Company Quick10K Filing
FTE Networks
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 8 $94
10-Q 2018-11-19 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-21 Quarter: 2018-03-31
10-K 2018-04-18 Annual: 2017-12-31
10-Q 2017-11-16 Quarter: 2017-09-30
10-Q 2017-08-21 Quarter: 2017-06-30
10-Q 2017-05-25 Quarter: 2017-03-31
10-K 2017-05-11 Annual: 2016-12-31
10-Q 2016-11-21 Quarter: 2016-09-30
10-Q 2016-08-16 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-01-13 Annual: 2015-09-30
10-Q 2015-08-19 Quarter: 2015-06-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-01 Quarter: 2012-03-31
10-Q 2012-02-08 Quarter: 2011-12-31
8-K 2019-12-30 Enter Agreement, M&A, Exhibits
8-K 2019-12-17 Regulation FD, Exhibits
8-K 2019-12-11 Sale of Shares, Officers
8-K 2019-11-08 Enter Agreement, Regulation FD, Exhibits
8-K 2019-10-09 Enter Agreement, M&A, Shareholder Rights, Officers, Other Events, Exhibits
8-K 2019-10-02 Officers
8-K 2019-09-16 Officers
8-K 2019-09-12 Other Events, Exhibits
8-K 2019-08-31 Off-BS Arrangement
8-K 2019-07-02 Enter Agreement, Sale of Shares, Amend Bylaw, Exhibits
8-K 2019-07-01 Enter Agreement
8-K 2019-06-28 Enter Agreement
8-K 2019-06-24 Officers
8-K 2019-06-14 Regulation FD, Exhibits
8-K 2019-06-12 Enter Agreement
8-K 2019-06-11 Amendment, Officers, Other Events, Exhibits
8-K 2019-06-05 Officers, Exhibits
8-K 2019-05-29 Officers
8-K 2019-05-28 Enter Agreement
8-K 2019-05-11 Enter Agreement, Officers
8-K 2019-05-09 Enter Agreement
8-K 2019-05-07 Enter Agreement
8-K 2019-05-03 Enter Agreement
8-K 2019-04-30 Enter Agreement
8-K 2019-04-24 Other Events
8-K 2019-04-17 Enter Agreement, Exhibits
8-K 2019-04-16 Enter Agreement
8-K 2019-04-09 Enter Agreement
8-K 2019-04-09 Officers, Other Events
8-K 2019-04-05 Enter Agreement
8-K 2019-04-02 Amendment, Other Events
8-K 2019-04-01 Officers
8-K 2019-03-30 Enter Agreement, Exhibits
8-K 2019-03-25
8-K 2019-02-26 Officers, Exhibits
8-K 2019-02-20 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-02-12 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2019-01-17 Officers
8-K 2018-12-26 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-12-19 Other Events, Exhibits
8-K 2018-12-18 Other Events, Exhibits
8-K 2018-12-04 Regulation FD, Exhibits
8-K 2018-11-20 Earnings, Exhibits
8-K 2018-11-15 Earnings, Exhibits
8-K 2018-10-30 Regulation FD
8-K 2018-09-25 Regulation FD, Exhibits
8-K 2018-08-15 Earnings, Exhibits
8-K 2018-08-06 Earnings, Exhibits
8-K 2018-07-09 Regulation FD, Exhibits
8-K 2018-05-21 Earnings, Exhibits
8-K 2018-04-18 Earnings, Exhibits
8-K 2018-04-03 Earnings, Exhibits
8-K 2018-03-21 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2018-03-12 Other Events, Exhibits
8-K 2018-01-10 Regulation FD, Exhibits
FTNW 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation and Significant Accounting Policies
Note 2. Liquidity and Managements' Plans
Note 3. Revenue Recognition
Note 4. Acquisition
Note 5. Accounts Receivable
Note 6. Intangible Assets and Goodwill
Note 7. Notes Payable
Note 8. Senior Debt
Note 9. Related Party Transactions
Note 10. Income Taxes
Note 11. Commitments and Contingencies
Note 12. Stockholders' Equity
Note 13. Stock Based Awards
Note 14. Customer Concentration
Note 15. Costs and Estimated Earnings on Uncompleted Contracts
Note 16. Backlog
Note 17. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine and Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

FTE Networks Earnings 2018-09-30

FTNW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
MAGS 133 119 36 0 0 0 0 91 0%
IDSY 104 60 33 55 27 3 4 96 49% 21.3 6%
UTSI 96 177 75 0 0 0 0 23 0%
ALSK 96 539 370 231 124 4 53 248 54% 4.7 1%
FTNW 94 159 164 378 52 -49 -40 90 14% -2.2 -31%
WIN 91 10,857 12,050 5,579 722 -2,911 -738 5,515 13% -7.5 -27%
IGLD 76 19,514 19,350 0 0 0 0 76 0%
HWCC 75 226 121 349 84 8 15 75 24% 4.9 4%
TLK 64 6 29 18 7 -30 -22 61 37% -2.8 -473%
ENT 56 703 1,003 649 123 -228 -127 835 19% -6.6 -33%

10-Q 1 form10-q.htm

 

 

 

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

 

For the quarterly period ended September 30, 2018

OR

 

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

 

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 every Interactive Data File required to be submitted 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 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 [  ] 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 12, 2018, there were 12,173,173 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, 2018

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION
   
ITEM 1. Financial Statements 4
   
Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017 (Unaudited) 4
   
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017 (Unaudited) 5
   
Condensed Consolidated Statement of Changes in Stockholders’ Equity (Unaudited) 6
   
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017 (Unaudited) 7-8
   
Notes to Condensed Consolidated Financial Statements (Unaudited) 9
   
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
   
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
   
ITEM 4. Controls and Procedures 27
   
PART II OTHER INFORMATION 27
   
ITEM 1. Legal Proceedings 27
   
ITEM 1A. Risk Factors 27
   
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
   
ITEM 6. Exhibits 30
   
Signatures 31

 

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

 

ITEM 1. Financial Statements

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share information)

 

    September 30, 2018     December 31, 2017  
             
ASSETS                
Current Assets:                
Cash and cash equivalents   $ 5,722     $ 15,642  
Accounts receivable, net     75,812       62,199  
Costs and estimated earnings in excess of billings on uncompleted contracts     4,362       11,226  
Other current assets     6,416       7,256  
Total Current Assets     92,312       96,323  
                 
Property and equipment, net     9,956       7,955  
Intangible assets, net     20,937       27,696  
Goodwill     35,672       35,672  
Total Assets   $ 158,877     $ 167,647  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 29,307     $ 35,135  
Contract liabilities     27,984       30,304  
Due to related parties     56        
Accrued expenses and other current liabilities     9,160       9,973  
Senior note payable, current portion net of original issue discount and deferred financing costs     31,122        
Notes payable, current portion, net of original issue discount and deferred costs     17,474       10,488  
Notes payable, related party, current, net of debt discount     18,334       8,526  
Total Current Liabilities     133,437       94,426  
                 
