable fair values applied prospectively. The amendments in ASU 2016-01 will become effective for us as of the beginning of our 2019 fiscal year. The adoption of this guidance is not expected to have a material impact upon our financial condition or results of operations.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 requires that a lessee recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. ASU 2016-02 leaves the accounting for leases by lessors largely unchanged from previous GAAP. The guidance in ASU 2016-02 will become effective for us as of the beginning of our 2020 fiscal year. We are currently evaluating the impact that the adoption of ASU 2016-02 will have on our consolidated financial statements, which we expect will have a material effect on our statement of financial position, and have not made any decision on the method of adoption with respect to the optional practical expedients.

In June 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (“ASU 2014-12”). The amendments in ASU 2014-12 require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification Topic No. 718, “Compensation - Stock Compensation” (“ASC 718”), as it relates to awards with performance conditions that affect vesting to account for such awards. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The standard will be effective for the Company on January 1, 2016. The adoption of ASU 2014-12 is not expected to have a material effect on the Company’s financial statements or disclosures.

Liquidity - The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2015, the Company has an accumulated deficit of $12.8 million. In addition, the Company has working capital deficiencies of $3.6 million and $6.3 million as of December 31, 2015 and September 30, 2015, respectively. Management plans to continue to raise additional funds through the sales of debt or equity securities. Consistent with management’s plans to increase liquidity and enhance capital resources, the Company successfully negotiated an $8 million replacement senior credit facility and retired $3.5 million of senior secured notes and related accrued interest through a tender offer. The Company paid the December 31, 2015 interest payment due on the new senior note, $146,000, on January 20, 2016. However, there is no assurance that additional financing will be available when needed or that management will be able to obtain and close financing, including the aforementioned transaction, on terms acceptable to the Company or whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

Reclassifications – Certain  prior year balances have been reclassified in order to conform to current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

Use of Estimates – The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates relate to its allowances for receivables, taxes and equity issuances.

Revenue and Cost of Goods Sold Recognition – Generally, for the staffing business, revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.

Due to the short term nature of the Company’s construction contracts, revenue is recognized once 100% of a contract segment is completed. A contract may have many segments, of which, once a segment is completed, the revenue for the segment is recognized when no further significant performance obligations exists. The Company’s construction contracts or segments of contracts typically range from several days to two to four months. Contract costs may be billed as incurred. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. The Company begins recognizing revenue on a project as project costs are incurred and revenue recognition criteria are met.

Provisions for losses on uncompleted contracts are made in the period such losses are known. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, changes in raw material costs, and final contract settlements may result in revisions to revenue, costs and income and are recognized in the period in which the revisions are determined.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

Earnings Per Share – Basic earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if potentially dilutive securities had been issued using the treasury stock method. Dilutive convertible shares and warrants are excluded from the calculation of weighted average dilutive common shares because they are not currently convertible or because their inclusion would have been anti-dilutive. The following table sets forth the computation of basic and diluted earnings (loss) per common share from continuing operations:

The following securities are excluded from the calculation of weighted average dilutive common shares because they are not currently convertible, or because their inclusion would have been anti-dilutive:

Concentration of Credit Risk – Financial instruments that potentially expose the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash at one financial institution that management believes is a high-credit, high-quality financial institution and accordingly, subject to minimal credit risk. Deposits held with these financial institutions may be in excess of the amount of insured limits provided on such deposits, if any. The Company is subject to risk of nonpayment of its trade accounts receivable.

The Company’s customer base is highly concentrated. As of September 30, 2015, the Company’s two largest customers, a provider of large scale fiber optic cables (“Customer E”) and a leading provider of wireless infrastructure solutions (“Customer B”) represented 47% and 12% of accounts receivable, respectively. As of December 31, 2015, the Company’s three largest customers, Customer E, Customer H and Customer B, represented 47%, 14%, and 10% of accounts receivable, respectively.

Revenue may significantly decline if the Company were to lose one or more of its significant customers. For the three months ended December 31, 2015 and December 31, 2014, Customer C represented approximately 1% and 89%, respectively, and a corporate staffing customer within the Company’s staffing segment, Customer D, represented 52% and 0%, respectively.

