Company Quick10K Filing
FTE Networks
Price12.27 EPS-6
Shares8 P/E-2
MCap94 P/FCF-163
Net Debt-4 EBIT-47
TEV90 TEV/EBIT-2
TTM 2018-09-30, in MM, except price, ratios
10-K 2019-12-31 Filed 2020-11-05
10-K 2018-12-31 Filed 2020-05-11
10-Q 2018-09-30 Filed 2018-11-19
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-21
10-K 2017-12-31 Filed 2018-04-18
10-Q 2017-09-30 Filed 2017-11-16
10-Q 2017-06-30 Filed 2017-08-21
10-Q 2017-03-31 Filed 2017-05-25
10-K 2016-12-31 Filed 2017-05-11
10-Q 2016-09-30 Filed 2016-11-21
10-Q 2016-06-30 Filed 2016-08-16
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-09-30 Filed 2016-01-13
10-Q 2015-06-30 Filed 2015-08-19
10-Q 2012-06-30 Filed 2012-08-14
10-Q 2012-03-31 Filed 2012-05-01
10-Q 2011-12-31 Filed 2012-02-08
8-K 2021-01-25
8-K 2020-12-30
8-K 2020-12-22
8-K 2020-09-25
8-K 2020-05-21
8-K 2020-05-15
8-K 2020-03-30
8-K 2020-03-10
8-K 2020-03-09
8-K 2020-02-27
8-K 2020-02-21
8-K 2020-01-16
8-K 2019-12-30
8-K 2019-12-20
8-K 2019-12-17
8-K 2019-12-11
8-K 2019-11-08
8-K 2019-10-18
8-K 2019-10-14
8-K 2019-10-09
8-K 2019-10-02
8-K 2019-09-16
8-K 2019-09-12
8-K 2019-08-31
8-K 2019-07-02
8-K 2019-07-01
8-K 2019-06-28
8-K 2019-06-24
8-K 2019-06-14
8-K 2019-06-12
8-K 2019-06-11
8-K 2019-06-05
8-K 2019-05-29
8-K 2019-05-28
8-K 2019-05-11
8-K 2019-05-09
8-K 2019-05-07
8-K 2019-05-03
8-K 2019-04-30
8-K 2019-04-24
8-K 2019-04-17
8-K 2019-04-16
8-K 2019-04-09
8-K 2019-04-09
8-K 2019-04-05
8-K 2019-04-02
8-K 2019-04-01
8-K 2019-03-30
8-K 2019-03-25
8-K 2019-02-26
8-K 2019-02-20
8-K 2019-02-12
8-K 2019-01-17
8-K 2018-12-26
8-K 2018-12-19
8-K 2018-12-18
8-K 2018-12-04
8-K 2018-11-20
8-K 2018-11-15
8-K 2018-10-30
8-K 2018-09-25
8-K 2018-08-15
8-K 2018-08-06
8-K 2018-07-09
8-K 2018-05-21
8-K 2018-04-18
8-K 2018-04-03
8-K 2018-03-21
8-K 2018-03-12
8-K 2018-01-10

FTNW 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Part IV
Item 15. Exhibits and Financial Statement Schedules.
Item 16. Form 10 - K Summary.
Note 1. Description of Business and Basis of Presentation
Note 2. Summary of Significant Policies
Note 3. Leases
Note 4. Asset Acquisition
Note 6. Accounts Receivable
Note 7. Other Current Assets
Note 8. Property and Equipment, Net
Note 9. Accrued Expenses and Other Current Liabilities
Note 10: Merchant Account Agreements
Note 11: Convertible Notes Payable
Note 12: Notes Payable and Financing Leases
Note 13. Senior Debt
Note 14. Related Party
Note 15. Fair Value Measurements
Note 16. Benefit Plans
Note 17. Commitments and Contingencies
Note 18. Income Taxes
Note 19. Stockholders' Equity
Note 20. Stock - Based Awards
Note 21. Unaudited Quarterly Data
Note 22. Subsequent Events
EX-10.22 ex10-22.htm
EX-10.23 ex10-23.htm
EX-10.24 ex10-24.htm
EX-10.25 ex10-25.htm
EX-10.26 ex10-26.htm
EX-10.27 ex10-27.htm
EX-10.28 ex10-28.htm
EX-10.29 ex10-29.htm
EX-10.30 ex10-30.htm
EX-10.31 ex10-31.htm
EX-10.32 ex10-32.htm
EX-10.33 ex10-33.htm
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EX-10.35 ex10-35.htm
EX-10.36 ex10-36.htm
EX-10.37 ex10-37.htm
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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 2019-12-31

Balance SheetIncome StatementCash Flow
175137996123-152014201520172019
Assets, Equity
11085603510-152014201520172019
Rev, G Profit, Net Income
20124-4-12-202014201520172019
Ops, Inv, Fin

10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2019

 

or

 

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

 

For the transition period from               to

 

Commission file number: 001-38322

 

FTE NETWORKS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   81-0438093
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

237 W. 35th St., Ste. 806, New York, NY 10001
(Address of principal executive offices)

 

Registrant’s telephone number, including area code: 1-800-320-1911

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant of section 12(g) of the Act: None

 

Indicate by check mark if the registrant is well-known seasoned issuer, as defined in Rule-405 of the Securities Act. [  ] Yes [X] No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [  ] Yes [X] No

 

Indicate by check mark whether the registrant (1) has filed all reports 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 Regulations 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:

 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. [  ]

 

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

 

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates as of June 30, 2019, was approximately $10.1 million.

 

On October 31, 2020, there were 25,572,148 shares of common stock outstanding.

 

 

 

 

 

 

FTE NETWORKS, INC.

FORM 10-K

TABLE OF CONTENTS

 

    Page
Forward-Looking Statements  
   
  PART I  
     
Item 1. Business. 4
Item 1A. Risk Factors. 10
Item 1B. Unresolved Staff Comments. 27
Item 2. Properties. 27
Item 3. Legal Proceedings. 28
Item 4. Mine Safety Disclosures. 29
     
  PART II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 29
Item 6. Selected Financial Data. 30
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 38
Item 8. Financial Statements and Supplementary Data. 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 38
Item 9A. Controls and Procedures. 39
Item 9B. Other Information. 41
     
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance. 41
Item 11. Executive Compensation. 44
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 48
Item 13. Certain Relationships and Related Transactions, and Director Independence. 49
Item 14. Principal Accounting Fees and Services. 53
     
  PART IV  
     
Item 15. Exhibits and Financial Statement Schedules. 53
Item 16. Form 10-K Summary. 54
Signatures   55

 

2
 

 

PART I

 

DEFINITIONS

 

In this Annual Report on Form 10-K, the words “FTE”, the “Company”, the “Registrant”, “we”, “our”, “ours” and “us” refer to FTE Networks, Inc. and, except as otherwise specified herein, to our subsidiaries.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K includes certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, all of which are based upon various estimates and assumptions that the Company believes to be reasonable as of the date hereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “should,” “expect,” “plan,” “project,” “intend,” “anticipate,” “believe,” “seek,” “estimate,” “predict,” “potential,” “pursue,” “target,” “continue,” the negative of such terms or other comparable terminology. These statements involve risks and uncertainties that could cause the Company’s actual future outcomes to differ materially from those set forth in such statements. Such risks and uncertainties include, but are not limited to:

 

  Our ability to maintain sufficient liquidity to continue operations;
  Our ability to make payments on our indebtedness;
  Our ability to raise capital on acceptable terms and conditions;
  Difficulties in implementing uniform controls, procedures and policies in our single-family rental properties and real estate, or in remediating control deficiencies;
  Our current insurance coverage may not be adequate, and we may be unable to obtain additional layers of coverage at acceptable rates;
  Uncertainties relating to the long-term impact of COVID-19 on our business, operations and employees;
  A significant slowdown or the continuing decline in economic conditions could adversely impact our results of operations;
  Interruptions to our information systems and cyber security or data breaches;
  Liabilities under laws and regulations protecting the environment;
  Loss of key personnel and effective transition of new management;
  Our ability to successfully implement our strategic initiatives and achieve their anticipated impact;
  The impact of changes to the supply of value of and returns on single-family rental assets;
  Our ability to successfully integrate our single-family rental property business into our corporate organization;
  Our ability to successfully integrate newly acquired properties into our portfolio of single-family rental properties;
  Changes in the market value of our single-family rental properties and real estate;
  The impact of adverse real estate, mortgage or housing markets; and
  The impact of adverse legislative, regulatory or tax changes.

 

You should understand that the foregoing, as well as other risk factors discussed in this document, including those listed in Part I, Item 1A of this report under the heading “Risk Factors”, could cause future outcomes to differ materially from those experienced previously or those expressed in such forward-looking statements. The Company undertakes no obligation to publicly update or revise any information, including information concerning its net operating losses, borrowing availability or cash position, or any forward-looking statements to reflect events or circumstances that may arise after the date of this report. Forward-looking statements are provided in this Annual Report on Form 10-K pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of the estimates, assumptions, uncertainties and risks described herein.

 

3
 

 

Item 1. Business.

 

The following historical business description should be read in conjunction with the Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

 

Our Corporate History and Current Business

 

The Company was incorporated in the state of Nevada in May 2000. On March 13, 2014, following a series of mergers, acquisitions and business combinations, the Company changed its name from Beacon Enterprise Solutions Group, Inc. to FTE Networks, Inc.

 

Prior to October 2019, the Company was a provider of end-to-end design, construction management, build and support solutions for networks, data centers, residential, and commercial properties and services at Fortune 100/500 companies (our “Historical Business”). The Company’s primary activities included engineering, building, installation, maintenance and support solutions for state-of-the-art networks and commercial properties, including the following services: data-center infrastructure, fiber optics, wireless integration, network engineering, internet service provider, construction management and general contracting.

 

The Company had three operating subsidiaries (one of which is still an operating subsidiary):

 

  (i) Benchmark Builders, Inc. (“Benchmark”) was a leading full-service general construction management subsidiary that provided general contracting and construction management services on interior commercial spaces in the New York City market. As the primary operating subsidiary, Benchmark was divested in October 2019 as a result of a strict foreclosure by  the Company’s senior creditors in exchange for the cancellation of the senior secured debt and other debt (the “Benchmark Foreclosure”), as discussed in detail in “Recent Developments – “Foreclosure by Senior Secured Lenders”.
     
  (ii) CrossLayer, Inc. (“CrossLayer”), the managed network provider subsidiary, was designed to equip commercial real estate property owners and businesses with custom platforms that enabled them to introduce and deliver managed network service to their tenants. In an effort to reduce operating losses, and in connection with a reoriented corporate strategy stemming from the Company’s acquisition of a large rental home portfolio (discussed in “Recent Developments – “Acquisition of Vision Property Assets”), FTE divested itself of CrossLayer’s assets on January 16, 2020.
     
  (iii) Jus-Com, Inc. (dba “FTE Network Services” or “Jus-Com”) is part of the Company’s core legacy business which focuses on telecommunications solutions in the wireline and wireless telecommunications industry. Jus-Com provided outside plant solutions (“OSP”), that included all forms and methods of connecting the nation’s telecommunications infrastructure, and inside plant operations (“ISP”) which consisted of cable rack, wiring build-outs, infrastructure build-outs and cable installation, among other things. Jus-Com’s OSP component was wound down in the first half of 2019; however, its ISP component remains an operating subsidiary.

 

On December 30, 2019, the Company, through its subsidiary US Home Rentals LLC, (“US Home Rental”) acquired a portfolio of approximately 3,200 rental home properties across the United States, and became a major owner, operator and investor of affordable rental housing in tier 3 and 4 markets.

 

The Company seeks to become a leading provider of affordable rental housing nationwide and with a focus on renovating its existing rental home portfolio and operating high quality single-family homes, which we expect will attract a strong resident base and yield long-term demand. The Company is continuing to evaluate real estate acquisitions with a view towards maximum portfolio optimization. The Company is headquartered in New York, New York.

 

4
 

 

RECENT DEVELOPMENTS

 

2019 Internal Investigation

 

During 2019, the Company launched an internal investigation into (among other things) the acts of certain members of former management who caused the issuance of approximately $22,700,000 in convertible notes and 5,186,306 shares of common stock to investors without the approval of the Company’s Board of Directors (the “Board”), as well as whether the Company properly accounted for and disclosed: (i) certain related party transactions, (ii) expenses by and compensation to members of prior management, and (iii) interactions with the Company’s former audit firm. Information about the scope of this investigation, including the findings of the investigation and the Company’s remedial actions, are more fully described in the Company’s Form 10-K for the fiscal year ended 2018 filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2020. As of the date of this filing, the Company is continuing to cooperate with the SEC, the New York County District Attorney’s Office (“NYCDA”), and the U.S. Attorney’s Office for the Southern District of New York (“SDNY”) in their respective investigations into these matters.

 

Departure and Appointment of Executive Officers

 

Throughout 2019, the Company had a series of officer departures and interim appointments, including the resignation of its former Chief Financial Officer (“CFO”), David Lethem, on March 11, 2019 and the termination of its former Chief Executive Officer (“CEO”), Michael Palleschi, on May 13, 2019. There were several interim CEO appointments in 2019, culminating in the appointment of Michael P. Beys as interim CEO on December 11, 2019. Additionally, Ernest Scheidemann was appointed as the Company’s interim CFO on May 5, 2020. A complete list of the departures and interim officer appointments can be found in Item 10. “Directors, Executive Officers and Corporate Governance” of this Form 10-K.

 

On September 25, 2020, the Company entered into an executive employment agreement with Munish Bansal to serve as the Chief Executive Officer of the Company’s wholly-owned subsidiary, US Home Rentals, effective September 28, 2020 (the “Employment Agreement”). Pursuant to the Employment Agreement, Mr. Bansal will transition to the role of Chief Executive Officer of the Company following the resumption of trading of the Company’s common stock on an over-the-counter market. Michael P. Beys will continue to serve as the Company’s interim Chief Executive Officer until such time. There is currently no trading market for the Company’s common stock and there can be no assurance that trading in the Company’s common stock will resume.

 

Departure and Appointment of Board Members

 

The composition of the Company’s Board of Directors (the “Board”) also underwent several changes in 2019. Luisa Ingargiola, Christopher Ferguson, Patrick O’Hare, and Brad Mitchell resigned on May 29, 2019. Fred Sacramone remained on the Board at that time and was joined by James E. Shiah, Jeanne Kingsley, Stephen Berini, Irving Rothman, and Richard Omanoff between April 2019 and June 2019. All of these Board members subsequently resigned in October 2019 and were replaced with the Company’s current Board, which, as of the date of this filing consists of Michael P. Beys, Joseph F. Cunningham, Jr., Richard de Silva, and Peter Ghishan.

 

Restatement of Previously Issued Financial Statements

 

The Company issued two announcements on April 2, 2019 and June 11, 2019 in which it disclosed that the Audit Committee (the “Audit Committee”), following a communication with Marcum, LLP, its former registered independent public accounting firm, concluded that the Company’s previously issued audited financial statements as of and for the years ended December 31, 2017 and 2016 and completed interim reviews for the periods ended March 31, June 30, and September 30, 2018, 2017 and 2016 should no longer be relied upon.

 

The Company completed its restatement of the subject financial statements and filed its restatement as part of its annual report for the fiscal year ended December 31, 2018 with the SEC on May 11, 2020.

 

5
 

 

Amendment and Cancelation of Senior Credit Facility

 

Amendment No. 4 to Lateral Credit Agreement

 

On February 12, 2019, the Company entered into Amendment No. 4 (the “Fourth Amendment”) to the credit agreement dated October 28, 2015, by and among Jus-Com, Inc., certain other Company subsidiaries, Lateral Juscom Feeder LLC (“Lateral”) and several lenders party thereto (together with Lateral, the “Lenders”) (as amended, the “Credit Agreement”). The Fourth Amendment provided for, among other things, $12,632,000 in delayed draw loans (the “Delayed Draw Term Loans”). The Delayed Draw Term Loans had a maturity date of March 31, 2019, and an interest rate of 12% payable quarterly in arrears according to the terms of the Credit Agreement and 4% of paid in kind interest. In addition, the Company and the Lenders agreed to enter into a restructuring services agreement. Lateral is controlled by Richard de Silva, who joined the Company’s Board of Directors on October 18, 2019.

 

The Fourth Amendment also provided for (i) amendments to the employment agreements between Benchmark, our former principal operating subsidiary, and Fred Sacramone and Brian McMahon, the principals of Benchmark who sold Benchmark to the Company in April of 2017 (the “Benchmark Sellers”); (ii) the issuance of a promissory note to Fred Sacramone for cash received in the principal amount of $1,000,000 (the “Sacramone Bridge Note”), which note originally matured on March 31, 2019, and was subsequently amended and restated on July 2, 2019 to extend the maturity date to September 30, 2020, and for which Mr. Sacramone was issued 356,513 shares of the Company’s common stock; (iii) the appointment of a finance transformation officer (who was acting in the capacity of Chief Financial Officer from January 23, 2019 through July 15, 2019); and (iv) the issuance of an aggregate of 1,698,580 shares of the Company’s common stock to the Lenders. During 2019, Mr. Sacramone served as Interim Chief Executive Officer and as a director of the Company.

 

Restructuring of Lateral Credit Agreement and Designation of Series H Preferred Stock

 

On July 2, 2019, the Company completed the debt restructuring contemplated under the Fourth Amendment by entering into an amended and restated credit agreement (the “Amended and Restated Credit Agreement”) among the Company, Lateral and several Lenders. The Company also amended and restated the Series A convertible notes (as amended, the “Series A Notes”) and the Series B promissory notes (as amended, the “Series B Notes”) issued to the Benchmark Sellers, and the Sacramone Bridge Note (together with the Series A Notes and the Series B Notes, the “Benchmark Notes”).

 

Amended and Restated Credit Agreement Summary

 

Pursuant to the Amended and Restated Credit Agreement, the Delayed Draw Term Loans, which were continued as super senior term loans with an aggregate outstanding balance of $12,900,000 (the “Super Senior Term Loans”) were amended to: (i) extend the maturity to September 30, 2020; (ii) amend the interest rate to 12% per annum payable in cash; (iii) add a 4% extension fee to the principal amount (subject to reduction); and (iv) provide for monthly amortization payments based on available cash flow. In addition, the existing term loans under the Credit Agreement, with an aggregate balance of approximately $37,900,000 (“Lateral’s Existing Term Loans”) were amended to: (i) extend the maturity to April 30, 2021; (ii) amend the interest rate to 12% per annum payable in cash; (iii) add a 4% extension fee to the principal amount thereof (subject to reduction); and (iv) include monthly amortization payments based on available cash flow.

 

As consideration for the Amended and Restated Credit Amendment, the Company issued to the Lenders 1,500,000 shares of the Company’s common stock and warrants (the “Warrants”) exercisable to purchase 3,173,731 shares of the Company’s common stock (collectively, the “Lender Securities”) with an initial exercise price of $3.00 per share. Pursuant to the terms of the Warrants, in the event the Super Senior Term Loans were not paid and satisfied by October 31, 2019, the exercise per share of half of the Warrants would be automatically reset to $0.01 and in the event the Super Senior Term Loans were not paid by December 31, 2019, the exercise per share of the other half of the Warrants would be automatically reset to $0.01. The Company also agreed that on December 31, 2019, the aggregate number of shares of the Company’s common stock issuable upon exercise of the Warrants would be automatically adjusted on December 31, 2019 such that Lateral and its affiliates would beneficially own, in the aggregate, inclusive of all shares of the Company’s common stock previously issued, 25% of the outstanding shares of the Company’s common stock on a fully-diluted basis as of December 31, 2019, subject to certain exceptions.

