UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016.
Commission file number: 000-31355
FTE Networks, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 81-0438093 | |
| (State
or other jurisdiction of incorporation or organization) |
(I.R.S.
Employer Identification No.) |
999 Vanderbilt Beach Road, Suite 601
Naples, Florida 34108
(Address of principal executive offices)
1-877-878-8136
(Registrant’s telephone number, including area code)
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.
| Large accelerated filer | [ ] | Accelerated filer | [ ] |
| Non-accelerated filer | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [X] |
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 November 21, 2016, there were 85,625,252 shares of FTE Networks, Inc. common stock, $0.001 par value issued outstanding.
FTE NETWORKS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2016
TABLE OF CONTENTS
| 2 |
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 Quarterly Report on Form 10-Q 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.
| 3 |
PART I - FINANCIAL INFORMATION
FTE NETWORKS, INC. AND SUBSIDIARIES CONDENSED
(unaudited)
| September 30, 2016 | December 31, 2015 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 8,586 | $ | 205,133 | ||||
| Restricted Cash | - | 3,003,226 | ||||||
| Accounts receivable, net | 7,025,156 | 1,446,480 | ||||||
| Other current assets | 2,829,789 | 2,047,606 | ||||||
| Total Current Assets | 9,863,531 | 6,702,445 | ||||||
| Property and equipment, net | 3,268,877 | 2,544,497 | ||||||
| Total Assets | $ | 13,132,408 | $ | 9,246,942 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIENCY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | 2,232,859 | 2,998,240 | ||||||
| Due to related parties | 418,707 | 245,764 | ||||||
| Accrued expenses and other current liabilities | 4,109,342 | 3,578,945 | ||||||
| Notes payable, current portion | 4,105,491 | 1,887,120 | ||||||
| Notes payable, related parties, current portion | 287,301 | 287,301 | ||||||
| Warrant derivative liability | 143,200 | - | ||||||
| Accrued litigation costs | 1,195,839 | 1,335,771 | ||||||
| Total Current Liabilities | 12,492,739 | 10,333,141 | ||||||
| Notes payable, non-current portion | 2,275,856 | 1,572,063 | ||||||
| Senior note payable, non-current portion, net of original issue discount and deferred costs | 7,244,074 | 6,846,110 | ||||||
| Total Liabilities | 22,012,669 | 18,751,314 | ||||||
| Temporary Equity: | ||||||||
| Series D convertible preferred stock, subject to put provision, stated value $4.00, 2,000,000 designated and 0 and 163,441 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 129,027 | ||||||
| Series F convertible preferred stock, subject to put provision, stated value $4.00, 2,000,000 designated and 0 and 391,903 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 308,353 | ||||||
| Common stock; $0.001 par value, subject to put provision, 200,000,000 shares authorized and 11,106,880 and 0 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | 437,380 | - | ||||||
| Total Temporary Equity | 437,380 | 437,380 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficiency: | ||||||||
| Preferred stock; $0.01 par value, 5,000,000 shares authorized: | ||||||||
| Series A convertible preferred stock, stated value $1,000, 4,500 shares designated and 500 shares issued and outstanding at September 30, 2016 and December 31, 2015 (liquidation preference $1,422,178) | 5 | 5 | ||||||
| Series A-1 convertible preferred stock, stated value $1,000, 1,000 shares designated and 295 shares issued and outstanding at September 30, 2016 and December 31, 2015 (liquidation preference $877,373) | 3 | 3 | ||||||
| Series D convertible preferred stock, stated value $4.00, 2,000,000 designated and 0 and 1,830,759 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 18,308 | ||||||
| Series F convertible preferred stock, stated value $4.00, 1,980,000 designated and 0 and 525,559 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | - | 5,256 | ||||||
| Common stock; $0.001 par value, 200,000,000 shares authorized and 67,505,373 and 2,319,524 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively | 67,504 | 2,319 | ||||||
| Additional paid-in capital | 7,489,707 | 3,053,075 | ||||||
| Common shares to be issued | 848,138 | - | ||||||
| Subscriptions receivable | (1,716,997 | ) | (204,789 | ) | ||||
| Accumulated deficit | (16,006,001 | ) | (12,815,929 | ) | ||||
| Total Stockholders’ Deficiency | (9,317,641 | ) | (9,941,752 | ) | ||||
| Total Liabilities and Stockholders’ Deficiency | $ | 13,132,408 | $ | 9,246,942 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| For
the Three Months Ended September 30, | For
the Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2015 | 2016 | 2015 | |||||||||||||
| Revenues, net of discounts | $ | 3,827,853 | $ | 4,026,208 | $ | 9,083,959 | $ | 11,444,647 | ||||||||
| Cost of revenues | 2,402,605 | 3,475,189 | 5,648,968 | 9,353,841 | ||||||||||||
| Gross Profit | 1,425,248 | 551,019 | 3,434,991 | 2,090,805 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Compensation expense/selling, general and administrative | 605,491 | 645,235 | 1,705,892 | 1,594,552 | ||||||||||||
| Selling, general and administrative expenses | 547,376 | 1,223,478 | 1,919,791 | 2,318,212 | ||||||||||||
| Travel expense | 43,406 | 130,991 | 209,670 | 328,505 | ||||||||||||
| Occupancy costs | 201,057 | 62,641 | 559,411 | 163,607 | ||||||||||||
| Transaction expenses | - | 42,650 | - | 44,150 | ||||||||||||
| Total Operating Expenses | 1,397,330 | 2,104,995 | 4,394,764 | 4,449,027 | ||||||||||||
| Operating Income (Loss) | 27,918 | (1,553,976 | ) | (959,773 | ) | (2,358,221 | ) | |||||||||
| Other (Expense) Income | ||||||||||||||||
| Interest expense | (490,236 | ) | (630,959 | ) | (1,452,354 | ) | (1,044,879 | ) | ||||||||
| Amortization of debt discount | (109,314 | ) | - | (327,944 | ) | - | ||||||||||
| Forbearance expense | - | 971,956 | - | (51,156 | ) | |||||||||||
| Other income (expense) | (146,456 | ) | (331,270 | ) | (100,915 | ) | (320,314 | ) | ||||||||
| Incentive expense for investor | - | - | (35,186 | ) | - | |||||||||||
| Extinguishment loss | (313,900 | ) | - | (313,900 | ) | - | ||||||||||
| Total Other (Expense) Income | (1,059,906 | ) | 9,727 | (2,230,299 | ) | (1,416,349 | ) | |||||||||
| Net Loss | (1,031,988 | ) | (1,544,249 | ) | (3,190,072 | ) | (3,774,570 | ) | ||||||||
| Preferred stock dividends | (19,890 | ) | (19,891 | ) | (59,670 | ) | (59,670 | ) | ||||||||
| Net Loss attributable to common shareholders | $ | (1,051,878 | ) | $ | (1,564,140 | ) | $ | (3,249,742 | ) | $ | (3,834,241 | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic and diluted | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.09 | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | 60,450,606 | 42,313,609 | 60,450,606 | 42,313,609 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY
FOR THE NINE MONTHS ENDED September 30, 2016
(unaudited)
| Series A | Series A-1 | Series D | Series F | Common | Paid in | Common shares to be | Subscription | Accumulated | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | issued | Receivable | Deficit | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/2015 Shares/Amounts | 500 | $ | 5 | 295 | $ | 3 | 1,830,759 | $ | 18,308 | 525,559 | $ | 5,256 | 2,319,524 | $ | 2,319 | 3,053,075 | $ | - | $ | (204,789 | ) | $ | (12,815,929 | ) | $ | (9,941,752 | ) | |||||||||||||||||||||||||||||||||