Deferred taxes – During the three months ended December 31, 2015 and 2014, the difference between the effective tax rate and the statutory tax rate is due to the utilization of fully reserved net operating losses.

Amortization of Senior Note Debt Discount and Deferred Financing Costs – The amortization of the senior note debt discount (Note 5. Senior Debt) is calculated monthly using the straight line method, which approximates the interest rate method, over the original term of the note, twenty-four months. The result of this monthly amortization is recognized in amortization of debt discount in the period amortized for the debt discount and interest expense for the deferred finance costs.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

The restricted cash account was created to deposit the unused proceeds from the Company’s new senior debt (Note 5. Senior Debt). The funds are kept at a bank in an account segregated from our main operating account. The Company does not have direct access to or control over the funds held in this account. The funds are disbursed to the Company upon the written request of the lender. These balances were $3,003,226 as of December 31, 2015 and $0 as of September 30, 2015, respectively.

Other current assets consist of the following as of December 31, 2015 and September 30, 2015:

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

As of December 31, 2015 and September 30, 2015, Accrued Expenses and Other Current Liabilities were comprised of the following:

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

Equipment Notes

Other Notes Payable

Senior Debt Disclosure

On October 28, 2015, the Company, through its main operating entity Jus-Com, Inc. entered into an $8 million dollar senior credit facility. The facility has a two year term, and calls for interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a “payment in kind” (PIK) provision which calls for a 4% per annum increase in the principal balance monthly. The facility is a senior credit facility, and is secured by principally all assets of the Company. The uses of the senior facility are to retire the existing senior debt and related accrued interest through a tender offer, retire the factoring line of credit, pay certain senior loan closing costs, settle certain pending litigation, and provide working capital to the Company. A “blocked” bank deposit account, controlled by the lender, was also initially established in the amount of $3,000,000 to be held for future advances. (See restricted cash, note 3). The Company is prohibited from an early payoff of the facility until October 28, 2017. There are several affirmative and negative covenants the Company must comply with, such as minimum bank account balances, minimum EDITDA thresholds, capital expenditures, leverage ratio, and debt service coverage ratio. As a condition of the facility, the Company issued 163,441 shares of its Series D preferred stock and 391,903 shares of its Series F preferred stock to the lender. As a result of a market valuation performed on this transaction by a qualified third party valuation firm, an original issue discount of $437,380 was determined, which will be amortized on a straight line method, which approximates the interest rate method, over a twenty four month period to interest expense. During the period ended December 31, 2015, $36,448 was included in amortization of debt discount, and $400,932 remained unamortized as of December 31, 2015.

Property Lease Obligations

On October 1, 2015, the Company entered into a three year lease for 4,500 square feet of warehouse space in Naples, FL, at a monthly rent of $4,500.

On October 13, 2015, the Company entered into a seven year lease, commencing December 1, 2015, for 5,377 square feet of office space in Naples, FL, at a monthly rent of $27,158.

On November 1, 2015, the Company entered into a one year lease for 4,000 square feet of office and warehouse space in Marysville, WA, at a monthly rent of $3,000.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

On November 15, 2015, the Company entered into a one year lease for 1,000 square feet of apartment space in Bonita Springs, FL, at a monthly rent of $1,650.

Rental expense, resulting from property lease agreements was $80,274 and $34,656 for the three months ending December 31, 2015, and December 31, 2014, respectively

Following is a schedule by years of future minimum payments required under leases obligations with initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2015:

Accrued Litigation Expense

Legal Matters - The Company is involved in litigation claims arising in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. There have been no material developments in any legal proceedings since the disclosures contained in the Company’s Form 10-K for the year ended September 30, 2015, at which time the Company provided for an accrual of $1,840,891 to settle these claims. On November 20, 2015, the Company settled the Martin and Arey lawsuit for $150,000 cash, a promissory note for $250,000, and 512,820 share of common stock, having a value of $5,120. On November 24, 2015, the Company settled the Daniel Fournier lawsuit for $100,000 in cash.

Related Party Advances

Through December 31, 2015, the Chief Executive Officer (CEO) provided cash advances witnessed by a note, from time to time, aggregating $245,764. Additionally, advances in the amount of approximately $66,236 were advanced on the Company’s behalf on credit cards the CEO is personally liable for the entire amount of the credit obligation. Additionally, the Company entered into several secured equipment financing arrangements with total obligations of approximately $380,000 as of December 31, 2015 that required the guaranty of a Company officer, which was provided by the CEO.