 

As additional consideration for the Amended and Restated Credit Agreement, the Company and Lateral entered into a registration rights agreement (the “Registration Rights Agreement”) whereby the Company agreed to register the Company’s common stock issued to Lateral. The Company and Lateral also entered into an investor rights agreement (the “Investor Rights Agreement”) whereby the Company agreed that within sixty days of its execution, the Company would set the number of directors on its Board of Directors at seven and Lateral would be entitled to nominate one of such seven directors.

 

6
 

 

Series A Notes and Series B Notes and Designation of Series H Preferred Stock

 

In July 2019, the Series A Notes and Series B Notes were also amended to extend the maturity date to July 30, 2021 and to amend the interest rate to 8% per annum to be paid in kind until the borrowings under the Amended and Restated Credit Agreement were repaid in full. At the same time the Sacramone Bridge Note was amended to extend the maturity date to September 30, 2020, to capitalize the accrued interest as of July 2, 2019 and to provide for monthly cash interest payments. Additionally, all of the foregoing notes were amended to provide for monthly amortization payments based on available cash flow.

 

As consideration for amending and restating the Benchmark Notes, the Company entered into subscription agreements (the “Subscription Agreements”) pursuant to which it issued to the Benchmark Sellers an aggregate of 1,951 shares of the Company’s Series A Preferred Stock and 296 shares of the Company’s Series A-1 Preferred Stock (collectively, the “Series A Preferred”), which the Benchmark Sellers immediately exchanged, pursuant to exchange agreements (the “Exchange Agreements”), for an aggregate of 100 shares of a new series of preferred stock (the “Series H Preferred,” and together with the Series A Preferred, the “Preferred Stock”). The Series H Preferred had no dividend rights, no liquidation preference, was not convertible and had perpetual voting rights equivalent to 51% of the total number of votes that could be cast by all outstanding shares of capital stock of the Company.

 

Foreclosure by Senior Secured Lenders

 

During July 2019, the Company was notified that judgments had been entered against the Company in favor of six holders of the Company’s convertible notes in the state of New York. Certain of these convertible noteholders sought to levy against the bank account of the Company’s former subsidiary, Benchmark, and filed an order directing the Company to turn over all of the Company’s assets. The Company’s failure to satisfy, vacate or stay these judgments constituted an event of default under the Credit Agreement.

 

As a result, on October 10, 2019, the Company consented to a Proposal for Surrender of Collateral and Strict Foreclosure (the “Foreclosure Proposal”), from Lateral, Lateral Builders LLC (“Lateral Builders”) and Benchmark Holdings, LLC (“Benchmark Holdings” and together with Lateral Recovery LLC (“Lateral Recovery”), the (“Foreclosing Lenders”)), pursuant to which the Foreclosing Lenders took possession and ownership of the Subject Collateral (see below) by means of a strict foreclosure by the Foreclosing Lenders (the “Benchmark Foreclosure”).

 

Pursuant to the Foreclosure Proposal, the Company transferred; (i) to Benchmark Holdings all of its (a) equity interests in Benchmark, the Company’s principal operating subsidiary, and (b) cash on hand in excess of levels specified in the Foreclosure Proposal; and (ii) to Lateral Recovery, all of the Credit Parties’ interests in certain commercial tort litigation claims, fraud claims, and insurance claims as specified in the Foreclosure Proposal (collectively, the “Subject Collateral”).

 

Also pursuant to the Foreclosure Proposal, Benchmark transferred $3,000,000 of cash to the Company. Additionally, Benchmark agreed to make a monthly cash payment to the Company, in the amount of $300,000 per month (the “Working Capital Cash Payments”), for purposes of funding certain of the Company’s remaining obligations related to accounts payable, indebtedness for borrowed money, convertible note obligations and other matters specified in the Foreclosure Proposal (the “Remainder Obligations”). Working Capital Cash Payments were to continue until the earlier of (i) October 10, 2021, (ii) the repayment in full of the Remainder Obligations or (iii) the occurrence of a Working Capital Termination Event (as defined in the Foreclosure Proposal). The cash infusion and Working Capital Cash Payments provided the opportunity for the Company to receive total cash payments of up to $10,200,000 over the next 24 months. Benchmark made a total of two Working Capital Cash Payments to the Company—one in each of the months of November and December of 2019—for aggregate Working Capital Cash Payments of $600,000.

 

Benchmark Holdings, as the holder of the following of the Company’s obligations, absolutely and unconditionally released and forever discharged the Company and the other Credit Parties from certain indebtedness previously held by Niagara Nominee L.P. totaling $4,900,000, Lateral’s Existing Term Loans totaling $42,300,000 and the Super Senior Term Loans totaling $13,500,000 as each such term is defined in the Credit Agreement. Accordingly, Lateral’s Existing Term Loans and the Super Senior Term Loans were deemed fully paid and satisfied.

 

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Additionally, pursuant to an Agreement Regarding Debt and Series H Preferred Stock (the “Debt and Series H Agreement”), entered into October 10, 2019, between the Company and Fred Sacramone and Brian McMahon, Messrs. Sacramone and McMahon released the Company and its affiliates from (i) all obligations represented by the Sacramone Bridge Note per the Credit Agreement, which had an outstanding amount equal to approximately $1,030,000 and (ii) indebtedness represented by the Series B Notes in the amount of $18,982,640. As a result, the total amount remaining outstanding under the Series A Notes and Series B Notes was $28,895,711 (the “Remaining Indebtedness”) with a due date of December 31, 2019.

 

The total debt relief provided pursuant to the Foreclosure Proposal and the related agreements and arrangements equaled an aggregate of $81,065,348.

 

In accordance with the Debt and Series H Agreement, the Remaining Indebtedness was to be automatically released and discharged as of December 31, 2019 unless (i) on or before November 10, 2019, the Company entered into a business combination transaction that enabled the Company’s common stock to remain listed on the NYSE American Exchange or any other U.S. national securities exchange and (ii) such business combination transaction was consummated on or before December 31, 2019 (such transaction, a “Qualified Business Combination”). Additionally, the Debt and Series H Agreement also required Messrs. Sacramone and McMahon to sell their shares of Series H Preferred Stock to the Company for a nominal price in the event an agreement for a Qualified Business Combination was entered into on or before November 10, 2019, and such Qualified Business Combination was consummated on or before December 31, 2019.

 

On November 8, 2019, the Company and Messrs. Sacramone and McMahon entered into an amendment to the Debt and Series H Agreement, extending the date by which an agreement for a Qualified Business Combination must be entered into from November 10, 2019 to December 31, 2019 and extending the date by which a Qualified Business Combination must close from December 31, 2019 to February 28, 2020.

 

On December 23, 2019, the Company entered into separate agreements with Messrs. Sacramone and McMahon pursuant to which the Company repurchased all outstanding shares of Series H Preferred Stock from Messrs. Sacramone and McMahon for a payment of $1.00 per share, as a result of which no shares of Series H Preferred Stock remain outstanding.

 

In January 2020, in order to facilitate the continued inflow of additional cash infusions from Benchmark pertaining to the Remaining Indebtedness (as further explained below), the Board determined that, as result of the completion of the Rental Home Portfolio Asset Purchase, Benchmark would no longer be obligated to continue making Working Capital Cash Payments to the Company. On January 10, 2020, Benchmark loaned $300,000 to the Company with a maturity date of October 1, 2020 and an annual interest rate of 10%. Shortly thereafter, on January 27, 2020, the Company issued two senior promissory notes to Benchmark, one in the principal amount of $4,129,000 and the other in the principal amount of $600,000 (collectively, the “Senior Notes”), each such note is secured by all of the Company’s non-real estate assets. The $4,129,000 note was issued in consideration of an additional $6,000,000 reduction to the $28,895,711 Remaining Indebtedness, provided for a maturity date of December 1, 2020, bore interest at an annual rate of 10% and obligated the Company to repay all monies previously paid or transferred to the Company pursuant to the Foreclosure Proposal, including (i) $3,000,000 in cash; (ii) two Working Capital Cash Payments totaling $600,000; and (iii) approximately $529,000 in cash remaining in a Benchmark bank account. The $600,000 note, which matures on December 1, 2020 and has an interest rate of 10%, was issued to evidence the loan received by Benchmark on January 10, 2020 in the principal amount of $300,000 and an additional $300,000 loan from Benchmark received on January 27, 2020. In summary, the Company issued promissory notes to Benchmark totaling $4,729,000 and released Benchmark from the obligation to make an additional $6,600,000 in Working Capital Cash Payments in exchange for a $6,000,000 reduction in the Remaining Indebtedness.

 

On May 1, 2020, the parties entered into a second amendment to the Debt and Series H Agreement (the “Second Amendment”) pursuant to which Messrs. Sacramone and McMahon agreed to release and forever discharge the Remaining Indebtedness on the date on which the NYSE American Exchange files a Form 25 with the Securities and Exchange Commission (the “SEC”), delisting the Company’s common stock (the “Termination Date”), provided that in no event shall the Termination Date be any sooner than July 1, 2020 or any later than October 1, 2020. The NYSE American Exchange filed a Form 25 with the SEC delisting the Company’s common stock on May 21, 2020. Accordingly, the Remaining Indebtedness was released and discharged effective as of July 1, 2020.

 

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Acquisition of Rental Home Portfolio

 

On December 20, 2019, the Company entered into a purchase agreement (the “Rental Home Portfolio Asset Purchase Agreement”) with (i) US Home Rentals, (ii) the holders (the “Equity Sellers”) of 100% of the equity interests in entities owned by the Equity Sellers that collectively hold a real estate asset portfolio consisting of approximately 3,200 rental homes located across the United States (the “Entities”), (iii) Vision Property Management, LLC, a South Carolina limited liability company (“Vision” and together with the Equity Sellers, the “Rental Home Portfolio Sellers”), and (iv) Alexander Szkaradek, in his capacity as the representative of the Rental Home Portfolio Sellers (the “Sellers’ Representative”). On December 30, 2019, the parties amended the Rental Home Portfolio Asset Purchase Agreement (the “Amendment”) in order to address certain changes to the Rental Home Portfolio Asset Purchase Agreement, including, among other things, to allow the $9,750,000 balance of the cash portion of the purchase price to be paid in short-term promissory notes(resulting in the issuance of a $4,875,000 note to Alex Szkaradek and a $4,875,000 note to Antoni Szkaradek (collectively, the “Szkaradek Notes”) , and to reduce the Rental Home Portfolio Sellers’ indemnification deductible to $100,000. On December 30, 2019, the Company completed the acquisition of the Entities pursuant to the Rental Home Portfolio Asset Purchase Agreement, as amended.

 

Pursuant to the Rental Home Portfolio Asset Purchase Agreement, as amended, US Homes Rentals LLC purchased (a) all of the equity interests in the Entities and (b) all of Vision’s assets that are related to its business, including certain assumed contracts and assumed intellectual property, excluding certain specified assets, for aggregate consideration of $350,000,000, consisting of (i) $250,000 of cash; (ii) $9,750,000 in promissory notes, payable on or before January 31, 2020, which date was extended to March 31, 2020 pursuant to a 60-day forbearance that was included in the promissory notes; (iii) the amount of outstanding indebtedness of the Entities, which was calculated at approximately $80,000,000; (iv) 4,222,474 shares of the Company’s common stock, par value $0.001, which the parties valued at $32,000,000; and (v) shares of a newly designated Series I Non-Convertible Preferred Stock having an aggregate stated value equal to 228,000,000, which is subject to adjustment. See Part II Item 8, Financial Statements and Supplementary Data, Note 3 “Asset Acquisition”

 

Divestiture of CrossLayer, Inc.

 

On January 16, 2020, the Company entered into an asset purchase agreement (the “CrossLayer Purchase Agreement”) with CBFA Corporation, pursuant to which CBFA acquired the customer agreements which were of nominal value and largely cancelable without penalty, in exchange for agreeing to perform all of CrossLayer’s obligations under those agreements plus the assumption of approximately $73,000 in accounts payable and approximately $100,000 in long-term supplier contracts.

 

Delisting of Common Stock from the NYSE American Exchange

 

During 2019, the Company received a series of letters from the NYSE American concerning the Company’s failure to comply with various continued listing requirements under the NYSE American Company Guide. On December 17, 2019, as a result of a calculation error resulting in the issuance of more than 20% of the Company’s outstanding common stock without the requisite shareholder approval, the staff of NYSE Regulation (the “Staff”) notified the Company of its determination to initiate proceedings to delist the Company’s common stock from the Exchange and suspended trading of the Company’s common stock on the same day, citing public interest reasons.

 

The Company challenged the Staff’s decision as unfairly punitive in relation to the Company’s mistake, especially given that the Company took prompt and effective remedial actions to undo the issuance, rescinded the underlying agreement, and established new controls around the issuance of stock. Despite the Company’s efforts and repeated requests for reconsideration, and after exhausting multiple levels of appeal, on May 21, 2020, the Staff filed a Form 25 with the SEC to remove the Company’s common stock from listing and registration on the Exchange. The delisting became effective 10 days following the date of the Staff’s filing.

 

As of the date of the filing, the Company’s common stock is not quoted or trading on any stock market. The Company solicited the assistance of a prospective market maker who has expressed interest in sponsoring the Company’s Form 211 application with FINRA (subject to completing their due diligence) which would enable the Company’s common stock to resume trading on a trading platform operated by OTC Markets Group.

 

Notice of Default from Inmost Partners LLC

 

On July 1, 2020, the Company received a written notice of default (the “Notice of Default”) from Inmost Partners LLC in its capacity as Noteholder Agent (“Inmost”) to issuer noteholders who, collectively, hold approximately $51,564,000 in secured notes that the Company assumed from the Rental Home Portfolio Sellers in connection with the Rental Home Portfolio Asset Purchase Agreement. Inmost asserted that certain events of default had occurred with respect to certain Note Issuance and Purchase Agreements each dated as of July 10, 2017 by and among, inter alia, certain Entities acquired by the Company, Inmost, and issuer noteholders named therein (the “Note Purchase Agreements”). Specifically, Inmost claimed that the Company (i) failed to satisfy the loan-to-value test (the “LTV Test”) as defined in the Note Purchase Agreements and (ii) failed to obtain consent from the Noteholder Agent before transferring the equity interests of certain Entities to US Home Rentals LLC (the “Equity Interest Transfer”) pursuant to the Rental Home Portfolio Asset Purchase Agreement. The Notice of Default also included certain demands by Inmost for additional capital contributions by the Company and Alex and Antoni Szkaradek (the “Guarantors”). 

 

As of the date of this filing, the Company has cured the defaults associated with the LTV Test. Additionally, on November 3, 2020, Inmost granted its consent to the Equity Interest Transfer and rescinded the Default Notice in exchange for (i) a new guaranty agreement under which FTE Networks, Inc. and US Home Rentals LLC will jointly and severally guarantee the obligations of certain Entities under the Note Purchase Agreements, (ii) amendments to the Limited Liability Company Agreements for each of the subject Entities to provide for the appointment of a second manager of Noteholder Agent’s choosing, and (iii) amendments to the Note Purchase Agreements.

 

DLP Financing

 

On August 26, 2020, certain wholly-owned subsidiaries (collectively, the “Borrowers”) of US Home Rentals entered into seven separate loan agreements as part of a tranche of financing with DLP Lending Fund, LLC (the “Lender”) (each a “Loan Agreement” and collectively, the Loan Agreements”). The Lender had previously loaned an aggregate of $21,184,906 to the Equity Sellers. Pursuant to the Loan Agreements, the Borrowers issued promissory notes in the aggregate principal amount of approximately $23,453,699 (the “DLP Tranche”). Proceeds from the DLP Tranche were used to refinance certain of the Borrower’s properties, pay outstanding property taxes, and other costs and expenses incurred in connection with the Loan Agreements. The Company did not receive any proceeds from the financing.

 

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The Borrowers’ obligations to pay principal, interest and other amounts under the DLP Tranche are evidenced by promissory notes executed by the Borrowers as of August 26, 2020 (each a “Note” and collectively, the “Notes”). Each Note is secured by a first priority lien mortgage on certain of the Borrowers’ properties (the “Mortgaged Properties”) and confessions of judgment. Each Note will mature on August 31, 2021, subject to one-year extensions at the Borrowers’ option and other conditions. The Borrowers may prepay the outstanding loan amount in whole or in part by written notice of such prepayment to Lender, subject to certain conditions. The Company also executed certain Environmental Indemnity Agreements and certain Guaranty Agreements in connection with each Loan Agreement in favor of the Lenders pursuant to which the Company and Guarantors agreed to indemnify the Lenders for certain environmental risks and guaranty the Borrowers’ obligations under the Loan Agreements.

 

Employees

 

As of October 31, 2020, the Company, together with its subsidiaries, has 66 full-time employees and contractor staff and no part-time employees. The number of employees and job-site contractors varies according to the level of the Company’s work in progress. The Company maintains a nucleus of technical and managerial personnel to supervise all projects and adds employees and job-site contractors as needed to complete specific projects.

 

Intellectual Property

 

The Company has trademarks, trade names and licenses that it believes are necessary for the operation of its business as it is currently conducted. The Company does not consider its trademarks, trade names or licenses to be material to the operation of the business.

 

Available Information

 

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). Accordingly, the Company files periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.

 

The Company makes available, free of charge on its website, the Company’s Annual Report on Form 10-K, Quarterly Reports on Forms 10-Q, Current Reports on Forms 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as practicable after we electronically file these documents with, or furnish them to, the SEC. These documents may be accessed through the Company’s website at www.ftenetworks.com under “Investor Relations.” The information posted or linked on the website is not part of this report. The Company also makes its Annual Report available in printed form upon request at no charge. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding FTE Networks and other issuers that file electronically with the SEC.

 

The Company also makes available on its website, as noted above, or in printed form free of charge upon request, the Company’s Code of Ethics and the charters for the Audit, Compensation, and Nominating and Corporate Governance committees of the Board of Directors.

 

ITEM 1A. RISK FACTORS.

 

The following discussion identifies the most significant risks or uncertainties that could (i) materially and adversely affect our business, financial condition, results of operations, liquidity or prospects or (ii) cause our actual results to differ materially from our anticipated results or other expectations. The following information should be read in conjunction with the other portions of this report, including “Special Note Regarding Forward-Looking Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes. Please note that the following discussion is not intended to comprehensively list all risks or uncertainties faced by us. Our operations or actual results could also be similarly impacted by additional risks and uncertainties that are not currently known to us, that we currently deem to be immaterial, that may arise in the future or that are not specific to us, such as general economic conditions. If any of the events or circumstances described in the following risks occurs, our business, financial condition or results of operations could be materially adversely affected.

 

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Risks Related to Our Financial Results, Financing Plans and Indebtedness

 

We have limited capital resources , and we will need additional funds in order to continue as a viable enterprise. There is no guarantee that we will be able to generate those funds from our business operations.