| Preferred Series F Issued to Investor | 285,664 | 2,857 | 961,737 | (929,408 | ) | 35,186 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued to Employees | 2,229,000 | 2,229 | 1,375,551 | (1,357,800 | ) | 19,980 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares to Settle Debt | 1,559,389 | 1,559 | 896,879 | 898,438 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued to Consultant | 465,000 | 465 | 290,735 | 291,200 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares Issued for Equity Raise | 2,507,000 | 2,507 | 850,917 | 853,424 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Shares to be issued for Equity Raise | 848,138 | 848,138 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series F adjustment to transfer agent records | 48,250 | 483 | (483 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Series F issued to directors and employees for compensation | 231,041 | 2,310 | 150,177 | 152,487 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series D to Common Stock | (1,830,759 | ) | (18,308 | ) | 36,615,180 | 36,615 | (18,307 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Conversion of Series F to Common Stock | (1,090,514 | ) | (10,906 | ) | 21,810,280 | 21,810 | (10,904 | ) | 0 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of Subscription Receivable | 775,000 | 775,000 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Accrued Dividends -Preferred Stock | (59,670 | ) | (59,670 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | (3,190,072 | ) | (3,190,072 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 9/30/2016 Amounts | 500 | $ | 5 | 295 | $ | 3 | 0 | $ | - | - | $ | - | 67,505,373 | $ | 67,504 | $ | 7,489,707 | $ | 848,138 | ($ | 1,716,997 | ) | $ | (16,006,001 | ) | $ | 9,317,641 | ) | ||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
FTE NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (3,190,072 | ) | $ | (3,774,570 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Amortization of deferred financing costs | 327,944 | - | ||||||
| Change in value of term loan | 313,900 | - | ||||||
| Forbearance incentive expense | - | 101,156 | ||||||
| Depreciation expense | 374,935 | 98,762 | ||||||
| Amortization of original issue discount | 164,018 | - | ||||||
| Payment in kind interest-senior debt | 246,600 | - | ||||||
| Stock incentive expense to investor | 35,186 | - | ||||||
| Stock compensation expense to employees | 172,467 | 473,328 | ||||||
| Provision for bad debt | - | 409,481 | ||||||
| Gain on lease termination costs | - | (226,544 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (5,578,676 | ) | 1,167,146 | |||||
| Other current assets | (600,984 | ) | (1,316,984 | ) | ||||
| Due to related party | - | 183,538 | ||||||
| Accounts payable and accrued liabilities | 900,568 | 3,819,086 | ||||||
| Net cash (used in) provided by operating activities | (6,834,114 | ) | 934,399 | |||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | (308,907 | ) | 28,320 | |||||
| Restricted cash account | 3,003,226 | - | ||||||
| Net cash provided by investing activities | 2,694,319 | 28,320 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable | 2,500,000 | - | ||||||
| Payments on factor line of credit, net | - | (383,682 | ) | |||||
| Payments on notes payable | (691,183 | ) | (137,367 | ) | ||||
| Proceeds from issuance of notes payable-related parties | 195,086 | - | ||||||
| Payments on notes payable-related parties | (43,518 | ) | (210,302 | ) | ||||
| Payment of deferred financing costs | (493,699 | ) | (125,000 | ) | ||||
| Collection of subscription receivable | 775,000 | 60,000 | ||||||
| Net proceeds from sale of common stock | 1,701,562 | - | ||||||
| Net cash provided (used in) by financing activities | 3,943,248 | (796,351 | ) | |||||
| Net change in cash | (196,547 | ) | 166,368 | |||||
| Cash, beginning of period | 205,133 | 41,372 | ||||||
| Cash, end of period | $ | 8,586 | $ | 207,740 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | 1,083,160 | 256,479 | |||||
| Non-cash financing activities: | ||||||||
| Notes payable issued to finance equipment purchases | $ | 794,302 | 1,220,305 | |||||
| Common stock shares issued for notes payable | $ | 898,438 | - | |||||
| Issuance of notes to settle accrued litigation | $ | 146,000 | 200,000 | |||||
| Issuance of notes to settle accounts payable | $ | 719,877 | 430,683 | |||||
| Accrued dividends, preferred stock | $ | 59,670 | 59,670 | |||||
| Cancellation of preferred shares | - | 202 | ||||||
| Repayment in kind of subscription receivable | - | (60,000 | ) | |||||
| Unpaid subscription for preferred shares | - | (433,883 | ) | |||||
| Preferred shares issued to settle rent obligation | - | 50,000 | ||||||
| Common shares issued as subscription receivable | 1,357,800 | - | ||||||
| Conversion of preferred shares to common shares | 58,425 | - | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND HISTORY
Overview
FTE Networks, Inc. (FTNW), and its wholly owned subsidiaries, is a leading international networking infrastructure service solutions company. The Company designs, build, and support telecommunications and technology systems and infrastructure services for Fortune 500 companies operating four (4) telecommunication segments; Data Center Infrastructure, Fiber Optics, Wireless Integration, and Surveillance & Security. FTE Networks is headquartered in Naples, Florida, with offices throughout the United States and Europe.
| ● | Jus-Com, Inc., (dba FTE Network Services) specializes in the design, engineering, installation, and maintenance of all forms of telecommunications infrastructure. Services include engineering consulting, design, installation, maintenance, and emergency response in various categories including cabling, equipment installation and configuration, rack and stack, wiring build-outs, infrastructure build-outs, DC power installation, OSP/ISP fiber placement, fiber cable splicing and testing. | |
| ● | FTE Wireless, LLC, offers wireless solutions to major wireless carriers including equipment installation, fiber backhaul, antennae installation and testing, small cell solutions, fiber-to-site and other turnkey solutions as needed by such clients. | |
| ● | Focus Venture Partners, Inc. (dba FVP Worx) is a multifaceted employment firm offering full service staffing solutions, specializing in the telecommunications, technology and construction services industries. |
FTE Network Services and FTE Wireless Service, LLC are reported in the Company’s telecommunications segment. FVP Worx represents the Company’s staffing segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Effective January 27, 2016, the Company changed its fiscal year end from September 30 to December 31 and filed an unaudited transitional report on Form 10-QT to cover the period from October 1, 2015 to December 31, 2015 with the Securities and Exchange Commission on April 11, 2016. The unaudited condensed consolidated financial statements and these notes should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (the “Annual Report”). The condensed consolidated balance sheet data as of December 31, 2015 is unaudited and was derived from the Company’s Form 10-QT and does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. The unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures, including critical and significant accounting policies, normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Results of operations and cash flows for interim periods presented in the unaudited condensed consolidated financial statements are not necessarily indicative of results of operations and cash flows for the full fiscal year.
RECENT ACCOUNTING PRONOUNCEMENTS
On January 5, 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes to the current GAAP model primarily affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The classification and measurement guidance will be effective in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating how the adoption of this standard will impact its consolidated financial statements.
| 8 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02” Topic 842). The core change with ASU 2016-02 is the requirement for the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the adoption of ASU 2016-02 will have on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting,” or ASU 2016-09, which amends ASC Topic 718, “Compensation – Stock Compensation.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 31, 2016, and interim periods within those years and early adoption is permitted. The Company is currently evaluating how the adoption of this standard will impact its consolidated financial statements.