Preferred Stock

On October 2, 2015, the Company received $145,000 from its investor from the stock subscription receivable.

On November 2, 2015, the Company issued 163,441 shares of its Series D preferred stock with a grant date value of $126,840, under the terms of the Company’s new senior credit facility.

On November 2, 2015, the Company issued 391,903 shares of its Series F preferred stock with a grant date value of $310,540, under the terms of the Company’s new senior credit facility.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

On December 18, 2015, the Company issued 6,250 shares of its Series F preferred stock with a grant date value of $25,000 in settlement for investor relations services.

On December 21, 2015 the Company issued 519,308 shares of its Series F preferred stock with a grant date value of $342,743 to various employees under the terms of their employment agreements.

Common Stock

On November 5, 2015, the Company issued 539,925 shares of its common stock with a grant date value of $139,701 as a settlement with one of the Company’s vendors.

On December 4, 2015, the Company issued 512,820 shares of its common stock with a grant date value of $5,120 as part of a legal settlement agreement.

On April 7, 2016, the Company issued 200,000 shares of its common stock with a grant date value of $2,000 to several employees under the terms of their employment agreements.

Dividends

Dividend charges recorded during the three months ended December 31, 2015 and 2014 are as follows:

Accrued dividends payable at December 31, 2015 and September 30, 2015 are comprised of the following:

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(audited and unaudited)

Warrants

There were no warrants issued during the three months ended December 31, 2015.

A summary of the warrant activity during the three months ended December 31, 2015 is presented below:

The following table presents information related to stock warrants at December 31, 2015:

Series F Convertible Preferred Stock

On October 28, 2015, the Company’s Board of Directors approved the Certificate of Designation for Series F Convertible Preferred Stock. The shares authorized under this certificate was 1,980,000 at a par value of $.01 and a stated value of $4.00 per share. The rights of the Series F is subordinated to existing shares of Preferred Series A, Preferred Series A-1, and Preferred Series D. The Preferred Series F grants voting rights of 20 votes for each share of preferred owned. The shares are convertible into 20 shares of common stock for each share of preferred owned. The shares are mandatorily convertible on the first date following the successful completion of a common stock reverse split. The liquidation value of each share is the stated value of $4.00 per share. As of December 31, 2015, there were 917,461 shares issued and outstanding.

Temporary Equity

In conjunction with the Lateral senior credit agreement dated October 28, 2015, the Company also entered into a Redemption Rights Agreement (“agreement”). Contained in this agreement is a put provision related to the preferred shares of stock issued as a condition of the transaction. The Redemption Rights may be exercised at any time on or after October 28, 2017, provided the following conditions are met:

Further, the Redemption Rights are barred from being exercised if the exercise of such Redemption Rights would, in good faith, prevent the Company from continuing as a going concern.

The Redeemable Shares are redeemable at the per share price implied by 10 multiplied by the Company’s LTM EBITDA, multiplied by the Ownership Percentage, divided by the number of Redeemable shares then held.

An analysis was performed, under ASC 480-10-25-7 to determine if the redeemable shares should be classified as debt or equity. The results of this analysis determined the redeemable shares did not fall under the definition of mandatorily redeemable financial instruments and therefore should not be classified as debt.

Pursuant to ASC 480-10-S99, preferred stock redeemable for cash or other assets are to be classified outside of permanent equity if it is redeemable with any one of the following characteristics:

The Redeemable Shares are redeemable upon the occurrence of certain events that are not solely within the control of the reporting entity. In the natural course of pursuing the fulfillment of its required fiduciary duties, the Company may meet the conditions upon which the shares would become redeemable (i.e. market capitalization and/or EBITDA, along with going concern status), and would be thus unable to control the events leading to redemption. As a result of the evaluation, the Company has concluded that the Redeemable Shares are appropriately classified outside of permanent equity as temporary equity.

The Company’s reportable operating segments consist of its telecommunications segment and its staffing segment, which are organized, managed and operated along key product and service lines.

The following tables summarize financial information about the Company’s business segments for the three months ended December 31, 2015. Comparative data for the three months ended December 31, 2014 is not presented here as the staffing revenues generated during that period were negligible.