 

As of December 31, 2019, the Company had $93,561,120, in negative working capital and $789,390 in cash and cash equivalents. The Company has limited capital resources following a strict foreclosure of the Company’s equity interests in Benchmark (among other assets), our former primary operating subsidiary, by the Company’s senior lenders (See “Recent Developments – “Foreclosure by Senior Secured Lenders”). As a result, the Company currently conducts operations through two subsidiaries, US Home Rentals and Jus-Com, Inc. .

 

As of October 31, 2020, the Company had $73,870 in cash and cash equivalents. As of the date of this filing, our cash and cash equivalents are insufficient to sustain operations in the near term. We have substantial cash requirements, which consist of payment obligations under existing indebtedness, settlement agreements for indebtedness to third parties incurred by former management, promissory notes issued as part of the purchase consideration for the Rental Home Portfolio Asset Purchase, indebtedness secured by the real estate properties we acquired in the Rental Home Portfolio Asset Purchase, payroll, and other corporate expenses.

 

Our ability to conduct equity financings has been hampered by, among other things, our delinquent Exchange Act reports, leaving us with very limited financing options. Currently, our primary sources of cash have been from short-term bridge loans and debt financings. The uncertainty as to the severity and duration of the COVID-19 pandemic (which has led to disruption and volatility in the financial and real estate markets) has also weakened our short-term financing prospects. We are continuing to negotiate extensions and/or forbearances with debt holders and critical vendors with significant outstanding payables; however, there is no assurance that these efforts will be met with success or that we will obtain financing to support our daily operations in the near term.

 

We applied for loans under the Paycheck Protection Program (“PPP”) and the Economic Injury Disaster Loan program (“EIDL”) pursuant to the CARES Act through the U.S. Small Business Association programs and received net proceeds of $979,316 in May 2020 under the PPP and $150,000 in June of 2020 under the EIDL program. We are also continuing to explore and pursue various types of financing alternatives, including financings that leverage unencumbered properties in our real estate portfolio. We believe our debt and equity financing prospects will improve once we are current in our Exchange Act filings and we are able to resume trading on a national stock exchange or on an over-the-counter market, although no assurances can be provided in that regard either. And while we believe in the viability of our strategy to increase revenues and raise additional funds, we are unable to predict the continued impact of COVID-19 on our operations and liquidity, and depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.

 

If we are required to repay our outstanding notes and settlement agreements, we would need to raise additional funds. Failure to repay our notes could subject us to legal action, including, but not limited to, judgments being entered against us.

 

We entered into settlement agreements with certain holders of convertible notes, whose notes were deemed to have been issued without the requisite corporate authorization following the findings of the independent investigation announced on June 13, 2019 (See Item 1 Business, Recent Development “Internal Investigation”). Of the noteholders with whom we were unable to reach settlement terms, six filed purported confessions of judgment. We have since entered into settlement agreements with all holders of judgments previously entered against us, which require us to make monthly payments in accordance with respective payout schedules. Throughout 2019, we were successful in negotiating several forbearances/deferrals on certain of the monthly payments owed in connection with these settlement agreements. As a result of our persistent liquidity constraints, we have not secured additional forbearances for approximately $1,294,262 past due and owing payments under these settlement agreements. As of the date of this filing, there is an aggregate balance owing of approximately $5,135,142 to these noteholders . The noteholders of the obligations currently past due, or those that become past due as a result of our inability to resume our payout schedules or secure the necessary forbearances, could commence legal action against us to recover the amounts due, including filing confessions of judgment and attaching them to our bank accounts. Any such action would restrict our ability to conduct business and would have an adverse effect on our financial condition and results of operations.

 

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Additionally, we issued $9,750,000 of promissory notes payable to the Szkaradeks’ as part of the purchase consideration for the Rental Home Portfolio Asset Purchase , which were payable in full on March 31, 2020. As of the date of this filing, we have made some payments for the account of the Szkaradeks’ which could result in decreasing the outstanding balance of the Szkaradek Notes; however, we have been unable to repay the Szkaradek Notes in full by their stated maturity date. We have subsequently received forbearance agreements for the Szkaradek Notes extending the maturity date through January 1, 2021. We are actively pursuing multiple potential sources of additional debt and equity capital to fund repayment of the Szkaradek Notes. There is, however, no assurance that we will be successful in securing suitable financing. The Szkaradeks’ may seek to enforce their rights under the Szkaradek Notes through the judicial process, which would have a material adverse effect on our results of operations and financial condition.

 

Our current insurance coverage may not be adequate: insurance premiums for such coverage have increased and may continue to increase and we may not be able to obtain insurance at acceptable rates, or at all.

 

In light of substantial increases in premiums payable for Directors and Officers insurance coverage, we have chosen to reduce coverage limits. These insurance policies may not be adequate to protect us from liabilities that we incur in our business. In addition, in the future our insurance premiums may increase, and we may not be able to obtain similar levels of insurance on reasonable terms, or at all. Any such inadequacy of, or inability to obtain insurance coverage could have a material adverse effect on our business, financial condition and results of operations.

 

Our failure to successfully implement our growth plan may adversely affect our financial performance.

 

We are prone to all of the risks inherent in growing a business. You should consider the likelihood of our future success to be highly speculative in light of the limited resources, problems, expenses, risks and complications frequently encountered by entities at our current stage of development. As our growth plan is pursued, we may encounter difficulties expanding and improving our operating and financial systems to maintain pace with the increased complexity of the expanded operations and management responsibilities.

 

To address these risks, we must, among other things:

 

  obtain equity or debt financing on satisfactory terms and in timely fashion in amounts adequate to implement our business plan and meet our obligations.
     
  implement and successfully execute our business and marketing strategy;
     
  respond to industry and competitive developments; and
     
  attract, retain, and motivate qualified personnel.

 

We may not be successful in addressing these risks and if we do not, our business prospects, financial condition and results of operations would be materially adversely affected.

 

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Debt financing agreements we enter may contain a number of restrictive covenants which will limit our ability to finance future operations, acquisitions or capital needs or engage in other business activities that may be in our interest.

 

If Company needs additional liquidity through debt financing; however, any related credit arrangements and indentures may contain a number of significant covenants that could impose operating and other restrictions on us and our subsidiaries. Such restrictions could affect, and in many respects could limit or prohibit, among other things, our ability and the ability of some of our subsidiaries to:

 

  incur additional indebtedness;
     
  create liens;
     
  pay dividends and make other distributions in respect of our equity securities;
     
  redeem or repurchase our equity securities;
     
  distribute excess cash flow from foreign to domestic subsidiaries;
     
  make investments or other restricted payments;
     
  sell assets; and
     
  effect mergers or consolidations.

 

These restrictions could limit our ability to plan for or react to market or economic conditions or meet capital needs or otherwise restrict our activities or business plans, and could adversely affect our ability to finance our operations, acquisitions, investments or strategic alliances or other capital needs or to engage in other business activities that would be in our interest.

 

Our litigation can be time-consuming, costly, and we cannot anticipate the results.

 

We have spent a significant amount of our financial and management resources defending litigation against third parties. We believe this litigation, and other litigation matters that we may in the future determine to pursue, will continue to consume management and financial resource for long periods of time. There can be no assurance that our current or future litigation matters will ultimately result in a favorable outcome for us or that our financial resources will not be exhausted before achieving a favorable outcome. In addition, even if we obtain favorable interim rulings or verdicts in particular litigation matters, they may not be predictive of the ultimate resolution of the matter. Unfavorable outcomes could result in exhaustion of our financial resources and could have a material adverse impact on our financial condition, results of operations, cash flows, and business prospects. See Item 3 Legal Proceedings.

 

Risks Related to Ownership of Our Common Stock

 

Our common stock was delisted from the NYSE American and quotation of our common stock has not resumed on an over-the-counter market. As a result, there is currently no active public trading market for our common stock and there can be no assurances that any established market will develop or that our common stock will be quoted for trading.

 

During 2019, we received a series of letters from the NYSE American concerning our failure to comply with various continued listing requirements under the NYSE American Company Guide. On December 17, 2019, as a result of a calculation error resulting in the issuance of more than 20% of the Company’s outstanding common stock, the staff of NYSE Regulation (the “Staff”) notified the Company of its determination to initiate proceedings to delist the Company’s common stock from the Exchange and suspended trading of the Company’s common stock on the same day, citing public interest reasons.

 

We challenged the Staff’s decision as unfairly punitive in relation to the Company’s mistake, especially given we took prompt and effective remedial actions to undo the issuance, rescind the underlying agreement, and establish new controls around the issuance of stock. Despite these efforts and repeated requests for reconsideration, and after exhausting multiple levels of appeal, on May 21, 2020, the Staff filed a Form 25 with the SEC to remove the Company’s common stock from listing and registration on the Exchange. The delisting became effective 10 days following the date of the Staff’s filing.

 

As of the date of the filing, our common stock is not quoted or trading on any stock market.

 

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Because our common stock did not automatically resume trading on the over-the-counter market, we solicited the assistance of a market maker who has agreed to sponsor our Form 211 application with the Financial Industry National Regulatory Authority (“FINRA”) in order to apply for the inclusion of our common stock in one of the over-the-counter price-quotation platforms maintained by the OTC Markets Group (subject to completing their due diligence). No estimate may be given as to the time that this application process will require. Moreover, our efforts may not be successful, and our shares may never be approved for quotation and owners of our common stock may not have a market in which to sell the shares.

 

Even if our common stock is quoted and granted a listing, a market for our common shares may not develop, resulting in major fluctuations and volatility in the price of our common stock.

 

The market for purchases and sales of our common stock may be so limited that the sale of a relatively small number of shares could cause the price of our common stock to fall sharply. Accordingly, it may be difficult to sell shares quickly without significantly depressing the value of our common stock. Unless we are successful in developing and maintaining investor interest in our common stock, sales of our common stock could result in major fluctuations in the price of our common stock. Additionally, if our revenues do not grow or grow more slowly than we anticipate, or, if operating or capital expenditures exceed our expectations and cannot be adjusted accordingly, or if some other event adversely affects us, the market price of our common stock could decline. Fluctuations in our stock price may be influenced by, among other things, general economic and market conditions, conditions or trends in our industry, changes in the market valuations of other residential real estate rental companies announcements by us or our competitors of significant acquisitions, strategic partnerships or other strategic initiatives, and trading volumes. Many of these factors are beyond our control but may cause the market price of our common stock to decline, regardless of our operating performance. Moreover, if the stock market in general experiences a loss in investor confidence or otherwise fails, the market price of our common stock could fall for reasons unrelated to our business, results of operations and financial condition. The market price of our common stock also might decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.

 

Our insiders and affiliated parties beneficially own a significant portion of the aggregate voting power of our capital stock.

 

As of the date of hereof, our executive officers, directors, their affiliated parties and holders of 10% or more of our common stock beneficially own approximately 33.5% of our common stock. As a result, our officers, directors, their affiliated parties and holders of 10% or more of our common stock will have a controlling interest and the ability to:

 

  elect or defeat the election of our directors;
     
  amend or prevent amendment of our certificate of incorporation, as amended, or bylaws;
     
  effect or prevent a merger, sale of assets or other corporate transaction; and
     
  affect the outcome of any other matter submitted to the stockholders for vote.

 

Affiliated party stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempt to obtain control of us, which in turn could reduce the price of our common stock or prevent our stockholders from realizing any gains from our common stock. In addition, any sale of a significant amount of our common stock held by our directors, executive officers, and affiliated parties, or the possibility of such sales, could adversely affect the market price of our common stock.

 

Investors may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock.

 

We may need to issue additional authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We may also issue additional shares of our common stock or other securities that are convertible into or exercisable for common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of common stock may have rights, preferences, and privileged more favorable than those of our common stock and may create downward pressure on the trading price of the common stock. There can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with any capital raising efforts. As a result, holders of our common stock will bear the risk that our future capital raising efforts will reduce the market price of our common stock and dilute the value of their stockholdings.

 

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Stockholders who hold unregistered shares of our common stock may be subject to resale restrictions pursuant to Rule 144, due to the fact that we are deemed to be a former “shell company.”

 

Pursuant to Rule 144 of the Securities Act (“Rule 144”), a “shell company” is defined as a company that has no or nominal operations and either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. While we do not believe that we are currently a “shell company,” we were previously a “shell company” and are deemed to be a former “shell company” pursuant to Rule 144, and as such, sales of our securities pursuant to Rule 144 may not be able to be made unless we continue to be subject to Section 13 or 15(d) of the Exchange Act, and have filed all of our required periodic reports for at least the previous one year period prior to any sale pursuant to Rule 144. As a result, it may be harder for us to fund our operations and pay our consultants with our securities instead of cash. Our status as a former “shell company” could prevent us from raising additional funds, engaging consultants, and using our securities to pay for any acquisitions.

 

Any market that develops in shares of our common stock will be subject to the “penny stock” rules of the SEC and the trading market in our securities may become limited, which will make transactions in our stock cumbersome and may reduce the value of an investment in the stock.

 

If we are able to resume trading in the short-term, it will be on one of the over-the-counter price-quotation platforms maintained by the OTC Markets Group. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations as to the price of our common stock. Additionally, our common stock will be subject to regulation as a “penny stock” under Rule 15g-9 under the Exchange Act. That rule establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that is no longer trading on a national exchange and has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.

 

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Any trading market that may develop may be restricted by virtue of state securities “Blue Sky” laws that prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to raise capital in those states.

 

Each state has its own securities laws, often called “blue sky” laws, which (i) limit sales of securities to a state’s residents unless the securities are registered in that state or qualify for an exemption from registration, and (ii) govern the reporting requirements for broker-dealers doing business directly or indirectly in the state. Before a security is sold in a state, there must be a registration in place to cover the transaction, or the transaction must be exempt from registration. The applicable broker must be registered in that state. We do not know whether securities will be registered or exempt from registration under the laws of any state. A determination regarding registration will be made by those broker-dealers, if any, who agree to serve as the market-makers for our common stock. Registering or qualifying shares with states can be time consuming. Compliance and regulatory costs may vary from state to state and may adversely affect future financings and our ability to raise capital.

 

We have not paid dividends in the past and do not expect to pay dividends for the foreseeable future, and any return on investment may be limited to potential future appreciation on the value of our common stock.

 

We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future. Our payment of any future dividends will be at the discretion of our board of directors after taking into account various factors, including without limitation, our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements or other debt instruments that we may be a party to at the time. To the extent we do not pay dividends, our shares of common stock may be less valuable because a return on investment will only occur if and to the extent our stock price appreciates, which may never occur. In addition, investors must rely on sales of their common stock after price appreciation as the only way to realize their investment, and if the price of our common stock does not appreciate, then there will be no return on investment. Investors seeking cash dividends should not purchase our common stock.

 

Risks Related to Our Industry and Business

 

The current pandemic of the novel coronavirus, or COVID-19, and the future outbreak of other highly infectious or contagious diseases, could materially and adversely impact or disrupt our financial condition, results of operations, cash flows and performance.

 

Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.

 

The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.

 

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Certain states and cities, including where we own rental homes, have also reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate. As a result, the COVID-19 pandemic is negatively impacting almost every industry directly or indirectly. We expect that a significant number of our tenants will suffer economic dislocation, such as through job furloughs or job loss, which will adversely impact their ability to pay rent to the Company. Some of our tenants have already requested rent deferral or rent abatement during this pandemic. Many experts predict that the outbreak will trigger, or even has already triggered, a period of global economic slowdown or a global recession, which would further adversely impact the ability of our tenants to pay rent to the Company. Moreover, the weekly $600 federal unemployment benefit as part of the CARES ACT COVID-19 relief package has ended. On August 8, 2020, there was an extension of federal benefits by executive order through the Lost Wages Assistance program which provided an additional $300 weekly supplement to unemployment benefits, this program expired. This reduction or termination of benefits may limit our tenants’ ability to pay rent to us (to the extent they were relying on this benefit as a primary source of income).The COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our ability to successfully operate and on our financial condition, results of operations and cash flows due to, among other factors:

 

  a complete or partial closure of, or other operational issues at, our corporate offices, rental and associated property management business from government or tenant action;
     
  the reduced economic activity severely impacts our tenants’ livelihoods, financial condition and liquidity and may cause them to be unable to meet their obligations to us in full, or at all, or to otherwise seek modifications of such obligations;
     
  difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address existing and anticipated liabilities on a timely basis;
     
  a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our portfolio of properties;
     
  a deterioration in our ability to operate in affected areas or delays in the supply of products or services to us from vendors that are needed for our efficient operations could adversely affect our operations; and
     
  the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption; and
     
  the inability of our business to secure financing or grants through the U.S. Small Business Association programs, including the Economic Injury Disaster Loan program, the Paycheck Protection Program, or other similar offerings, each as a result of program limitations, our credit profile, or other factors; and
     
  the inability of state or federal jurisdictions to mandate coverage under business interruption insurance policies which contain pandemic exclusions or our inability to otherwise secure recoveries from such insurance coverages should they become available.

 

The extent to which the COVID-19 pandemic impacts our operations and the financial health of our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions (both at a state and federal level) taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. The inability of our tenants to pay rent to us, and early terminations by our tenants of their leases, could continue to reduce our cash flows, which could have a material adverse impact on our performance, financial condition, results of operations, cash flows and performance. The rapid development and fluidity of this situation precludes any prediction as to the full adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risk with respect to our performance, financial condition, results of operations, cash flows and performance.

 

Our results of operations will likely be diminished as a result of the foreclosure on the equity of Benchmark Builders, Inc., down-sizing of Jus-Com and divestiture of CrossLayer as well as our reliance on other operating subsidiaries. We may not be able to effectively manage the transition of our business.

 

As discussed above, our lenders previously foreclosed on the equity in Benchmark, previously our primary operating subsidiary, as well as other assets. Additionally, the Company restructured and down-sized the Jus-Com businesses in 2019, completed the acquisition of entities that collectively hold a real estate asset portfolio consisting of approximately 3,200 rental homes located across the United States (the “Rental Home Portfolio Properties”), and completed the divestiture of CrossLayer in January 2020. Due to the Benchmark foreclosure, the down-sizing of the Jus-Com businesses and the divestiture of CrossLayer, the Company is now reliant on the businesses of our remaining operating subsidiaries, primarily the U.S. Home Rental properties.

 

Moreover, whereas our Historical Business operated in the construction management and general contracting industry and telecommunications industry, our primary current business operates in the single-family residential property industry. As we are transitioning our business to focus primarily on single-family residential properties, this business model transition may lead to fluctuations in revenue that will make it more difficult to accurately project our operating results or plan for future growth. If we are unable to effectively manage these changes, our growth and ability to achieve long-term projections may be negatively impacted, and our business and operating results will be adversely affected.

 

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Our integration of the operations of Rental Home Portfolio Properties into our operations may be more difficult, costly or time-consuming than expected, and the anticipated benefits and cost savings of these acquisitions by the Company may not be realized.