On June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13”). This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 will be effective for us as of January 1, 2020. The Company is currently reviewing the effect of ASU 2016-13.
On August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230 “ASU 2016-15”). ASU 2016-15 amends ASC 230 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The updated guidance requires a retrospective transition method to each period presented. The Company is currently evaluating the impact of the adoption of ASU 2016-15 on its statements of consolidated operations and cash flows.
Liquidity - The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of September 30, 2016, the Company has an accumulated deficit of $16 million. In addition, the Company has working capital deficiencies of $2.6 million and $3.6 million as of September 30, 2016 and December 31, 2015, respectively. The Company recently closed on an equity raise thru a private placement, resulting in net proceeds to the Company of $1.5 million as of September 30, 2016. Management plans to continue to raise additional funds through the sales of debt or equity securities until such time its operations will begin to produce a positive cash flow. However, there is no assurance that additional financing will be available when needed or that management will be able to obtain and close financing transactions on terms acceptable to the Company or whether the Company will become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds, it will have to develop and implement a plan to further extend payables and reduce overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. As of September 30, 2016, the Company has a backlog of approximately $32,500,000 of future orders to be fulfilled in the next twelve months.
| 9 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Reclassifications - Certain prior period balances have been reclassified in order to conform to current period presentation. These reclassifications have no effect on previously reported results of operations or loss per share.
Use of Estimates - The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Actual results could differ from those estimates. The Company’s most significant estimates relate to its allowances for receivables, taxes and equity issuances.
Revenue and Cost of Goods Sold Recognition - Generally, for the staffing business, revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price to the buyer is fixed or determinable, and (4) collectability is reasonably assured.
Due to the short term nature of the Company’s construction contracts, revenue is recognized once 100% of a contract segment is completed. A contract may have many segments, of which, once a segment is completed, the revenue for the segment is recognized when no further significant performance obligations exists. The Company’s construction contracts or segments of contracts typically range from several days to two to four months. Contract costs may be billed as incurred. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. Selling, general and administrative costs are charged to expense as incurred. The Company begins recognizing revenue on a project as project costs are incurred and revenue recognition criteria are met. As expenses are incurred on a project but the invoicing criteria are not met, but the work has been accepted by the customer, revenue is recognized in that period and recognized in accounts receivable as unbilled revenue. Such amount approximated $5 million and $1 million at September 30, 2016 and December 31, 2015, respectively. Provisions for losses on uncompleted contracts are made in the period such losses are known. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, changes in raw material costs, and final contract settlements may result in revisions to revenue, costs and income and are recognized in the period in which the revisions are determined.
Basic and Diluted Loss Per Share - The basic net loss per share is computed by dividing the net loss (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted net loss per common share is computed by dividing the net loss by the weighted average number of common shares and potential common shares outstanding (if dilutive) during each period. Potential common shares include convertible debt, warrants an d preferred stock. The number of potential common shares outstanding relating to convertible debt, warrants and preferred stock is computed using the treasury stock method. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Comparative data for the previous period has been adjusted to reflect the 1 for 20 reverse split effectuated May 26, 2016.
| 10 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
The following securities are excluded from the calculation of weighted average dilutive common shares because they are not currently convertible, or because their inclusion would have been anti-dilutive:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Convertible preferred stock, Series A | 667,169 | 667,169 | ||||||
| Convertible preferred stock, Series A-1 | 393,645 | 393,645 | ||||||
| Convertible preferred stock, Series D [1] | - | 760,959,600 | ||||||
| Convertible preferred stock, Series F [1] | - | - | ||||||
| Warrants | 11,658,814 | 797,358 | ||||||
| Convertible debt | - | 200,000 | ||||||
| Total potentially dilutive shares | 12,719,628 | 763,017,722 | ||||||
| [1] | The Series D and Series F preferred shares are convertible at a rate of 400 pre-split shares of common stock for each share of preferred stock but not until the Company has effected a sufficient increase in the authorized common shares. The Series D and Series F preferred shares were mandatorily converted to common shares at a ratio of 1 to 20 when the reverse split of common shares was effectuated on May 26, 2016. |
Concentration of Credit Risk - Financial instruments that potentially expose the Company to significant concentrations of credit risk consist principally of cash and accounts receivable. The Company maintains its cash at one financial institution that management believes is a high-credit, high-quality financial institution and accordingly, subject to minimal credit risk. Deposits held with these financial institutions may be in excess of the amount of insured limits provided on such deposits, if any. The Company is subject to risk of nonpayment of its trade accounts receivable.
The Company’s customer base is highly concentrated. As of December 31, 2015, the Company’s three largest customers, Customer E, Customer H and Customer B, represented 47%, 14%, and 10% of accounts receivable, respectively. As of September 30, 2016, the Company’s four largest customers, innovative communications service providers, Customer M, Customer E, Customer N and Customer J represented 34%, 13%, 12%, and 11% of accounts receivable, respectively.
Revenue may significantly decline if the Company were to lose one or more of its significant customers. For the three and nine months ended September 30, 2015, Customer E represented approximately 51% and 47% of revenues respectively, and customer B represented approximately 8% and 23% respectively. During the three and nine months ended September 30, 2016 the Company generated revenue by four major customers, Customer M, represented approximately 49% and 33% of revenues respectively Customer J, represented approximately 8% and 19% of revenues respectively, Customer N, represented approximately 16% and 13% of revenues respectively, and Customer L representing 6% and 10% of revenues, respectively.
Amortization of Senior Note Debt Discount and Deferred Financing Costs - The amortization of the senior note debt discount (Note 7. Senior Debt) is calculated monthly using the straight line method, which approximates the interest rate method, over the original term of the note, twenty-four months, using the straight-line method which approximates the interest rate method. The result of this monthly amortization is recognized in amortization of debt discount in the period amortized for the debt discount and interest expense for the deferred finance costs.
| 11 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Fair Value of Financial Instruments - The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs other than quoted prices in active markets that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s financial instruments consist of cash, accounts receivable, inventory, prepaid expenses, leasehold improvements, property and equipment, deposits, other assets, accounts payable, accrued expenses, deferred revenue, capital leases, equity-linked warrants, and notes payable. The recorded values of cash, accounts receivable, inventory, prepaid expenses, and accounts payable approximate fair values due to the short maturities of such instruments. Recorded values for notes payable and related liabilities approximate fair values, since their amortization of deferred financing cost stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.
3. RESTRICTED CASH ACCOUNT
The restricted cash account was created to deposit the unused proceeds from the Company’s new senior debt (Note 7. Senior Debt). The funds are kept at a bank in an account segregated from our main operating account. The Company does not have direct access to or control over the funds held in this account. The funds are disbursed to the Company upon the written request of the lender. These balances were $0 as of September 30, 2016 and $3,003,226 as of December 31, 2015.
