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EX-32.2 - FTE Networks, Inc.ex32-2.htm
EX-32.1 - FTE Networks, Inc.ex32-1.htm
EX-31.2 - FTE Networks, Inc.ex31-2.htm
EX-31.1 - FTE Networks, Inc.ex31-1.htm
EX-21 - FTE Networks, Inc.ex-21.htm
EX-3.1 - FTE Networks, Inc.ex3-1.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, 2017

 

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: 000-31355

 

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.)

 

999 Vanderbilt Beach Rd., Suite 601, Naples, Florida 34108
(Address of principal executive offices)

 

Registrant’s telephone number, including area code: 1-877-878-8136

 

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $0.001 per share.

 

Securities registered pursuant of section 12(g) of the Act: Not Applicable.

 

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

 

Note -Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

 

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. [X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 235.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [  ] No

 

Indicate by check mark if disclosure of delinquent filers pursuant of Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definite proxy of information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. [X]

 

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

 

Large accelerated filer [  ]       Accelerated filer [  ]
None-accelerated filer [  ]   (Do not check if a smaller reporting company)   Smaller Reporting Company [X]
Emerging growth company [  ]    

 

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

 

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

 

The aggregate market value of the registrant’s outstanding common stock held by non-affiliates of the registrant computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second quarter was approximately $30,859,273 (based on a closing price of $15.75 per share for the registrant’s common stock on the OTCQX marketplace on June 30, 2017.)

 

As of April 10, 2018, there were 6,281,630 shares of common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A for the 2018 annual meeting of shareholders is incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

 

 

 

 

 

 

FTE NETWORKS, INC.

FORM 10-K

TABLE OF CONTENTS

 

    Page
Forward-Looking Statements 1
  PART I 2
     
Item 1. Business. 2
Item 1A. Risk Factors. 9
Item 1B. Unresolved Staff Comments. 9
Item 2. Properties. 9
Item 3. Legal Proceedings. 9
Item 4. Mine Safety Disclosures. 9
  PART II 10
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 10
Item 6. Selected Financial Data. 11
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 16
Item 8. Financial Statements and Supplementary Data. 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 17
Item 9A. Controls and Procedures. 17
Item 9B. Other Information. 18
  PART III  
     
Item 10. Directors, Executive Officers and Corporate Governance. 18
Item 11. Executive Compensation. 18
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 18
Item 13. Certain Relationships and Related Transactions, and Director Independence. 18
Item 14. Principal Accounting Fees and Services. 18
  PART IV 19
     
Item 15. Exhibits and Financial Statement Schedules. 19
Signatures   22

 

 

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

Forward-looking statements can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements which are contained in this Annual Report on Form 10-K because they reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include, without limitation:

 

  Our ability to maintain sufficient liquidity;
  Our ability to attract and retain key personnel and temporary workers;
  Our ability to collect account receivables;
  Our ability to manage the growth of our operations and effectively integrate acquisitions;
  Our ability to retain our key customers and market share;
  Our ability to compete for suitable merger prospects;
  Our ability to successfully integrate future acquisitions;
  Our ability to satisfy our service level agreements;
  Our ability to effectively manage our backlog;
  The impact of legislative actions and significant regulations on our business;
  Our ability to adapt to swift changes in the telecommunications industry;
  The effectiveness of our physical infrastructure and services;
  Fluctuations in general conditions;
  Our ability to comply with regulations;
  The effects of any employment related to other claims against our business;
  Our ability to maintain workers’ compensation insurance coverage at commercially reasonable terms; and
  Our ability to raise capital when needed and on acceptable terms and conditions.

 

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

 

1

 

 

PART I

Item 1. Business.

 

Our Company

 

FTE Networks, Inc. or the (“Company”, “FTE”, “we,” “our” or “us”) together with its wholly owned subsidiaries, is a leading provider of innovative, technology-oriented solutions for smart platforms, network infrastructure and buildings. The Company provides end-to-end design, construction management, build and support solutions for state-of-the-art networks, data centers, residential, and commercial properties and services Fortune 100/500 companies. FTE has three complementary business offerings which are predicated on smart design and consistent standards that reduce deployment costs and accelerate delivery of innovative projects and services.