Senior note payable, non-current portion, net of original issue discount and deferred financing costs           24,143  
Notes payable, non-current portion     1,414       1,955  
Notes payable, related parties, non-current, net of debt discount     28,463       38,530  
Deferred tax liability     1,128       560  
Total Liabilities     164,442       159,614  
                 
Commitments and contingencies            
                 
Stockholders’ Equity:                
Preferred stock; $0.01 par value, 5,000,000 shares authorized:                
Series A convertible preferred stock, $1,000 stated value, 4,500 shares designated, and 500 shares issued and outstanding at September 30, 2018 and December 31, 2017 (liquidation preference $1,522,263)            
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated, and 295 shares issued and outstanding at September 30, 2018 and December 31, 2017 (liquidation preference $936,415)            
Common stock; $0.001 par value, 100,000,000 shares authorized, 7,699,251 and 5,789,281 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively     8       6  
Additional paid-in capital     71,421       49,381  
Shares to be issued           625  
Subscriptions receivable     (2,941 )     (3,675 )
Accumulated deficit     (74,053 )     (38,304 )
Total Stockholders’ (deficit) equity     (5,565 )     8,033  
Total Liabilities and Stockholders’ Equity   $ 158,877     $ 167,647  

 

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)

(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 [*]
 
    2018     2017     2018     2017     (Predecessor)  
                               
Revenues, net of discounts   $ 92,224     $ 79,083     $ 263,735     $ 134,866     $ 42,089  
Cost of revenues     76,311       63,553       222,380       108,608       33,789  
Gross profit     15,913       15,530       41,355       26,258       8,300  
                                         
Operating Expenses                                        
Compensation expense     9,283       5,312       21,777       10,668       5,671  
Selling, general and administrative expenses     9,045       4,660       19,653       10,746       2,191  
Amortization of intangible assets     938       768       2,813       1,358        
Total operating expenses     19,266       10,740       44,243       22,772       7,862  
Operating (loss) income     (3,353 )     4,790       (2,888 )     3,486       438  
                                         
Other (Expense) Income                                        
Interest (expense) income     (2,140 )     (1,824 )     (5,942 )     (4,351 )     5  
Amortization of deferred financing costs and debt discount     (4,318 )     (1,332 )     (13,688 )     (3,663 )      
Change in warrant fair market valuation           2,033             854        
Other (expense) income     (572 )     (7 )     (2,316 )     (52 )     51  
Financing costs     (1,374 )     (139 )     (10,187 )     (1,694 )      
Total other (expense) income     (8,404 )     (1,269 )     (32,133 )     (8,906 )     56  
(Loss) income before (benefit)provision for income taxes     (11,757 )     3,521       (35,021 )     (5,420 )     494  
(Benefit) provision for income taxes     268       972       728       1,093       240  
                                         
Net (loss) income     (12,025 )     2,549       (35,749 )     (6,513 )     254  
Preferred stock dividends     (20 )     (20 )     (60 )     (60 )      
Net (loss) income attributable to common shareholders     (12,045 )     2,529       (35,809 )     (6,573 )     254  
                                         
(Loss) earnings per share:                                        
Basic     (1.89 )     0.47       (6.36 )     (1.40 )        
Diluted     (1.89 )     0.46       (6.36 )     (1.40 )        
                                         
Weighted average number of common shares outstanding                                        
Basic     6,372,775       5,367,208       5,630,556       4,699,369          
Diluted     6,372,775       5,547,743       5,630,556       4,699,369          

 

[*] 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.

 

5
 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(UNAUDITED)

(in thousands, except share information)

 

   Series A   Series A-1   Common   Paid in   Subscription   Shares to be   Accumulated   Total 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Receivable   Issued   Deficit   Equity 
Balance as of December 31, 2017   500   $-    295   $-    5,798,281   $6   $49,381   $(3,675)  $625   $(38,304)  $8,033 
Common Shares returned   -    -    -    -    (70,114)   -    -    -    -    -    - 
Common Shares issued to settle legal matter   -    -    -    -    13,177    -    273    -    -    -    273 
Common Shares sold to investors   -    -    -    -    902,784    1    6,856    -    (625)   -    6,232 
Common Shares issued to consultants   -    -    -    -    100,986         1,408    -    -    -    1,408 
Common Shares issued to board members   -    -    -    -    33,750    -    551    -    -    -    551 
Common Shares issued to settle debt and related costs   -    -    -    -    651,667    1    12,063    -    -    -    12,064 
Common shares issued to warrant holders upon exercise   -    -    -    -    250,717    -    -    -    -    -    - 
Share-based compensation   -    -    -    -    18,003    -    949    734    -    -    1,683 
Accrued dividends -preferred stock   -    -    -    -    -    -    (60)   -    -    -    (60)
Net loss   -    -    -    -    -    -    -    -    -    (35,749)   (35,749)
Balance as of September 30, 2018   500   $-    295   $-    7,699,251   $8   $71,421   $(2,941)  $-   $(74,053)   (5,565)

 

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)

(in thousands)

 

    For the Nine Months Ended
September 30,
    For the Three Months
Ended
March 31, 2017 [*]
 
    2018     2017     (Predecessor)  
Cash flows from operating activities:                        
Net (loss) income   $ (35,749 )   $ (6,513 )   $ 254  
Adjustments to reconcile net (loss) income to net cash used in operating activities:                        
Depreciation     1,251       444       5  
Amortization of debt discount     23,928       4,408        
Amortization of intangible assets     6,759       5,324          
Payment in kind interest - senior debt     954       613        
Payment in kind interest - note payable     504              
Payment in kind interest - related party     1,303              
Share-based compensation     1,683       1,670        
Change in fair value of warrant derivative liability           (854 )      
(Gain) loss on sale of asset     (13 )     376        
Deferred tax income taxes     608              
Provision for bad debts     2,599       300          
Changes in operating assets and liabilities:                        
Accounts receivable     (13,612 )     (30,446 )     37,076  
Cost and estimated earnings in excess of billings on uncompleted contracts     6,864              
Other current assets     160       (1,394 )        
Due to related party     (42 )     243       (1,061 )
Accounts payable and accrued liabilities     (4,543 )     13,493       (37,498 )
Contract liabilities     (2,320     7,378       5,514  
Net cash (used in) provided by operating activities     (9,666 )     (4,958 )     4,290  
                         
Cash flows from investing activities:                        
Net cash paid for Benchmark Builders, Inc. acquisition           (14,834 )      
Purchase of property and equipment     (3,213 )     (4,031 )     (28 )
Net cash used in investing activities     (3,213 )     (18,865 )     (28 )
                         
Cash flows from financing activities:                        
Proceeds from issuance of notes payable, net     20,960       7,070        
Payments on notes payable     (21,524 )     (1,506 )      
Proceeds from issuance of notes payable – senior notes     945       11,610        
Proceeds from notes payable – related party                    
Payments on notes payable - related parties     (3,276 )            
Payment of deferred financing costs     (378 )            
Series C notes consideration for Benchmark acquisition           7,500        
Distribution to stockholders                 (6,599 )
Net proceeds for shares to be issued     6,232       865        
Net proceeds from sale of common stock           26        
Net cash provided by (used in) financing activities     2,959       25,565       (6,599 )
                         
