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, 2017

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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “larger accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer [ ]		Accelerated filer [ ]
Non-accelerated filer [ ]	(Do not check if a smaller reporting company)	Smaller Reporting Company [X]
Emerging growth company [ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. [ ]

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

As of November 14, 2017, there were 5,597,296 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, 2017

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements	4

Unaudited Condensed Consolidated Balance Sheets	4

Unaudited Condensed Consolidated Statements of Operations	5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficiency)	6

Unaudited Condensed Consolidated Statements of Cash Flows	7

Notes to Unaudited Condensed Consolidated Financial Statements	8

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	39

ITEM 4. Controls and Procedures	40

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings	41

ITEM 1A. Risk Factors	41

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	41

ITEM 3. Defaults Upon Senior Securities	44

ITEM 4. Mine Safety Disclosures	44

ITEM 5. Other Information	44

ITEM 6. Exhibits	45

Signatures	46

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.

REVERSE STOCK SPLIT

On November 6, 2017 we effected a 25-for-1 reverse stock split of our common stock. The total number of shares of common stock held by each stockholder was converted automatically into the number of shares of common stock equal to the number of issued and outstanding shares of common stock held by each such stockholder immediately prior to the reverse stock split, divided by 25, with such resulting number of shares rounded up to the nearest whole share. The Company issued one whole share of the post-reverse stock split common stock to any stockholder who otherwise would have received a fractional share as a result of the reverse stock split. All share and per share information for the periods presented have been retroactively adjusted to give effect thereto. The reverse stock split has no effect on the par value of the common stock.

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

FTE NETWORKS, INC. AND SUBSIDIARIES CONDENSED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

	September 30, 2017			December 31, 2016			December 31, 2016
	(unaudited)						(Predecessor)
ASSETS
Current Assets:
Cash	$	3,154		$	1,412		$	4,753
Accounts receivable, net		51,791			7,020			51,701
Costs and estimated earnings in excess of billings on uncompleted contracts		6,773			-			9,759
Other current assets		7,727			2,833			3,174
Total current assets		69,445			11,265			69,387

Property and equipment, net		7,101			3,467			23
Intangible assets, net		26,306			-			-
Goodwill		46,922			-			-
Total Assets	$	149,774		$	14,732		$	69,410

LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
Current Liabilities:
Accounts payable	$	33,531		$	2,357		$	50,714
Billings in excess of costs and estimated earnings on uncompleted contracts		7,378			-			5,043
Due to related parties		343			100			-
Accrued expenses and other current liabilities		9,931			3,204			5,700
Notes payable, current portion, net of original issue discount and deferred costs		14,022			3,444			-
Notes payable, related party		791			791			-
Warrant derivative liability		303			594			-
Total Current Liabilities		66,299			10,490			61,457

Notes payable, non-current portion		46,899			6,530			-
Senior note payable, non-current portion, net of deferred financing costs		20,022			7,576			-
Total Liabilities		133,220			24,596			61,457


Commitments and contingencies

Temporary Equity:
Common stock; $0.001 par value, subject to put provision, 8,000,000 shares authorized and 444,475 shares issued and outstanding at December 31, 2016		-			437			-
Total Temporary Equity		-			437			-

Stockholders’ Equity (Deficiency):
Preferred stock; $0.01 par value, 5,000,000 shares authorized:
Series A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at September 30, 2017 and December 31, 2016 (liquidation preference $1,472,222)		-			-			-
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at September 30, 2017 and December 31, 2016 (liquidation preference $906,893)		-			-			-

Common stock; $0.001 par value, 8,000,000 shares authorized and 5,430,551 and 3,120,795 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		5			3			-
Common stock predecessor; $1 par value; 10,000 shares authorized, issued and outstanding		-			-			10
Additional paid-in capital		45,625			11,575			-
Shares to be issued		75			-			-
Subscriptions receivable		(3,588	)		(2,829	)		-
Accumulated (deficit) earnings equity		(25,563	)		(19,050	)		7,943
Total Stockholders’ Equity (Deficiency)		16,554			(10,301	)		7,953
Total Liabilities, Temporary Equity and Stockholders’ Equity (Deficiency)	$	149,774		$	14,732		$	69,410

(1) Common stock data for periods ended September 30, 2017 and December 31, 2016 have been adjusted retroactively to reflect 25-for-1 reverse stock split effective November 6, 2017.

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

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share information)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31, *2017 []**		For the Three Months Ended September 30, 2016		For the Nine Months Ended September 30, 2016
	2017			2016			2017			2016			(Predecessor)		(Predecessor)		(Predecessor)

Revenues, net of discounts	$	79,083		$	3,828		$	134,866		$	9,084		$	42,089	$	77,644	$	307,984
Cost of revenues		63,553			2,403			108,608			5,649			33,789		67,201		261,042
Gross Profit		15,530			1,425			26,258			3,435			8,300		10,443		46,942

Operating Expenses
Compensation expense		5,312			605			10,668			1,706			5,671		4,478		13,645
Selling, general and administrative expenses		4,064			548			8,662			1,920			2,009		4,452		17,199
Amortization of intangible assets		768			-			1,358			-			-		-		-
Travel expense		128			43			419			210			22		98		261
Occupancy costs		222			201			615			559			160		121		323
Loss on Sale of Asset		-			-			376			-			-		-		-
Transaction expenses		246			-			1,666			-			-		-		-
Total Operating Expenses		10,740			1,397			23,764			4,395			7,862		9,149		31,428
Operating Income (Loss)		4,790			28			2,494			(960	)		438		1,294		15,514