4. OTHER CURRENT ASSETS
Other current assets consist of the following as of September 30, 2016 and December 31, 2015:
| September 30, 2016 | December 31, 2015 | |||||||
| Other receivables, net of reserve of $150,000 as of September 30, 2016 and December 31, 2015 | $ | 1,306,781 | $ | 1,232,555 | ||||
| Security deposits | 82,489 | 69,805 | ||||||
| Prepaid expenses | 654,060 | 121,448 | ||||||
| Prepaid consultants fees | 291,200 | - | ||||||
| Pre-paid Cost (Work in Process) | 495,259 | 623,798 | ||||||
| TOTAL | $ | 2,829,789 | $ | 2,047,606 | ||||
| 12 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
As of September 30, 2016 and December 31, 2015, Accrued Expenses and Other Current Liabilities were comprised of the following:
| September 30, 2016 | December 31, 2015 | |||||||
| Accrued interest payable[1] | $ | 748,465 | $ | 817,452 | ||||
| Accrued dividends payable | 510,804 | 451,133 | ||||||
| Accrued compensation expense[2] | 1,984,029 | 2,015,277 | ||||||
| Other accrued expense | 866,044 | 295,083 | ||||||
| Accrued expenses, current | $ | 4,109,342 | $ | 3,578,945 | ||||
| [1] | Accrued interest payable includes approximately $300,000 of estimated penalties and interest associated with the unpaid payroll taxes as of September 30, 2016 and December 31, 2015, respectively. |
| [2] | Accrued compensation expense includes $1,863,031 of unpaid payroll taxes for the period ended September 30, 2016 and December 31, 2015, respectively. |
6. NOTES PAYABLE
| September 30, 2016 | December 31, 2015 | |||||||
| Vendors Notes (Unsecured) | ||||||||
| Long term vendor Notes (“Vendor Notes”) issued to settle litigation bearing interest rates between 0% and 6% per annum. Terms range from 1 to 9 months. | $ | 1,059,337 | $ | 491,000 | ||||
Other Notes Payable
| Notes payable bearing interest at a stated rate of 12% and a 4% PIK per annum. Terms is for 7 months. | 2,560,700 | - | ||||||
| Less deferred financing costs | (473,100 | ) | ||||||
| Total other note payable, net | 2,087,600 | |||||||
| Notes payable bearing interest at a stated rate between 10% and 12% per annum. Terms range from 1 to 4 months. | 609,000 | 709,000 |
Equipment Notes
| Obligations under capital leases, bearing interest rates between 4.1% and 8.2% per annum, secured by equipment having a value that approximates the debt value. Terms range from 48 to 60 months. | 1,050,935 | 960,205 | ||||||
| Various Equipment notes, bearing interest rates between 2% and 41% per annum, secured by equipment having a value that approximates the debt value. Terms range from 36 to 72 months. | 1,574,475 | 1,298,978 | ||||||
| Total Notes payables | $ | 6,381,347 | $ | 3,459,183 | ||||
| Less: Current portion | $ | 4,105,491 | $ | (1,887,120 | ) | |||
| Total Notes non-current portion | $ | 2,275,856 | $ | 1,572,063 |
| 13 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
7. SENIOR DEBT
On October 28, 2015, the Company, through its main operating entity Jus-Com, Inc. entered into an $8 million dollar senior credit facility. The facility has a two year term, and calls for interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a “payment in kind” (PIK) provision which calls for a 4% per annum increase in the principal balance monthly. The facility is a senior credit facility, and is secured by principally all assets of the Company. The uses of the senior facility were to retire the existing senior debt and related accrued interest through a tender offer, retire the factoring line of credit, pay certain senior loan closing costs, settle certain pending litigation, and provide working capital to the Company. A “blocked” bank deposit account, controlled by the lender, was also initially established in the amount of $3,000,000 to be held for future advances. (See restricted cash, note 3). The Company is prohibited from an early payoff of the facility until October 28, 2017. There are several affirmative and negative covenants the Company must comply with, such as minimum bank account balances, minimum EDITDA thresholds, capital expenditures, leverage ratio, and debt service coverage ratio. As a condition of the facility, the Company issued 163,441 shares of its Series D preferred stock and 391,903 shares of its Series F preferred stock to the lender. As a result of a market valuation performed on this transaction by a qualified third party valuation firm, an original issue discount of $437,380 was determined, which will be amortized on a straight line method, which approximates the interest rate method, over a twenty four month period to interest expense. During the period ended September 30, 2016, $164,018 was included in amortization of debt discount, and $236,914 remained unamortized as of September 30, 2016. On April 5, 2016 the Company entered into an amendment agreement to its existing credit facility with Lateral, amending the original credit agreement signed October 28, 2015. The agreement amends select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. On September 30, 2016, the Company entered into a second amendment agreement to its existing credit facility, amending the original credit agreement signed October 28, 2015. The agreement was amended solely to consolidate a series of short term bridge loans granted to the Company from time to time during the second and third quarter of 2016 into a $2.5 million loan, which matures on April 30, 2017. The second amendment also amended the covenants related to consolidated EBITDA, consolidated leverage, consolidated debt service, SG&A expenses, and compensation expense. The Company is in compliance with its covenants as of September 30, 2016.
Senior Debt Disclosure
| On October 28, 2015 the Company entered into a credit agreement, pursuant to which the Company received $8,000,000. The funds were disbursed as follow $6,000,000 and $2,000,000 on October 28, 2015 and November 11, 2015 respectively. The interest rate used is 12% per annum, also required to make 4% PIK payments, which is booked monthly as an increase to the senior debt balance. | $ | 8,295,282 | $ | 8,048,682 | ||||
| Less: Original issue discount | (236,914 | ) | (400,932 | ) | ||||
| Less: Deferred financing cost | (814,294 | ) | (801,640 | ) | ||||
| Total Senior Debt, non-current portion | $ | 7,244,074 | $ | 6,846,110 |
| 14 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. TERM LOAN
On September 30, 2016, the Company and its senior lender modified certain bridge loans entered into from June 2016 through September 2016. The various bridge loans with an outstanding balance of $2.25 million were restructured into one term loan for $2.5 million, with a maturity date of April 30, 2017 and an interest rate of 16% per year. Consideration was then made whether the terms of the restructured debt instrument were substantially different from the original debt instrument. Under ASC 470-50 Modifications and Extinguishment if the present value of the cash flows under the new debt is at least 10% different from the present value of the remaining cash flows under the original debt, they are considered to be substantially different and extinguishment accounting is applied. Based on the calculations performed, there was a greater than 10% difference between the present value of cash flows under the restructured debt compared to the present value of the remaining cash flows under the original debt. Therefore, the restructuring met the conditions for debt extinguishment accounting under ASC 470-50. As of September 30, 2016, the fair value of this debt was determined to be $2,560,700, and is recorded as such in Section 6, Notes Payable. The difference in the face value of the note and the fair value of the note, $60,700 was recorded as a one time extinguishment expense in this period, along with $110,000 of fees paid to the lender and $143,200 to establish the warrant liability, for a total one time extinguishment expense of $313,900. See Footnote 10 “Warrants and Derivative Warrant Liability” for the fair value calculation of the warrant issued in conjunction with this term loan. As of September 30, 2016 there are $473,100 in deferred financing costs associated with the term loan, which will be amortized on a straight line method, which approximates the interest rate method, over a seven month period to interest expense.