Net change in cash     (9,920 )     1,742       (2,337 )
Cash and cash equivalents, beginning of period     15,642       1,412       4,753  
Cash and cash equivalents, end of period   $ 5,722       3,154       2,416  

 

7
 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

(in thousands)

 

   For the Nine Months Ended
September31,
  

For the Three

Months Ended

March 31, 2017 [*]

 
   2018   2017   (Predecessor) 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:               
Cash paid for interest  $2,050   $4,352   $ 
Cash paid for income taxes  $3   $404   $68 
                
Non-cash investing and financing activities:               
Common stock shares issued to settle legal matter  $272   $125   $ 
Common stock shares issued for notes payable and other debt  $5,331   $444   $ 
Common stock shares issued to senior lender  $   $5,650   $ 
Common stock shares issued to board members  $551   $62   $ 
Accrued dividends, preferred stock  $60   $60   $ 
Common stock shares issued to employees under employment agreement for future services  $   $3,841   $ 
Common stock shares issued to consultants for services to be rendered  $1,408   $1,568   $ 
Common stock shares issued to investor relation firm for services to be rendered  $   $125   $ 
Series A, B notes considerations for Benchmark acquisition  $   $42,500   $ 
Common stock issued as consideration for Benchmark acquisition  $   $21,659     
Common stock shares reclassified from Temporary Equity  $   $437   $ 
Capital leases issued for the purchase of fixed assets  $25   $   $ 

 

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

 

8
 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

 

NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

FTE Networks, Inc. (collectively with its subsidiaries, “FTE” or the “Company”) is a leading provider of innovative technology-oriented solutions for smart platforms, network infrastructure and buildings throughout the United States across a range of industries. The Company’s primary activities include the engineering, building, installation, maintenance and support solutions for state-of-the-art networks and commercial properties and the following services, data center infrastructure, fiber optics, wireless integration, network engineering, internet service provider, general contracting management and general contracting.

 

On April 20, 2017, FTE acquired Benchmark Builders, Inc. (“Benchmark” or “Predecessor”). Benchmark is a full-service general contracting management and general contracting firm in the New York metropolitan area. See Note 4. The Company and Benchmark operate in similar segments. Unaudited predecessor financial statements have 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.

 

Basis of Presentation

 

The accompanying condensed unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. Pursuant to these rules and regulations, certain information and footnote disclosures normally included in the annual audited consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated balance sheet as of December 31, 2017, is derived from the Company’s audited financial statements as of that date. Because certain information and footnote disclosures have been condensed or omitted, these condensed unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, contained in the Company’s 2017 Annual Report on Form 10-K (the “2017 Form 10-K”). The condensed consolidated financial statements include the Predecessor financial statements for the period of January 1, 2017, through March 31, 2017, the activity for the period from April 1, 2017 through April 20, 2017 was not material. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included.

 

Certain prior year amounts have been reclassified to conform to the current period presentation. Interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. The Company believes that the disclosures made in these condensed unaudited consolidated financial statements are adequate to make the information not misleading.

 

Segments

 

The Company operates in two segments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting”, (“ASC No. 280”). Operating segments as defined in ASC No. 280, are components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by the Company’s chief operating decision maker in deciding how to assess performance and allocate resources. The two primary segments are the infrastructure segment and technology segment. The Company is reporting as one segment per ASC No. 280 as the revenue, profit and loss, and assets of the technology segment are immaterial.

 

There have been no material changes to the Company’s significant accounting policies and critical accounting estimates described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

9
 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(in thousands, except share and per share information)

 

Use of Estimates

 

The preparation of financial statements in conformity with U. S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on historical information, information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Key estimates include: the recognition of revenue and project profit or loss (which the Company defines as project revenue less project costs of revenue, including project-related depreciation), in particular, on construction contracts accounted for under the percentage-of-completion method, for which the recorded amounts require estimates of costs to complete projects, ultimate project profit and the amount of probable contract price adjustments as inputs; allowances for doubtful accounts; estimated fair values of acquired assets; asset lives used in computing depreciation and amortization; share-based compensation; other reserves and accruals; accounting for income taxes. While management believes that such estimates are reasonable when considered in conjunction with the Company’s consolidated financial position and results of operations taken as a whole, actual results could differ materially from those estimates.

 

Balance Sheet Classifications

 

The Company includes in current assets and liabilities retainage receivable and payable under construction contracts that may extend beyond one year. A one-year time period is used as the basis for classifying all other current assets and liabilities.

 

Recently Adopted Accounting Standards

 

The Company adopted ASC No. 606, “Revenue From Contracts with Customers” (“ASC No. 606”) with a date of initial application of January 1, 2018. As a result, the Company has updated its accounting policy for revenue recognition to reflect the new standard, see Note 3. The adoption of ASC No. 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. The Company applied ASC No. 606 using the modified retrospective method. The Company has elected to apply this initial application of the standard only to contracts that are not completed at the date of initial application. For contracts which were modified before the adoption date, the Company has not restated the contract for those modifications. Instead, the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price, if necessary. The cumulative effect of initially applying the new revenue standard would be applied as an adjustment to the opening balance of retained earnings. The Company has analyzed this effect and found the adoption of the new guidance did not have a material impact on its consolidated financial statements and its recognition is consistent with the historical accounting policies. As such, comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed in U.S. GAAP and will thereby reduce the current diversity in practice. ASU 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company adopted the new standard on January 1, 2018 without a material impact on its financial statements.

 

Recently Issued Accounting Standards

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The standard requires a lessee to recognize assets and liabilities on the balance sheet for leases with lease terms greater than 12 months. The standard is effective for annual reporting periods beginning after December 15, 2018, the effective date for the Company is January 1, 2019, with early application permitted. The adoption will require a modified retrospective approach for leases that exist or are entered after the beginning of the earliest period presented. The Company is currently evaluating the standard to determine the impact of the adoption on the consolidated financial statements.

 

The Company will adopt ASU 2016-02 as of January 1, 2019 and expects to utilize the expedients permitted under ASU 2016-02, which allow entities to retain the classification of lease contracts existing as of the date of adoption and ASU 2018-11 which relieves the entities from having to present prior comparative years’ results when adopting the standard and allows an entity to recognize the cumulative effect of applying the new standard to leased assets and liabilities as an adjustment to the opening balance of retained earnings.

 

10
 

 

The Company is continuing to assess the potential effects of this ASU, which have not yet been quantified, on its consolidated financial statements. The Company’s assessment, which it expects to substantially complete in the fourth quarter of 2018, includes a detailed review of the lease contracts and a comparison of its historical accounting policies and practices to the new standard. Based on the Company’s progress in reviewing its leasing arrangements across all of its business units, the Company expects to recognize incremental lease assets and liabilities on its consolidated balance sheets upon adoption of the standard.