Other (Expense) Income
Interest expense		(1,824	)		(490	)		(4,351	)		(1,452	)		-		-		-
Amortization of deferred financing costs and debt discount		(1,332	)		(109	)		(3,663	)		(328	)				-		-
Change in warrant fair market valuation		2,033			-			854			-			-		-		-
Other Income (Expense)		(7	)		(147	)		(52	)		(101	)		56		30		74
Incentive expenses		-			-			-			(35	)		-
Extinguishment loss		-			(314	)		-			(314	)
Financing Costs		(139	)		-			(702	)		-			-
Total Other (Expense) Income		(1,269	)		(1,060	)		(7,914	)		(2,230	)		56		30		74
Income (Loss) before provision for local income taxes		3,521			(1,032	)		(5,420	)		(3,190	)		494		1,324		15,588
Provision for local income taxes		972			-			1,093			-			240		265		1,065

Net Income (Loss)		2,549			(1,032	)		(6,513	)		(3,190	)		254		1,059		14,523
Preferred stock dividends		(20	)		(20	)		(60	)		(60	)		-		-		-
Net Income (Loss) attributable to common shareholders		2,529			(1,052	)		(6,573	)	$	(3,250	)		254		1,059		14,523

Income (Loss) per common share:
Basic	$	0.47		$	(0.43	)	$	(1.40	)	$	(1.34	)
Diluted	$	0.46		$	(0.43	)	$	(1.40	)	$	(1.34	)

Weighted average number of common shares outstanding
Basic		5,367,208			2,418,024			4,699,369			2,418,024
Diluted		5,547,743			2,418,024			4,699,369			2,418,024

[*] Activity for the period April 1, 2017 through April 20, 2017 was not material.

(1) Common stock and per share data for the three and nine months ended September 30, 2017 and 2016 have been adjusted retroactively to reflect a 25-for-1 reverse stock split effective November 6, 2017.

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

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(unaudited)

(in thousands, except share information)

	Series A				Series A-1				Common				Paid in			Subscription			Shares to			Accumulated			Total
	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Receivable			be Issued			Deficit			Equity
Balance as of December 31, 2016		500	$	0		295	$	0		3,120,795	$	3	$	11,575		$	(2,829	)	$	-		$	(19,050	)	$	(10,301	)
Common Shares to Settle Legal Matter		-		-		-		-		9,181		0		125			-			-			-			125
Common Shares Sold to Investors		-		-		-		-		221,511		0		2,712			615			(3,301	)		-			26
Common Shares Issued to Consultants		-		-		-		-		103,782		0		1,568			-			-			-			1,568
Common Shares Issued to Employees		-		-		-		-		164,609		0		3,841			(3,044	)		-			-			797
Common Shares Issued to Board members										5,300		0		62												62
Common Shares Reclassified from Temporary Equity										444,275		1		436			-			-			-			437
Common Shares Issued to Senior Lender		-		-		-		-		256,801		0		5,650			-			-			-			5,650
Common Shares Issued to Benchmark sellers										1,069,538		1		21,658												21,659
Common Shares Issued to Settle Debt		-		-		-		-		29,399		0		444			-			-			-			444
Common shares issued to investor relation firm		-		-		-		-		5,360		0		125												125
Record stock compensation		-		-		-		-		-		-		-			1,670			-			-			1,670
Shares to be issued		-		-		-		-		-		-		(2,511	)		-			3,376			-			865
Accrued Dividends -Preferred Stock		-		-		-		-		-		-		(60	)		-			-			-			(60	)
Net Loss		-		-		-		-		-		-		-			-			-			(6,513	)		(6,513	)
Balance as of September 30, 2017		500	$	0		295	$	0		5,430,551	$	5	$	45,625		$	(3,588	)	$	75		$	(25,563	)	$	16,554

(1)

Common stock and per share data for the three and nine months ended September 30, 2017 have been adjusted retroactively to reflect a 25-for-1 reverse stock split effective November 6, 2017.

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

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net loss	$	(6,513	)	$	(3,190	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Amortization of deferred financing costs		3,663			328
Change in value of loan term		-			314
Warrant expense in connection with financing		563			-
Depreciation		444			375
Amortization of original issue discount		182			164
Amortization of intangible assets		5,324			-
Payment in kind interest - Senior debt		613			247
Stock incentive expense to investor		-			35
Stock based compensation		1,670			172
Provision for bad debts		300			-
Change in fair value of warrant derivative liability		(854	)		-
Loss from sale of asset		376			-
Changes in operating assets and liabilities:
Accounts receivable		(30,446	)		(5,579	)
Other current assets		(1,394	)		(601	)
Due to Related Party		243			-
Accounts payable and accrued liabilities		13,493			901
Billings in excess of costs and estimated earnings on uncompleted contracts		7,378			-
Net cash used in provided by operating activities		(4,958	)		(6,834	)

Cash flows from investing activities:
Net cash paid for Benchmark Builders, Inc. acquisition		(14,834	)		(309	)
Purchase of property and equipment		(4,031	)		-
Restricted cash account		-			3,003
Net cash (used in) provided by investing activities		(18,865	)		2,694