9. COMMITMENTS AND CONTINGENCIES
Property Lease Obligations
Rental expense, resulting from property lease agreements was $158,469 and $56,265 for the three months ending September 30, 2016 and September 30, 2015, respectively, and $442,848 and $147,239 for the nine months ending September 30, 2016, and September 30, 2015, respectively
Following is a schedule by years of future minimum payments required under leases obligations with initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2016:
| 2016 (Remaining) | $ | 142,584 | ||
| 2017 | 473,172 | |||
| 2018 | 452,189 | |||
| 2019 | 410,589 | |||
| 2020 | 381,252 | |||
| Thereafter | 508,398 | |||
| Total Lease Obligations | $ | 2,368,184 |
Accrued Litigation Expense
Legal Matters - The Company is involved in litigation claims arising in the ordinary course of business. Legal fees and other costs associated with such actions are expensed as incurred. In addition, the Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. The Company reserves for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. There have been no material developments in any legal proceedings since the disclosures contained in the Company’s Form 10-K for the year ended September 30, 2015, at which time the Company provided for an accrual of $1,840,891 to settle these claims. On November 20, 2015, the Company settled the Martin and Arey lawsuit for $150,000 cash, a promissory note for $250,000, and 512,820 share of common stock, having a value of $5,120. On November 24, 2015, the Company settled the Daniel Fournier lawsuit for $100,000 in cash. On December 14, 2015, the Company settled the RoadSafe lawsuit for $130,000, payable in 13 monthly installments of $10,000 in cash.
| 15 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. COMMITMENTS AND CONTINGENCIES, continued
Related Party Advances
Through September 30, 2016, the Chief Executive Officer (CEO) provided cash advances witnessed by a note, and from time to time, advances for the Company’s behalf on credit cards the CEO is personally liable for, aggregating $380,316. Additionally, the Company entered into several secured equipment financing arrangements with total obligations of approximately $321,000 as of September 30, 2016 that required the guaranty of a Company officer, which was provided by the CEO.
10. STOCKHOLDERS’ EQUITY
Stock To Be Issued
On September 29, 2016, the Company closed on its second round of an equity raise thru its investment banker. The transaction, which resulted in proceeds to the Company of $848,138 (gross proceeds of $969,475 less transaction fees of $121,337) called for the issuance of 2,423,687 shares of common stock on the closing date. Since the transfer agent did not issue the shares until October 12, 2016, these shares, as of September 30, 2016, were classified as common shares to be issued in stockholder’s equity. As of December 31, 2015, there were no shares classified as common shares to be issued.
Dividends
Dividend charges recorded during the three months and nine months ended September 30, 2016 and 2015 are as follows:
| For the three Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Series | ||||||||
| A | $ | 12,510 | 12,510 | |||||
| A-1 | 7,380 | 7,381 | ||||||
| Total | $ | 19,890 | 19,891 | |||||
| For the nine Months Ended | ||||||||
| September 30, | ||||||||
| 2016 | 2015 | |||||||
| Series | ||||||||
| A | $ | 37,530 | 37,529 | |||||
| A-1 | 22,140 | 22,141 | ||||||
| Total | $ | 59,670 | 59,670 | |||||
Accrued dividends payable at September 30, 2016 and December 31, 2015 are comprised of the following:
| September 30, 2016 | December 31, 2015 | |||||||
| Series | ||||||||
| A | $ | 297,176 | $ | 259,646 | ||||
| A-1 | 213,628 | 191,487 | ||||||
| Total | $ | 510,804 | $ | 451,133 | ||||
| 16 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCKHOLDERS’ EQUITY, continued
Warrants and Derivative Warrant Liability
The Company accounts for common stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted for as derivative liabilities if the warrants allow for cash settlement or provide for modification of the warrant exercise price in the event subsequent sales of common stock by the Company are at a lower price per share than the then-current warrant exercise price. We classify derivative warrant liabilities on the balance sheet at fair value, and changes in fair value during the periods presented in the statement of operations, which is revalued at each balance sheet date subsequent to the initial issuance of the stock warrant. As of September 30, 2016, the following warrants are outstanding:
| Issued to | Amount | Issue date | Expiration Date | Exercise Price | ||||||||
| Term Note Lender(1) | 2,343,750 | 9/30/2016 | 9/30/2021 | 0.80 | ||||||||
| Investment Bank | 1,969,837 | 12/9/2012 | 12/9/2019 | 0.20 | ||||||||
| Investment Bank | 2,434,539 | 10/31/2014 | 10/31/2021 | 0.20 | ||||||||
| Equity Investors | 2,487,000 | 9/8/2016 | 9/8/2021 | 0.80 | ||||||||
| Equity Investors | 2,423,688 | 9/29/2016 | 9/29/2021 | 0.80 | ||||||||
| 11,658,814 | ||||||||||||
| (1) | Warrant was determined to be a derivative subject to fair value accounting and is booked as a warrant liability. |
A summary of the warrant activity during the nine months ended September 30, 2016 is presented below:
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Exercise | Remaining | Intrinsic | |||||||||||||
| Warrants | Price | Life in Years | Value | |||||||||||||
| Outstanding, December 31, 2015 | 437,335 | $ | 0.60 | - | - | |||||||||||
| Issued | 11,658,814 | 0.57 | 4.7 | - | ||||||||||||
| Exercised | - | - | - | - | ||||||||||||
| Expired | (437,335 | ) | 0.60 | - | - | |||||||||||
| Outstanding, September 30, 2016 | 11,658,814 | $ | .57 | 4.7 | $ | - | ||||||||||
| Exercisable, September 30, 2016 | 11,658,814 | $ | .57 | 4.7 | $ | - | ||||||||||
| 17 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCKHOLDERS’ EQUITY, continued
The Company has assessed its outstanding equity-linked financial instruments issued with the term loan cited in Footnote 8 and has concluded that the warrants are subject to derivative accounting as a result of certain anti-dilution provisions contained in the warrants. The fair value of these warrants is classified as a liability in the financial statements, with the change in fair value during the future periods being recorded in the statement of operations.
The following table summarizes the calculated aggregate fair values for the warrant derivative liability using the Lattice Model method based on the following assumptions:
| September 30, 2016 | ||||
| Risk free rate | 1.14 | % | ||
| Volatility | 37.80 | % | ||
| Dividends | 0 | |||
| Time to maturity | 5 years | |||
| Fair value per share price | .0611 | |||
| Fair value of warrants | $ | 143,200 | ||
These warrants are Level 3 valuation which were issued and measured on September 30, 2016.
Subscription Receivable
During the nine months ended September 30, 2016 the Company issued 2,229,000 shares of common stock to employees that were subject to certain vesting requirements. As of September 30, 2016, 2,100,000 shares of such shares that with a grant date value of $1,357,800 remain unvested. Because these common shares are subject to forfeiture if the employees are no longer employed with the Company at the end of their employment agreements, their unvested value is carried in subscriptions receivable within stockholder’s equity.
Equity Transactions
During the nine months ended September 30, 2016, the Company issued 285,664 shares of its of its Preferred Series F stock with a grant date value of $35,186 to one of its investors as an incentive to continue raising equity proceeds.
During the nine months ended September 30, 2016, the Company issued 231,041 shares of its of its Preferred Series F stock to its independent directors and two officers with a grant date value of $152,487 for compensation.
During the nine months ended September 30, 2016, the Company issued 1,559,389 shares of its common stock with a grant date value of $898,438 to settle debt, with a $100,913 expense recorded in other income/expense.
During the nine months ended September 30, 2016, the Company issued 465,000 shares of its common stock with a grant date value of $291,200 to consultants for services performed for the Company.
During the nine months ended September 30, 2016, the Company issued 2,507,000 shares of its common stock to individual investors for an equity raise totaling $853,424.
| 18 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. STOCKHOLDERS EQUITY, continued
Temporary Equity
In conjunction with the Lateral senior credit agreement dated October 28, 2015, the Company also entered into a Redemption Rights Agreement (“agreement”). Contained in this agreement is a put provision related to the preferred shares of stock issued as a condition of the transaction. The Redemption Rights may be exercised at any time on or after October 28, 2017, provided the following conditions are met:
(i) The Company’s market capitalization on such date is equal to greater than $25,000,000, or (ii) the last twelve months earnings before interest, taxes depreciation, and amortization ending on the last day of the month preceding such date is greater than $3,000,000.