 

This ASU is not expected to have a material effect on the amount of expense recognized in connection with the Company’s current leasing arrangements as compared to current practice; however, based on the Company’s preliminary review of its lease contracts to date, it anticipates that the amount of incremental lease assets and lease liabilities to be recognized upon adoption of this ASU will not be material. The Company’s expectations may change as its assessment progresses. For information about the Company’s future lease commitments as of December 31, 2017, see Note 12 – Commitments and Contingencies in the Company’s 2017 Form 10-K.

 

Securities and Exchange Commission Disclosure Update and Simplification

 

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule was effective on November 5, 2018. The Company is evaluating the impact of this guidance on its condensed consolidated financial statements.

 

Net (Loss) Earnings Per Common Share

 

Basic (loss) earnings per share is computed by dividing net(loss) earnings attributable to common stockholders (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted net (loss) earnings per common share is computed by dividing net loss (earnings) attributable to common shareholders by the weighted average number of common shares outstanding during the period adjusted for the dilutive effects of common stock equivalents (the denominator), as calculated under the treasury stock method, which includes the potential effect of dilutive common stock equivalents, such as issued but unvested restricted shares. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. The Company incurred losses for the three and nine months ended September 30, 2018 and the nine months ended September 30, 2017.

 

The Company had the following anti-dilutive common stock equivalents as calculated under the treasury stock method:

 

  

For the Three Months Ended

September 30,

  

For the Nine Months Ended

September 30,

 
   2018   2017   2018   2017 
Convertible preferred stock, Series A (a)   28,724    26,687    28,724    26,687 
Convertible preferred stock, Series A-1 (a)   18,173    15,746    18,173    15,746 
Common stock warrants   1,086,319    138,102    1,086,319    819,925 
Restricted stock units   322,921    12,045    322,921    322,921 
Options   46,490        46,490     
Total potentially dilutive shares   1,502,627    192,580    1,502,627    1,185,279 

 

  (a) Dilutive effect of convertible securities are included in diluted EPS by application of the if-converted method.

 

The above table excludes any common shares related to the convertible debt since such debt is only convertible at the then prevailing market price upon default.

 

NOTE 2. LIQUIDITY AND MANAGEMENTS’ PLANS

 

During the nine months ended September 30, 2018, the Company reported an operating loss of $2,888 and had a cash and cash equivalent balance of $5,722 at September 30, 2018. The Company also used cash in its operating activities of $9,666 and had a working capital deficit of $41,125 primarily due to its senior notes payable and notes payables becoming current within the year. The Company believes with its cash and cash equivalent balance at September 30, 2018, of $5,722, current revenues of $263,735 and backlog and orders under master service agreements of approximately $473,651 as of September 30, 2018, will be sufficient to maintain operations and working capital requirements for at least the next 12 months from the date of this filing. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings.

 

11
 

 

NOTE 3. REVENUE RECOGNITION

 

On January 1, 2018, the Company adopted ASC No. 606. Under ASC No. 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC No. 606. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. The Company does not collect sales, value add, and other taxes collected on behalf of third parties.

 

Disaggregation of Revenue

 

The following table details the revenue from customers disaggregated by source of revenue.

 

   

Three Months Ended

September 30, 2018

    Nine Months Ended
September 30, 2018
 
Major Sources of Revenue                
Infrastructure   $ 91,999     $ 262,952  
Technology     225       783  
Total   $ 92,224     $ 263,735  

 

Infrastructure revenue

 

Revenues in the Infrastructure segment are derived from construction services, which in Benchmark are derived from short-term construction projects ranging from 6 to 12 months in duration under fixed-price contracts. The Company has determined that these short-term construction projects provide a distinct service and, therefore, qualify as one performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. Revenue from fixed-price contracts provide for a fixed amount of revenue for the entire project, subject to certain additions for modified scope or specifications to the original project. Revenue is recognized over time, because of the continuous transfer of control to the customer as all the work is performed at the customer’s site and, therefore, the customer controls the asset as it is being constructed. This continuous transfer of control to the customer is further supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process.

 

Under ASC No.606, the cost-to-cost measure of progress continues to best depict the transfer of control of assets to the customer, which occurs as we incur costs. Contract costs include labor, material, and other direct costs. Contract modifications are routine in the performance of the contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contact modifications are for goods or services that are not distinct, therefore, accounted for as part of the existing contract. Cost to obtain contracts (pre-contract costs) are generally charged to expense as incurred and included in operating expenses on the consolidated statements of operations.

 

Certain construction contracts include retention provisions to provide assurance to the customers that the Company will perform in accordance with the contract terms and, therefore, not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the customer. The Company has determined that there are no significant financing components in its contracts during the three and nine months ended September 30, 2018.

 

Costs to mobilize equipment and labor to a job site prior to substantive work beginning are capitalized as incurred and amortized over the expected duration of the contract. As of September 30, 2018, and January 1, 2018, the Company had no material capitalized mobilization costs.

 

Revenue from telecommunication services from FTE Network Services are derived from short-term projects performed under master and other service agreements as well as from contracts for specific projects or jobs requiring the installation of an entire infrastructure system or specified units within an entire infrastructure system. The Company has determined that these short-term projects provide a distinct service and, therefore, qualify as one performance obligation. The Company provides services under unit-price or fixed-price master service or other service agreements under which the Company furnishes specified units of service for a fixed-price per unit of service and revenue is recognized upon completion of the defined project due to its short-term nature.

 

12
 

 

Technology revenue

 

The Company also derives service revenues by managing wireless networks for customers to offer to their tenants and bills monthly in advance for the month’s services. The Company determined the wireless service contracts cover a single performance obligation and transfer control of access to the wireless service continuously as the customer simultaneously receives and consumes the benefits. Therefore, the revenue for the monthly wireless service, is considered to be recognized over time.

 

Contract Assets and Liabilities

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, retainage receivable and costs and estimated earning in excess of billings on uncompleted contracts (contract assets) on the consolidated balance sheet. In the infrastructure segment, amounts are billed as work in progress in accordance with agreed-upon contractual terms at periodic intervals. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from its customers, before revenue is recognized, resulting in billings in excess of costs and estimated earnings on uncompleted contracts (contract liabilities). These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of the reporting period. Changes in the contract asset and liability balances for the three and nine months ended September 30, 2018, were not materially impacted by any other factors.

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers:

 

    January 1, 2018     September 30, 2018  
Trade receivables   $ 62,199     $ 75,812  
Contract assets   $ 11,226     $ 4,362  
Contract liabilities   $ 30,304     $ 27,984  

 

As of January 1, 2018, and September 30, 2018, contract liabilities consisted of accrued subcontract costs, therefore, no amounts were recognized in revenue during the three and nine months ended September 30, 2018, related to its contract liabilities.

 

Contract Acquisition Costs

 

The Company does not have commission programs or incur other contract fulfilment costs in obtaining new contracts. All personnel costs were expensed as current period costs.