On April 5, 2016 the Company entered into an amendment agreement to its existing credit facility with Lateral, amending the original credit agreement signed October 28, 2015. The agreement amends select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. This amendment was agreed upon and entered into as a mutually beneficial process for both the Company and Lateral.

On April 7, 2016, the Company issued 200,000 shares of its common stock with a grant date value of $2,000 to several employees under the terms of their employment agreements.

Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements. We disclaim any obligation to update forward-looking statements.

Unless the context requires otherwise, references in this document to “FTE”, “we”, “our”, “us” or the “Company” are to FTE Networks, Inc. and its subsidiaries.

Overview

We are a U.S. based provider of international and regional telecommunications and technology systems, specializing in the design, engineering, installation, construction and maintenance of telecommunications and technology networks and infrastructure. We also offer managed information technology, telecommunications services, subscriber based services and staffing solutions through our wholly owned subsidiaries:

Recent Business Developments

During the Company’s second fiscal quarter ended March 31, 2015, we began the formation of a Business Development team with the addition of Carli Ancor as Chief Technology Officer. The efforts of the business development team have added new clients and business to the work mix, providing client diversification and opening up new geographies domestically. Specifically, the company entered into a three year strategic alliance agreement with Edge Communications with a value of up to $100 million dollars on February 18, 2016. Additionally, on March 3, 2015, the company signed a multi-year, multi-million-dollar contract with a leading telecommunications carrier. 

On November 3, 2015, the Company entered into a credit agreement, dated October 28, 2015 (the “Agreement”), pursuant to which the Company entered into an $8 million senior credit facility from Lateral Investment Management (“Lateral”). Proceeds of $1,757,731 were used to extinguish an aggregate principal amount of $3,550,012 of existing Senior Secured Promissory Notes, pursuant to a tender offer. The noteholders who tendered their notes received the tender offer consideration of approximately $0.50 per $1 principal amount of the Notes from the proceeds from the term loan, and all interest payable, which was $1,748,380 thru the tender offer, on the notes was forgiven. The Company recognized a $3,431,533 one time gain, net of costs associated with the offer of $109,124, related to the extinguishment of the Senior Secured Promissory Notes.

On December 23, 2015, the Board unanimously authorized and approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at a 1-for-20 ratio (the “Reverse Split”). On December 30, 2015, stockholders holding a majority of our voting power approved by written consent the amendment to our Articles of Incorporation, which would effect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. On March 9, 2016, the Company filed a Form Pre-14C with the SEC concerning the 1 for 20 reverse stock split and the increase of the authorized shares of common stock from 70,000,000 to 200,000,000.

On January 4, 2016, the Company entered into an employment agreement with Kirstin Gooldy to serve as the Company’s Chief Compliance Officer in consideration of a salary of $112,500 per year, with standard employee insurance and other benefits.  The employment agreement commenced on January 4, 2016 and ends on January 4, 2018, after which it is renewable for twelve months, until terminated by either party with 90 days written notice

On February 8, 2016, Mr. Brad Mitchell was appointed to the Board of Directors as an independent director. Mr. Mitchell (56) currently serves as President of TelePacific Communications - Texas, and is responsible for TelePacific's operations across the state of Texas. Mr. Mitchell brings a unique combination of knowledge and wide-ranging telecommunications industry experience gained in both the venture capital and established industry leader arenas. Mitchell returned to TelePacific after previously serving as Senior Vice President - Field Operations, and was instrumental in creating TelePacific's customer-centric structure by leading the TelePacific's sales operations during TelePacific's early years. Prior to TelePacific, Mr. Mitchell served as Area Vice President at Sprint PCS, where he launched and operated several markets in the southeast, including New Orleans and Atlanta. More recently, he served as Executive Vice President of Cable & Wireless' International Accounts and also built a highly successful retail franchise operation. Mitchell earned a degree in Business Administration from Oglethorpe University in Atlanta.