Further, the Redemption Rights are barred from being exercised if the exercise of such Redemption Rights would, in good faith, prevent the Company from continuing as a going concern.
The Redeemable Shares are redeemable at the per share price implied by 10 multiplied by the Company’s LTM EBITDA, multiplied by the Ownership Percentage, divided by the number of Redeemable shares then held.
An analysis was performed, under ASC 480-10-25-7 to determine if the redeemable shares should be classified as debt or equity. The results of this analysis determined the redeemable shares did not fall under the definition of mandatorily redeemable financial instruments and therefore should not be classified as debt.
Pursuant to ASC 480-10-S99, preferred stock redeemable for cash or other assets are to be classified outside of permanent equity if it is redeemable with any one of the following characteristics:
| ● | At a fixed or determinable price on a fixed or determinable date, |
| ● | At the option of the shareholder, or |
| ● | Upon the occurrence of an event that is not solely within the control of the reporting entity. |
The Redeemable Shares are redeemable upon the occurrence of certain events that are not solely within the control of the reporting entity. In the natural course of pursuing the fulfillment of its required fiduciary duties, the Company may meet the conditions upon which the shares would become redeemable (i.e. market capitalization and/or EBITDA, along with going concern status), and would be thus unable to control the events leading to redemption. As a result of the evaluation, the Company has concluded that the Redeemable Shares are appropriately classified outside of permanent equity as temporary equity.
The Redeemable Shares originally issued with the transaction, 163,441 of Series D Preferred Convertible shares and 391,903 of Series F Preferred Convertible shares, were converted to 11,106,880 shares of the Company’s Common Stock on or around May 26, 2016. The conversion was completed due to the mandatory conversion feature of the preferred shares due to the reverse split of the Company’s Common Stock on May 26, 2016.
Reverse Split
On December 23, 2015, the Board unanimously authorized and approved an amendment to our Articles of Incorporation to effect a reverse stock split of our Common Stock at a 1-for-20 ratio (the “Reverse Split”) and increase our common shares authorized to 200,000,000. On December 30, 2015, stockholders holding a majority of our voting power approved by written consent the amendment to our Articles of Incorporation, which would affect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. The reverse stock was approved by the Financial Industry Regulatory Authority (“FINRA”) on May 25, 2016 and effectuated on May 26, 2016. In conjunction with the Reverse Split approval, all of the Series D and Series F preferred convertible shares mandatorily converted to common shares at a 1-for-20 ratio.
| 19 |
FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
11. SEGMENT DATA
The Company’s reportable operating segments consist of its telecommunications segment and its staffing segment, which are organized, managed and operated along key product and service lines.
The following tables summarize financial information about the Company’s business segments for the three and nine months ended September 30, 2016 and September 30, 2015.
| For the Three Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 3,795,306 | 32,547 | 3,827,853 | ||||||||
| Income (Loss) from Operations | $ | 23,000 | 4,918 | 27,918 | ||||||||
| Depreciation and Amortization | $ | (247,512 | ) | - | (247,512 | ) | ||||||
| Interest Expense | $ | 485,926 | 4,310 | 490,236 | ||||||||
| For the Three Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 1,729,915 | 2,296,293 | 4,026,208 | ||||||||
| Income (Loss) from Operations | $ | (1,563,759 | ) | 9,783 | (1,553,976 | ) | ||||||
| Depreciation and Amortization | $ | (45,714 | ) | - | (45,714 | ) | ||||||
| Interest Expense | $ | 326,649 | 304,310 | 630,959 | ||||||||
| For the Nine Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 9,017,652 | 66,307 | 9,083,959 | ||||||||
| Income (Loss) from Operations | $ | (1,009,788 | ) | 50,015 | (959,773 | ) | ||||||
| Depreciation and Amortization | $ | (702,878 | ) | - | (702,878 | ) | ||||||
| Interest Expense | $ | 1,439,425 | 12,929 | 1,452,354 | ||||||||
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FTE NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| For the Nine Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 5,822,267 | 5,622,380 | 11,444,647 | ||||||||
| Income (Loss) from Operations | $ | (2,382,750 | ) | 24,529 | (2,358,221 | ) | ||||||
| Depreciation and Amortization | $ | (98,762 | ) | - | (98,762 | ) | ||||||
| Interest Expense | $ | 728,732 | 316,147 | 1,044,879 | ||||||||
12. SUBSEQUENT EVENTS
On October 12, 2016, the Company issued 2,423,687 shares of its common stock with a grant date value of $969,475 for proceeds from an equity raise purchase, resulting in net proceeds to the Company of $848,138.
On October 19, 2016, the Company issued 2,589,312 shares of its common stock with a grant date value of $1,035,725 for proceeds from an equity raise purchase, resulting in net proceeds to the Company of $688,138.
On October 19, 2016, the Company issued 2,000,000 shares of its common stock with a grant date value of $1,040,000 to several employees resulting in incentive compensation expense of the grant date value.
On October 12, 2016, FTE Networks, Inc. (the “Company”) concluded a private placement offering (the “Offering”) of 7,500,000 units (each a “Unit” and collectively, the “Units”). Each Unit consisted of (i) one (1) share of the Company’s common stock, par value $0.001 per share (the “Common Stock”), and (ii) a warrant (each, a “Warrant”) to purchase one (1) share of Common Stock, at a price per Unit of $0.40. The minimum investment amount that could be purchased was twenty five thousand (25,000) Units for an aggregate minimum purchase price of $10,000. Each Warrant has an initial exercise price of $0.80 per share, subject to adjustment, and is exercisable following the date of issuance for a period of five (5) years from the date of issuance. In connection with the Offering, the Company entered into a Unit Purchase Agreement (the “Purchase Agreement”), by and among the Company and selected accredited investors (each an “Investor” and collectively, the “Investors”). Laidlaw & Company (UK) Ltd. served as the placement agent in the Offering.
Pursuant to the Purchase Agreement, the Company also entered into a Registration Rights Agreement with the Investors. The Company will be required to file within 45 days of the termination date of the Offering a registration statement registering for resale all shares of Common Stock issued as part of the Units and all of the shares issued under the Warrants.
Each of the Investors is an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Act”), and the securities were sold to it in reliance on the exemption from registration provided by Rule 506 and Section 4(2) of the Act.
The foregoing descriptions of each of the Purchase Agreement, Registration Right Agreement and Warrant do not purport to be complete and are qualified in their entirety by reference to the complete text of the Purchase Agreement, which is filed hereto as Exhibit 10.1, the Registration Rights Agreement, which is filed as Exhibit 10.2, and the Warrant, which is filed as Exhibit 10.3.
The common shares issued as described above were not registered under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon the exemption from registration provided by Section 4(2) of that Act and Regulation D promulgated thereunder, which exempts transactions by an issuer not involving any public offering. These securities may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements. Certificates representing these securities contain a legend stating the same.