 

Contract Estimates

 

Accounting for long-term contracts and programs involves the use of techniques to estimate total contract revenue and costs. Transaction price for contracts may include variable consideration, which includes increases to transaction price for approved and change orders, claims and other contract provisions. The Company includes variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. The estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based largely on an assessment of the anticipated performance and all information (historical, current and forecasted) that is reasonably available to the Company. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders and claims reflected in transaction price are not resolved in the Company’s favor, or to the extent other contract provisions reflected in the transaction price are not earned, there could be reductions in or reversals of, previously recognized revenue. No adjustment on any one contract was material to the consolidated financial statements for the three and nine months ended September 30, 2018 and 2017.

 

Transaction Price Allocated to the Remaining Performance Obligations

 

On September 30, 2018, the Company had approximately $283,651 of estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied).

 

NOTE 4. ACQUISITION

 

2017 Acquisition

 

During April 2017, the Company acquired all the issued and outstanding shares of common stock of Benchmark. The acquisition was accounted for as a business combination in accordance with ASC Topic 805, “Business Combinations”. Benchmark is a full-service general contracting management and general contracting firm, significantly expanding the Company’s presence in the New York area.

 

13
 

 

Unaudited Supplemental Pro Forma Information

 

The pro forma results presented below include the effects of the Company’s 2017 acquisition of Benchmark as if the acquisition occurred on January 1, 2017. The pro forma net loss for the period ended September 30, 2017, includes the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and elimination of transaction costs. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2017.

 

The unaudited pro forma combined results, which assumes the transaction was completed on January 1 is as follows for the period ended September 30, 2017.

 

   Revenue   Net Loss   Loss per
Share
   Weighted
Average
Shares
 
2017 supplemental pro forma from January 1, 2017 through September 30, 2017  $176,955   $(10,652)  $(2.25)   4,725,146 

 

NOTE 5. ACCOUNTS RECEIVABLE

 

Accounts receivable, net for the following:

 

   September 30, 2018   December 31, 2017 
Uncompleted contracts  $43,128   $39,612 
Completed contracts   8,187    8,555 
Accounts receivable   3,020    4,510 
Unbilled receivable   22,147    10,077 
Allowance for doubtful accounts   (670)   (555)
Accounts receivable, net  $75,812   $62,199 

 

Accounts receivable from customers are generated from revenues earned after the installation or service for a job has been completed, inspected and approval has been obtained by its customer. The Company segments some of its large contracts into smaller more manageable contracts which allows for certain jobs to be completed, inspected and approved for payment by the customer in less time than non-segmentation. Unbilled Accounts Receivable are generally invoiced when authorized by the service provider typically within 90 to 180 days after the Company completes its performance obligation. The payment terms are generally 30 days.

 

NOTE 6. INTANGIBLE ASSETS AND GOODWILL

 

The fair value of identifiable intangible assets consisted of the following at September 30, 2018:

 

   Weighted
average
remaining useful
life (months)
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Indefinite- Lived Intangible                    
Goodwill      $35,672   $   $35,672 
                     
Definite- Lived Intangibles                    
Trademarks and tradenames   66.7    2,749    566    2,183 
Customer relationships   66.7    22,743    4,686    18,057 
Contracts in progress   0.7    10,632    10,325    307 
Non-compete   42.7    548    158    390 
Total Definite Intangible Assets        36,672    15,735    20,937 
Total Intangible Assets       $72,344   $15,735   $56,609 

 

14
 

 

The Company performs its annual goodwill impairment assessment at the end of the first quarter each year. As a result of the Company’s annual assessment, the Company determined that the fair value of the indefinite-lived intangible asset was substantially in excess of its carrying values and no impairment had occurred. The Company continues to believe that goodwill and the indefinite-lived intangible asset are recoverable; however, significant adverse changes in the projected revenues and cash flows of the Company could result in an impairment of goodwill or the indefinite-lived intangible asset. There can be no assurances that goodwill or the indefinite-lived intangible asset may not be impaired in future periods.

 

The amortization expense for the intangible assets consisted of the following:

 

    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
    2018     2017     2018     2017  
Operating expense   $ 938     $ 768     $ 2,813     $ 1,358  
Cost of goods sold     1,315       2,245       3,946       3,966  
Total amortization expense   $ 2,253     $ 3,013     $ 6,759     $ 5,324  

 

No amortization expense was recorded prior to April 20, 2017, the acquisition date of Benchmark.

 

NOTE 7. NOTES PAYABLE

 

Outstanding promissory notes and other notes payable consisted of the following:

 

   September 30, 2018   December 31, 2017 
         
Vendor notes issued to settle litigation, bearing interest rates between 0% and 6% per annum, terms range from 1 to 48 months.  $491   $890 
           
Short-term agreements, due between one and six months   8,755    7,315 
           
Short-term notes payable bearing interest at stated rates between 4% and 12% per annum. Terms range from 3 to 36 months   14,258    5,174 
           
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.   386    695 
           
Various Equipment notes, bearing interest rates between 2% and 41% per annum, secured by equipment having a value that approximates the debt value. Terms range from 30 to 72 months   1,275    1,507 
           
Total Notes Payables   25,165    15,581 
Less: Original issue discount and deferred financing costs   (6,277)   (3,138)
Notes payable, net of original issue discount and deferred financing costs   18,888    12,443 
Less: Current portion   (17,474)   (10,488)
Total Notes non-current portion  $1,414   $1,955 

 

During the nine months ended September 30, 2018, the Company issued short-term agreements and promissory notes payable in the aggregate of $37,203 net of original issue discounts of $9,606 and deferred financing costs of $1,828. The short-term agreements and promissory notes payable are unsecured, bear interest between 4% and 12% per annum and mature between three months and one year. During the nine months ended September 30, 2018, the Company repaid a total of $20,636 in cash and issued an aggregate of 394,173 shares of common shares for the payment of $2,784 in promissory note principal and accrued interest.

 

NOTE 8. SENIOR DEBT

 

The Company’s senior credit facility, the (“Facility”) as amended provides financing at the discretion of the lender with an interest rate of 12% paid quarterly in arrears and includes a “payment in kind” (PIK) provision providing a 4% per annum increase in the principal balance monthly. The Facility is due on March 31, 2019 and is secured by all assets of the Company.

 

During January 2018, the Company received cash of $23 for a note under the terms of the facility and converted $867 in PIK interest and $110 in debt discount into principal, all due March 31, 2019.

 

15
 

 

During April 2018, the Company borrowed a total of $1,025 under the terms of the Facility, due March 31, 2019. The Company recognized an original issuance discount of $103 and deferred finance costs of $10 on the note.

 

During September 2018, the Company borrowed a total of $2,188 under the terms of the Facility, due March 31, 2019. The Company recognized an original issuance discount of $239 on the note.

 

The Company recognized $1,811 and $1,239 in interest expense from the amortization of original issuance discounts and deferred financing costs for the three months ended September 30, 2018 and 2017, respectively, and $3,390 and $2,478 for nine months ended September 30, 2018 and 2017, respectively.