 

Our acquisition of the Rental Home Portfolio Properties in December 2019 represented the Company’s pivot to owning and managing a portfolio of single-family residential properties. The success of the acquisition, including anticipated benefits, will depend, in part, on the Company’s ability to successfully combine and integrate the businesses within the Company’s projected timeframe in a manner that permits growth opportunities. A number of factors could affect the Company’s ability to successfully combine its business with acquired businesses, including the following:

 

  the potential for unexpected costs, delays and challenges that may arise in integrating the Rental Home Portfolio Properties into the Company’s business;
     
  unexpected obstacles to the Company’s ability to realize the expected cost savings and synergies from the acquisition;
     
  the Company’s ability to retain key employees and maintain relationships;
     
  diversion of management’s attention and resources during integration efforts;
     
  challenges related to operating a new business and in new states; and
     
  discovery following the acquisition of previously unknown liabilities associated with the Rental Home Portfolio Properties.

 

We have encountered a number of integration challenges, all of which have caused us to incur varying levels of costs, including costs associated with assimilating and integrating personnel, financial systems and procedures, and unique operation and reporting structures. We have also experienced significant delays in establishing internal controls over the financial reporting on a consolidated basis, which in turn has limited our ability to manage risks, reduce costs, and improve overall operational performance. If the Company continues to encounter these and other significant difficulties in the integration process, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected. Failure to achieve the anticipated benefits of the acquisition in the timeframe projected by the Company could result in increased costs and decreased revenues. This could have a dilutive effect on the Company’s earnings per share. If the Company is unable to successfully integrate the business it acquired, the Company’s business, financial condition and results of operations may be materially adversely affected.

 

Liabilities and obligations assumed in connection with our acquisition of Rental Home Portfolio Properties may result in a material adverse effect to our business and financial condition.

 

Risk of Default under Entities’ Indebtedness. The Entities that we acquired in the Rental Home Portfolio Asset Purchase, which own all of the properties that were subject to the acquisition, are subject to approximately $80,284,086 of indebtedness (the “Entities’ Indebtedness”), which was assumed by the Company as described in “Item 1. Business – Recent Developments – Acquisition of Rental Home Portfolio Property Assets.” The Entities’ Indebtedness is subject to certain conditions and covenants, including the requirement that the Entities obtain the consent of the lender before taking certain actions. Failure to comply with the conditions and covenants in the financing agreements governing the Entities’ Indebtedness that is not consented to or waived by the lenders or otherwise cured could lead to a termination of such debt facilities, acceleration of all amounts due under such debt facilities, or other actions by the lenders. On July 1, 2020, we received a written notice of default (the “Notice of Default”) from Inmost, in its capacity as Noteholder Agent to issuer noteholders of the Entities’ Indebtedness. Inmost asserted that certain events of default had occurred with respect to certain Note Issuance and Purchase Agreements each dated as of July 10, 2017 by and among, inter alia, certain Entities acquired by the Company, Inmost, and issuer noteholders named therein (the “Note Purchase Agreements”). Specifically, Inmost claimed that the Company (i) failed to satisfy the loan-to-value test (the “LTV Test”) as defined in the Note Purchase Agreements and (ii) failed to obtain consent from the Noteholder Agent before transferring the equity interests of certain Entities to US Home Rentals LLC (the “Equity Interest Transfer”) pursuant to the Rental Home Portfolio Asset Purchase Agreement. The Notice of Default also included certain demands by Inmost for additional capital contributions by the Company and Guarantors. 

 

As of the date of this filing, the Company has cured the defaults associated with the LTV Test. Additionally, on November 3, 2020, Inmost granted its consent to the Equity Interest Transfer and rescinded the Default Notice in exchange for (i) a new guaranty agreement under which FTE Networks, Inc. and US Home Rentals LLC will jointly and severally guarantee the obligations of certain Entities under the Note Purchase Agreements, (ii) amendments to the Limited Liability Company Agreements for each of the subject Entities to provide for the appointment of a second manager of Noteholder Agent’s choosing, and (iii) amendments to the Note Purchase Agreements.

 

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We could be harmed by security breaches or other significant disruptions or failures of networks, information technology infrastructure or related systems owned or installed by us.

 

We are materially reliant upon our networks, information technology infrastructure and related technology systems (including our billing and provisioning systems) to manage our operations and affairs. We face the risk, as does any company, of a security breach or significant disruption of our information technology infrastructure and related systems. Moreover, in connection with processing and storing sensitive and confidential data on our networks, we face a risk that a security breach or disruption could result in unauthorized access to our customers’ or their customers’ proprietary information.

 

We strive to maintain the security and integrity of information and systems under our control and maintain contingency plans in the event of security breaches or other system disruptions. Nonetheless, we cannot assure you that our security efforts and measures will prevent unauthorized access to our systems, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service, computer viruses, malware, ransomware, distributed denial-of-service attacks, or other forms of cyber-attacks or similar events. These threats may derive from human error, hardware or software vulnerabilities, aging equipment or accidental technological failure. These threats may also stem from fraud, malice or sabotage on the part of employees, third parties or foreign nations, including attempts by outside parties to fraudulently induce our employees or customers to disclose or grant access to our data or our customers’ data, potentially including information subject to stringent domestic and foreign data protection laws governing personally identifiable information, protected health information or other similar types of sensitive data. These threats may also arise from failure or breaches of systems owned, operated or controlled by other unaffiliated operators to the extent we rely on such other systems to deliver services to our customers. Each of these risks could further intensify to the extent we maintain information in digital form stored on servers connected to the Internet.

 

Additional risks to our network, infrastructure and related systems include, among others:

 

  capacity or system configuration limitations, including those resulting from changes in usage patterns, the introduction of new technologies or products, or incompatibilities between newer and older systems;
     
  theft or failure of our equipment;
     
  software or hardware obsolescence, defects or malfunctions;
     
  power losses or power surges;
     
  physical damage, whether caused by fire, flood, adverse weather conditions, terrorism, sabotage, vandalism or otherwise;
     
  deficiencies in our processes or controls;

 

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  our inability to hire and retain personnel with the requisite skills to adequately design, install, maintain or improve our products;
     
  programming, processing and other human error; and
     
  inadequate building maintenance by third-party landlords or other service failures of our third-party vendors.

 

Due to these factors, from time to time in the ordinary course of our business we experience disruptions in our service and could experience more significant disruptions in the future.

 

Disruptions, security breaches and other significant failures of the above-described networks and systems could:

 

  disrupt the proper functioning of these networks and systems;
     
  result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive, classified or otherwise valuable information of ours;
     
  require us to notify customers, regulatory agencies or the public of data breaches;
     
  subject us to claims for damages, fines, penalties, termination or other remedies under our customer contracts or service standards set by regulators, which in certain cases could exceed our insurance coverage;
     
  result in a loss of business, damage our reputation among our customers and the public generally; or
     
  require significant management attention or financial resources to remedy the resulting damages or to change our systems, including expenses to repair systems, add new personnel or develop additional protective systems.

 

Any or all of the foregoing developments could have a negative impact on our business, results of operations, financial condition and cash flows.

 

We may experience interruptions to its business operations arising out of events beyond our control, and insurance may not cover the full extent of damages.

 

A catastrophic event beyond our control, such as a natural disaster, health pandemic, cyber-attack, adverse weather event or act of terrorism, that results in the destruction or disruption of any of our critical business systems or operations could harm our ability to conduct normal business operations and, in turn our operating results.

 

While we maintain business continuity plans that are intended to allow us to continue operations or mitigate the effects of events that could disrupt our business, we cannot provide assurances that our plans would fully protect us from all such events. In addition, insurance maintained by us to protect against property damage, loss of business and other related consequences resulting from catastrophic events is subject to coverage limitations, depending on the nature of the risk insured. This insurance may not be sufficient to cover all of our damages or damages to others in the event of a catastrophe. In addition, insurance related to these types of risks may not be available now or, if available, may not be available in the future at commercially reasonable rates.

 

Due to our size, we depend on key personnel and other skilled employees.

 

Our employees are key to the growth and success of our business and our continued success depends to a large extent on our ability to recruit, train, and retain skilled employees, particularly executive management and technical employees. If we are unable to attract and retain key personnel, our operating results could be adversely affected.

 

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Additionally, the Company’s ability to retain skilled workforce and its success in attracting and hiring new skilled employees will be a critical factor in determining whether the Company will be successful in the future. The Company faces competition for qualified individuals and may be unable to attract and retain suitably qualified individuals. The Company’s failure to do so could have an adverse effect on its ability to implement the business plan.

 

Future litigation may impair our reputation or lead us to incur significant costs, and the costs of such litigation may exceed our insurance coverage.

 

We are currently party to several lawsuits and may become party to various lawsuits and claims arising in the normal course of business, which may include lawsuits or claims relating to contracts, third party contract manufacturers, intellectual property, product recalls, product liability, false or deceptive advertising, employment matters, environmental matters or other aspects of our business. Negative publicity resulting from allegations made in lawsuits or claims asserted against us, whether or not valid, may adversely affect our reputation. In addition, we may be required to pay damage awards or settlements or become subject to injunctions or other equitable remedies, which could have a material adverse effect on our financial condition, results of operations and cash flows. The outcome of litigation is often difficult to predict, and the outcome of pending or future litigation may have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

We maintain general and excess liability, cyber security, workers’ compensation and medical insurance, all in amounts consistent with industry practice and as part of our overall risk management strategy. Further, our policies are held with financially stable coverage providers, often in a layered or quota share arrangement which reduces the likelihood of an interruption or impact to operations. Although we have various insurance programs in place, the potential liabilities associated with potential litigation matters, or those that could arise in the future, could be excluded from coverage or, if covered, could exceed the coverage provided by such programs. In addition, insurance carriers may seek to rescind or deny coverage with respect to pending or future claims or lawsuits. If we do not have sufficient coverage under our policies, or if coverage is denied, we may be required to make material payments to settle litigation or satisfy any judgment. Any of these consequences could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

The rent-to-own business model has been the subject of increased regulatory scrutiny, and, as we begin to move away from this business model to a standard rental business model, we may encounter problems which might make it difficult to predict our future performance, may limit our ability to conduct business and adversely affect our ability to execute on our long-term strategy.

 

The rent-to-own industry has been the subject of increased regulatory scrutiny over the last decade. Vision Property Management, our predecessor in interest, has faced (and is continuing to face) allegations of violations of consumer protection laws and other lending regulations arising out of this business model. Most of these legacy matters involve lawsuits brought by attorneys general from states where our properties are located and have either been settled or are in advanced settlement discussions. See Part 1 - Item 3. Legal Proceedings. We are in the process of transitioning away from the rent-to-own model; however, there is no assurance that we will be able to fully transition to a strictly rental property business financial model and we may not be able to sustain the growth of our assets and results from operations that we seek.

 

Our failure to effectively perform property management functions or to effectively manage our portfolio and operations could materially and adversely affect us.

 

We have direct responsibility for the management of the properties in our single family residential (“SFR”) portfolio, including, without limitation, renovations, maintenance and certain matters related to leasing, such as marketing and selection of tenants. If our internal property manager is unable to effectively perform property management services at the level and/or the cost that we expect or if we fail to allocate sufficient resources to meet our property management needs, it may adversely affect our performance and we may need to outsource property management functions at a higher cost. In addition, we will be responsible for ensuring the compliance of our internal property manager with governmental laws, regulations and covenants that are applicable to our homes, our tenants and our prospective tenants, including, without limitation, permitting, licensing and zoning requirements and tenant relief laws, such as laws regulating evictions, rent control laws and other regulations that limit our ability to increase rental rates.

 

Our ability to perform the property management services will be affected by various factors, including, among other things, our ability to maintain sufficient personnel and retain key personnel and the number of our SFR properties that we manage. No assurance can be made that we will continue to be successful in attracting and retaining skilled personnel or in integrating any new personnel into our organization.

 

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Our future success will depend, in part, upon our ability to successfully monitor our operations, costs, regulatory compliance and service quality and maintain other necessary internal controls. Our inability to effectively perform the property management services on the properties managed by us, or to effectively manage our portfolio and operations could materially adversely affect our business, financial results and share price.

 

We may incur significant costs in renovating our properties or turning vacant properties, and we may underestimate the costs or amount of time necessary to complete restorations or unit turns.

 

While a substantial portion of the SFR properties we have acquired to date meet our rental specifications at the time of acquisition, properties frequently require additional renovations prior to renting. Beyond customary repairs, we may undertake improvements designed to optimize the overall property appeal and increase the value of the property. Though we endeavor to conduct property inspections and due diligence prior to acquiring new SFR portfolios, we expect that nearly all of our rental properties will require some level of renovation immediately upon their acquisition or in the future following expiration of a lease or otherwise. We may acquire properties that we plan to extensively renovate and restore. In addition, in order to reposition properties in the rental market, we will be required to make ongoing capital improvements and may need to perform significant renovations and repairs from time to time. Consequently, we are exposed to the risks inherent in property renovation, including potential cost overruns, increases in labor and materials costs, delays by contractors in completing work, delays in the timing of receiving necessary work permits and certificates of occupancy and poor workmanship. If our assumptions regarding the cost or timing of renovations across our properties prove to be materially inaccurate, it may be more costly or take significantly more time than anticipated to develop and grow our SFR portfolio, which could materially and adversely affect us.

 

We may incur significant costs in preparing newly vacant homes for occupancy as we do not collect security or damage deposits on our rental homes.

 

While we anticipate a minimum level of effort will be required to prepare a newly vacant property to be made ready for occupancy by a new tenant, we may find that the newly vacant property may require extensive repairs and/or improvements which costs may be solely borne by us, given we do not collect security or damage deposits from tenants at the time the rental property is leased. Accordingly, the cost of maintaining and preparing rental properties may be higher than originally anticipated. Additionally, we are exposed to risks of cost overruns, increases in costs of materials or labor, delays in the completion of work and other factors. If we are unable to perform unit turns efficiently or in a timely manner, we would experience decreased revenue, increased expenses or both.

 

The availability of portfolios of single-family residential properties for purchase on favorable terms may decline as market conditions change, our industry matures and/or additional purchasers for such portfolios emerge, and the prices for such portfolios may increase, any of which could materially and adversely affect us.

 

In recent years, there has been an increase in supply of SFR property portfolios available for sale. Because we operate in an emerging industry, market conditions may be volatile, and the prices at which portfolios of SFR properties can be acquired may increase from time to time, or permanently, due to new market participants seeking such portfolios, a decrease in the supply of desirable portfolios or other adverse changes in the geographic areas that we may target from time to time. For these reasons, the supply of SFR properties that we may acquire may decline over time, which could materially and adversely affect us and our growth prospects.

 

Portfolios of properties that we have acquired or may acquire may include properties that do not fit our investment criteria, and divestiture of such properties may be costly or time consuming or both, which may adversely affect our operating results.

 

We have acquired, and expect to continue to acquire, portfolios of SFR properties, many of which are, or will be, subject to existing leases. We may be subject to a variety of risks, including risks relating to the condition of the properties, the credit quality and employment stability of the tenants and compliance with applicable laws, among others. In addition, financial and other information provided to us regarding such portfolios during our due diligence may be inaccurate, and we may not be able to obtain relief under contractual remedies, if any. Currently, approximately 1/3 of our SFR portfolio is comprised of properties that may not fit our target investment criteria and/or may require extensive renovations and repairs. If we conclude that certain properties acquired as part of a portfolio do not fit our investment criteria or that the scope of renovation and repair exceeds our cost estimates, we may decide to sell such properties and may be required to renovate the properties prior to sale, to hold the properties for an extended marketing period and/or sell the property at an unfavorable price, any of which could materially and adversely affect us.

 

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Competition in identifying and acquiring residential rental assets could adversely affect our ability to implement our business strategy, which could materially and adversely affect us.

 

We face competition from various sources for investment opportunities, including REITs, hedge funds, private equity funds, partnerships, developers and others. Some third-party competitors have substantially greater financial resources and access to capital than we do and may be able to accept more risk than we can. Competition from these companies may reduce the number of attractive investment opportunities available to us or increase the bargaining power of asset owners seeking to sell, which would increase the prices of assets. If such events occur, our ability to implement our business strategy could be adversely affected, which could materially and adversely affect us. Given the existing competition, complexity of the market and requisite time needed to make such investments, no assurance can be given that we will be successful in acquiring investments that generate attractive risk-adjusted returns. Furthermore, there is no assurance that such investments, once acquired, will perform as expected.

 

We may be materially and adversely affected by risks affecting the single-family rental properties in which our investments may be concentrated at any given time as well as from unfavorable changes in the related geographic regions.

 

Our assets are not subject to any geographic diversification requirements or concentration limitations, and, as a result, circumstances or events that impact a geographic region in which we have a significant concentration of properties, including a downturn in regional economic conditions or natural disasters, could materially and adversely affect us. Entities that sell residential rental portfolios may group the portfolios by location or other metrics that could result in a concentration of our portfolio by geography, SFR property characteristics and/or tenant demographics. Such concentration could increase the risk of loss to us if the particular concentration in our portfolio is subject to greater risks or undergoing adverse developments. In addition, adverse conditions in the areas where our properties or tenants are located (including business layoffs or downsizing, industry slowdowns, changing demographics, oversupply, reduced demand and other factors) may have an adverse effect on the value of our investments. A material decline in the demand for single-family housing or rentals in the areas where we own assets may materially and adversely affect us. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments.

 

Short-term leases of residential property expose us more quickly to the effects of declining market rents.

 

The majority of our leases to tenants of SFR properties will be for a term of one year. As these leases permit the residents to leave at the end of the lease term without penalty, we anticipate our rental revenues will be affected by declines in market rents more quickly than if our leases were for longer terms. Short-term leases may result in high turnover, resulting in additional cost to renovate and maintain the property and lower occupancy levels. Because we have a limited operating history, our tenant turnover rate and related cost estimates may be less accurate than if we had more operating data upon which to base these estimates.

 

We may be unable to secure funds for property restoration or other capital improvements, which could limit our ability to attract, retain or replace tenants.

 

When we acquire or otherwise take title to single-family properties or when tenants fail to renew their leases or otherwise vacate their space, we may be required to expend funds for property restoration and leasing commissions in order to lease the property. If we have not collected or maintained tenant damage deposits or established reserves or set aside sufficient funds for such expenditures, we may have to obtain financing from other sources, as to which no assurance can be given. We may also have future financing needs for other capital improvements to restore our properties. If we need to secure financing for capital improvements in the future but are unable to secure such financing on favorable terms or at all, we may be unable or unwilling to make capital improvements or may choose to defer such improvements. If this happens, our properties may suffer from a greater risk of obsolescence or decreased marketability, a decline in value or decreased cash flow as a result of fewer potential tenants being attracted to the property or existing tenants not renewing their leases. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, and our properties’ ability to generate revenue may be significantly impaired.

 

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Our revenue and expenses are not directly correlated, and, because a large percentage of our costs and expenses are fixed and some variable expenses may not decrease or may increase over time, we may not be able to adapt our cost structure to offset any declines in our revenue.