Cash flows from financing activities:
Proceeds from issuance of notes payable, net		7,070			2,500
Payments on notes payable		(1,506	)		(691	)
Proceeds from issuance of senior notes payable, net		11,610			-
Series C notes consideration for Benchmark acquisition		7,500			-
Proceeds from issuance of notes payable -related parties		-			195
Payments on notes payable - related parties		-			(44	)
Payment of deferred financing costs		-			(494	)
Collection of subscription receivable		-			775
Proceeds for shares to be issued		865			-
Net proceeds from sale of common stock		26			1,703
Net cash provided by financing activities		25,565			3,944

Net change in cash		1,742			(196	)
Cash, beginning of period		1,412			205
Cash, end of period	$	3,154		$	9

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	4,352		$	256
Cash paid for income taxes	$	404		$	-

Non-cash investing and financing activities:
Issuance of notes payable for the purchase of fixed assets	$	-		$	794
Common stock shares issued to settled legal matter	$	125
Common shares reclassified from Temporary Equity	$	437		$	-
Common stock shares issued for notes payable and other debt	$	444		$	898
Common shares issued to senior lender	$	5,650		$	-
Common Shares Issued to Board members	$	62		$	-
Issuance of notes to settle accrued litigation	$	-		$	146
Issuance of notes to settle accounts payables	$	-		$	720
Preferred shares issued -Investors incentive	$	-		$	-
Accrued dividends, preferred stock	$	60		$	60
Common shares issued to employees under employment agreement for future services	$	3,841		$	-
Common shares issued to consultants for services to be rendered	$	1,568		$	-
Common shares issued to investor relation firm for services to be rendered	$	125		$	-
Common shares issued as subscription receivable	$	-		$	1,358
Conversion of preferred shares to common shares	$	-		$	58
Series A, B notes consideration for Benchmark acquisition	$	42,500		$	-
Common shares issued as consideration for Benchmark acquisition	$	21,6589		$	-

[*] Activity for the period April 1, 2017 through April 20, 2017 was not material.

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

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

1. DESCRIPTION OF BUSINESS AND HISTORY

Overview

FTE Networks, Inc. is a leading provider of innovative technology-oriented solutions for smart platforms, network infrastructure and buildings. FTE’s three complementary businesses are FTE Network Services, CrossLayer, Inc. and Benchmark Builders, Inc. Together they provide end-to-end design, build and support solutions for state-of-the-art networks and commercial properties to create the most transformative smart platforms and buildings. FTE’s businesses are predicated on smart design and consistent standards that reduce deployment costs and accelerate delivery of innovative projects and services. The Company works with Fortune 100/500 companies, including some of the world’s leading communications services providers. FTE Networks and its subsidiaries support multiple services, including Data Center Infrastructure, Fiber Optics, Wireless Integration, Network Engineering, Internet Service Provider, General Contracting Management and General Contracting.

FTE Network Services is reported in the Company’s telecommunications infrastructure segment. FVP Worx represents the Company’s staffing segment, and CrossLayer represents the Company’s technology segment The Company will not include segment reporting per Accounting Standards Codification (“ASC”) 280 as the revenue, profit and loss, and assets of the staffing and technology segments are immaterial for both the three and nine months ended September 30, 2017 and 2016. On April 20, 2017, FTE expanded its product offering with the consummation of an acquisition of Benchmark Builders, Inc. (“Benchmark” or “Predecessor”). Benchmark is a full-service general contracting management and general contracting firm incorporated in 2008 as a New York State S-Corporation. Benchmark is a general contracting manager and general contractor serving a diverse and sophisticated corporate client base in the telecommunications, commercial, industrial, broadcast, technology, infrastructure, financial services, healthcare, and education industries, primarily in the New York area. Management believes that the historical operations of the Company and those of Benchmark operate under the same segment. Any assets outside of the continental U.S. are immaterial.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited condensed consolidated financial statements and the accompanying notes should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Annual Report”). The condensed consolidated balance sheet data as of September 30, 2017 included does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for audited financial statements. The unaudited condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures, including critical and significant accounting policies, normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. Results of operations and cash flows for interim periods presented in the unaudited condensed consolidated financial statements are not necessarily indicative of results of operations and cash flows for the full fiscal year. The condensed consolidated financial statements includes results from Benchmark for the period of April 21, 2017 through September 30, 2017, the period after closing date of acquisition of April 20, 2017.