 

   September 30, 2018   December 31, 2017 
Senior note payable  $33,536   $29,475 
Less: Original issue discount   (2,183)   (4,901)
Less: Deferred financing cost   (231)   (431)
Total Senior note payable, current portion  $31,122   $ 
Total Senior note payable, non-current portion  $   $24,143 

 

The Company is in compliance with its debt covenants as of September 30, 2018 and December 31, 2017.

 

NOTE 9. RELATED PARTY TRANSACTIONS

 

Guarantees Related Party Advances

 

The Chief Executive Officer (“CEO”) provided cash advances witnessed by interest-bearing notes totaling $0 and $536, as of September 30, 2018 and December 31, 2017, respectively, and provided cash advances totaling $0 and $80, as of September 30, 2018 and December 31, 2017, respectively. Additionally, the CEO provided a personal credit card account for the purchase of goods and services by FTE. While the credit card balances are reflected in the Company’s books and records, the CEO is personally liable for the payment of the entire amount of the open credit obligation, which was $0 and $12 as of September 30, 2018 and December 31, 2017, respectively.

 

Additionally, the Company entered into several secured equipment financing arrangements with total obligations of approximately $47 and $345 as of September 30, 2018 and December 31, 2017, respectively, that required the guaranty of a Company officer, which was provided by him.

 

The Chief Financial Officer (“CFO”) provided an unsecured, interest-bearing note totaling $150 during the year ended December 31, 2017. The balance on the note was $0 and $80 as of September 30, 2018 and December 31, 2017, respectively. Additionally, the CFO personally guaranteed several secured equipment financing arrangements with total obligations of approximately $69 and $562 as of September 30, 2018 and December 31, 2017, respectively.

 

The CFO also provides a personal credit card account for the purchase of goods and services by FTE. While the credit card balances are reflected in the Company’s books and records, the CFO is personally liable for the payment of the entire amount of the open credit obligation, which was $0 and $14 at September 30, 2018 and December 31, 2017, respectively.

 

Mr. Chris Ferguson, a member of the Board of Directors, has provided cash advances totaling $147 as of September 30, 2018 and December 31, 2017.

 

Benchmark Acquisition

 

On April 20, 2017, the Company issued Series A convertible promissory notes, in the aggregate principal amount of $12,500 to the former owners of Benchmark and significant shareholders of the Company, maturing on April 20, 2019. Interest is computed at the rate of 5% percent per annum on the outstanding principal, is payable in arrears quarterly, commencing June 30, 2017 by capitalizing it to the outstanding principal amount. Interest expense was $168 and $491 for the three and nine months ended September 30, 2018, respectively, and $159 and $281 for the three and nine months ended September 30, 2017, respectively.

 

On April 20, 2017, the Company issued Series B Notes in the aggregate principal amount of $30,000 to the former owners of Benchmark and significant shareholders of the Company, which mature on April 20, 2020. Interest is computed at the rate of 3% per annum on the outstanding principal is payable in arrears quarterly, commencing June 30, 2017 by capitalizing it to the outstanding principal amount. Interest expense was $236 and $694 for the three and nine months ended September 30, 2018, respectively, and $228 and $403 for the three and nine months ended of September 30, 2017, respectively.

 

16
 

 

On April 20, 2017, the Company issued Series C Notes in the aggregate principal amount of $7,500 to the former owners of Benchmark and significant shareholders of the Company, which mature on October 20, 2018. See Note 17. Interest computes at the rate of 3% per annum on the outstanding principal, is payable in arrears quarterly, commencing June 30, 2017 by capitalizing it to the outstanding principal amount. Interest expense was $37 and $129 for the three and nine months ended September 30, 2018, respectively, and $55 and $97 for the three and nine months ended of September 30, 2017, respectively.

 

Total related party notes consisted of the following:

 

   September 30, 2018   December 31, 2017 
CEO and Board Member Cash Advance  $379   $1,043 
CFO       80 
Series A Notes   13,433    12,942 
Series B Notes   31,327    30,633 
Series C Notes   4,882    7,403 
    50,021    52,101 
Less: current portion   (18,334)   (8,526)
Less: discount on related party notes   (3,224)   (5,045)
Total related party notes  $28,463   $38,530 

 

NOTE 10. INCOME TAXES

 

The Company’s effective tax rate for the three months ended September 30, 2018 and 2017 was (2.4)% and 27.6%, respectively. The Company’s effective tax rate for the nine months ended September 30, 2018 and 2017 was (2.1)% and (20.2)%, respectively. For the three and nine months ended September 30, 2018 and 2017, the Company calculated income tax expense based upon an annual effective tax rate forecast adjusted for discrete items that specifically relate to the interim period. Changes in tax laws or rates on deferred tax assets and liabilities are recognized as discrete items in the interim period that includes the enactment date.

 

The Company’s effective tax rate for the three and nine months ended September 30, 2018 was primarily based on the Company’s recognition of a deferred tax liability as of March 31, June 30, and September 30, 2018. The deferred tax liability is related to goodwill, which was assigned an indefinite life for book purposes, also known as a “naked credit” in the amount of $1,120, $1,007, and $1,128 as of March 31, June 30, and September 30, 2018, respectively.

 

On December 22, 2017, new legislation was signed into law, informally titled the Tax Cuts and Jobs Act, which included, among other things, a provision to reduce the federal corporate income tax rate to 21%. Under ASC 740, Accounting for Income Taxes, the enactment of the Tax Act also requires companies, to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. There is no further change to its assertion on maintaining a full valuation allowance against its U.S. deferred tax assets. The Company’s gross deferred tax assets have been revalued from 34% to 21% with a corresponding offset to the valuation allowance. Any potential other taxes arising due to the Tax Act will result in reductions to its net operating loss carryforward and valuation allowance. The reduction of the corporate tax rate resulted in a write-down of the gross deferred tax asset of approximately $4,700, and a corresponding write-down of the valuation allowance. Upon completion of the 2018 U.S. income tax return the Company may identify additional remeasurement adjustments to the deferred tax liability. The Company will continue to assess its provision for income taxes as future guidance is issued but does not currently anticipate significant revisions will be necessary. Any such revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.

 

NOTE 11. COMMITMENTS AND CONTINGENCIES

 

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.

 

17
 

 

NOTE 12. STOCKHOLDERS’ EQUITY

 

Dividends

 

Dividend charges recorded during the three and nine months ended September 30, 2018 and 2017 are as follows:

 

    For the Three Months Ended   For the Nine Months Ended 
    September 30,   September 30, 
    2018   2017   2018   2017 
Series                 
A   $13   $13   $38   $38 
A-1    7    7    22    22 
Total   $20   $20   $60   $60 

 

Accrued dividends payable included in accrued expenses are as follows:

 

    September 30, 2018   December 31, 2017 
Series           
A   $    397   $354 
A-1    273    257 
Total   $670   $611 

 

Subscription Receivable

 

As of September 30, 2018, 194,049 shares of common stock issued to employees were vested at a fair value of $5,975. As of September 30, 2018, 128,872 shares that were previously issued to employees with a fair value of $2,682 remained 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 in stockholders’ equity.