 

Our Service Offerings

 

Network Infrastructure Solutions

 

Jus-Com, Inc. (dba “FTE Network Services”) provides comprehensive telecommunications solutions in the wireline and wireless telecommunications industry. Services include the design, engineering, installation, repair and maintenance of fiber optic, copper and coaxial cable networks used for video, data and voice transmission. In the wireless space, FTE provides engineering, design, installation and upgrade of wireless communications networks, including infrastructure, antennas, switching systems, and backhaul links from wireless systems to voice, data and video networks.

 

Managed Network Services

 

CrossLayer, Inc. (“CrossLayer”) is FTE’s managed network services subsidiary connecting large-scale, state-of-the-art campuses and multi-use developments. This service offering delivers technology solutions via a new software-driven, mobile-edge compute platform, providing owners and developers with the control that comes with an owned-and-operated system. Often referred to as “Edge Computing” technology, CrossLayer’s purpose-built platform enables commercial real estate owners and businesses to introduce and deliver innovative services quickly, increase user satisfaction and create monetization opportunities previously afforded only to network operators, while reducing capital and operating costs.

 

General Contracting and Construction Management

 

Benchmark Builders, Inc. (“Benchmark”) is a leading full-service general construction management and general contracting firm, and the third complimentary element to FTE’s business portfolio, serving a diverse and sophisticated corporate client base in the telecommunications, retail, professional services, industrial, broadcast, technology, infrastructure, and financial services industries, primarily in New York City, NY.

 

Staffing

 

Focus Venture Partners, Inc. (“FVP Worx”) is a multifaceted employment firm offering full service staffing solutions, specializing in the telecommunications, technology and construction services.

 

Our Corporate History

 

We were organized in the state of Nevada in December 2007 as Beacon Enterprise Solutions Group, Inc. (“Beacon”). Beacon sold its operating assets in September 2012 but maintained its public company “shell” status. Then, in June 2013, Beacon’s subsidiary, Beacon Acquisition Sub, Inc., also a Nevada corporation (“Merger Sub”), merged with Focus Venture Partners, Inc. (“Focus”), a Nevada holding company operating in the telecommunications industry.

 

Focus, via its subsidiary, Optos Capital Partners, LLC (“Optos”), managed and operated two telecom entities: (1) Focus Fiber Solutions, LLC, a Delaware limited liability company and (2) Jus-Com, Inc., an Indiana corporation, and our current network infrastructure business component. Focus continued as the surviving corporation and became Beacon’s subsidiary (the “Beacon Merger”). Following the Beacon Merger, on March 13, 2014, Beacon changed its name to “FTE Networks, Inc.” (“FTE” or the “Company”). We are headquartered in Naples, Florida.

 

Recent Developments

 

Acquisition of Benchmark

 

On April 20, 2017, FTE expanded its product and service offerings with the consummation of an acquisition of Benchmark, a privately held New York corporation. Benchmark is a New York City based construction manager and general contractor with historical annual revenues in the $300 million to $400 million range. Benchmark’s business model focuses on the build-out of interior commercial space for a client base that consists of some of the world’s most distinguished companies.

 

2

 

 

Benchmark is a New York-based construction manager and general contractor serving a diverse and sophisticated client base in the telecommunications, retail, professional services, industrial, broadcast, technology, infrastructure, and financial services industries. The Company delivers unique project solutions in the complex New York marketplace. It emphasizes the ability of its experienced staff to become an integral part of a client’s project team, responding to every client need and request. Benchmark excels at technologically complex work building broadcast studios and infrastructure, as well as large projects which can range from $30 million to $100 million. Benchmark maintains its strong reputation by consistently delivering on the quality, budget, and schedule expectations of some of the world’s most demanding clients. Benchmark offers general contracting, pre-construction planning and comprehensive project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project. Benchmark offers general contracting, pre-construction planning and comprehensive project management services, including the planning and scheduling of the manpower, equipment, materials and subcontractors required for a project.