On February 11, 2016, Mr. Chris Ferguson was appointed to the Board of Directors as an independent director. Mr. Ferguson (47) currently serves as the Managing Director of Tern Capital Partners, LLC, a private equity investment firm founded by Mr. Ferguson in 2013. In 2010, Mr. Ferguson co-founded a company in the fiber network industry, and he served as CEO of the company until June 2013. In August 2001, Mr. Ferguson co-founded Mercer, a provider of innovative workforce management solutions to a variety of industries including transportation and engineering, with co-founder, Michael Traina. Prior to founding Mercer, Mr. Ferguson and former New Jersey Governor, James J. Florio, co-founded The Florio Group, a private equity investment company. In addition, Mr. Ferguson served as Chief Financial Officer for Cabot Marsh Corporation in 1995 and remained as a director for the company until 1999. Mr. Ferguson has been a member of the New Jersey and Pennsylvania Bars since 1994. He graduated from Widener University School of Law in May of 1994 and received a Bachelor of Arts Degree from Villanova University in May of 1990.

On February 16, 2016, Ms. Luisa Ingargiola was appointed to the Board of Directors as an independent director. Mrs. Ingargiola is the Chief Financial Officer for Magne Gas, a NASDAQ listed technology company, which produces a plasma based system for the gasification and sterilization of liquid waste. Mrs. Ingargiola currently serves as a Board Director for The JBF Foundation Worldwide and CES Synergies, Inc., where she also serves as the Audit Committee Chair. Prior to joining Magne Gas, Mrs. Ingargiola worked as a Budget and Expense Manager for MetLife Insurance Company. In this capacity she managed a $30-million-dollar annual budget. Her responsibilities included budget implementation, expense and variance analysis and financial reporting. Luisa previously served as a Board Director, Audit Committee Chair for CBD Energy Limited in 2014. Mrs. Ingargiola received her Bachelor's Degree from Boston University and her Master's Degree from the University of South Florida.

On November 2, 2015, the Company issued 163,441shares of its Series D preferred stock with a grant date value of $126,840, under the terms of the Company’s new senior credit facility.

On November 2, 2015, the Company issued 391,903 shares of its Series F preferred stock with a grant date value of $310,540, under the terms of the Company’s new senior credit facility.

On December 18, 2015, the Company issued 6,250 shares of its Series F preferred stock with a grant date value of $25,000 in settlement for investor relations services.

On December 21, 2015 the Company issued 519,308 shares of its Series F preferred stock with a grant date value of $342,743 various employees under the terms of their employment agreements.

On November 5, 2015, the Company issued 539,925 shares of its common stock with a grant date value of $5,400 as a settlement with one of the Company’s vendors.

On December 4, 2015, the Company issued 512,820 shares of its common stock with a grant date value of $5,120 as part of a legal settlement agreement.

On March 31, 2016, Mr. Carlie Ancor (45) was appointed to the Board of Directors and serves as a non-independent director. Mr. Ancor is currently the Company’s Chief Technology Officer. Mr. Ancor began his tenure as the Chief Marketing Officer for FTE Networks Inc. in January 2015. Mr. Ancor is responsible for global marketing, product management and the customer experience. From 2008-2014, Mr. Ancor was managing director at Emerge Technology Solutions for Europe, the Middle East and Africa based in the United Arab Emirates where he was responsible for business development and growth, technology optimization, operational execution and quality of customer experience. Prior to that, he was an Executive Vice President for core IP and optical network development at Level 3 Communications in North America and Western Europe. Mr. Ancor attended Texas A&M University.

On March 31, 2016, Mr. Patrick O’Hare (48) was appointed to the Board of Directors and serves as an independent director. Mr. O’Hare has over 25 years experience in the telecommunications industry and is currently the Senior Vice President of Operations at ZenFi Networks, Inc. where he is responsible for network planning, engineering, operations, and service delivery. Prior to ZenFi, Mr. O’Hare was the Senior Vice President of Operations and Engineering at Sidera Networks where he led all operations, service delivery and engineering functions and was instrumental in the company’s acquisition by Berkshire Partners. Mr. O’Hare was also the Senior Vice President of Operations and Engineering at RCN Metro, Sidera’s predecessor company, and was integral to the company’s acquisition by ABRY Partners and the successful separation of assets from the RCN Cable parent company. Previously, he was Vice President of Field Operations for Zayo Bandwidth, where he was responsible for all aspects of field operations and the company’s fiber to the tower deployments. Prior to that, Patrick was Vice President for Field Operations for Level 3 Communications, where he was responsible for field operations, outside plant, colocation and facilities for the East region of North America. During his tenure at Level 3, Mr. O’Hare also held responsibility nationally for the company’s Customer Program Management organization. Before joining Level 3 in 1999, he held several management positions of increasing responsibility in corporate communications, customer service and operations at Verizon’s predecessor companies; New York Telephone, NYNEX and Bell Atlantic. Mr. O’Hare holds an MBA from Long Island University and a BA from the State University of New York – University at Albany.