 

Equity Transactions (in whole dollars)

 

Settlement of debt and related costs

 

During the nine months ended September 30, 2018, the Company issued 559,099 shares of its common stock with a fair value of $10,505,000 to settle obligations.

 

During the nine months ended September 30, 2018, the Company issued 92,568 shares of its common stock with a fair value of $1,558,000 for debt related costs.

 

Consultants

 

During the nine months ended September 30, 2018, the Company issued 100,986 shares of its common stock with a fair value of $1,408,000 pursuant to consulting agreements.

 

Sale of Common Stock

 

During the nine months ended September 30, 2018, the Company issued 902,784 shares of its common stock to individual investors, which resulted in net proceeds to the Company of $6,856,000.

 

Board of Directors

 

During the nine months ended September 30, 2018, the Company issued 33,750 shares of its common stock with a fair value of $551,000 to members of the Board of Directors per their agreements.

 

18
 

 

Settle Legal Matters

 

During the nine months ended September 30, 2018, the Company issued 13,177 shares of its common stock with a fair value of $273,000 to settle certain legal matters.

 

Share- Based Compensation

 

During the nine months ended September 30, 2018, the Company issued 18,003 shares of its common stock with a fair value of $281,000 to employees under employment agreements.

 

Exercise of Warrant Shares

 

During the nine months ended September 30, 2018, the Company issued 250,717 shares of its common stock for the exercise of warrant shares.

 

Shares Returned

 

During the nine months ended September 30, 2018, 70,114 shares of its common stock was returned to the Company.

 

NOTE 13. STOCK BASED AWARDS

 

The Company’s 2017 Omnibus Incentive Plan provides for awards of common stock in the form of incentive stock options, non-qualified stock options, SARs, restricted stock, performance shares or other stock-based awards. Awards are discretionary. The exercise price of stock options is equal to the fair market value of the underlying Common Stock on the date of grant. The options vest on the anniversary of the grant over a four-year term.

 

The following table summarizes stock option award activity during the nine months ended September 30, 2018:

 

   Stock Options 
   Shares   Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual
Life (In years)
   Aggregate
Intrinsic Value
(In thousands)
 
Outstanding as of December 31, 2017   47,870   $8.72    8.4   $65 
Granted      $         
Options exercised      $         
Forfeited or expired   (1,380)  $         
Outstanding as of September 30, 2018   46,490   $8.72    7.6   $144 
                     
Fully vested and exercisable as of September 30, 2018   12,750   $8.0    4.1   $47 

 

Stock compensation expense related to the options totaled approximately $14 and $42 for the three and nine months ended September 30, 2018 and is included in Selling, General and Admin on the Condensed Consolidated Statement of Operations. No stock compensation expense related to options was incurred for the three or nine months ended September 30, 2017.

 

As of September 30, 2018, the Company had unrecognized compensation expense related to stock options of $160. This expense will be recognized over a weighted-average number of years of approximately 3.0, based on the average remaining service periods for the awards.

 

The aggregate intrinsic values presented above represent the total pre-tax intrinsic values (the difference between the Company’s closing stock price of $11.67 on the last trading day, September 28, 2018 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of the second quarter of 2018. The amount of aggregate intrinsic value will change based on the price of the Company’s common stock.

 

There were no stock options granted and/or exercised during the nine months ended September 30, 2018.

 

19
 

 

Warrants

 

A summary of the warrant activity for the nine months ended September 30, 2018 is as follows:

 

       Weighted   Weighted 
       Average   Average 
   Number of   Exercise   Remaining 
   Warrants   Price   Life in Years 
Outstanding, December 31, 2017   980   $13.12    4.08 
Issued   340   $10.39    3.33 
Exercised   (234)  $5.60     
Expired      $     
Outstanding, September 30, 2018   1,086   $13.88    3.33 
Exercisable, September 30, 2018   1,086   $13.88    3.33 

 

NOTE 14. CUSTOMER CONCENTRATION

 

Revenue from the Company’s major customers are as follows:

 

   For the Three Months September 30,   % of Total Revenue 
   2018   2017   2018   2017 
Customer A  $11,218   $    13%   %
Customer B  $10,790   $    12%   %
Customer C  $8,653   $    9%   %
Customer E  $   $17,444    %   23%
Customer F  $   $8,246    %   11%
Customer G  $   $6,032    %   8%

 

   For the Nine Months September 30,   % of Total Revenues 
   2018   2017   2018   2017 
Customer A  $45,852   $         17%   %
Customer H  $27,129   $    10%   %
Customer D  $22,142   $    8%   % 
Customer E  $    $26,301    %   20%
Customer F  $   $12,711    %   9%
Customer G  $   $13,284    %   10%

 

Accounts Receivables for the Company’s major customers are as follows:

 

   Accounts Receivable   % of Total
Accounts Receivable
 
   As of
September 30, 2018
   As of
December 31, 2017
    
2018
    
2017
 
Customer B  $7,201   $    9%   %
Customer I  $6,352   $    8%   %
Customer C  $6,392   $    8%   %
Customer J  $   $18,477        28%
Customer D  $   $7,513    %   12%

 

The Company’s customer base is highly concentrated. Revenues are non-recurring, project-based revenues, therefore, it is not unusual for significant period-to-period shifts in customer concentrations. Revenue may significantly decline if the Company were to lose one or more of its significant customers, or if the Company were not able to obtain new customers upon the completion of significant contracts.

 

20
 

 

NOTE 15. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

 

Costs and estimated earnings in excess of billings on uncompleted contracts are summarized as follows:

 

    September 30, 2018     December 31, 2017  
Costs incurred on uncompleted contracts   $ 299,757     $ 147,117  
Estimated earnings     60,109       46,277  
      359,866       193,394  
Billings to date     (355,504 )     (212,472 )
      4,362     $ (19,078 )
                 
Included in the accompanying balance sheets:                
Costs and estimated earnings in excess of billings     4,362       11,226  
Billings in excess of costs and estimated earnings           (30,304 )
Total   $ 4,362     $ (19,078 )

  

NOTE 16. BACKLOG

 

The following is a reconciliation of backlog representing signed contracts in progress at September 30, 2018:

 

Balance – June 30, 2018   $ 132,110  
New contracts and adjustments     240,777  
      372,887  
Less contract revenues earned for the three months ended September 30, 2018     (89,236 )
         
Balance – September 30, 2018   $ 283,651  

 

Note 17. SUBSEQUENT EVENTS

 

During October 2018, the Company paid the remaining principal and accumulated in-kind interest balance totaling $4,891on its Series C Notes in the aggregate principal amount of $7,500 to the former owners of Benchmark.