 

Uplisting to NYSE American

 

On December 11, 2017, the Company announced that its common stock had been approved for listing on the NYSE American. The Company’s common stock started trading on the NYSE American exchange under its current symbol, “FTNW” on December 14, 2017.

 

Authorization of Series G Preferred Stock

 

The Board of Directors of the Company authorized the designation of a new series of preferred stock, the Series G Convertible Preferred Stock, out of its available “blank check preferred stock” and authorized the issuance of up to 1,780 shares of the Series G Convertible Preferred Stock. A Certificate of Designation was filed with the Secretary of State of the State of Nevada on December 4, 2017. The Series G Convertible Preferred Stock has various rights, privileges and preferences, including conversion into 100 shares of Common Stock (subject to adjustments) upon the filing of an amendment to the Company’s Articles of Incorporation incorporating a reverse stock split and the rights are junior and subordinate to any shares of Preferred Stock issued prior to this issuance.

 

Reverse Split of Common Stock

 

The Board of Directors approved a reverse stock split of our issued and outstanding shares of Common Stock and appointed and authorized a committee (the “Committee”) to fix the exact ratio from a range predetermined by the Board of Directors. On November 2, 2017, the Committee fixed a 25-for-1 reverse stock split ratio (the “Reverse Stock Split”). The Reverse Stock Split was approved by Financial Industry Regulatory Authority (“FINRA”) and was effectuated on November 6, 2017. All shares and share information in this Form 10-K have been retroactively restated for the split.

 

Launch of CrossLayer

 

On October 26, 2017, FTE announced the launch of CrossLayer, a managed network services company with technology that introduces a new business model for connected large-scale, state-of-the-art campuses and multi-use developments. This new business base, added to FTE’s existing portfolio, leverages infrastructure and construction management expertise across a larger addressable market for expanded customer offerings and attendant growth opportunities.

 

Technology Services

 

CrossLayer’s purpose-built platform is designed to enable commercial real estate property owners and businesses to introduce and deliver innovative services quicker, while creating monetization opportunities previously available only to network operators. By providing reduced capital and operating costs for customers, CrossLayer’s managed network service solutions deliver the agility and flexibility to meet evolving technology advancements.

 

CrossLayer’s service platform is distinct from those of its competitors for the following reasons:

 

  Single network to reduce complexity and increase efficiency;
  Revenue sharing model to increase building net operating income;
  Service availability;
  Direct connect to the internet eliminates need for ISP or cable provider;
  Single contact for service and support; and
  Specific focus on enabling building management systems

 

Infrastructure Services

 

Benchmark, our construction management subsidiary provides general contracting and construction management services on interior commercial space, predominately in the New York City market. New York City construction industry spending is expected to maintain a record $50 billion annual pace through 2019, an increase of 30% from 2015 levels. The general contracting and construction management industry in given geographic markets is typically very competitive at the local level and services by providers with a local presence where there is a familiarity with the client base, understanding of local laws and regulations, and relationships with the subcontractor trades as well as other professionals including architects and engineers. A significant part of our collective success in this market is attributable to strong relationships with core clients, in particular Benchmark’s long-standing reputation for quality service and industry-recognized depth of experience.

 

3

 

 

While Benchmark has the potential to expand into other industry verticals such as government or healthcare, as well as other geographic markets in the future, the corporate commercial market in New York City has seen steady growth and expansion in recent years and remains on an upward growth trajectory for the foreseeable future. This growth has been fueled by a combination of factors, including the broad economic expansion and the redevelopment of specific sites within New York City, the surrounding boroughs, and adjacent urban areas in New Jersey. Furthermore, as businesses relocate, expand, contract or consolidate within the city or to areas of redevelopment, there is potential for significant renovation opportunities as building owners and occupants look to renovate existing commercial space, inclusive of amenities, infrastructure and technology required to be competitive in attracting and retaining tenants.

 

Our success in these industries and markets is the result of experienced management and leadership, customer recognition in New York City, purchasing relationships and logistics, project planning, project management disciplines, training, quality control and top down commitment to customer satisfaction.