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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:
| ● | Jus-Com, Inc., (dba FTE Network Services) specializes in the design, engineering, installation, and maintenance of all forms of telecommunications infrastructure. Services including engineering consulting, design, installation, maintenance and emergency response in various categories including cabling, rack and stack, equipment installation and configuration, wiring build-outs, infrastructure build-outs, DC power installation, OSP/ISP fiber placement, fiber cable splicing and fiber testing. |
| ● | FTE Wireless, LLC, offers wireless solutions to major wireless carriers including equipment installation, fiber backhaul, antennae installation and testing, small cell solutions, fiber-to-site and other turnkey solutions as needed by the clients. |
| ● | Focus Venture Partners, Inc. (dba FVP Worx) is a multifaceted employment firm offering full service staffing solutions, specializing in telecommunications, technology and construction services industries. |
Recent Business Developments
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 affect the Reverse Split. The Reverse Split will reduce the number of outstanding shares of our Common Stock by reclassifying and converting all outstanding shares of our Common Stock into a proportionately fewer number of shares of Common Stock. 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 March 18, 2016 the Company received a comment letter from the SEC regarding the Form Pre-14C. The Company filed a response to the SEC on April 8, 2016. The Company received correspondence from the SEC on April 15, 2016, and had no objections to the response letter. On April 18, 2016, the Company filed its Definitive Form 14-C with the SEC. On May 25, 2016 “FINRA” approved the Reverse Split, which was effectuated on May 26, 2016.
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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 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.
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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 July 28, 2016, the Board of Directors of FTE Networks, Inc. (the “Company”) approved the appointment of Michael Bonewitz as the Company’s Chief Technology Officer commencing on August 24, 2016 and has replaced Carlie Ancor who will transition into a new role supporting the Company’s major account sales strategy. Mr. Bonewitz has over 20 years of senior management experience in communications network engineering and information technology industries developing cutting edge capabilities via advanced IT automation and data analytics driving operational and financial performance. Prior to FTE, he was VP of Strategy and Product Development for Cloud services, Fiber engineering and construction at Nexius where he developed and launched the company’s first fiber deployment program supporting multiple Tier 1 service providers in the US. He also led the company strategy and participation into Open Compute Project (OCP) as a Platinum member and as an original member of Facebook’s Telcom Infra Project (TIP). He has held previous technology and engineering leadership positions with Ericsson, Zayo and Level 3.
On September 27, 2016, the Board of Directors appointed Mr. Lynn Martin as Chief Operating Officer. As COO, Lynn Martin will be responsible for the prioritization and alignment of company initiatives overseeing, developing, and setting the strategic direction for the day-to-day operations of FTE Networks and ensuring operational excellence across the company. Prior to joining FTE, Lynn was head of the communications, software, and technology division of Nexius where he was responsible for growing the business by delivering end-to-end network solutions for emerging technologies, such as Open Source/NFV/SDN and infrastructure services that provided relevant value to customers and helped them to optimize their businesses. In addition to leading the software and technology teams, he created several new business offerings in Engineering, Fiber and Open Source development where he joined efforts with Open Compute Project and Telecom Infra Project communities both founded by Facebook to provide new network architectures and solutions with greater simplicity and efficiency. Before Nexius, Martin served as Executive Director of Telcordia Technologies, where he ran the company’s next generation software product line, was a senior strategist in Accenture’s Network Practice, and spent over a decade at Level 3 Communications at VP of Operational Integration and Process Management.
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.
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Segment Reporting
We operate in the telecommunications infrastructure services industry and the staffing industry. The following table summarizes financial information regarding our business segments during three months and nine months ended September 30, 2016 and September 30, 2015.
| For the Three Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 3,795,306 | 32,547 | 3,827,853 | ||||||||
| Income (Loss) from Operations | $ | 23,000 | 4,918 | 27,918 | ||||||||
| Depreciation and Amortization | $ | (247,512 | ) | - | (247,512 | ) | ||||||
| Interest Expense | $ | 485,926 | 4,310 | 490,236 | ||||||||
| For the Three Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 1,729,915 | 2,296,293 | 4,026,208 | ||||||||
| Income (Loss) from Operations | $ | (1,563,759 | ) | 9,783 | (1,553,976 | ) | ||||||
| Depreciation and Amortization | $ | (45,714 | ) | - | (45,714 | ) | ||||||
| Interest Expense | $ | 326,649 | 304,310 | 630,959 | ||||||||
| For the Nine Months Ended September 30, 2016 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 9,017,652 | 66,307 | 9,083,959 | ||||||||
| Income (Loss) from Operations | $ | (1,009,788 | ) | 50,015 | (959,773 | ) | ||||||
| Depreciation and Amortization | $ | (702,878 | ) | - | (702,878 | ) | ||||||
| Interest Expense | $ | 1,439,425 | 12,929 | 1,452,354 | ||||||||
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| For the Nine Months Ended September 30, 2015 | ||||||||||||
| Telecommunications | Staffing | Consolidated | ||||||||||
| Revenues | $ | 5,822,267 | 5,622,380 | 11,444,647 | ||||||||
| Income (Loss) from Operations | $ | (2,382,750 | ) | 24,529 | (2,358,221 | ) | ||||||
| Depreciation and Amortization | $ | (98,762 | ) | - | (98,762 | ) | ||||||
| Interest Expense | $ | 728,732 | 316,147 | 1,044,879 | ||||||||
Discussion of Operation Results for the Three and Nine Months ended September 30, 2016 and 2015
Overview
For the three months ended September 30, 2016 and 2015, respectively, we reported consolidated net losses attributable to common shareholders of $1,051,878 and $1,564,140, reflecting a decrease in net losses of $512,262 or 33%. A decrease in operating loss for the three month period from September 30, 2015 to 2016, respectively, of $1,581,894 was offset primarily by an increase of $138,416 in occupancy costs.
We reported consolidated net losses attributable to common shareholders of $3,249,742 and $3,834,241 during the nine months ended September 30, 2016 and 2015, respectively, reflecting a decrease in net losses of $584,499 or 15%. An increase in gross profit for the nine months ended September 30, 2016 and 2015 of $1,344,186 or 64% was offset primarily by a same period increase of $111,340 in compensation expense, $395,804 in occupancy expense, $407,475 in interest expense, $313,900 in a one time expense due to fair value analysis of our term loan, and $327,945 of amortization expense of debt discount.
Revenues and Gross Profit
We had overall revenues of $3,827,853 for the three months ended September 30, 2016, as compared to revenues of $4,026,208 for the three months ended September 30, 2015, resulting in a decrease in revenues of $198,355 or 5%. The decrease in revenues is primarily attributable to the staffing segment. In order to dedicate Company resources and capital to the telecommunications segment’s new business and to increase gross profit margin, management significantly reduced its focus in the staffing segment. As a result, for the three months ended September 30, 2016, staffing revenue was $32,547 compared to $2,296,293 for the three months ended September 30, 2015, resulting in a decrease in staffing revenue of $2,263,746 or 99%. Telecommunications revenues increased $2,065,391 or 119% for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Telecommunications revenue for those periods were $3,795,306 and $1,729,915, respectively. This shift in revenue mix resulted in an increase in gross profit margin from 14% to 37% for the three months ended September 30, 2015 and September 30, 2016, respectively.
We had overall revenues of $9,083,959 for the nine months ended September 30, 2016, as compared to revenues of $11,444,647 for the nine months ended September 30, 2015, resulting in a decrease in revenues of $2,360,688 or 21%. The decrease in revenues is primarily attributable to the staffing segment as described above. For the nine months ended September 30, 2016, staffing revenue was $66,307 compared to $5,622,380 for the nine months ended September 30, 2015, resulting in a decrease in staffing revenue of $5,556,073 or 99%. Telecommunications revenues increased $3,195,385 or 54% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2105. Telecommunications revenue for those periods were $9,017,652 and $5,822,267, respectively. This shift in revenue mix resulted in an increase in gross profit margin from 18% to 37% for the nine months ended September 30, 2015 and September 30, 2016, respectively.