On April 5, 2016 the Company entered into an amendment agreement to its existing credit facility with Lateral, amending the original credit agreement signed October 28, 2015. The agreement amends select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. This amendment was agreed upon and entered into as a mutually beneficial process for both the Company and Lateral.

On April 7, 2016, the Company issued 200,000 shares of its common stock with a grant date value of $2,000 to several employees under the terms of their employment agreements.

Critical Accounting Policies 

There are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in our Annual Report 10-K filed with the Securities and Exchange Commission (“SEC”) on January 13, 2016. Please refer to that document for disclosures regarding the critical accounting policies related to our business.

Segment Reporting

We operate in the telecommunications infrastructure services industry and, effective May 8, 2014, entered the staffing industry. The following table summarizes financial information regarding our business segments during three months ended December 31, 2015. We did not include any comparative data for the three months ended December 31, 2014 as the revenues generated from the staffing segment were negligible.

Discussion of Operation Results for the Three Months ended December 31, 2015 and 2014

Overview

We reported consolidated net income attributable to common shareholders of $526,281 and $199,764 during the three months ended December 31, 2015 and 2014, respectively, reflecting an increase in net income of $326,517, primarily resulting from a one time gain in the extinguishment of our senior debt and related accrued interest.

Revenues and Gross Profit

We had overall revenues of $3,070,805 for the three months ended December 31, 2015, as compared to revenues of $2,944,035 for the three months ended December 31, 2014, resulting in an increase of $126,770 or 4%. The revenues related to our staffing segment of approximately $1,885,000 during the three months ended December 31, 2015 partially offset the reduced revenue streams from the telecommunications segment. Due to the fact that the majority of our telecommunications revenues are non-recurring, project-based revenues, it is not unusual for there to be significant period-to-period shifts in revenues and customer concentrations. Revenues generated by the staffing segment were negligible during the three months ended December 31, 2014, since the staffing segment was in the development stage during this period.

The $722,850 or 59% decrease in gross profit to $502,947 in the current quarter from $1,225,797 in the prior year comparative quarter resulted significant cost overruns attributable to one project, and a shift in revenue mix from the telecommunications segment to the staffing segment, which generates lower margins.

Operating Expenses

We reported operating expenses of $2,799,433 and $750,943 for the three months ended December 31, 2015 and 2014, respectively, representing an increase of $2,048,490 or 273%. Selling, general, and administrative expenses increased $813,228 or 226%, due primarily to increased legal expenses, business insurance, stock based compensation expenses, as well as increased selling and business development costs related to the formation of a business development team focused entirely on business development with significant activity, resulting in new clients, new business and new markets. (See Recent Business Developments, above). Compensation expense was $1,356,288 and $293,575 for the three months ended December 31, 2015 and 2014, respectively, representing an increase of $1,062,713 or 362%. This increase is attributable primarily to an increase in salary expense and related ancillary expenses due to the addition of key personnel for our business development team.

Operating Income

Operating income decreased by $2,771,340, from income of $474,854 for the three months ended December 31, 2014 to a loss of $2,296,486 for the three months ended December 31, 2015. This was attributable to the one time increase in cost of revenues attributable to one project, combined with the shift in business to our staffing segment, which generates lower margins, and our increases in compensation and selling, general, and administrative expenses as described above.

Other Income and Expense

Other income increased by $3,097,885 or 1,213%, during the three months ended December 31, 2015, when compared to the same period in the previous year, primarily due to the recognition of a one time gain of $3,431,533 on the extinguishment of senior debt and related accrued interest from the new financing transaction on October 28 2015. Interest expense, net, increased by $172,266 or 65% from $263,197 to $435,463 for the three months ended December 31, 2014 and 2015, respectively. This was due primarily to the increase in loans and leases to finance vehicles and equipment in the telecommunications sector.