 

FTE provides comprehensive telecommunications solutions to Fortune 100/500 and other customers in the wireline and wireless telecommunications industry. Services performed by FTE include the design, engineering, installation, repair and maintenance of fiber optic, copper and coaxial cable networks used for video, data and voice transmission. In the wireless space, FTE provides engineering, design, installation and upgrade of wireless communications networks, including infrastructure, antennas, switching systems, and backhaul links from wireless systems to voice, data and video networks. FTE also provides emergency restoration services, including the repair of telecommunications infrastructure damaged by inclement weather. We also provide premise wiring where we install, repair, and maintain the telecommunications structure within improved structures.

 

FTE’s success in these technology spaces is the result of experienced management and leadership, purchasing relationships and logistics, project planning, project management disciplines, training, quality control and top down commitment to customer satisfaction.

 

We believe that certain provisions of the American Recovery and Reinvestment Act of 2009 (“ARRA”) will continue to create additional demand for our services. Specifically, the ARRA includes federal stimulus funding for the deployment of broadband services to underserved areas that lack sufficient bandwidth to adequately support economic development. We also expect many customers who received stimulus funds to continue to expand their networks even though stimulus funding may no longer be available.

 

The combination of a growing North American wireless subscriber base, greater use of wireless data for consumer and enterprise applications and services, and the development of innovative consumer wireless data products has led to a significant increase in the amount of wireless data traffic on wireless networks. As a result, the traditional backhaul infrastructure that has historically linked wireless cell sites to broader voice, data and video networks is reaching capacity. To handle current and future wireless data traffic demands and to improve wireless network quality and reliability, wireless carriers are implementing plans to replace their legacy backhaul networks based on T-1 lines and circuit switching applications with fiber optic networks, typically referred to as “fiber to the cell site” initiatives. We believe these initiatives will continue several more years before the backhaul system upgrade is completed, resulting in additional opportunities to assist our wireless customers in their fiber to the cell site initiatives.

 

We anticipate increased long-term opportunities arising from plans by a number of wireless companies to deploy and implement 5G and LTE (Long Term Evolution) and XLTE (Extended Long Term Evolution) technology and networks throughout North America. These technologies are being deployed in the United States using a new spectrum, which effectively requires an entirely new network to be built. As a result, we expect significant capital expenditures will be made over a relatively long period of time as wireless carriers build out their 5G and LTE networks and then augment and optimize their networks for reliability and network quality. We believe wireless carriers are in the very early stages of their 5G and LTE network deployment plans.

 

Fiber to the X (“FTTx”) comprises the many variants of fiber optic access infrastructure. These include fiber to the home (“FTTH”), fiber to the premise (“FTTP”), fiber to the building (“FTTB”), fiber to the node (“FTTN”), and fiber to the curb or cabinet (“FTTC”). GIA announces the release of a comprehensive global report on Fiber Optic Components market. Global market for Fiber Optic Components is projected to reach US$42 billion by the year 2017. Growth will be driven by the continuously growing demand for bandwidth and the ensuing need for fiber-based broadband, robust growth in mobile internet, and stronger FTTx related deployments.

 

Outside Plant Operations

 

Outside Plant Operations (OSP) includes all forms and methods of connecting the nation’s telecommunications infrastructure. Historically this work has been with copper and then coax. Today, it is predominately aerial and buried fiber. FTE builds outside plant for large corporate customers, government entities and private investors.

 

FTE Network Services has scaled to approximately 200+ concurrent crews in multiple geographies representing multiple customers and multiple projects. FTE Network Services’ success is based on several factors:

 

  Staff construction experience in these markets over many years in the past provides an understanding of the challenges in most every market with respect to local regulations to diverse soil types and rock formations.

 

  FTE has a network of seasoned Project Managers and Construction Managers that it leverages in all markets on all projects.
     
  FTE uses a blend of self-perform and sub-contract that maintains internal quality standards and allows the company to expand operation rapidly and likewise downsize at completion preserving company profitability.

 

4

 

 

  FTE creates a local presence for all projects with local office and warehouse space to run and manage the project and handle materials logistics respectively.
     
  FTE has relationships with major national suppliers for everything from heavy equipment to custom order fiber optic cable.
     