Reverse stock split

On November 6, 2017 the Company effected a 25-for-1 reverse stock split of its common stock. The total number of shares of common stock held by each stockholder was converted automatically into the number of shares of common stock equal to the number of issued and outstanding shares of common stock held by each such stockholder immediately prior to the reverse stock split, divided by 25, with such resulting number of shares rounded up to the nearest whole share. The Company issued one whole share of the post-reverse stock split common stock to any stockholder who otherwise would have received a fractional share as a result of the reverse stock split. All share and per share information for the periods ended September 30, 2017, and all other periods presented, have been retroactively adjusted to give effect thereto. The reverse stock split has no effect on the par value of the common stock.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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, 2017, the Company has an accumulated deficit of $25,563. In addition, the Company has working capital of $3,146 as of September 30, 2017. On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral Investment Management (“Lateral”) amended its existing credit facility to provide for approximately $10,110 towards the cash purchase price, and extended the maturity date of the existing credit facility to June 30, 2019. Additionally, the Company, in conjunction with the Benchmark acquisition, took on approximately $50,000 of debt. With Benchmark’s significant annual revenue and its backlog as of September 30, 2017 of $273,508, the Company believes that it has the ability to support this additional debt and fund all current operations, thereby mitigating this uncertainty. However, if needed, there is no assurance that additional financing will be available or that management will be able to obtain and close financing on terms acceptable to the Company, enter an acceptable installment plan with the IRS, which is scheduled to be presented in the first quarter of 2018, or whether the Company’s anticipated future profitability and positive operating cash flow generated through its backlog will coincide with its debt service requirements and debt maturity schedules. If the Company is unable to raise sufficient additional funds or continue to generate positive operating cash flow when required, it will have to develop and implement a plan which may include but may not be limited to such measures as extending payables, renegotiating debt facilities, extending debt maturities, and reducing overhead until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. We have considerable discretion over the extent of expenditures and have the ability to curtail the related cash flows as needed. We believe all of these factors are sufficient to alleviate substantial doubt about the Company’s ability to continue as a going concern.

Reclassifications

Certain prior period balances have been reclassified in order to conform to current period presentation. The Company recently, in conjunction with the Benchmark acquisition, refinanced its senior debt and the maturity was extended to June 30, 2019. At the time of filing its Annual Report, the Company inadvertently did not reclassify approximately $4,167 of senior debt that had been included in short term notes. In as much as such debt was refinanced prior to the issuance of its Annual Report, it should have been presented as long term. These reclassifications had no effect on previously reported results of operations, loss per share or total liabilities.

	As Reported		As Restated
Current Liabilities	$	14,657	$	10,490
Long Term Liabilities	$	9,939	$	14,106
Total Liabilities	$	24,596	$	24,596

Use of Estimates

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

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Revenue and Cost of Goods Sold Recognition

Generally, revenue is recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. Revenue from telecommunication services is principally all derived from construction projects performed under master and other service agreements as well as from contracts for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. The Company provides services under unit price or fixed price master service or other service agreements under which the Company furnishes specified units of service for a fixed price per unit of service and revenue is recognized upon completion of the defined project due to its short term nature. Revenue from fixed price contracts provides for a fixed amount of revenue for the entire project, subject to certain additions for changed scope or specifications. Such contracts provide that the customer accept completion of progress to date and compensate the Company for services rendered, which may be measured in terms of costs incurred, units installed, hours expended or some other measure of progress. Contract costs include all direct materials, labor and subcontracted costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and the operational costs of capital equipment. Much of the materials associated with the Company’s work are customer-furnished and are therefore not included in contract revenue and costs.

Management reviews estimates of contract revenue and costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected contract settlements are factors that influence estimates of total contract value and total costs to complete those contracts and, therefore, the Company’s profit recognition. Changes in these factors may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined and accepted by the customer. Provisions for losses on uncompleted contracts are made in the period in which such losses are determined to be probable and the amount can be reasonably estimated. The majority of fixed price contracts are completed within one year.

The Company may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Management determines the probability that such costs will be recovered based upon engineering studies and legal opinions, past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer. The Company treats such costs as a cost of contract performance in the period incurred if it is not probable that the costs will be recovered, or defers costs and/or recognizes revenue up to the amount of the related cost if it is probable that the contract price will be adjusted and can be reliably estimated. As of September 30, 2017, and 2016, such amounts were not material. The Company actively engages in substantive meetings with its customers to complete the final approval process, and generally expects these processes to be completed within one year. The amounts ultimately realized upon final acceptance by its customers could be higher or lower than such estimated amounts.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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

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

The Company also recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimated costs, it is at least reasonably possible that the estimates used will change within the near term. Contract cost of sales include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. The asset, “Costs and estimated earnings in excess of billings on uncompleted contracts,” represents revenues recognized in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts,” represents billings in excess of revenues recognized.

Balance Sheet Classifications

In accordance with normal practice in the construction industry, the Corporation includes asset and liability accounts relating to construction contracts in current assets and liabilities even when such amounts are realizable or payable over a period in excess of one year. For the nine months ended September 30, 2017, the Company has included retainage payable as part of Billings in excess of costs and estimated earnings on uncompleted contracts. Retainage payable is anticipated to be paid within the next twelve months. The Company has also included any unbilled retention receivable as part of costs and estimated earnings in excess of billings on uncompleted contracts-and such amounts are also expected to be billed and collected within the next twelve months.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Valuation of Long-lived Assets

The Company evaluates its long-lived assets for impairment in accordance with related accounting standards. Assets to be held and used (including projects under development as well as property and equipment), are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, the Company first groups its assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, the Company estimates the undiscounted future cash flows that are directly associated with and expected to arise from the completion, use and eventual disposition of such asset group. The Company estimates the undiscounted cash flows over the remaining useful life of the primary asset within the asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model. If an asset is still under development, future cash flows include remaining construction costs. There were no impairments during the periods presented.

Income Taxes

The Company records income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is more likely than not that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more likely than not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, the Company’s experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives. The Company provided for a full valuation allowance against its net operating loss carryforwards, however it was subject to New York local tax.