 

Many of the expenses associated with our business, such as acquisition costs, restoration and maintenance costs, Home Owners Association (“HOA”) fees, personal and real property taxes, insurance, compensation and other general expenses are fixed and would not necessarily decrease proportionally with any decrease in revenue. Our assets also will likely require a significant amount of ongoing capital expenditure. Our expenses, including capital expenditures, will be affected by, among other things, any inflationary increases, and cost increases may exceed the rate of inflation in any given period. Certain expenses, such as HOA fees, taxes, insurance and maintenance costs are recurring in nature and may not decrease on a per-unit basis as our portfolio grows through additional property acquisitions. By contrast, our revenue is affected by many factors beyond our control, such as the availability and price of alternative rental housing and economic conditions in our markets. As a result, we may not be able to fully, or even partially, offset any increase in our expenses with a corresponding increase in our revenues. In addition, state and local regulations may require us to maintain our properties, even if the cost of maintenance is greater than the potential benefit.

 

Competition could limit our ability to lease single-family rental properties or increase or maintain rents.

 

Our SFR properties compete with other housing alternatives to attract residents, including rental apartments, condominiums and other single- family homes available for rent as well as new and existing condominiums and single-family homes for sale. Our competitors’ properties may be of better quality, in a more desirable location or have leasing terms more favorable than we can provide. In addition, our ability to compete and generate favorable returns depends upon, among other factors, trends of the national and local economies, the financial condition and liquidity of current and prospective renters, availability and cost of capital, taxes and governmental regulations. Given significant competition, we cannot assure you that we will be successful in acquiring or managing SFR properties that generate favorable returns.

 

If rents in our markets do not increase sufficiently to keep pace with potential rising costs of operations, our operating results and cash available for distribution will decline.

 

The success of our business model will substantially depend on conditions in the SFR property market in our geographic markets. Our asset acquisitions are premised on assumptions about, among other things, occupancy and rent levels. If those assumptions prove to be inaccurate, our operating results and cash available for distribution will be lower than expected, potentially materially. Rental rates and occupancy levels have benefited in recent periods from macroeconomic trends affecting the U.S. economy and residential real estate and mortgage markets in particular, including a tightening of credit and increases in interest rates that has made it more difficult to finance a home purchase, combined with efforts by consumers generally to reduce their exposure to credit. A decrease in rental rates would have a material adverse effect on the performance of our SFR portfolio or could cause a default of our obligations under one or more financing agreements, and our business, results of operations and financial condition would therefore be materially harmed.

 

If the current trend favoring renting rather than homeownership reverses, the single-family rental market could decline.

 

The SFR market is currently significantly larger than in historical periods. We do not expect the favorable trends in the SFR market to continue indefinitely. Eventually, continued strengthening of the U.S. economy and job growth, together with the large supply of foreclosed SFR properties, the current availability of low residential mortgage rates and government sponsored programs promoting home ownership, may contribute to a stabilization or reversal of the current trend that favors renting rather than homeownership. In addition, we expect that as investors increasingly seek to capitalize on opportunities to purchase undervalued housing properties and convert them to productive uses, the supply of SFR properties will decrease and the competition for tenants will intensify. A softening of the rental property market in our markets would adversely affect our operating results and cash available for distribution, potentially materially.

 

24
 

 

Suboptimal tenant underwriting and defaults by our tenants may materially and adversely affect us.

 

Our success depends, in large part, upon our ability to attract and retain qualified tenants for our properties. This depends, in turn, upon our ability to screen applicants, identify good tenants and avoid tenants who may default. We may make mistakes in our selection of tenants, and we may rent to tenants whose default on our leases or failure to comply with the terms of the lease or HOA regulations could materially and adversely affect us. For example, tenants may default on payment of rent; make unreasonable and repeated demands for service or improvements; make unsupported or unjustified complaints to regulatory or political authorities; make use of our properties for illegal purposes; damage or make unauthorized structural changes to our properties that may not be fully covered by security deposits; refuse to leave the property when the lease is terminated; engage in domestic violence or similar disturbances; disturb nearby residents with noise, trash, odors or eyesores; fail to comply with HOA regulations; sub-let to less desirable individuals in violation of our leases or permit unauthorized persons to live with them. The process of evicting a defaulting tenant from a family residence can be adversarial, protracted and costly. Furthermore, some tenants facing eviction may damage or destroy the property. Damage to our properties may significantly delay re-leasing after eviction, necessitate expensive repairs, reduce the rental revenue generated by the property or impair its value. In addition, we will incur turnover costs associated with re-leasing the properties, such as marketing expenses and brokerage commissions, and will not collect revenue while the property is vacant. Although we will attempt to work with tenants to prevent such damage or destruction, there can be no assurance that we will be successful in all or most cases. Such tenants will not only cause us not to achieve our financial objectives for the properties in which they live, but may subject us to liability and may damage our reputation with our other tenants and in the communities where we do business.

 

A significant uninsured property or liability loss could have a material adverse effect on us.

 

We carry commercial general liability insurance and property insurance with respect to our SFR properties on terms we considered commercially reasonable. However, many of the policies covering casualty losses are subject to substantial deductibles and exclusions, and we will be self-insured up to the amount of the deductibles and exclusions. For example, we may not always be fully insured against losses arising from floods, windstorms, fires, earthquakes, acts of war or terrorism or civil unrest because they are either uninsurable or the cost of insurance makes it economically impractical. If an uninsured property loss or a property loss in excess of insured limits were to occur, we could lose our capital invested in a property or group of properties as well as the anticipated future revenues from affected SFR properties or groups of properties. Further, inflation, changes in building codes and ordinances, environmental considerations and other factors might also prevent us from using insurance proceeds to replace or renovate a property after it has been damaged or destroyed.

 

In the event that we incur a casualty loss that is not fully covered by insurance, the value of our assets will be reduced by the amount of any such uninsured loss, and we could experience a significant loss of capital invested and potential revenues in these properties and could potentially remain obligated under any recourse debt associated with the property. Further, if an uninsured liability to a third party were to occur, we would incur the cost of defense and settlement with or court ordered damages to that third party. A significant uninsured property or liability loss could adversely affect our financial condition, operating results, cash flows and ability to make distributions on our common stock.

 

We rely on information supplied by prospective tenants in managing our business.

 

We rely on information supplied to us by prospective tenants in their rental applications as part of our due diligence process to make leasing decisions, and we cannot be certain that this information is accurate. In particular, we rely on information submitted by prospective tenants regarding household income, tenure at current job, number of children and size of household. Moreover, these applications are submitted to us at the time we evaluate a prospective tenant, and we do not require tenants to provide us with updated information during the terms of their leases, notwithstanding the fact that this information can, and frequently does, change over time. Even though this information is not updated, we will use it to evaluate the overall average credit characteristics of our portfolio over time. If tenant-supplied information is inaccurate or our tenants’ creditworthiness declines over time, we may make poor leasing decisions, and our portfolio may contain more credit risk than we believe.

 

Our single-family residential properties are not liquid assets, which could limit our ability to vary our portfolio or to realize the value at which such assets are carried if we are required to dispose of them.

 

Our SFR properties are not liquid assets, which could limit our ability to vary our portfolio or to realize the value at which such assets are carried if we are required to dispose of them. Our inability to sell individual or portfolios of SFR properties on acceptable terms and/or in accordance with our anticipated timing could materially and adversely affect our financial condition.

 

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Changes in global economic and capital market conditions, including periods of generally deteriorating occupancy and real estate industry fundamentals, may materially and adversely affect us.

 

There are risks to the ownership of real estate and real estate related assets, including decreases in residential property values, changes in global, national, regional or local economic, demographic and real estate market conditions as well as other factors particular to the locations of our investments. A prolonged recession and a slow recovery could materially and adversely affect us as a result of, among other items, the following:

 

  joblessness or unemployment rates that adversely affect the local economy;
     
  an oversupply of or a reduced demand for SFR properties for rent;
     
  a decline in employment or lack of employment growth;
     
  the inability or unwillingness of residents to pay rent increases or fulfill their lease obligations;
     
  a decline in rental rate, which may be accentuated since we expect to generally have rent terms of one year;
     
  rent control or rent stabilization laws or other laws regulating housing that could prevent us from raising rents to offset increases in operating costs;
     
  changes in interest rates and availability and terms of debt financing; and
     
  economic conditions that could cause an increase in our operating expenses such as increases in property taxes, utilities and routine maintenance.

 

These conditions could also adversely impact the financial condition and liquidity of the renters that will occupy our real estate properties and, as a result, their ability to pay rent to us.

 

Residential properties that are subject to eviction are subject to risks of theft, vandalism or other damage that could impair their value.

 

When a residential property is subject to an eviction, it is possible that the tenant may cease to maintain the property adequately or that the property may be abandoned by the tenant and become susceptible to theft or vandalism. Lack of maintenance, theft and vandalism can substantially impair the value of the property. To the extent we initiate eviction proceedings, some of our properties could be impaired.

 

Contingent or unknown liabilities associated with respect to our prior acquisitions of portfolios of properties could expose us to material litigation and unanticipated costs, which could adversely affect our financial condition, cash flows and operating results.

 

Assets and entities that we have acquired in connection with prior SFR portfolio or operating entity acquisitions may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for or with respect to liens attached to properties; unpaid real estate tax, utilities or HOA charges for which a subsequent owner remains liable; clean-up or remediation of environmental conditions or code violations; claims of customers, vendors or other persons dealing with the acquired entities; or tax liabilities. Purchases of single-family properties in portfolio purchases typically involve limited representations or warranties with respect to the properties and may allow us limited or no recourse against the sellers. Such properties also often have unpaid tax, utility and HOA liabilities for which we may be obligated but fail to anticipate. As a result, the total amount of costs and expenses that we may incur with respect to liabilities associated with prior SFR property or entity acquisitions may exceed our expectations, which may adversely affect our operating results and financial condition. Additionally, such prior SFR property acquisitions may be subject to covenants, conditions or restrictions that restrict the use or ownership of such properties, including prohibitions on leasing. We may not have discovered such restrictions during the acquisition process, and such restrictions (including undisclosed or contingent liabilities) may subject us to material litigation and cause us to experience significant losses, which could materially adversely affect our business, results of operations and financial condition and may adversely affect our ability to operate such properties as we intend.

 

26
 

 

The costs and amount of time necessary to secure possession and control of certain properties may exceed our assumptions, which would delay our receipt of revenue from, and return on, the property.

 

A majority of the SFR properties we have acquired have had an existing tenant at the time of acquisition. However, certain SFR properties require us to secure possession. In certain circumstances, we may have to evict occupants who are in unlawful possession before we can secure possession and control of the property. The holdover occupants may be the former owners or tenants of a property, or they may be squatters or others who are illegally in possession. Securing control and possession from these occupants can be both costly and time consuming. If these costs and delays exceed our expectations, our financial performance may suffer because of the increased expenses incurred or the unexpected delays in turning the properties into revenue-producing rental properties.

 

Eminent domain could lead to material losses on our investments.

 

It is possible that governmental authorities may exercise eminent domain to acquire land on which our properties are built in order to build roads or other infrastructure. Any such exercise of eminent domain would allow us to recover only the fair value of the affected properties, which we believe may be interpreted to be substantially less than the actual value of the property. Several cities are also exploring proposals to use eminent domain to acquire residential loans to assist borrowers to remain in their homes, potentially reducing the supply of single-family properties for sale in our markets. Any of these events can cause a material loss to us.

 

We likely will incur costs due to litigation, including but not limited to, class actions, tenant rights claims and consumer demands, which could directly limit and constrain our operations and may result in significant litigation expenses and reputational harm.

 

There are numerous tenants’ rights and consumer rights organizations throughout the country. As we grow in scale, we may attract attention from some of these organizations and become a target of legal demands or litigation. Many such consumer organizations have become more active and better funded in connection with mortgage foreclosure-related issues and displaced home ownership. Some of these organizations may shift their litigation, lobbying, fundraising and grass roots organizing activities to focus on landlord-tenant issues as more entities engage in the SFR property market. Additional actions that may be targeted at us include eviction proceedings and other landlord-tenant disputes, challenges to title and ownership rights (including actions brought by prior owners alleging wrongful foreclosure by their lender or servicer) and issues with local housing officials arising from the condition or maintenance of an SFR property. While we intend to conduct our rental business lawfully and in compliance with applicable landlord-tenant and consumer laws, such organizations might work in conjunction with trial and pro bono lawyers in one state or multiple states to attempt to bring claims against us on a class action basis for damages or injunctive relief. We cannot anticipate what form such legal actions might take or what remedies they may seek. Any of such claims may result in a finding of liability that may materially and adversely affect us. We were named as a successor defendant in a class action lawsuit filed in Michigan federal court arising out of alleged actions that occurred prior to the Rental Home Portfolio Asset Purchase. We intend to vigorously defend our interests in this lawsuit and believe we have valid defenses. However, because litigation is inherently uncertain, there are no assurances that we will prevail, and any judgment or injunctive relief entered against us or any adverse settlement could adversely impact our business, financial condition, and operating results (See Item 3 - Legal Proceedings).

 

Additionally, these organizations may lobby local county and municipal attorneys or state attorneys general to pursue enforcement or litigation against us or may lobby state and local legislatures to pass new laws and regulations to constrain our business operations. If they are successful in any such endeavors, they could directly limit and constrain our business operations and impose on us significant litigation expenses, including settlements to avoid continued litigation or judgments for damages or injunctions. Any of the above-described occurrences may materially and adversely affect us.

 

ITEM 1B. Unresolved Staff Comments.

 

None.

 

ITEM 2. Properties.

 

On April 4, 2019, we moved our corporate headquarters to 237 W. 35th St., Suite 806, New York, NY 10001. Our current lease expires on October 31, 2021 and has 4,340 square feet which it subleases from Benchmark Builders, LLC under the terms of the Transition Support Agreement which was entered into and disclosed as part of the Strict Foreclosure. Our subsidiaries leased five additional office/warehouse facilities throughout the United States, which is summarized below.

 

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Location:  Usage   Square
Footage
   Lease Start
Date
  Lease End
Date
  Monthly Obligation 
Naples, FL1   Office    5,377   11/01/2015  11/30/2022  $20,445 
Indianapolis, IN   Office    2,500   12/1/2018  2/28/2022  $1,550 
Boise, ID2   Office    1,500   7/1/2017  7/31/2020  $2,668 
New York, NY3   Office    4,340   10/1/2010  10/31/2021  $20,249 
Columbia, SC4   Office    3,000   N/A  N/A  $3,000 

 

N/A – Not applicable

 

1 The Company is currently in default on the Naples office lease. We recorded the future rent, interest and penalties as accrued expenses on our consolidated balance sheet.
2 The Company paid rent on the Boise ID office space through January 2020 and owes approximately $20,000 through the lease termination date of July 31, 2020.
3 The Company paid rent on its New York office space through January 2020 and owes approximately $141,000 to Benchmark Builders, LLC through August 31, 2020.
4 The Company is currently occupying office space at 16 Berryhill Road, Columbia SC, on a month to month basis.

 

We believe our properties are suitable and adequate for our business needs.

 

ITEM 3. Legal Proceedings.

 

From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business, and we may in the future be subject to additional legal proceedings and disputes.

 

The following is a summary of material legal proceedings as of December 31, 2019:

 

On May 10, 2018, Vista Capital Investments, LLC (“Vista”) filed suit against the Company for breach of contract and breach of the implied covenant of good faith and fair dealing arising out of a securities purchase agreement and a convertible note in the principal amount of $275,000 in the Superior Court of California for the county of San Diego. Vista alleges damages in excess of $9,000,000 stemming from the Company’s purported dilutive issuances of Company common stock. Vista was the holder of a convertible note for which there was no prior Board authorization (See Item 1, Recent Developments “Internal Investigation”). The Company and Vista reached a tentative settlement framework (subject to final documentation), following which the court dismissed this matter without prejudice.

 

On March 28, 2019, the Company obtained a temporary restraining order against Nevada Agency and Transfer Company (“NATCO”) in the Second Judicial District Court for the State of Nevada, enjoining NATCO, the Company’s transfer agent, from processing or issuing any conversion requests submitted on behalf of convertible noteholders whose notes were determined to have been issued without requisite Board approval (See Item 1, Recent Developments “Internal Investigation”). The Company obtained a preliminary injunction on April 11, 2019 and filed an amended complaint on January 23, 2020 adding Michael Palleschi (the Company’s former CEO) and certain related parties as defendants, seeking (among other damages) a declaratory judgment that the shares of Company stock issued to Mr. Palleschi and related parties were unauthorized and to compel the return of these shares to the Company’s authorized capital stock. The matter remains pending in Nevada and has been delayed because of COVID-19.

 

On April 11, 2019, the Company received a demand for arbitration, which was filed with the American Arbitration Association (AAA), Case No. 01-19-0001-0962, on behalf of Michael Palleschi, the former CEO, alleging a breach of his employment agreement and seeking $11,300,000 in damages. The Company has asserted counterclaims and affirmative defenses to Mr. Palleschi’s claims and intends to vigorously defend this matter. This matter has been placed in abeyance, to be reopened upon motion and payment of panel deposit.

 

On June 26, 2019, Efraim Barenbaum filed a shareholder derivative suit in the United States District Court for the Southern District of New York against certain of the Company’s former directors and executive officers, alleging claims for breaches of fiduciary duties, unjust enrichment, waste, and violations of Section 14 of the Securities Exchange Act of 1934. The Company was named as a nominal defendant only. The Company filed a motion to dismiss the complaint on September 23, 2019. In response to the motion, the plaintiff filed an amended complaint on November 1, 2019, but the causes of action remained equally deficient. Having found the claims in the amended complaint also to be baseless, the Company filed a motion to dismiss that pleading as well on January 27, 2020. Motion practice is ongoing. On September 30, 2020, the court dismissed the plaintiff’s compliant with prejudice.

 

On August 17, 2019, Auctus Fund, LLC (“Auctus”) filed suit against the Company alleging, among other things, breach of contract and violations of state and federal securities laws, arising out of a securities purchase agreement and a convertible note in the principal amount of $525,000. Auctus is the holder of a convertible note for which there was no prior Board authorization (See Item 1, Recent Developments “Internal Investigation”). The Company denies any alleged wrongdoing and intends to vigorously defend against these claims. The matter is pending in the United States District Court for the District of Massachusetts. The parties are continuing to negotiate the terms of a settlement.

 

On November 5, 2019, St. George Investments LLC (“St. George”) filed suit against the Company in the Third Judicial District Court for Salt Lake County in the state of Utah to compel arbitration, alleging, among other things, breach of contract arising out of a securities purchase agreement and convertible note in the principal amount of $2,315,000. St. George is the holder of a convertible note for which there was no prior Board authorization (See Item 1, Recent Developments “Internal Investigation”). On June 4, 2020, the Company learned that the arbitrator, following a hearing on St. George’s motion for partial summary judgment, granted St. George’s motion and requested relief of approximately $2.7 million. The Company believes the arbitrator’s decision is inconsistent with the underlying facts and applicable law and has filed papers to vacate the arbitration award, among other relief. On October 21, 2020, the district court granted St. George’s motion to confirm the arbitration award and denied the Company’s motion to vacate the arbitration award and its motion for leave to amend its answer. The Company is currently evaluating its legal options.

 

28
 

 

On November 26, 2019, David Lethem (the Company’s former CFO) filed a complaint against the Company in the 20th Judicial Circuit Court for Lee county in the State of Florida for breach of contract arising out of a transition, separation and general release agreement. The Company filed a counterclaim to rescind the agreement based on fraudulent inducement. Discovery is ongoing in this case and the Company continues to vigorously defend its interests in this matter.