  All contract outside plant operations are fulfilled with a combination of our fleet of aerial trucks, underground plows, directional drills, fiber placement crews, and fiber splicers.
     
  All equipment used on OSP projects is mobile, with dedicated logistics to service these projects as demands change. FTE Network Services can meet any scheduling requirement and accommodate changing demands by calling on its extensive network of strategic partners.
     
  Finally, FTE itself has a broad base of experienced operators and installers dedicated to each project, and we are committed to providing the necessary personnel and equipment to meet the demands of every engagement.

 

Inside Plant Operations

 

Inside Plant Operations (ISP) are services provided to major telecommunications services providers in their switching and processing facilities. The scope of services includes the following:

 

  Cable rack / wiring build-outs
     
  Infrastructure build-outs
     
  DC power installation
     
  Battery installation / maintenance
     
  Uninterrupted power source (“UPS”) installation
     
  Power distribution unit (“PDU”) installation
     
  Fiber cable splicing
     
  Structured cable installation
     
  All low-voltage cable installation
     
  Provisioning, test, turn-up of FTTP, FTTN, FTTH, FTTx.
     
  Security camera installation
     
  AC circuits & conduit builds

 

Each major telecommunications client has their own build and quality standards. FTE trains its technicians in each specific protocol and has quality standards that it maintains on each and every project. FTE has the capability to engineer, build, turn up, test and manage every component in a client’s facility. The facilities that we work in performing ISP work are secure, highly available and mission critical to the countries telecommunications infrastructure. The client facilities that FTE works inside of touches everything from Wall Street trading floors to the video, telephone and data services used every day by the typical family and individual. This critical infrastructure connects corporate land-based services, mobile data services, on-demand video, TV and cable broadcast, internet, public networks, private networks and telephone. The quality of the work product from engineering to construction in this work is critical.

 

5

 

 

Our clients engage us with confidence as is shown by our solid, standing relationships and repeat business opportunities that have been tested and forged over time.

 

Project Estimating and Feasibility Studies

 

Our subsidiaries share an estimating department that provides all cost needs, both internal and external, as a value-added service to telecommunications clients. For extremely difficult builds, we use a “boots on the ground” approach, ready with someone to look at the project up close, typically within 24 hours. For the bid process, the following steps are followed:

 

  A request for a proposal, or a request for information is received from a prospective customer: typically a data file is provided with a general route, cell tower locations, laterals, rings, etc.
     
  Using Google Earth, we provide a solution based on aerial and underground construction options, utilizing the U.S. geological studies for ground conditions and “street view” programs to analyze the conditions. Additional services are often used, including: MS Streets & Trips, MapInfo, Bing Maps, Delorme, and a national database of GIS maps. At the same time, we reach out to vendors and suppliers to start assessing rough costs for materials and labor.
     
  We specialize in complex projects with a large geographical footprint and multiple customer drop points. This goal is met by importing the customer drop points (i.e., latitude and longitude) into whichever software program the customer has specified as the deliverable. Then, using the aforementioned methods, we identify the best installation path and verify whether the most cost-effective method of installation will be aerial, underground, or existing conduit paths. This conclusion is portrayed on the deliverable software, and the different methods of construction are clearly defined by specific colors on the reports.
     
  The project is broken into segments with independent budgets for each segment, allowing the customer to identify the fiber size based upon end-use requirements. This all flows into a master project budget, giving the customer a snapshot that will allow them to make changes to the individual segments at their discretion based upon the budgetary information provided.
     
  The nationwide network of project managers is utilized to analyze the geography of each part of the project and provide feedback on critical portions of the proposed build.
     
  This all culminates into finished proposals - ones that we believe accurately represent the ideal and most cost-effective approach to the build process. Due to the process, we have solidified in our estimating department, bringing in and training additional support staff typically takes less than 2 weeks.