Significant judgment is required in evaluating the Company’s tax positions and determining its provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the underlying net tangible and intangible assets acquired. The Company tests goodwill resulting from acquisitions for impairment annually on March 1, or whenever events or changes in circumstances indicate an impairment. For purposes of the goodwill impairment test, the Company has determined that it operates as a single reporting unit. If it is determined that an impairment has occurred, the Company adjusts the carrying value accordingly and charges the impairment as an operating expense in the period the determination is made. Although the Company believes goodwill is appropriately stated in the consolidated condensed financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance. There were no impairments during the periods presented.

Intangible assets that are not considered to have an indefinite life are amortized over their useful lives on a straight-line basis (see Note 4). Customer relationships acquired through business combinations are amortized over the estimated remaining useful life of the acquired customer base. This remaining useful life is based on historical customer retention and attrition rates. Contracts in progress acquired through business combinations are amortized over the estimated duration of the underlying projects. Trademarks and tradenames acquired through business combinations are amortized over the estimated useful life that such trademarks and tradenames are expected to be used. Non-compete arrangements entered into in connection with business combinations are amortized over the contractual life of the arrangements. On a periodic basis, the Company evaluates the estimated remaining useful life of acquired intangible assets and whether events or changes in circumstances warrant a revision to the remaining period of amortization. The carrying amounts of these assets are periodically reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.

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. The number of potential common shares outstanding relating to warrants and preferred stock is computed using the treasury stock method. For the periods presented, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Comparative data for the previous period has been adjusted to reflect the 1 for 20 reverse split effectuated May 26, 2016 and the 1 for 25 reverse split effectuated November 6, 2017.

	Three months ended
	September 30,
	2017
Basic net income (loss) per share:
Numerator:
Net income attributable to common shareholders	$	2,529
Denominator:
Weighted-average shares of common stock outstanding		5,367,208
Basic net income (loss) per share	$	0.47

Diluted net income (loss) per share:
Numerator:
Net income attributable to common shareholders	$	2,529
Dividend		20
Net Income(Loss)		2,549
Denominator:
Weighted-average shares of common stock outstanding		5,367,208
Dilutive warrants outstanding		138,102
Shares upon conversion of preferred stock		42,433
Number of shares used in diluted per-share computation		5,547,743

Diluted net income (loss) per share	$	0.46

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

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,
	2017		2016
Convertible preferred stock, Series A		26,687		26,687
Convertible preferred stock, Series A-1		15,746		15,746
Convertible preferred stock, Series D [1]		-		-
Convertible preferred stock, Series F [1]		-		-
Warrants		819,925		-

Total potentially dilutive shares		862,358		42,433

[1] The Series D (39,883,500) and Series F (19,415,460) preferred shares are convertible at a rate of 400 pre-split shares of common stock for each share of preferred stock but not until the Company has effected a sufficient increase in the authorized common shares. The Series D and Series F preferred shares were mandatorily converted to common shares at a ratio of 1 to 20 when the reverse split of common shares was effectuated on May 26, 2016.

Concentration of Credit Risk

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

Due to the fact that the majority of our revenues are nonrecurring, project based revenues, it is not unusual for there to be significant period to period shifts in customer concentrations. Revenue may significantly decline if the Company were to lose one or more of its significant customers, or if the Company were not able to obtain new customers upon the completion of significant contracts.

The following tables set forth the Company’s revenues and accounts receivable balances for the periods indicated:

	For the Three Months				For the Nine Months
	September 30, 2017				September 30, 2017
Revenues		$	%			$	%
Customer A		17,444	23	%		26,301	20	%
Customer B		8,246	11	%		12,711	9	%
Customer C		6,032	8	%		13,284	10	%

	For the Three Months					For the Nine Months
	September 30, 2016					September 30, 2016
Revenues	$		%			$		%
Customer M		1,714		51	%		2,831		33	%
Customer N		543		16	%		1,599		19	%
Customer L		221		9	7%		1,096		13	%

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

	September 30, 2017				December 31, 2016
Account Receivable		$	%			$	%
Customer A		12,037	23	%		-	-	%
Customer B		3,763	7	%		-	-	%
Customer D		3,490	7	%		-	-	%
Customer E		2,910	6	%		-	-	%

Fair Value of Financial Instruments - The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, does not require any new fair value measurements. The standard clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The recorded values of long-term debt approximate their fair values, as interest approximates market rates. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs other than quoted prices in active markets that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s financial instruments consist of accounts receivable, other current assets, accounts payable, and notes payable. The recorded values of accounts receivable, other current assets, 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.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application. ASU 2014-09 will be effective for the Company beginning in fiscal 2019 as a result of ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which was issued by the FASB in August 2015 and extended the original effective date by one year. The Company is currently evaluating the impact of adopting the available methodologies of ASU 2014-09 and 2015-14 upon its financial statements in future reporting periods. The Company has not yet selected a transition method. The Company is in the process of evaluating the new standard against its existing accounting policies, including the timing of revenue recognition, and its contracts with customers to determine the effect the guidance will have on its financial statements and what changes to systems and controls may be warranted. The Company is currently evaluating the standard to determine the impact of the adoption on the financial statements and what changes to systems and controls may be warranted.

There have been four new ASUs issued amending certain aspects of ASU 2014-09. ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net),” was issued in March, 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10, “Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers, noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09. Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by these four new ASUs.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

In March 2016, the FASB issued Accounting Standards Update 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. The adoption of this standard did not have a material impact on the Company’s financial statements.