 

On January 3, 2020, CBRE, Inc. (“CBRE”) filed suit against the Company’s subsidiary, CrossLayer, Inc., for breach of contract arising out of a program participation agreement in the Superior Court of the state of Delaware. CBRE is alleging damages of $1,333,000. The Company considers CBRE’s claims to be without merit and has engaged counsel who is vigorously disputing this matter. On April 29, 2020, CBRE filed a notice of voluntary dismissal without prejudice.

 

On June 5, 2020, certain former directors of the Company (Christopher Ferguson, Luisa Ingargiola, Brad Mitchell, and Patrick O’Hare) filed suit against the Company in the District Court for Clark County in the State of Nevada to recover indemnification costs arising out of indemnification agreements. The Company denies any alleged wrongdoing and is defending its interests in this matter. The Company continues to assess and discuss terms of a possible settlement.

 

On September 29, 2020, a class action lawsuit was filed in the United States District Court for the Eastern District of Michigan against Vision Property Management, LLC and related entities, including the Company and US Home Rentals LLC, as successor defendants, in connection with claims arising out of various regulations, including the Fair Housing Act, the Michigan Consumer Protection Act, and the Truth in Lending Act. The Company is evaluating this action and intends to vigorously defend its interests in this matter  . Moreover, the Company plans to seek indemnification from the Rental Home Portfolio Sellers for this and the legacy matters listed below pursuant to its indemnification rights under the Rental Home Portfolio Asset Purchase Agreement.

 

Additionally, there are legal proceedings arising out of the legacy Vision business that implicate certain of our existing rental properties. A brief summary of these matters follows:

 

- In November 2016, the State of Wisconsin filed a lawsuit against Vision Property Management, LLC and related entities owning properties within the state, in connection with claims arising out of state landlord-tenant laws. This matter was settled in December 2018, pending a final agreement regarding fines and restitution.
   
- In March 2017, the State of Maryland filed a lawsuit against Vision Property Management, LLC and related entities owning properties within the state, in connection with claims arising out of state lead paint laws. This matter was settled in December 2017, subject to the payment of fines, which remain outstanding as of the date of this filing.
   
- On August 1, 2018, the State of New York filed a lawsuit against Vision Property Management, LLC and related entities owning properties within the state, alleging violations of state lending laws in connection with claims arising out of certain lease-to-own agreements. This matter was settled in December 2019.
   
-

On August 31, 2018, a private class action lawsuit was filed in New Jersey (not yet certified) against Vision Property Management, LLC and related entities owning properties within the state, in connection with claims arising out of state landlord-tenant laws. The case remains pending and settlement negotiations are underway.

   
- On October 10, 2019, the State of Pennsylvania filed a lawsuit against Vision Property Management, LLC and related entities owning properties within the state claims arising out of certain lease-to-own agreements. The case remains pending and settlement negotiations are ongoing.

 

There can be no assurance with respect to the outcome of any current or future litigation brought against us, and we may not have sufficient liquidity to fund the defense of any such litigation. An adverse outcome of any of the foregoing legal proceedings, or the inability to settle any such legal proceedings on favorable terms, could have a material adverse impact on our business, operating results and financial condition.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

On December 17, 2019, trading in our common stock was suspended from the NYSE American Market (See “Item 1. Business – Recent Developments – Delisting of Common Stock from NYSE American”). Prior to this date, our stock had been trading under the symbol FTNW.

 

As of the date of the filing, the Company’s common stock is not quoted or trading on any stock market.

 

See “Item 1. Business – Recent Developments – Delisting of Common Stock from NYSE American.”

 

Stockholders of Record

 

There were approximately 435 holders of record of our common stock as of October 31, 2020.

 

Dividends  

 

We have not declared or paid any dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. We plan to retain any future earnings for use in our business operations. Any decisions as to future payments of cash dividends will depend on our earnings and financial position and such other factors as the Board deems relevant. Under our Articles of Incorporation, we may not declare or pay any dividends on any shares of common stock without the affirmative vote or written consent of a majority of the then outstanding shares of Series A and Series A-1 Preferred Stock and even then, not unless we have paid in full the aggregate accrued dividends upon such preferred stock and such amounts that the holders of such preferred stock would receive if they were to convert their shares of preferred stock into shares of common stock. Additionally, certain of our debt include covenants that prohibit us from paying dividends on our common stock.

 

Securities Authorized for Issuance Under Equity Compensation Plans.

 

Our Board of Directors approved the 2017 Omnibus Incentive Plan (the “2017 Incentive Plan”) which reserves 3,000,000 shares of our common stock for issuance to enable us to attract and retain highly qualified personnel who will contribute to the Company’s success and provide incentives to participants in the 2017 Incentive Plan that are linked directly to increases in stockholder value. The 2017 Incentive Plan was approved stockholders on November 8, 2017.

 

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The following table illustrates the common shares remaining available for future issuance under the 2017 Incentive Plan as of December 31, 2019:

 

   Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities
remaining available for
future issuance under
equity plans
 
Plan Category:               
Equity compensation plans approved by security holders   340,388   $15.82    2,659,612 
Equity compensation plans not approved by security holders            
Total   340,388   $15.82    2,659,612 

 

Issuer Purchases of Equity Securities

 

During the year ended December 31, 2019, there were no purchases of our equity by us or any “affiliated purchaser.”

 

ITEM 6. Selected Financial Data.

 

Not required for a smaller reporting company.

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion should be read in conjunction with our historical financial statements and the related notes contained elsewhere in this report.

 

Overview

 

Prior to October 2019, we were a provider of end-to-end design, construction management, build and support solutions for networks, data centers, residential, and commercial properties and services at Fortune 100/500 companies (our “Historical Business”). Our primary activities included engineering, building, installation, maintenance and support solutions for state-of-the-art networks and commercial properties, including the following services: data center infrastructure, fiber optics, wireless integration, network engineering, internet service provider, construction management and general contracting under three operating subsidiaries, Benchmark, CrossLayer and FTE Network Services.

 

30
 

 

Our Current Business and Corporate Strategy

 

Following a year of corporate and financial restructuring in response to the findings of an internal investigation (see below) that examined the acts and omissions of certain former officers and directors, and the loss of our principal operating subsidiary through a foreclosure by our former senior secured lenders, we were presented with an opportunity to acquire a real estate portfolio consisting of approximately 3,200 rental homes across the United States moving us into a new direction which our current management believes offers substantial opportunity for the benefit of shareholders. Accordingly, on December 30, 2019, we closed on the Rental Home Portfolio Asset Purchase Agreement, acquiring approximately 3,200 real estate properties by and through our new subsidiary, US Home Rentals.

 

FTE Network Services, part of our core legacy business, continues to provide ISP services, which consist of rack, wiring build-outs, infrastructure build-outs and cable installation, among other things.

 

Critical Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Our key estimates include: the recognition of revenue and project profit or loss (which we define 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.

 

Revenue and Cost of Goods Sold Recognition

 

Rental income from rental home operations are recognized on a straight-line basis over the life of the respective lease when collectability is reasonably assured and the tenant has taken possession or controls the physical use of the rental home. Tenant recoveries related to reimbursement of real estate taxes, insurance, and other expense are recognized as revenue in the period the applicable costs are incurred. We did not recognize any revenue from rental operations during the years ended December 31, 2019 and 2018 as the assets were not acquired until the end of 2019.

 

Revenue from telecommunication services are derived from short-term projects performed under master and other service agreements as well as from contracts for specific projects or jobs requiring the installation of an entire infrastructure system or specified units within an entire infrastructure system. We have determined that these short-term projects provide a distinct service and, therefore, qualify as one performance obligation. We provide services under unit-price or fixed-price master service or other service agreements under which we furnish 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.

 

Valuation of Long-lived Assets

 

We evaluate our 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, we first group our 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, we estimate 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. We estimate 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. Upon foreclosure by our senior lender of our assets, the associated long-lived intangible assets were fully impaired as there are no future cash flows associated with the intangible assets.

 

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Income Taxes

 

We record 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, our experience with operating loss and tax credit carryforwards not expiring unused, and tax planning alternatives.

 

Significant judgment is required in evaluating our tax positions and determining our 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. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments, and which may not accurately anticipate actual outcomes.

 

Fair Value of Financial Instruments

 

We 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.

 

Our 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 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.

 

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Derivatives

 

We account for derivative instruments in accordance with applicable accounting standards and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet.

 

We use estimates of fair value to value our derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. In general, our policy in estimating fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates and credit spreads (including for our liabilities), relying first on observable data from active markets. We categorize our fair value estimates in accordance with Accounting Standard Codification 820, Fair Value of Financial Instruments, based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.

 

Warrant Liability

 

We account for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our consolidated statements of operations.

 

Embedded Conversion Features

 

We evaluate embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in our statements of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is evaluated for consideration of any beneficial conversion feature requiring separate recognition.

 

In this section, we discuss the results of our operations for the year ended December 31, 2019 compared to the year ended December 31, 2018.

 

Consolidated Results of Operations

(dollars in thousands)

 

Overview 

 

For the years ended December 31, 2019 and 2018, we reported a net loss of $15,440 and $46,592 which includes the loss from continuing operations of $29,694 and $65,552, respectively, and income from discontinued operations of $14,254 and $18,960, The discontinued operations represent the assets foreclosed upon by our senior lender. See Item 1. Business– “Recent Developments –Amendment and Cancelation of Senior Credit Facility – Foreclosure by Senior Secured Lenders.

 

The decrease in the net loss from continuing operations of $35,858 or 54.7%, is primarily due to the decrease in operating expenses of $34,632 and total other expenses of $2,631, partially offset by the increase in gross deficit of $1,405.

 

Revenues and Gross Profit

 

Our consolidated revenues for the year ended December 31, 2019 were $7,518 as compared to revenues of $15,103 for the year ended December 31, 2018, a decrease of $7,585 or 50.2%. Our cost of revenues decreased by $6,180 or 45% year-over-year. Our gross (deficit) profit margin was approximately (0.3)% and 9.2% for the years ended December 31, 2019 and 2018, respectively.

 

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Operating Expenses

 

Our operating expenses were $25,041 and $59,673 for the years ended December 31, 2019 and 2018, respectively, representing a decrease of $34,632 or 58.4% The decrease in operating expenses was primarily due to the following: i) the decrease in compensation expense of $21,714 of which $17,375 was attributable to share-based compensation and $4,159 in salaries and wages due to the reduction in headcount during 2019, and ii) the decrease in selling, general and administrative of $17,0384 which was primarily attributable to a decrease of $8,490 in consulting fees, $6,128 of expenses related to the write-off of the CrossLayer network platform, $2,414 in bad debt expense and $1,274 in depreciation and amortization expense, partially offset by an increase in insurance expense of $897 and certain other expenses; these decreases in operating expenses were partially offset by the increase of $3,708 in loss on lease termination due to the default on our Naples, FL office space.

 

Operating Loss

 

The operating loss decreased by $33,226, from an operating loss of $58,290 for the year ended December 31, 2018 to an operating loss of $25,063 for the year ended December 31, 2019, primarily due to the decrease in total operating expenses.

 

Other (Expense) Income

 

Other (expense) income, net was $(4,631) for the year ended December 31, 2019, as compared to $(7,262) for the year ended December 31, 2018, a decrease of $2,631 or 36.2%. The decrease in expense is primarily due to the decrease of: (i) amortization of deferred financing costs and debt discount of $21,075; (ii) the gain on senior lender foreclosure of $31,538; and (iii) loss on issuance notes of $5,324. The decreases are partially offset by the increase in (i) gain on convertible derivative liability of $18,779; (ii) gain on warrant derivative liability of $12,104; (iii) the extinguishment loss of $28,005; and (vii) increase in interest expense of $1,288.

 

Liquidity and Capital Resources

(dollars in thousands)

 

Overview

 

As of December 31, 2019 and 2018, we had total assets of $235,435 and $164,290, current assets of $3,531 and $161,043, total liabilities of $160,809 and $223,749, and current liabilities of $97,091 and $193,328, respectively.

 

Current assets consist of operating cash of $789 and $342, restricted cash of $1,351 and $-0- accounts receivable of $742 and $1,449, other current assets of $649 and $1,575 and assets of discontinued operations of $-0- and $157,677 as of December 31, 2019 and 2018, respectively. Current liabilities consists of accounts payable $2,986 and $3,402, accrued expenses and other current liabilities of $12,836 and $4,964, senior notes payable of $-0- and $34,322, convertible notes payable, merchant credit agreements, notes payable and right-of-use and capital leases of $34,612 and $10,239, related party notes payable of $10,750 and $-0-, notes payable to Benchmark sellers of $25,049 and $13,397, debt and warrant derivative liabilities of $10,858 and $11,596 and liabilities of discontinued operations of $-0- and $115,408 as of December 31, 2019 and 2018, respectively.

 

As of December 31, 2019 and 2018, we had negative working capital of $93,561 and $32,285, respectively. As of October 31, 2020, the Company had approximately $74 in cash and cash equivalents . As of the date of this filing, our cash and cash equivalents are insufficient to sustain operations in the near term. We have substantial cash requirements, which consist of payment obligations under existing indebtedness, settlement agreements for indebtedness to third parties incurred by former management, promissory notes issued as part of the purchase consideration for the Rental Home Portfolio Asset Purchase, indebtedness in place at the real estate entities we acquired in the Rental Home Portfolio Asset Purchase, payroll and other corporate expenses

 

Currently, our primary sources of cash have been from short-term borrowings and financings, which prospects have been hampered as a result of the uncertainty as to the duration of the COVID-19 pandemic (which has led to disruption and volatility in the financial and real estate markets). And even though we have already taken measures to mitigate the effect of COVID-19 on our business, including negotiating extensions or deferrals on outstanding debt and placing certain employees in impacted markets on furlough, there is no assurance that these efforts will be enough to continue supporting our daily operations in the near term without additional financing.

 

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We applied for loans under the PPP and EIDL pursuant to the CARES Act through the U.S. Small Business Association programs and received net proceeds of $979 in May 2020 and $150 in June 2019, respectively. We are also continuing to explore and pursue various types of financing alternatives, including financings that leverage unencumbered properties in our real estate portfolio. We believe our debt and equity financing prospects will improve once we are current in our Exchange Act filings and we are able to resume trading on a national stock exchange or on an over-the-counter market, although no assurances can be provided in that regard either. And while we believe in the viability of our strategy to increase revenues and raise additional funds, we are unable to predict the impact of COVID-19 on our operations and liquidity, and depending on the magnitude and duration of the COVID-19 pandemic, such impact may be material.

 

Liquidity

 

Sources of liquidity in 2019 and 2018 included cash receipts from telecommunication service revenues, as well as funds from issuances of debt and equity securities in private financings. As of and during the year ended December 31, 2019 and 2018, we had an accumulated deficit of $190,072 and $174,632 and incurred net losses of $15,440 and $46,592, respectively. We expect our liquidity needs to include the payment of interest and principal on our indebtedness, capital expenditures, income taxes and other operating expenses. We use our cash inflows to manage the temporary increases in cash demand and utilize our borrowings to manage more significant fluctuations in liquidity.

 

Future sources of liquidity could include potential public or private issuances of debt or equity. However, there is no assurance that additional financing will be available when needed or that we will be able to obtain and close financing on terms acceptable to us, or whether our anticipated future profitable and positive operating cash flow generated through our backlog and rents will coincide with our debt service requirements and debt maturity schedule. If we are unable to raise sufficient additional funds or generate positive operating cash flow when required, we may need 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, the sale of SFR assets 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.

 

Cash Flows

(in thousands)

 

The following table summarizes our cash flow for 2019 and 2018:

 

    For Year Ended December 31,  
    2019     2018     Increase (Decrease)  
                         
Net cash provided by (used in):                                
Operating activities   $ (4,297 )   $ 17,854     $ (22,151 )     (124.1 )%
Investing activities     (6,841 )     (631 )   $ (6,210 )     N/M *
Financing activities     1,108       (20,695 )   $ 21,803       (105.4 )%
(Decrease) increase in cash   $ (10,030 )   $ (3,472 )   $ (6,558 )     230.9 %

 

*N/M – Not meaningful

 

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Cash Flows for the Years Ended December 31, 2019 and 2018

 

Cash (Used in) Provided by Operating Activities

 

Net cash used in operating activities for the year ended December 31, 2019 was $4,297 as compared to net cash provided by $17,854 for the year ended December 31, 2018. The unfavorable change in net cash from operating activities of $(22,151), or approximately (124.1)%, is due to the following: i) the net $(29,038) decrease in operating assets and liabilities, primarily due to the decrease in accounts payable of $(64,973) and decrease in accounts receivable of $28,578, as a result of the foreclosure of Benchmark, and ii) the net $(24,265) decrease in non-cash operating expenses, partially offset by the decrease in the net loss of $31,152.

 

Cash Used in Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2019 and 2018, was $6,841 and $631, respectively, an increase in net cash used of $6,210. The increase in the use of cash in investing activities was primarily due to the cash returned to Benchmark due to the foreclosure of $8,029 partially offset by the decrease in cash used for the purchase of property and equipment of $609 and payment of $250 for the Rental Home Portfolio Asset Acquisition , partially offset by the cash received of $1,460 from the Rental Home Portfolio Asset Acquisition.

 

Cash Provided by (Used in) Financing Activities

 

Net cash provided by financing activities was $1,108 for the year ended December 31, 2019 as compared to cash used in financing activities of $20,695 for the year ended December 31, 2018, a favorable change of $21,803. During the year ended December 31, 2019, we received total cash proceeds of $21,772 and made total cash payments of $20,664 on the issuance of convertible notes and repayments of merchant credit agreements, senior notes and other payables. During the year ended December 31, 2018, we received total cash proceeds of $35,347 and made total cash payments of $63,974 on convertible notes, merchant credit agreements, senior notes and other notes payable and received proceeds from the sale of common stock of $7,370 and $562 from the exercise of warrants.

 

While it is often difficult for us to predict the impact of general economic conditions on our business, we believe that we will be able to meet our current and long-term cash requirements primarily through our operating cash flows and anticipate that we will be able to plan for and match future liquidity needs with future internal and available external resources.

 

Long-Term Debt and Credit Facilities

(dollars in thousands)

 

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Senior Secured Promissory Notes

 

On January 27, 2020, we issued two senior promissory notes to Benchmark, one in the principal amount of $4,129 and the other in the principal amount of $600 (collectively, the “Senior Notes”), each such note secured by all of our non-real estate assets pursuant to a security agreement of even date therewith. The $4,129 note, which matures on December 1, 2020 and has an annual interest rate of 10%, obligates us to repay certain monies previously paid or transferred to us at the time of the Foreclosure Proposal, including (i) $3,000 in cash; (ii) two Working Capital Cash Payments totaling $600; and (iii) approximately $529 in cash remaining in a Benchmark bank account, was issued in consideration of a $6,000 reduction to the $28,000 Remaining Indebtedness). The $600 note, which has a maturity date of December 1, 2020 and an annual interest rate of 10%, was issued to evidence the loan advanced by Benchmark on January 10, 2020 in the principal amount of $300 and an additional $300 loan from Benchmark advanced on January 27, 2020.