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Operating Expenses
We reported operating expenses of $1,397,330 and $2,104,995 for the three months ended September 30, 2016 and 2015, respectively, representing a decrease of $707,665 or 34%. Selling, general, and administrative expenses decreased $676,102, due primarily to a decrease in legal, accounting, and share based compensation expense. Compensation expense was $605,491 and $645,245 for the three months ended September 30, 2016 and 2015, respectively, representing a decrease of $39,744.
We reported operating expenses of $4,394,764 and $4,449,027 for the nine months ended September 30, 2016 and 2015, respectively, representing a decrease of $54,263 or 1%. Selling, general, and administrative expenses decreased $398,421 due primarily to decreases in audit, legal, and stock based compensation expense, which was offset by $395,804 increase in occupancy costs. Compensation expense was $1,705,892 and $1,594,552 for the nine months ended September 30, 2016 and 2015, respectively, representing an increase of $111,340. 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 and Loss
Operating loss decreased by $1,581,894 or 102% to operating income of $27,918 for the three months ended September 30, 2016 compared to a loss of $1,553,976 for the three months ended September 30, 2015. This was primarily attributable to an increase in gross profit as described above, with a decrease in selling, general, and administrative expenses, and an increase in occupancy costs.
Operating loss decreased by $1,398,448 from a loss of $959,773 for the nine months ended September 30, 2016 compared to a loss of $2,358,221 for the nine months ended September 30, 2015. This was primarily attributable to an increase in gross profit as described above, with a decrease in selling, general, and administrative expenses, partially offset by increases in occupancy expense.
Other Income and Expense
Other income and expense increased by $1,069,633 during the three months ended September 30, 2016, when compared to the same period in the previous year, primarily due to a $971,956 decrease in forbearance expense, offset by increases in amortization expense, transaction fees, a one time fair value expense on the term loan, and incentive expense. The increase in amortization and interest expense is mainly attributable to the senior credit facility effective October 28, 2015.
For the nine months ended September 30, 2016 and 2015, other income and expense increased by $813,950 primarily due to an increase in interest expense, amortization expense, and a one time fair value expense.
Liquidity and Capital Resources
Overview
As of September 30, 2016, the Company had an accumulated deficit of approximately $16 million. In addition, the Company has a working capital deficiency of $2.6 million as of September 30, 2016.
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.
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Cash Flows for the Nine months ended September 30, 2016 and 2015
Cash Provided by/Used in Operating Activities
Net cash used in operating activities was $6,834,114 during the nine months ended September 30, 2016 as compared to cash provided by operating activities of $934,399 during the nine months ended September 30, 2015. For the nine months ended September 30, 2016, cash used in operating activities was primarily attributable to accounts receivable and other current assets, partially offset by accounts payable. For the nine months ended September 30, 2015, cash provided by operating activities was attributable to forbearance expense and accounts payable.
Cash Provided by/Used in Investing Activities
We provided $2,694,319 cash from investing activities during the nine months ended September 30, 2016, as compared to cash provided of $28,320 during the same period of the previous year. Cash provided by investing activities in the current period was primarily related to proceeds received from the restricted cash account.
Cash Provided by/Used in Financing Activities
Cash provided by financing activities was $3,943,248 during the nine months ended September 30, 2016, as compared to cash used of $796,351 during the nine months ended September 30, 2015. During the nine months ended September 30, 2016, cash provided by financing activities consisted principally of issuance of notes payable and restricted cash account drawdowns. During the nine months ended September 30, 2015, cash used was derived from primarily payments on our factoring line of credit and payments made on notes payable.
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.
Backlog
As of September 30, 2016, we had a backlog of unfilled contracts and master service agreements of approximately $32,500,000. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We may experience variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.
Off-Balance Sheet Arrangements
None.
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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 September 30, 2016, 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 September 30, 2016.
A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that as of September 30, 2016 our internal controls over financial reporting were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act.
2. We do not have sufficient resources in our accounting function, which restricts the Company’s ability to gather, analyze and properly review information related to financial reporting in a timely manner. In addition, due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.
3. We do not have personnel with sufficient experience with generally accepted accounting principles in the United States to address complex transactions.
4. We have inadequate controls to ensure that information necessary to properly record transactions is adequately communicated on a timely basis from non-financial personnel to those responsible for financial reporting.
5. We have determined that oversight over our external financial reporting and internal control over our financial reporting by our audit committee is ineffective. The audit committee has not provided adequate review of the Company’s SEC’s filings and consolidated financial statements and has not provided adequate supervision and review of the Company’s accounting personnel or oversight of the independent registered accounting firm’s audit of the Company’s consolidated financial statement.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2016, 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.
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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.
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. On December 14, 2015, the Company settled the RoadSafe lawsuit for $130,000, payable in 13 monthly installments of $10,000 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.
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 July 18th, 2016, the Company issued 100,000 Shares of common stock with a grant date value of $60,000 for settlement of debt.
On July 19th 2016, the Company issued 50,000 shares of common stock with a grant date value of $124,000 as incentive compensation.
On August 8th, 2016, the Company issued 197,000 Shares of common stock with a grant date value of $118,200 for a settlement of debt.
On August 9th, 2016, the Company issued 50,000 Shares of Common stock with a grant date value of $14,000 for a settlement of debt.
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On August 18th, 2016, the Company issued 25,000 shares of common stock with a grant date value of $15,500 for services performed for the company.
On August 18th, 2016, the Company issued 200,000 shares of common stock with a grant date value of $124,000 for services performed for the company.
On August 18th, 2016, the Company issued 2,190,000 shares of common stock with a grant date value of $1,357,800 as incentive compensation.
On August 23rd, 2016, the Company issued 450,000 Shares of Common stock with a grant date value of $203,850 for a settlement of debt.
On September 7, 2016, the Company issued 2,487,000 shares of common stock with a grant date value of $994,800 for an equity raise.
On October 12, 2016, the Company issued 2,423,687 shares of its common stock with a grant date value of $969,475 for an equity raise purchase.
On October 19, 2016, the Company issued 2,589,312 shares of its common stock with a grant date value of $1,035,725 for an equity raise purchase.
On October 19, 2016, the Company issued 2,000,000 shares of its common stock with a grant date value of $1,040,000 to several employees as incentive compensation.
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.
None.
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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.
| Exhibit | Description | |
| 10.1 | Form of Unit Purchase Agreement, by and between the Company and Investors | |
| 10.2 | Form of Registration Rights Agreement, by and between the Company and Investors | |
| 10.3 | Form of Warrant to be issued by the Company to each of the Investors | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.* | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.* | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S. C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.* | |
| 101.INS | XBRL Instance Document* | |
| 101.SCH | XBRL Taxonomy Extension Schema Document* | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document* | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document* | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document* | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document* | |
| * | Filed herewith |
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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.
| FTE Networks, Inc. | ||
| Date: November 21, 2016 | By: | /s/ Michael Palleschi |
| Michael Palleschi | ||
| Chief Executive Officer | ||
| Date: November 21, 2016 | By: | /s/ David Lethem |
| David Lethem | ||
| Chief Financial Officer | ||
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