Liquidity and Capital Resources

Overview

As of December 31, 2015, the Company had an accumulated deficit of approximately $12.8 million. In addition, the Company has a working capital deficiency of $3.6 million as of December 31, 2015.

Management's plans are to continue to raise additional funds through the sales of debt and equity.

There is no assurance that additional financing will be available when needed or that management will be able to obtain and close financing, including the aforementioned transactions, on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.

Cash Flows for the Three months ended December 31, 2015 and 2014

Cash Used by Operating Activities

Net cash used in operating activities was $1,437,803 during the three months ended December 31, 2015 as compared to cash used in operating activities of $399,570 during the three months ended December 31, 2014. For the three months ended December 31, 2014, cash used in operating activities was primarily attributable to accounts receivable, partially offset by accounts payable and net income. For the three months ended December 31,2015, cash used in operating activities was attributable to the gain on extinguishment of the senior debt, partially offset by an increase in accounts payable and net income.

Cash Used by Investing Activities

We used $3,097,584 cash in investing activities during the three months ended December 31, 2015, as compared to $153,893 during the same period of the previous year. Cash used in investing activities was primarily related to purchases of property and equipment and the funding of a restricted cash account of $3,003,226.

Cash Provided by Financing Activities

Cash provided by financing activities was $4,532,780 during the three months ended December 31 2015, as compared to $593,581 during the three months ended December 31, 2014, representing an increase of $3,939,199. During the three months ended December 31, 2015, cash provided by financing activities consisted principally of proceeds from the issuance of new financing transaction of $8,000,000, offset by $2,194,376 payments (net) on our existing debt, and closing costs related to the new financing transaction. During the three months ended December 31, 2014, cash proceeds were derived from the payment of subscription receivable of $600,000.

Management’s Liquidity Plans

Management's plans are to continue to raise additional funds through the sales of debt or equity securities. However, there is no assurance that additional funding will be available when needed or that management will be able to obtain and close financing on terms acceptable to the Company and whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

As a smaller reporting company, we are not required to provide the information requested by paragraph (a)(5) of this Item.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of June 30, 2015, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2015. 

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2015, there were no changes in our internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Controls

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. Controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or deterioration in the degree of compliance with the policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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 November 20, 2015, the Company settled the Martin and Arey lawsuit for $150,000 cash, a promissory note for $250,000, and common stock of 512,820, having a value of $5,120. On November 24, 2015, the Company settled the Daniel Fournier lawsuit for $100,000 in cash. There have been no material developments in any legal proceedings since the disclosures contained in the Company’s Form 10-K for the year ended September 30, 2015, at which time the Company provided for an accrual of $1,840,891 to settle these claims.

Item 1A. Risk Factors

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this Item. However, our current risk factors are set forth in our Annual Report 10-K, filed with the SEC on January 13, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On November 2, 2015, the Company issued 163,441 shares of its Series D preferred stock with a grant date value of $126,840, under the terms of the Company’s new senior credit facility.

On November 2, 2015, the Company issued 391,903 shares of its Series F preferred stock with a grant date value of $310,540, under the terms of the Company’s new senior credit facility.

On December 18, 2015, the Company issued 6,250 shares of its Series F preferred stock with a grant date value of $25,000 in settlement for investor relations services.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds, continues

On December 21, 2015 the Company issued 519,308 shares of its Series F preferred stock with a grant date value of $342,743 to various employees under the terms of their employment agreements.

On November 5, 2015, the Company issued 539,925 shares of its common stock with a grant date value of $139,701 as a settlement with one of the Company’s vendors.

On December 4, 2015, the Company issued 512,820 shares of its common stock with a grant date value of $5,120 as part of a legal settlement agreement.

On April 7, 2016, the Company issued 200,000 shares of its common stock with a grant date value of $2,000 to several employees under the terms of their employment agreements.

The Series D and F preferred shares and the common shares issued as described above were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of that Act and Regulation D promulgated thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing these securities contain a legend stating the same.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine and Safety Disclosure

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following is a complete list of exhibits filed as part of this Form 10-Q. Exhibit numbers correspond to the numbers in the Exhibit Table of Item 601 of Regulation S-K.

SIGNATURES

Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.