 

Customer Concentration

 

Our revenues earned from sale of services for the year ended December 31, 2017 include 21% and 14% from two customers. These two customers accounted for approximately 66% of our total accounts receivable at December 31, 2017. At December 31, 2017, one customer accounted for 47% of our accounts receivable. Our revenues earned from sale of products and services for the year ended December 31, 2016 included 52%, 32% and 14% from three customers. At December 31, 2016, one customer accounted for an aggregate of 66% of our total accounts receivable. The majority of our revenues are non-recurring, project-based revenues, it is not unusual for there to be significant period-to-period shifts in customer concentrations. Generally, our customers do not have an obligation to make purchases from us and may stop ordering our products and services or may terminate existing orders or contracts at any time with little or no financial penalty. The loss of any of our significant customers, any substantial decline in sales to these customers, or any significant change in the timing or volume of purchases by our customers, could result in lower revenues and could harm our business, financial condition or results of operations.

 

Our current customers include, in part, multiple Fortune 500 telecommunications and technology providers and integrators. We also provide telecommunications engineering, construction, installation and maintenance services to a number of cable television multiple system operators. Premise wiring services are provided to various corporations and state and local governments. The Company’s strategy for the future includes customer and service diversification reducing the customer revenue concentration to less than 15% for any single customer.

 

Competition

 

The markets in which we operate are highly competitive. We compete with other contractors in most of the geographic markets in which we operate, and several of our competitors are large companies that have significant financial, technical and marketing resources. In addition, there are relatively few barriers to entry into some of the industries in which we operate and, as a result, any organization that has adequate financial resources and access to technical expertise may become a competitor. A significant portion of our revenues is currently derived from unit price or fixed price agreements, and price is often an important factor in the award of such agreements. Accordingly, we could be underbid by our competitors in an effort by them to procure such business. Economic conditions have increased the impacts of competitive pricing in certain of the markets that we serve. We believe that customers consider other factors in choosing a service provider, including technical expertise and experience, financial and operational resources, nationwide presence, industry reputation and dependability, which we expect to benefit larger contractors such as us. In addition, competition may lessen as industry resources, such as labor supplies, approach capacity. There can be no assurance, however, that our competitors will not develop the expertise, experience and resources to provide services that are superior in both price and quality to our services, or that we will be able to maintain or enhance our competitive position. We also face competition from the in-house service organizations of our existing or prospective customers, including telecommunications and engineering companies, which employ personnel who perform some of the same types of services as those provided by us. Although a significant portion of these services is currently outsourced by many of our customers, there can be no assurance that our existing or prospective customers will continue to outsource services in the future.

 

6

 

 

Materials and Supplies

 

The materials and supplies that are necessary for the operation of our businesses are available from a variety of sources. We are not dependent on any particular supplier or group of affiliated suppliers for our equipment needs.

 

Regulation

 

Our operations are subject to various federal, state, local and international laws and regulations including:

 

  licensing, permitting and inspection requirements applicable to contractors, electricians and engineers;
     
  regulations relating to worker safety and environmental protection;
     
  permitting and inspection requirements applicable to construction projects;
     
  wage and hour regulations;
     
  regulations relating to transportation of equipment and materials, including licensing and permitting requirements; and
     
  building and electrical codes.

 

We believe that we have all the licenses required to conduct our operations and that we are in substantial compliance with applicable regulatory requirements. Our failure to comply with applicable regulations could result in substantial fines or revocation of our operating licenses, as well as give rise to termination or cancellation rights under our contracts or disqualify us from future bidding opportunities.

 

Safety and Risk Management

 

We are committed to ensuring that our employees perform their work safely and we regularly communicate with our employees to reinforce that commitment and instill safe work habits. We review accidents and claims for our operations, examine trends and implement changes in procedures to address safety issues. Claims arising in our business generally include workers’ compensation claims, various general liability and damage claims, and claims related to vehicle accidents, including personal injury and property damage. We insure against the risk of loss arising from our operations up to certain deductible limits in substantially all of the states in which we operate. In addition, we retain risk of loss, up to certain limits, under our employee group health plan.

 

We carefully monitor claims and actively participate with our insurers in determining claims estimates and adjustments. The estimated costs of claims are accrued as liabilities, including estimates for claims incurred but not reported. Due to fluctuations in our loss experience from year to year, insurance accruals have varied and can affect the consistency of operating margins. If we experience insurance claims in excess of our umbrella coverage limit, our business could be materially and adversely affected.