In July 2017, the FASB issued Accounting Standards Update 2017-11 – Earnings Per Share. The Company is currently evaluating the standard to determine the impact of the adoption on the financial No. 2017-11—Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.

3. ACQUISITION OF BENCHMARK BUILDERS

On April 20, 2017, FTE acquired all of the issued and outstanding shares of common stock of Benchmark pursuant to Amendment No. 1 to the Stock Purchase Agreement, (and together with the Stock Purchase Agreement dated March 9, 2017, the “Amended Purchase Agreement”). The purchase price set forth in the Amended Purchase Agreement consists of (i) cash consideration of approximately $17,250 subject to certain prospective working capital adjustments (ii) 1,069,538 shares of FTE common stock with a fair value of $21,658, (iii) convertible promissory notes in the aggregate principal amount of $12,500 to certain stockholders of Benchmark (the “Series A Notes”, which mature on April 20, 2019) and (iv) promissory notes in the aggregate principal amount of $30,000 to certain stockholders of Benchmark (the “Series B Notes”, which mature on April 20, 2020). On April 20, 2017, in conjunction with the acquisition of Benchmark, FTE’s senior lender, Lateral, amended the original credit agreement to provide for approximately $10,110 towards the cash purchase price of the Benchmark acquisition, refinancing this new advance with the existing debt and extending the maturity date of the facility to March 31, 2019. In addition, certain sellers of Benchmark additionally provided approximately $7,500 towards the cash purchase price for which they received promissory notes in the aggregate principal amount of $7,500 to certain stockholders of Benchmark (the “Series C Notes”, which mature on October 20, 2018). The acquisition has been accounted for as a business combination.

The following is a summary of the consideration transferred for the acquisition of Benchmark:

Cash consideration	$	17,250
Shares of common stock		21,658
Series A notes		12,500
Series B notes		30,000

Merger consideration	$	81,408

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

3. ACQUISITION OF BENCHMARK BUILDERS, continued

The purchase price was assigned to the assets acquired based on their estimated fair values. The following is the preliminary purchase price allocation as of the April 20, 2017 closing date for Benchmark:

Cash	$	2,416
Accounts receivable		14,625
Other current assets		10,272
Property and equipment		47
Total identifiable assets acquired		27,360
Accounts payable		15,393
Accrued expenses and other current liabilities		9,111
Total liabilities assumed		24,504
Fair value of net tangible assets acquired and liabilities assumed		2,856

Contracts in progress		10,352
Trademarks and tradenames		1,592
Customer relationships		19,087
Non-compete		599
Fair value of identified intangible assets		31,630

Total consideration transferred		81,408
Goodwill	$	46,922

As discussed in Note 4, variations of the income approach were used to value the intangible assets. Goodwill of $46,922 was recorded related to this acquisition. The Company believes the goodwill related to the acquisition was a result of the expected growth platform to be used for growing the business. As of April 20, 2017, goodwill that is currently expected to be deductible for tax purposes is $36,875 and will be amortized over 15 years.

The operating results of Benchmark for the period from April 21, 2017 to September 30, 2017, included revenues of $73,470 and $118,008 and net income of $8,813 and $11,357 for the three and nine months ended September 30, 2017, respectively. These results have been included in the Company’s consolidated statements of operations for the three and nine months ended September 30, 2017. The net income in the Company’s consolidated statements of operations reflects $3,013 and $5,324 of amortization expense for the three and nine months ended September 30, 2017, in connection with Benchmark’s intangible assets. The Company incurred a total of $246 and $1,666 in transaction costs in connection with the acquisition, which are included within the consolidated statement of operations for the three and nine months ended September 30, 2017, respectively.

Unaudited predecessor financial information has been provided in these condensed consolidated financial statements since the operations of the Company before the acquisition of Benchmark were insignificant relative to the operations acquired.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

3. ACQUISITION OF BENCHMARK BUILDERS, continued

The unaudited pro forma combined results, which assumes the transaction was completed on January 1 of the respective nine month periods, are as follows for the nine months ended September 30, 2017 and 2016:

	Revenue		Earnings (Losses)
Actual three months ended September 30, 2017	$	79,083	$	2,549
Actual nine months ended September 30, 2017		134,866		(6,513	)
2017 supplemental pro forma from January 1, 2017 through September 30, 2017		176,955		(10,652	)
2016 supplemental pro forma from January 1, 2016 through September 30, 2016		317,068		(2,634	)
2016 supplemental pro forma from July 1, 2016 through September 30, 2016		81,472		(6,978	)

Significant adjustments included within the Company’s Proforma earnings and losses for the nine months ended September 30, 2017 and 2016 are as follows:

●	Adjustment to increase amortization expense of $3,717, $4,520 and $9,040 for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, respectively, reflects the preliminary adjustment to the amortization expense associated with the fair value of the identifiable intangible assets acquired in the acquisition.

●	Adjustment to eliminate transaction costs of $1,666 for the nine months September 30, 2017 reflects the removal of transaction costs incurred by the Company related to the Benchmark acquisition. There were no such transaction costs incurred during the three and nine months ended September 30, 2016.

●	Adjustment of interest expense of $1,038, $1,263 and $2,526 for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, respectively, reflects an increase in interest expense resulting from financing the total cash consideration paid in the acquisition and the issuance of promissory notes.