 

21
 

 

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. References to “Benchmark” or “Predecessor” in this document refers to Benchmark Builders, Inc., FTE’s wholly owned subsidiary. Predecessor financial information has been provided since our operations before the acquisition of Benchmark were insignificant relative to the operations acquired. Unless otherwise noted, dollar amounts are presented in thousands.

 

Overview

 

FTE Networks, Inc, is a leading networking infrastructure and interior full-service contractor for state-of-the-art networks and commercial properties. We provide general contract management, and provide end-to-end design, build and support solutions to create the most transformative smart platforms and buildings.

 

We completed the acquisition of Benchmark, a leading provider of construction management services based in New York for $74.2 million on April 20, 2017. The transaction allows us to offer services to each other’s clients and expand their offerings nationally. As a wholly-owned subsidiary of ours, Benchmark will continue to operate under its current successful model while also offering our “compute to the edge” technology in New York City and the surrounding region. The transaction enables us to expand infrastructure services for ISP through current and future Benchmark client base. Benchmark gives us access to major developers including REITs as potential CrossLayer technology clients. Additionally, the transaction strengthens the opportunity to win contracts from Fortune 100/500 companies and enables Benchmark to access more clients as a public company.

 

We operate primarily in two segments: the infrastructure segment and the technology segment. The infrastructure segment includes Jus-Com (network infrastructure solutions); and Benchmark (construction management), which provides end-to-end interior design, build and support solutions. The technology segment which includes CrossLayer, Inc. (managed network services with first-of-its-kind advanced network and cloud platform) became operational during October of 2017, with immaterial operations during the nine months ended September 30, 2018.

 

Critical Accounting Policies

 

The following critical accounting policy for Revenue Recognition became effective on January 1, 2018 upon our adoption of Accounting Standards Codification No. 606, “Revenue from Contracts with Customers”. There were no other 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 April 18, 2018. Please refer to that document for disclosures regarding other critical accounting policies related to our business.

 

22
 

 

Results of Operations

 

Comparison of Quarterly Results

 

The following table sets forth our condensed consolidated financial statements for the periods indicated and the amounts as a percentage of revenue (totals may not add due to rounding):

 

($ in millions)  

For the Three Months Ended

September30

   

For the Nine Months Ended

September30

 
    2018     2017     2018     2017  
Revenue, net of discounts   $ 92.2       100 %   $ 79.1       100 %   $ 263.7       100 %   $ 134.9       100 %
Costs of revenue     76.3       83 %     63.6       80 %     222.4       84 %     108.6       81 %
Gross profit     15.9       17 %     15.5       20 %     41.3       16 %     26.3       19 %
Operating expenses     19.3       21 %     10.7       14 %     44.2       17 %     22.8       17 %
Operating (loss) income     (3.4 )     (4 )%     4.8       6 %     (2.9 )     (1 )%     3.5       3 %
Other expense     (8.4 )     (9 )%     (1.3 )     (2 )%     (32.1 )     (12 )%     (8.9 )     (7 )%
Loss before income taxes     (11.8 )     (13 )%     3.5       4 %   $ (35.0 )     (13 )%     (5.4 )     (4 )%
(Benefit) provision for income taxes     0.3       %     1.0       1 %     0.7       %     1.1       1 %
Net (loss) income   $ (12.1 )     (13 )%   $ 2.5       3 %   $ (35.7 )     (14 )%   $ (6.5 )     (5 )%

 

Overview

 

For the three months ended September 30, 2018 and 2017, we reported condensed consolidated net (loss) income of $(12.1) million and $2.5 million, respectively, a decrease of $14.6 million or 584%. The increase in the net loss for the three months ended September 30, 2018 was attributable primarily to an increase in total operating expenses of $8.6 million, an increase in other expenses of $7.1 million, partially offset by a decrease in the provision for income tax of $0.7 million and an increase in gross margin of $0.4 million.

 

For the nine months ended September 30, 2018 and 2017, we reported condensed consolidated net losses of $35.7 million and $6.5 million, respectively, an increase of $29.2 million or 449%. The increase in the net loss was attributable to several factors, including an increase in other expenses of $23.2 million, an increase in operating expenses of $21.4 million, partially offset by an increase in gross profit of $15.0 million.

 

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

 

Revenues

 

Our revenues for the three months ended September 30, 2018 were $92.2 million as compared to revenues of $79.1 million for the three months ended September 30, 2017, an increase of $13.1 million or 17%. During the third quarter of 2017, Benchmark began to build up its backlog after completing some large projects during the first half of the 2017 and has continued to increase its backlog through the third quarter of 2018.

 

Cost of Revenues

 

For the three months ended September 30, 2018, the cost of revenues was approximately $76.3 million as compared to $63.6 million for the three months ended September 30, 2017, an increase of $12.7 million or 20%. The increase in the cost of revenues was attributable to Benchmark and are the result of new projects beginning during the third quarter of 2018.

 

Gross Profit and Margin

 

For the three months ended September 30, 2018, gross profit was $15.9 million as compared to $15.5 million for the three months ended September 30, 2017 an increase of $0.4 million or 3%. For the three months ended September 30, 2018, the gross profit margin increased by 3% to 17% from 20% for the three months ended September 30, 2017, due to the change in the product mix and the timing of scheduled project costs.

 

Operating Expenses

 

Our operating expenses were $19.3 million and $10.7 million for the three months September 30, 2018 and 2017, respectively, representing an increase of $8.6 million or 80%.

 

23
 

 

Compensation Expense

 

For the three months ended September 30, 2018, compensation expense increased by approximately $4.0 million or 75%, to $9.3 million from $5.3 million for the three months ended September 30, 2017, primarily due to an increase in headcount, salaries and certain bonuses.

 

Selling, General and Administrative

 

For the three months ended September 30, 2018, selling, general and administrative expense increased by approximately $4.3 million or 91%, to $9.0 million from $4.7 million for the three months ended September 30, 2017, was primarily due to an increase in other receivables reserve, consulting fees, professional fees and board of director fees.

 

Amortization of Intangible Assets

 

Amortization of intangible assets was $0.9 million and $0.8 million for the three months ended September 30, 2018 and 2017, respectively. The increase is due to the final purchase price allocation at December 31, 2017, which increased the amortization expense minimally.

 

Other Income and Expense

 

Our other expenses were $8.4 million and $1.3 million for the three months ended September 30, 2018 and 2017, respectively, representing an increase of $7.1 million or 546%, the increase was primarily due to the following; i) amortization expense of deferred financing cost and debt discounts of approximately $3.0 million; ii) the decrease in change in warrant fair valuation of $2.0 million due to the adoption of ASU 2017-11 during 2017 iii) financing costs of $1.2 million; iv) $0.6 million in settlement expenses related to certain notes payable; and v) an increase in interest expense of $0.3 million due to our notes payable and senior credit facility.

 

Provision for income tax

 

The following table presents our income tax provision and effective income tax rate for the three months ended September 30, 2018 and 2017:

 

   For the Three Months Ended 
($ in millions)  September 30, 2018   September 30,2017 
Income tax provision  $    0.3   $1.0