 

On February 12, 2020, we issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $800, consisting of approximately $550 in expenses and advances previously made by Lateral on behalf of us and an additional $250 loan from Lateral. The $800 note is secured by all of our non-real estate assets pursuant to security agreement of even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%. On September 30, 2020, this note was amended to add a cross-default provision and was assigned to Lateral Home Agent, LLC, an entity controlled by Richard de Silva.

 

On February 27, 2020, we issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $75 for working capital purposes. The $75 note is secured by all of our non-real estate assets pursuant to security agreement of even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%. On September 30, 2020, this note was amended to add a cross-default provision and was assigned to Lateral Home Agent, LLC, an entity controlled by Richard de Silva.

 

On April 29, 2020, we issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $200 for working capital purposes. The note is secured by all our non-real estate assets pursuant to a security agreement of even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%. The note including interest was paid in full on May 8, 2020.

 

On July 22, 2020, the Company issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $100 for working capital purposes. The note is secured by all of the Company’s non-real estate assets pursuant to a security agreement and has a maturity date of November 15, 2020 and an annual interest rate of 10%. On September 30, 2020, this note was amended to add a cross-default provision and was assigned to Lateral Home Agent, LLC, an entity controlled by Richard de Silva.

 

On August 3, 2020, the Company issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $250 for working capital purposes. The note is secured by all of the Company’s non-real estate assets pursuant to a security agreement and has a maturity date of November 15, 2020 and an annual interest rate of 10%. On September 30, 2020, this note was amended to add a cross-default provision and was assigned to Lateral Home Agent, LLC, an entity controlled by Richard de Silva.

 

On August 21, 2020, the Company issued a senior promissory note to Lateral SMA Agent, LLC in the principal amount of $150 for working capital purposes. The note is secured by all the non-real estate assets pursuant to a security agreement of even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%. On September 30, 2020, this note was amended to add a cross-default provision and was assigned to Lateral Home Agent, LLC, an entity controlled by Richard de Silva.

 

On October 1, 2020, we issued a senior promissory note to Lateral Recovery, LLC in the principal amount of $300 for working capital purposes. The note is secured by all our non-real estate assets pursuant to a security agreement of even date therewith and has a maturity date of November 15, 2020 and an annual interest rate of 10%. Lateral Recovery, LLC is an affiliate of Lateral, which is controlled by Richard de Silva, a member of our Board of Directors.

 

Rental Home Portfolio Asset Acquisition Promissory Notes and Notes Payable

 

On December 30, 2019, in conjunction with the Rental Home Portfolio Asset Purchase Agreement (“Agreement”), the parties amended the Agreement to, among other things, deliver $9,750 in promissory notes to the Szkaradeks’ in satisfaction of the cash portion of the purchase price under the Agreement. Accordingly, we issued $9,750 in promissory notes payable to the Szkaradeks’ with a January 31, 2020 maturity date , which date was extended to March 31, 2020 pursuant to a built in 60-day forbearance period and was further extended through January 1, 2021. As of the date of this filing, the Szkaradek Notes have not been repaid. See Part II, Item 8 Financial Statements and Supplementary Data, Note 14 “Related Party.”

 

On December 30, 2019, in conjunction with our closing under the Agreement, we assumed $51,564 in notes payable, secured by certain of our rental properties (the “Secured Notes Payable”). On July 1, 2020, we received a written notice of default (the “Notice of Default”) from Inmost Partners LLC, in its capacity as Noteholder Agent (“Inmost”) to issuer noteholders of the Secured Notes Payable, asserting that certain events of default had occurred with respect to certain Note Issuance and Purchase Agreements each dated as of July 10, 2017 by and among, inter alia, certain Entities we acquired, Inmost, and the issuer noteholders named therein (the “Note Purchase Agreements”). Specifically, Inmost claimed that (i) we failed to satisfy the loan-to-value test (the “LTV Test”) as defined in the Note Purchase Agreements and that (ii) we failed to obtain consent from the Noteholder Agent before transferring the equity interests of certain Entities to US Home Rentals (the “Equity Interest Transfer”) pursuant to the Rental Home Asset Purchase Agreement dated December 20, 2019. The Notice of Default also includes certain demands by Inmost for additional capital contributions by us and Guarantors. As of the date of this filing, we have cured defaults associated with the LTV Test. Additionally, on November 3, 2020, Inmost granted its consent to the Equity Interest Transfer and rescinded the Default Notice in exchange for (i) a new guaranty agreement under which FTE Networks, Inc. and US Home Rentals LLC will jointly and severally guarantee the obligations of certain Entities under the Note Purchase Agreements, (ii) amendments to the Limited Liability Company Agreements for each of the subject Entities to provide for the appointment of a second manager of Noteholder Agent’s choosing, and (iii) amendments to the Note Purchase Agreements.

 

Convertible Notes Payable

 

During March 2018, we issued a convertible redeemable note in the principal amount of $2,315. The note was due September 2018, accrues interest at 4% per annum and was secured by shares of our common stock. The note is convertible at any time at the option of the holder into shares of our common stock at a price equal to 50% of the lowest trading prices of our common stock during the prior twenty-one consecutive trading days. As of the date of this filing, the outstanding balance, including penalties and interest, is approximately $2,522, which is past due. We are pursuing a settlement of all amounts due. See Part 1 Item 1. Business, Recent Developments 2019 Internal Investigation and Item 3. Legal Proceedings.

 

During September 2018, we issued a convertible redeemable note in the principal amount of $525. The note was due September 2019, accrues interest at 4% per annum and was secured by shares of our common stock. The note is convertible at any time at the option of the holder into shares of our common stock at a price equal to 65% of the lowest trading prices of our common stock during the prior twenty-one consecutive trading days. As of the date of this filing, the outstanding balance including penalties and interest, is approximately $1,749 which is past due. We are pursuing a settlement of all amounts due. See Part 1 Item 1. Business, Recent Developments 2019 Internal Investigation and Item 3. Legal Proceedings.

 

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During March 2020, we issued a convertible redeemable note in the principal amount of $1,800. The note is due May 10, 2021, accrues interest at 6% per annum and is secured by a mortgage covering certain real property. The note is convertible at any time at the option of the holder into shares of our common stock at a price equal to 66% of the average of the two lowest daily volume weighted average trading prices of our common stock during the prior twelve consecutive trading days. The outstanding balance is approximately $1,800 as of the date of this filing.

 

Between April and October 2019, we entered into settlement and release agreements with nine convertible note holders to settle thirteen convertible notes, whereby, we agreed to pay the holders a total of $5,511 in monthly payments through Jan 2021 to settle all existing convertible note principal and interest amounts and remove any conversion features. The balance outstanding on these settlement agreements is approximately $3,335 as of the date of this filing.

 

Promissory Notes

 

On July 16, 2020, Cobblestone Ventures, Inc., an entity controlled by our interim CEO, loaned us $70 for working capital purposes, evidenced by a demand note in the principal amount of $70. The note bears an annual interest rate of 10% per annum and matures on November 15, 2020.

 

On July 31, 2020, Cobblestone Ventures, Inc., an entity controlled by our interim CEO loaned us $250 for working capital purposes, evidenced by a demand note in the principal amount of $250.The note bears annual interest of 10% and matures on November 15, 2020.

 

The Company is a party to pending legal proceedings arising out of certain of the foregoing loan arrangements. See Part I — Item 3. Legal Proceedings,” for further information regarding the Company’s pending legal proceedings.

 

Off Balance Sheet Arrangements

 

None.

 

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

FTE Networks, Inc. is a “smaller reporting company” as defined by Regulations S-K and as such, is not required to provide the information contained in this item pursuant to Regulation S-K.

 

ITEM 8. Financial Statements and Supplementary Data.

 

The financial statements required to be included in this Annual Report on Form 10-K appear immediately following the signature page to this Annual Report on Form 10-K beginning on page F-1.

 

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

On February 21, 2020, the Audit Committee of the Board of Directors dismissed Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm.

 

The audit reports of Marcum on the Company’s financial statements for the years ended December 31, 2018 and 2017, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. Marcum did not provide a report on the Company’s financial statements during fiscal years ended December 31, 2018 and December 31, 2019. During the fiscal years ended December 31, 2018 and December 31, 2019, and the subsequent period through February 21, 2020, there were (i) no disagreements between the Company and Marcum on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Marcum, would have caused Marcum to make reference to the subject matter of the disagreement in Marcum’s reports on the Company’s consolidated financial statements for such years, and (ii) no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K, except as described below.

 

As previously reported in Current Reports on Form 8-K filed by the Company on April 4, 2019 and June 13, 2019, Marcum had informed the Company that Marcum’s audit reports included in the Company’s previously issued audited financial statements as of and for the years ended December 31, 2017 and December 31, 2016, and Marcum’s interim reviews of the financial statements for the periods ended March 31, June 30, and September 30, 2018, 2017 and 2016, should no longer be relied upon. The Company identified a number of material weaknesses in internal control over financial reporting as disclosed in Item 9A of the Company’s Annual Reports on Form 10-K for the years ended December 31, 2017, as well as several Quarterly Reports on Form 10-Q for quarterly periods during 2017 and 2018. The Audit Committee discussed these matters with Marcum.

 

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On February 27, 2020, the Audit Committee of the Board of Directors approved the appointment of Turner, Stone & Company, L.L.P. as the Company’s independent registered public accounting firm for the years ended December 31, 2017, 2018 and 2019, as well as the year ending December 31, 2020.

 

ITEM 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our interim chief executive officer (“CEO”) and interim chief financial officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosures.

 

In connection with the preparation of this Annual Report on Form 10-K, we carried out an evaluation under the supervision of and with the participation of management, including our CEO and CFO, as of December 31, 2019, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our CEO and CFO concluded that as of December 31, 2019, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting described below.

 

Notwithstanding the existence of the material weaknesses described below, management performed additional analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with U.S. GAAP. Accordingly, management believes that the consolidated financial statements and disclosures included in this Annual Report on Form 10-K fairly present, in all material respects, in accordance with U.S. GAAP, our financial position, results of operations and cash flows for the periods presented.

 

Management Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management has determined that our internal control over financial reporting were not effective as of December 31, 2019, and the periods covered under this Annual Report on Form 10-K due to the material weaknesses described below.

 

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America.

 

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A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management, under the supervision of our CEO and CFO, and oversight of the board of directors, conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019, based on the criteria set forth in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 2013 Framework). Based on this assessment, management has identified deficiencies in our internal controls over financial reporting that contributed to the identified material weaknesses described below  :

 

  We lacked sufficient controls over the bank accounts and disposition and transfer of properties acquired from the Rental Home Portfolio Asset Acquisition to protect the company’s assets from misappropriation by third parties;

 

  We lacked a sufficient number of resources with assigned responsibility and accountability to ensure the application of generally accepted accounting principles and financial reporting and related internal controls over complex, significant non-routine transactions and routine transactions, which includes the integration of US Home Rentals LLC ;

 

  We did not have an effective risk assessment process to identify and analyze changes in business operations resulting from complex, significant non-routine transactions and, in turn, completeness and adequacy of required disclosures;

 

  We did not have an effective internal and external information and communication process to ensure that relevant and reliable information was communicated timely across the organization, to enable financial personnel to effectively carry out their financial reporting and internal control roles and responsibilities; and

 

  The Company did not design, implement and operate effective monitoring activities over account reconciliations, review and approval of manual journal entries, significant non-routine transaction such as troubled debt restructuring or the asset foreclosure and the timely preparation of financial statements.

 

The control deficiencies create a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that these control deficiencies are material weaknesses and our internal control over financial reporting is not effective as of December 31, 2019.

 

Management’s Remediation Plan

 

We have taken steps to enhance our internal control over financial reporting and plan to take additional steps to remediate the material weaknesses. Specifically, the following:

 

  Management has closed a significant number of the acquired bank accounts and opened new accounts which require review and approval of disbursements and (2) approvers signatures. Management believes this process will be complete by the December 31, 2020. Management is in the process of setting the proper authorizations and approvals for the disposition and transfer of assets.

 

  Management will review the assignment of roles and responsibilities of accounting personnel to ensure the proper matching of technical accounting skills to complex non-routine transactions and financial reporting requirements to ensure our financial reporting objectives are met.

 

  Management will document and assess key policies and internal control procedures to strengthen our identification of and accounting for complex, significant non-routine transactions and routine transactions.

 

  Management will ensure key process owners and other relevant personnel are adequately trained on our financial reporting processes and internal controls to ensure such processes and controls are performed timely and supported with adequate documentation evidencing control performance.

 

  Management will enhance internal communication processes through the formalization of internal control documentation and related documentation standards.

 

  Management will formalize and strengthen our oversight and monitoring controls to assess the effective functioning of controls over all components and functional areas of the organization and to monitor compliance with policies and procedures.

 

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Our management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements.

 

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations and vulnerabilities. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Changes in Internal Control over Financial Reporting

 

Except for the material weaknesses discussed above in this Item 9A that were identified in the fourth quarter (and that arose in an earlier period), there were no changes in our internal control over financial reporting during the fourth quarter of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. Other Information.

 

None.

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

For the Fiscal Year Ended December 31, 2019

 

Set forth below is information regarding the executive officers and directors for the fiscal year ended December 31, 2019:

 

Name   Age   Titles
Michael Palleschi   44   Former Chief Executive Officer, President, and Chairman of the Board
David Lethem   61   Former Chief Financial Officer
Lynn Martin   52   Former Chief Operating Officer
Luisa Ingargiola   52   Former Director and Audit Committee Chair
Christopher Ferguson   52   Former Director and Compensation Committee Chair
Patrick O’Hare   52   Former Director and Nominating and Corporate Governance Chair
Brad Mitchell   60   Former Director
Fred Sacramone   50   Former Director and Former Interim Chief Executive Officer
James Shiah   60   Former Director and Audit Committee Chair
Stephen Berini   71   Former Director
Irving Rothman   73   Former Director and Compensation Committee Chair
Jeanne Kingsley   51   Former Director
Richard Omanoff   78   Former Director and Nominating and Corporate Governance Chair

 

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As of the filing of this Annual Report

 

Set forth below is information regarding our current executive officers and directors as of the filing of this Annual Report on Form 10-K:

 

Name   Age   Titles   Date of Appointment
Michael P. Beys   48   Interim Chief Executive Officer, President and Director  

October 18, 2019 as Director

December 11, 2019 as Interim CEO

Munish Bansal   49   CEO of US Home Rentals LLC and CEO-Elect of FTE Networks, Inc.   September 25, 2020 as CEO of US Home Rentals LLC
Ernest J. Scheidemann   60   Interim Chief Financial Officer   May 5, 2020
Richard de Silva   47   Director   October 18, 2019
Peter Ghishan   42   Director and Compensation Committee Chair   October 18, 2019
Joseph Cunningham   72   Director and Audit Committee Chair   October 18, 2019

 

Michael P. Beys, Interim Chief Executive Officer and Director

 

Mr. Beys is a partner with the law firm Beys Liston & Mobargha LLP, which he founded in 2009. He focuses his practice on federal criminal defense, complex commercial litigation and real estate litigation. From 2000 to 2005, Mr. Beys served as a federal prosecutor in the U.S. Attorney’s Office for the Eastern District of New York, where he was the lead counsel in over 100 federal prosecutions and investigations involving racketeering, fraud, tax evasion, money laundering, narcotics trafficking, violent crimes and terrorism. Mr. Beys is also currently a director of Secure Property Development & Investment, PLC, a publicly listed (London’s AIM) owner and operator of commercial and industrial properties in Eastern Europe. In 2005, he co-founded Aristone Capital, a real estate investment firm which provided mezzanine debt financing to New York area real estate developers. In 1999, he founded Cobblestone Ventures, Inc., a real-estate development business which has invested in, or actively managed, numerous conversion and new construction projects in downtown Manhattan. Mr. Beys received a B.A. from Harvard College and a J.D. from Columbia Law School.

 

Munish Bansal, Chief Executive Officer of US Home Rentals LLC; CEO-Elect of FTE Networks, Inc.

 

Mr. Bansal was appointed as Chief Executive Officer of US Home Rentals LLC, the Company’s wholly-owned subsidiary on September 25, 2020. Pursuant to the terms of his employment agreement, Mr. Bansal will transition to the role of Chief Executive Officer of FTE Networks, Inc. following the resumption of trading of the Company’s common stock on an over-the-counter market. Mr. Bansal previously served as the Chief Financial Officer of Home Partners of America, a single-family rental real estate investment trust, from May 2016 to June 2018. Prior to that, Mr. Bansal served as the portfolio manager and Treasurer for the JP Morgan Chase Mortgage business unit. Mr. Bansal received a B.E.E. from the Indian Institute of Technology, Kanpur, India and an M.B.A. from the Indian Institute of Management, Ahmedabad, India.

 

Ernest J. Scheidemann, Interim Chief Financial Officer

 

Mr. Scheidemann was appointed Interim Chief Financial Officer on May 5, 2020. Mr. Scheidemann was the CFO of Benchmark from April 2017 through November 2018. From 2008 to 2015, Mr. Scheidemann was CFO of a private global software company. Prior to that, Mr. Scheidemann was the Treasurer and CFO of WCI Communities, a $2.0 billion publicly traded homebuilder from 2004 to 2008 and held various progressive finance and accounting leadership roles with AT&T Corp from 1984 through 1999. Mr. Scheidemann is a Certified Public Accountant. He holds a Certified Global Management Accountant and Certified Financial Forensics designation issued from the American Institute of CPAs. Mr. Scheidemann received a B.A. in Accounting from William Paterson University and M.B.A. in Finance and International Business from Seton Hall University.

 

Richard de Silva, Director

 

Mr. de Silva serves as Managing Partner of Lateral Investment Management, LLC, a California-based credit and growth equity firm, which he joined in 2014. Mr. De Silva is responsible for leading the day to day investment activities and operations of the firm, which include investment origination, underwriting, asset management and fundraising. Mr. de Silva was previously a General Partner at Highland Capital Partners, a private equity firm. He joined Highland in 2003 and focused on investments in growth-stage technology companies. Mr. de Silva has also held operating roles in several companies as an entrepreneur and senior executive including as co-founder of IronPlanet, a marketplace for construction equipment. He received a B.A. from Harvard College, a Master of Philosophy in International Relations from Cambridge University and an M.B.A. from Harvard Business School.

 

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Peter Ghishan, Director and Compensation Committee Chair

 

Mr. Ghishan is a partner at CPNV, a global real estate development and construction firm based in Nevada. Mr. Ghishan began his career as an attorney working for a regional media holding company based in Las Vegas from August 2002 to February 2005. In February 2005, Mr. Ghishan moved to real estate full time with Andiamo Ventures, LLC, where through September 2009, he developed nearly $10,000,000 in residential projects in Lake Tahoe, overseeing all aspects of development project underwriting, financing, negotiating all entitlements, construction management and sales oversight. In his role as a commercial real estate broker with Commercial Partners of Nevada from February 2007 to June of 2018, Peter assisted a number of developers, lenders and investors in their acquisition and disposition of more than $50,000,000 in commercial real estate assets. Mr. Ghishan received a B.A. from Duke University and a J.D. from the University of Arizona College of Law. Mr. Ghishan holds his New Mexico, California, and Nevada real estate broker licenses and is an active member of the State Bar of Nevada and an inactive member of the State Bars of Arizona, California, and Montana.