●	Adjustment of amortization expense of $1,304, $1,226 and $2,452 for the nine months ended September 30, 2017 and the three and nine months ended September 30, 2016, respectively, on deferred financing costs for financing cost of $890 incurred in amending the original credit agreement with Lateral, in addition to the 256,801 shares of common stock issued to Lateral with a fair value of $2,568 in connection with this amendment.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

4. INTANGIBLE ASSETS AND GOODWILL

The fair value of identifiable intangible assets acquired in the acquisition of Benchmark consist of the following:

Contracts in progress	$	10,352
Trademarks and tradenames		1,592
Customer relationships		19,087
Non-compete		599
Total identifiable intangible assets		31,630

Goodwill		46,922
Total Intangible Assets	$	78,552

Contracts in progress

The contracts in progress were valued within the income approach, multi-period excess earnings method. The contracts in progress are being amortized on a straight-line basis over an estimated useful life of eighteen months based on the remaining duration of the contracts in progress.

Trademarks and tradenames

The acquired trademarks and tradenames were valued using the income approach relief from royalty method. The Company has assumed the trade names will generate cash flows for the Company for seven years and will be amortized on a straight-line basis over their determined useful life.

Customer relationships

The existing customer relationships were valued within the income approach, multi-period excess earnings method. The customer relationships are being amortized on a straight-line basis over an estimated useful life of seven years, which is based on historical customer retention and attrition rates.

Non-compete

Non-competes were valued using the income approach, difference in cash flows “with” and “without” competition. The non-competes are being amortized on a straight-line basis over an estimated useful life of five years, which is based on the duration of the agreements.

Goodwill

The existing goodwill was valued as the excess of the purchase price of Benchmark assets over the fair market value of the assets purchased. Goodwill will be evaluated for impairment annually or when events and circumstances warrant such review. Impairment charges, if any, will be charged to operating expenses.

A cost approach was determined to be the most appropriate method for valuing the Assembled Workforce. The Assembled Workforce is not an identified intangible asset under ASC 805, Business Combinations so proceeds are not allocated directly to this asset. Rather, the fair value of the Assembled Workforce is calculated in order to determine the contributory asset charges for use in the multi-period excess earnings method which was used to value the Customer Relationships and the Contracts in Progress. For purposes of the purchase price allocation, the value of the assembled workforce is included within the value of residual goodwill.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

4. INTANGIBLE ASSETS AND GOODWILL, continued

Identifiable intangible assets consisted of the following at September 30, 2017:

	Weighted average remaining useful life (Months)		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite- Lived Intangible
Goodwill		-	$	46,922	$	-		$	46,922

Definite- Lived Intangibles
Trademarks and tradenames		78.7		1,592		100			1,492
Customer relationships		78.7		19,087		1,204			17,883
Contracts in progress		12.7		10,352		3,966	[1]		6,386
Non-compete		54.7		599		54			545
Total Definite Intangible Assets				31,630		5,324			26,306

Total Intangible Assets			$	78,552	$	5,324		$	73,228

[1] Amortization expense for the three and nine months ended September 30, 2017 totaled $3,013 and $5,324. For the three months ended September 30, 2017, $768 was charged to operating expenses and $2,245 was charged to cost of revenues. For the nine months ended September 30, 2017, $1,358 was charged to operating expenses and $3,966 was charged to cost of revenues.

Future projected annual amortization consists of the following for each of the following fiscal years ended December 31:

2017 (Remaining)	$	3,015
2018		7,215
2019		3,074
2020		3,231
2021		2,954
Thereafter		6,817
Total	$	26,306

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

5. OTHER CURRENT ASSETS

Other current assets consist of the following as of September 30, 2017 and December 31, 2016:

	September 30, 2017		December 31, 2016

Other receivables, net of reserves of $150 and $150, respectively	$	1,233	$	1,233
Prepaid insurance		1,760		45
Prepaid city and state taxes		1,754		-
Prepaid contract costs for work in process		265		409
Prepaid operating expenses		2,715		1,146
Other current assets	$	7,727	$	2,833

6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

As of September 30, 2017 and December 31, 2016, accrued expenses and other current liabilities were comprised of the following:

	September 30, 2017		December 31, 2016
Accrued interest payable^[1]	$	2,308	$	365
Accrued dividends payable		590		531
Accrued compensation expense^[2]		4,961		2,300
Accrued taxes		1,039		-
Other accrued expense		1,033		8
Accrued expenses, current	$	9,931	$	3,204

^[1]	Accrued interest payable as of September 30, 2017 and December 31, 2016 includes approximately $300 of estimated penalties and interest associated with prior period unpaid payroll taxes.

^[2]	Accrued compensation as of September 30, 2017 and December 31, 2016 includes $1,869 and $1,863 associated with prior period unpaid payroll taxes.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

7. NOTES PAYABLE

	September 30, 2017		December 31, 2016
Vendors Notes (Unsecured)
Long term vendor Notes (“Vendor Notes”) issued to settle litigation bearing interest rates between 0% and 6% per annum. Terms range from 1 to 48 months.	$	5,555		1,337

Other Notes Payable

Notes refinanced in conjunction with the senior debt		-		5,094
Less deferred financing costs		-		(926	)
Total other notes payable, net		-		4,168

Notes payable bearing interest at a stated rate between 10% and 12% per annum. Terms range from 1 to 12 months.		3,110		2,000

Unsecured Notes Issued in Connection with Benchmark Acquisition
Series A Convertible Notes		12,500		-
Series B Notes		30,000		-
Series C Notes		7,500		-
Total notes issued in connection with Benchmark acquisition		50,000		-

Equipment Notes

Obligations under leases, bearing interest rates between 4.1% and 8.2% per annum, secured by equipment having a value that approximates the debt value. Terms range from 48 to 60 months.		740			961
Various Equipment notes, bearing interest rates between 2% and 41% per annum, secured by equipment having a value that approximates the debt value. Terms range from 30 to 72 months.		1,516			1,508
Total Notes payables	$	60,921		$	9,974
Less: Current portion	$	(14,022	)	$	(3,444	)
Total Notes non-current portion	$	46,899		$	6,530

During the nine months ended September 30, 2017, the Company issued in Series A convertible promissory notes, in the aggregate principal amount of $12,500 to certain stockholders of Benchmark, which mature on April 20, 2019. Interest is computed at the rate of five percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $278 for the nine months ended September 30, 2017. This Note shall be convertible into conversion shares, at the holder’s option, upon an event of default at a conversion price per share of $11.88.

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

7. NOTES PAYABLE, continued

During the nine months ended September 30, 2017, the Company issued in Series B Notes in the aggregate principal amount of $30,000 to certain stockholders of Benchmark which mature on April 20, 2020. Interest is computed at the rate of three percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $400 for the nine months ended September 30, 2017.

During the nine months ended September 30, 2017, the Company issued in Series C Notes in the aggregate principal amount of $7,500 to certain stockholders of Benchmark which mature on October 20, 2018. Interest is computed at the rate of three percent per annum on the outstanding principal. Interest expense and accrued interest expense was approximately $98 for the nine months ended September 30, 2017.

The required principal payments for all borrowings for each of the five years following the balance sheet date are as follows:

2017 (Remaining)	$	762
2018		43,769
2019		15,333
2020		532
2021		365
Thereafter		160
Total	$	60,921

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

8. SENIOR DEBT

On October 28, 2015, the Company, through its main operating entity Jus-Com, Inc. entered into an $8 million senior credit facility. The facility has a two year term, and calls for interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a “payment in kind” (PIK) provision which calls for a 4% per annum increase in the principal balance monthly. The facility is a senior credit facility, and is secured by principally all assets of the Company. The uses of the senior facility are to retire the existing senior debt and related accrued interest through a tender offer, retire the factoring line of credit, pay certain senior loan closing costs, settle certain pending litigation, and provide working capital to the Company. A “blocked” bank deposit account, controlled by the lender, was also initially established in the amount of $3,000 to be held for future advances. The Company is prohibited from an early payoff of the facility until October 28, 2017. There are several affirmative and negative covenants the Company must comply with, such as minimum bank account balances, minimum EBITDA thresholds, capital expenditures, leverage ratio, and debt service coverage ratio. As a condition of the facility, the Company issued 163,441 shares of its Series D preferred stock and 391,903 shares of its Series F preferred stock to the lender. As a result of a market valuation performed on this transaction by a qualified third party valuation firm, an original issue discount of $437 was determined, which will be amortized on a straight line method, which approximates the interest rate method, over a twenty four month period to interest expense. During the period ended December 31, 2016, $249 was included in amortization of debt discount, and $237 remained unamortized as of December 31, 2016. On April 5, 2016, the Company entered into an amendment agreement to its existing credit facility with Lateral, amending the original credit agreement signed October 28, 2015. The agreement amends select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. On September 30, 2016, the Company entered into a second amendment agreement to its existing credit facility, maturing October 28, 2017, amending the original credit agreement signed October 28, 2015. The agreement was amended solely to consolidate a series of short term bridge loans granted to the company from time to time during the second and third quarter of 2016 into a $2.5 million loan, with a maturity date of April 30, 2017. The second amendment also amended the covenants related to consolidated EBITDA consolidated leverage, consolidated debt service, SG&A expenses, and compensation expense. On April 20, 2017, in conjunction with the acquisition of Benchmark, Lateral amended its existing credit facility to provide for $11,480 of which approximately $10.1 million went towards the cash purchase price, combining this new advance with the existing debt, extending the maturity date of the combined facility to March 31, 2019. The Company incurred deferred financing cost of approximately $890 in amending the original credit agreement with Lateral in conjunction with the acquisition of Benchmark to provide for partial financing of $10,110 towards the cash purchase price, refinancing this new advance with the existing debt, extending the maturity date of the facility to March 31, 2019. The Company issued 256,801 shares of common stock to Lateral with a fair value of $5,651 in connection with this amendment. Deferred financing cost are included within the senior note payable on the balance sheet as of September 30, 2017.

During the nine months ended September 30, 2017, the Company reclassified 444,275 shares of its common stock with a fair value of $437 to its senior lender from temporary equity to permanent equity which is now included in the consolidated statement of changes in stockholders’ equity. Reclassification was due to the put provision from the Lateral senior credit agreement dated October 28, 2015 was removed when the agreement was amended for the Benchmark acquisition on April 20, 2017.

FTE NETWORKS, INC. AND SUBSIDIARIES