 

Joseph Cunningham, Director and Audit Committee Chair

 

Mr. Cunningham serves as President of Liberty Mortgage Acceptance Corporation, a private mortgage lender arranging commercial mortgage-backed securities and bridge financing, which he co-founded in 1992. In 2009, Mr. Cunningham co-founded Renew Lending, Inc., a residential mortgage banking firm. Mr. Cunningham left the firm in 2017. Prior to 2009, Mr. Cunningham served as Chief Operating Officer of Colwell Financial Corporation, where he was responsible for all divisions including residential production, secondary marketing, construction lending, joint ventures, commercial real estate brokerage, loan servicing, insurance, underwriting, personnel, REO, finance and administration, and legal activities. Mr. Cunningham also previously served as Executive Vice President and Chief Financial Officer of Granite Financial Corporation, a boutique mortgage banking firm. Earlier in his career, Mr. Cunningham practiced as a CPA in the Boston office of PwC. Mr. Cunningham received a B.S. in Accounting from Boston College.

 

Term of Office

 

Our Directors are appointed for a one-year term to hold office until the next annual general meeting of our stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our board of directors and hold office until removed by the Board.

 

All current Directors will remain in office until the next annual meeting of our stockholders, and until their successors have been duly elected and qualified. There are no agreements with respect to the election of Directors.

 

Family Relationships

 

There are no family relationships among the Company’s current Directors or officers.

 

Involvement in Certain Legal Proceedings

 

During the past ten (10) years, none of our current officers have been involved in any legal proceeding that are material to the evaluation of their ability or integrity relating to any of the items set forth under Item 401(f) of Regulation S-K. None of our current officers is a party adverse to the Company or any of its subsidiaries in any material proceeding or has a material interest adverse to the Company or any of its subsidiaries.

 

Delinquent Section 16(a) Reports

 

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who own more than 10% of a registered class of our securities (“Reporting Persons”), to file reports of ownership and changes in ownership with the SEC. To our knowledge, and based solely on our review of the reports electronically filed by the Reporting Persons, the Company believes that all reports of securities ownership and changes in such ownership required to be filed during the year ended December 31, 2019 were timely filed, except that one Form 4 for each of the following former directors was not timely filed, in each case with respect to shares they received in connection with their respective separation agreements: Luisa Ingargiola, Christopher Ferguson, Patrick O’Hare, and Brad Mitchell and one Form 3 and one Form 4 by TTP8, LLC.

 

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Code of Ethics

 

Each of the Company’s directors and employees, including its executive officers, are required to conduct themselves in accordance with ethical standards set forth in the Code of Business Conduct and Ethics adopted by the Board of Directors on January 5, 2015.

 

A copy of the Company’s current Code of Business Conduct and Ethics is available on our website at www.ftenet.com.

 

Director Nominations

 

We made no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors.

 

Audit Committee

 

Our Board has a separately designated standing audit committee, established in accordance with Section 3(a)(58)(A) of the Exchange Act. It is governed by a charter, a copy of which is available on our website, www.ftenet.com. The current members of the audit committee are Joseph Cunningham (Chair) and Peter Ghishan each of whom is considered “independent” under the rules of the SEC. Each member of our audit committee can read and understand fundamental financial statements in accordance with audit committee requirements and our board of directors has determined that Mr. Cunningham is an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K, based upon past employment experience in finance and other business experience requiring accounting knowledge and financial sophistication. Our Board also has a standing compensation and nominating and corporate governance committee, comprised as set forth in the table below:

 

Audit Committee   Compensation Committee   Nominating and Governance Committee
Joseph Cunningham*   Peter Ghishan*   Joseph Cunningham
Peter Ghishan   Joseph Cunningham   Peter Ghishan
         
* Chairperson of the committee        

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth certain information with respect to compensation, in accordance with Regulation S-K, for the years ended December 31, 2019 and 2018 paid to all who served as our chief executive officer and our two most highly compensated executive officers, other than our chief executive officer, whose total compensation exceeded $100,000 (the “named executive officers” or “NEO’s”), including the aggregate fair value of large grants of common stock issued to certain NEO’s. Some of these shares of common stock have either been cancelled and returned to shares to be issued for lack of Board authorization or are the subject matter of a judicial action seeking their return. See Part 1 Item 3. Legal Proceedings.

 

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Summary Compensation Table

 

Name and Principal      Salary(1)   Bonus   Stock awards   Stock options   All other compensation   Total 
Position  Year   $   $   $   $   $   $ 
Michael Palleschi, Former Chief Executive Officer  2019    58,192                51,761    109,953(2)
   2018    1,164,572    850,000    16,278,843        2,623,370    20,916,785(3)
                                   
David Lethem, Former Chief Financial Officer  2019    91,163                   53,211    144,374(4)
   2018    282,692         3,564,798         741,676    4,589,166(5)
                                   
Lynn Martin, Former Chief Operating Officer  2019    48,660         138,979              187,639(6)
   2018    356,731                   395,400    752,132(7)
                                   
Anthony Sirotka, Former Chief Executive Officer and Chief Administrative Officer  2019    351,346    150,000            22,188    504,304(8)
   2018    486,538        3,565,150        136,457    4,188,145(9)
                                   
Fred Sacramone, Former Chief Executive Officer  2019    173,077                11,094    184,171(10)
                                   
Stephen Goodwin, Former Chief Executive Officer  2019    18,469                     18,469(11)
                                   
Michael P. Beys, Current Chief Executive Officer  2019                         (12)

 

  (1) Amounts reflect net salary (pro-rated in some instances) paid for the respective fiscal year.
  (2) Mr. Palleschi’s total compensation for the year ended December 31, 2019 included: (i) a net salary of $58,192, pro-rated to reflect actual time served; and (ii) approximately $51,761 in perquisites, including automobile and storage allowances. Mr. Palleschi was placed on leave without pay on January 19, 2019 and was subsequently terminated as CEO on May 13, 2019. On April 9, 2019, Mr. Palleschi served the Company with a demand for arbitration alleging a breach of his employment agreement and seeking approximately $11,300,000 in damages. The Company is vigorously contesting the allegations and its liability for any damages and has filed defenses and counterclaims in respect of same. The arbitration is pending in the State of Florida.
  (3) Mr. Palleschi’s total compensation for the year ended December 31, 2018 included:

 

  a. A net salary of $1,164,572 and $2,623,370 in perquisites, including health, life, dental, disability and vision benefits, automobile and storage allowances, private jet services, personal security, and certain other personal expenses. These and other forms of compensation are in dispute and are the subject of the pending arbitration;
  b. A purported bonus of $850,000 which was paid in 850 shares of Series A Preferred Stock;
  c. 905,770 shares of Company common stock issued on or about August 24, 2018 to TLP Investments, LLC (an entity controlled by Mr. Palleschi and/or his spouse) with a fair value of $12,217,931 and 400,524 shares of Company common stock issued on or about October 11, 2018 to Mr. Palleschi with a fair value of $4,060,912. The Company’s board of directors nullified the foregoing issuances to Mr. Palleschi and related parties and is presently engaged in litigation to secure their return to shares to be issued); and

 

  (4) Mr. Lethem’s total compensation for the year ended December 31, 2019 included: (i) a net salary of $91,163, pro-rated to reflect actual time served; (ii) approximately $53,211 in perquisites, including a vehicle allowance and certain other personal expenses.
  (5) Mr. Lethem’s total compensation for the year ended December 31, 2018 included: (i) a net salary of $282,692; (ii) approximately $741,676 in perquisites, including health, life, dental, disability, and vision benefits, private jet services, automobile allowance, payments to him and his spouse, and certain other personal expenses; and (iii) 351,558 shares of Company common stock issued on or around October 11, 2018 with a fair value of $3,564,798.
  (6) Mr. Martin’s total compensation for the year ended December 31, 2019 included: (i) a net salary of $48,660, pro-rated to reflect actual time served as Chief Operating Officer; and (ii) 40,063 shares of Company common stock issued on or around January 8, 2019 with a fair value of $139,019. Mr. Martin resigned as Chief Operating Officer on January 25, 2019.
  (7) Mr. Martin’s total compensation for the year ended December 31, 2018 included: (i) a net salary of $356,731; and (ii) approximately $395,400 in perquisites including medical, dental, and vision benefits and other wages and advances.
  (8) Mr. Sirotka served as interim CEO from January 19, 2019 until his resignation on October 2, 2019, during which time his compensation included (i) a net salary of $351,346, pro-rated to reflect actual time served; (ii) $22,188.60 in perquisites, including medical, dental and vision benefits; and (iii) a $150,000 bonus in consideration for providing a personal guaranty on certain Company debts.

 

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  (9) Prior to serving as interim CEO, Mr. Sirotka served as the Company’s Chief Administrative Officer (CAO). Mr. Sirotka’s total compensation for his service as CAO for the year ended December 31, 2018 included: (i) a net salary of $486,538; (ii) $136,457 in perquisites, including medical, dental, and vision benefits, an automobile allowance, and certain other personal expenses; and (iii) 351,558 shares of Company common stock issued on or around October 11, 2018 with a fair value of $3,565,150, which Mr. Sirotka returned in 2019.
  (10) Mr. Sacramone served as interim CEO from June 13, 2019 until his resignation on October 21, 2019, during which time his compensation included (i) a net salary of $173,077, pro-rated to reflect actual time served; and (ii) $11,094 in perquisites, including medical, dental, and vision benefits.
  (11) Mr. Goodwin served as interim CEO from October 21, 2019 until his resignation on December 11, 2019. He was paid a total of $18,469 for his service. He currently serves as the Company’s Executive Vice President of Operations.
  (12) Mr. Beys was appointed as interim CEO on December 11, 2019 and currently serves in this capacity. He earned $30,000 pro-rated for his service as the Company’s interim CEO in 2019, which was paid on May 12, 2020.

 

Employment Agreements

 

Below is a summary of the employment agreements with named executive officers for the year ended December 31, 2019.

 

On June 13, 2014, FTE Networks entered into an employment agreement with Michael Palleschi to serve as its Chief Executive Officer in consideration of a salary of $250,000 per year, with standard employee insurance and other benefits through June 13, 2017, including a mandatory arbitration provision. Mr. Palleschi was placed on unpaid leave on January 19, 2019 and later served the Company with a demand for arbitration alleging a breach of his employment agreement on April 9, 2019, seeking damages of approximately $11,900,000. The Company terminated Mr. Palleschi’s employment on May 13, 2019and has challenged the allegations set forth in the demand for arbitration including its liability for any damages thereunder, and has filed defenses and counterclaims in respect of same. The arbitration is pending in the state of Florida.

 

On June 2, 2014, the Company entered into an employment agreement with David Lethem to serve as its Chief Financial Officer in consideration of a salary of $120,000 per year. The employment agreement had an initial term of three years and was continued on a year-to-year basis thereafter. Mr. Lethem resigned on March 11, 2019 in connection with a transition, separation and general release agreement, pursuant to which the Company agreed to pay Mr. Lethem a severance payment of $87,500. In addition to certain releases and post-employment covenants, Mr. Lethem also returned 466,151 shares of Company common stock. The Company is actively litigating a dispute that arose in connection with Mr. Lethem’s transition, separation, and general release agreement in the State of Florida.

 

On May 2, 2016, the Company entered into an employment agreement with Lynn Martin to serve as the Company’s Chief Operating Officer in consideration of a salary of $250,000 per year. The employment agreement had an initial term of three years and was continued on a year-to-year basis thereafter. Mr. Martin resigned on January 25, 2019.

 

The Company has not entered into an employment agreement with Michael Beys in connection with his service as interim CEO; however, the Company’s compensation committee has approved a cash component of Mr. Beys’ overall compensation package which provides for a monthly salary of $50,000 for the duration of his service as interim CEO of which $150,000 has been paid to Mr. Beys for services rendered in 2020.

 

Munish Bansal, Chief Executive Officer of US Home Rentals LLC; CEO-Elect of FTE Networks, Inc.

 

On September 25, 2020, Munish Bansal was appointed as Chief Executive Officer of US Home Rentals LLC, the Company’s wholly-owned subsidiary, pursuant to an executive employment agreement. Pursuant to the terms of his employment agreement, Mr. Bansal will transition to the role of Chief Executive Officer of FTE Networks, Inc. following the resumption of trading of the Company’s common stock on an over-the-counter market. Mr. Bansal is to receive, among other things and subject to certain exceptions and conditions set forth therein, (i) an annual base salary of $500,000 (pro-rated for 2020), which salary Mr. Bansal has agreed to defer until the earlier of the closing of an equity capital raise of at least $25 million, or six (6) months, but in no event later than March 15, 2021; (ii) a target bonus equal to 100% of his annual base salary upon the achievement of a performance milestone specified in the Employment Agreement (and the opportunity to earn future cash bonuses equal to 100% of his annual base salary based on performance metrics to be determined annually by the Compensation Committee) (iii) a restricted stock grant pursuant to the Company’s 2017 Omnibus Incentive Plan (the “2017 Plan”), equal to six percent (6%) of the Company’s issued and outstanding common stock, calculated on a fully-diluted basis and subject to certain exceptions and acceleration provisions; (iv) future performance stock awards of up to eight percent (8%) of the Company’s issued and outstanding common stock under the 2017 Plan upon the achievement of certain milestones and subject to certain exceptions and acceleration provisions; (v) customary non-solicitation, non-disparagement and confidentiality provisions; (vi) and a severance for a termination without “cause” or for “good reason.”

 

Pursuant to the formula set forth in Appendix A of Mr. Bansal’s employment agreement, Mr. Bansal received 1,784,104 shares of restricted common stock as an initial inducement grant, which was calculated based on 25,572,148 shares of issued and outstanding common stock. This amount, however, does not currently account for all the Company’s issued and outstanding securities.

 

Outstanding Equity Awards at Fiscal Year End

 

There were no grants of plan-based equity awards or non-equity awards to named executives during the years ended December 31, 2019.

 

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Director Compensation

 

The following table provides the total compensation for each person who served as a non-employee member of our Board of Directors for each of the fiscal year ended December 31, 2019.

 

Name  Year  

Fees earned

or paid

in cash

($)

  

Stock

awards

($)

  

Option

awards

($)

  

All other compensation

($)

  

Total

($)

 
Luisa Ingargiola  2019                49,500(1)    
Patrick O’Hare  2019                99,000(2)    
Brad Mitchell  2019                49,500(3)    
Christopher Ferguson  2019                49,500(4)    
Directors appointed in the latter half of 2019                             
Irving Rothman  2019    21,500(5)               21,500 
                              
Richard Omanoff  2019    21,500(6)               21,500 
                              
Jeanne Kingsley  2019    17,500(7)               17,500 
                              
Stephen Berini  2019    17,500(8)               17,500 
                              
James Shiah  2019    51,000(9)               51,000 
                              
Joseph Cunningham  2019    30,000(10)               30,000 
                              
Michael Beys  2019    35,211(11)               35,211 
                              
Peter Ghishan  2019    24,329(12)               24,329 
                              
Richard de Silva  2019    24,329(13)               24,329 

 

(1) Compensation paid to Ms. Ingargiola during fiscal year ended December 31, 2019 consisted of 50,000 shares of Company common stock, with a fair value of $49,500, in connection with the terms of a separation agreement dated May 23, 2019.
(2) Compensation paid to Mr. O’Hare during fiscal year ended December 31, 2019 consisted of a cash payment of $22,500 and 100,000 shares of Company common stock, with a fair value of $99,000, in connection with the terms of a separation agreement dated May 23, 2019.
(3) Compensation paid to Mr. Mitchell during fiscal year ended December 31, 2019 consisted of a cash payment of $21,692 and 50,000 shares of Company common stock, with a fair value of $49,500, in connection with the terms of a separation agreement dated May 23, 2019.
(4) Compensation paid to Mr. Ferguson during fiscal year ended December 31, 2019 consisted of 50,000 shares of Company common stock, with a fair value of $49,500, in connection with the terms of a separation agreement dated May 23, 2019.
(5) Compensation paid to Mr. Rothman during fiscal year ended December 31, 2019 consisted of cash paid for his service on the Board and as chair of the Board’s Compensation Committee.
(6) Compensation paid to Mr. Omanoff during fiscal year ended December 31, 2019 consisted of cash paid for her service on the Board and as chair of the Board’s Nominating and Corporation Governance Committee.
(7) Compensation paid to Ms. Kingsley during fiscal year ended December 31, 2019 consisted of cash paid for her service on the Board.
(8) Compensation paid to Mr. Berini during fiscal year ended December 31, 2019 consisted of cash paid for his service on the Board.
(9) Compensation paid to Mr. Shiah during fiscal year ended December 31, 2019 consisted of cash paid for his service on the Board, as chair of the Board’s Audit Committee, and as Lead Independent Director.
(10) Compensation paid to Mr. Cunningham during fiscal year ended December 31, 2019 consisted of cash paid for his service on the Board and as chair of the Board’s Audit Committee.
(11) As of fiscal year ended December 31, 2019, Mr. Beys had earned and accrued fees for his service on the Board and chair of the Board’s Compensation Committee (pro-rated for time served as a director in Q4 2019) in connection with a Non-Employee Director Compensation Policy approved by the Board on January 13, 2020, with an effective date of October 18, 2019.
(12) As of fiscal year ended December 31, 2019, Mr. Ghishan had earned and accrued fees for his service on the Board and as chair of the Board’s Compensation Committee (pro-rated for time served as a director in Q4 2019) in connection with a Non-Employee Director Compensation Policy approved by the Board on January 13, 2020 with an effective date of October 18, 2019.
(13) As of fiscal year ended December 31, 2019, Mr. de Silva had earned and accrued fees for his service on the Board (pro-rated for time actually served as a director in Q4 2019) in connection with a Non-Employee Director Compensation Policy approved by the Board on January 13, 2020 with an effective date of October 18, 2019.

 

*Board members who are also employees of FTE Networks, Inc. do not receive additional compensation for their service on the board. Accordingly, Michael Palleschi and Fred Sacramone did not receive compensation in connection with their service on the board for fiscal year ended December 31, 2019.

 

Pension, Retirement or Similar Benefit Plans

 

As the year ended December 31, 2019, there were no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or the Compensation Committee.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  

 

The following table sets forth, as of October 31, 2020, certain information concerning the beneficial ownership of our common stock by (i) each person known to us to beneficially own 5% or more of the outstanding shares of our common stock, (ii) each director of our company, (iii) the executive officers of our company, and (iv) all directors and officers of our company as a group. Unless otherwise indicated on the table or the footnotes below, the address for each beneficial owner is c/o FTE Networks, Inc., 237 West 35th Street, Suite 806, New York, NY 10001.

 

Beneficial ownership is determined in accordance with the rules of SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock that are currently exercisable or exercisable within 60 days of October 31, 2020 are deemed to be beneficially owned by the person holding such securities and for the purpose of computing the percentage ownership of that person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

Name of Beneficial Owner 

Common Stock Beneficially

Owned (1)

  

%

of

Class

 
Directors and Officers          
Michael P. Beys, Interim Chief Executive Officer and Director   -