 

Seasonality

 

Our revenues are affected by seasonality as a significant portion of the work we perform is outdoors. Consequently, our operations are impacted by extended periods of inclement weather. Generally, inclement weather is more likely to occur during the winter season, which falls during our first and fourth fiscal quarters. Also, a disproportionate percentage of total paid holidays fall within our fourth quarter, which decreases the number of available workdays. Additionally, our customer premise equipment installation activities for cable providers historically decrease around calendar year-end holidays as their customers generally require less activity during this period. As a result, we may experience reduced revenue in the first or fourth quarters of our fiscal years.

 

Environmental Matters

 

A significant portion of our work is performed underground. As a result, we are potentially subject to material liabilities related to encountering underground objects which may cause the release of hazardous materials or substances. Additionally, the environmental laws and regulations which relate to our business include those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous materials or substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.

 

7

 

 

Employees

 

As of April 5, 2018, we, together with our subsidiaries, employ 223 full-time employees and 1 part-time employee. 47 of our employees are represented by local collective bargaining units. The number of our employees varies according to the level of our work in progress. We maintain a nucleus of technical and managerial personnel to supervise all projects and add employees as needed to complete specific projects.

 

Intellectual Property

 

We have trademarks, trade names and licenses that we believe are necessary for the operation of our business as we currently conduct it. We do not consider our trademarks, trade names or licenses to be material to the operation of our business. On October 31, 2017 the Company announced that it filed a provisional patent application with the United States Patent and Trademark Office (USPTO) for CrossLayer technology covering the decentralized provision of internet and cloud services.

 

With respect to our acquisition strategy, FTE intends to pursue a clearly defined telecommunications niche, but may, in its discretion, pursue acquisitions outside of this niche, although this will not be our focus. We selectively pursue acquisitions when we believe doing so is operationally and financially beneficial to our existing operations, although we do not rely solely on acquisitions for growth. In particular, we may pursue those acquisitions that we believe will provide us with incremental revenue and geographic diversification while complementing our existing operations. We generally target companies for acquisition that have defensible leadership positions in their market niches, are EBITDA positive, which meet or exceed industry averages, and have proven operating histories, sound management, and certain clearly identifiable cost synergies.

 

Executive Officers of the Registrant

 

The names and ages of all our executive officers and the positions held by them as of March 1, 2018, are as follows:

 

Name   Position with the Company   Age
         
Michael Palleschi   Chief Executive Officer and Chairman of the Board   42
         
David Lethem   Chief Financial Officer   59
         
Lynn Martin   Chief Operating Officer   49

 

Our executive officers are appointed annually and serve at the discretion of our Board of Directors. Mr. Palleschi, Chief Executive Officer; Mr. Lethem, Chief Financial Officer and Mr. Martin, Chief Operating Officer have written employment contracts. There are no familial relationships between any director and executive officers.

 

Mr. Michael Palleschi currently serves as the Chief Executive Officer and Chairman of the Board of Directors of FTE Networks since being appointed in January 2014. Mr. Palleschi joined FTE Networks in October 2010 where he served as COO of Focus Venture Partners, which featured investments in growing telecom companies including Focus Fiber Solutions, Jus-Com and Townsend Careers. Prior to Focus Venture Partners, from June 2007 until 2010, he was the Director of Infrastructure Services for South Florida facilities-based Telecommunications Company start up. From 2000 to 2007, he held several Senior Management roles at Level 3 Communications in New York and Georgia. Mr. Palleschi has also held several Sr. Management/Executive roles at major telecommunications companies such as Qwest Communications and MCI. Mr. Palleschi holds a degree in Engineering and Business Management. Mr. Palleschi also holds several professional and technical certifications.

 

Mr. David Lethem currently serves as the Chief Financial Officer of FTE Networks since being appointed in June 2014. Mr. Lethem joined FTE Networks in April 2014 as Vice President of Corporate Compliance. Prior to joining FTE, Mr. Lethem was the Director of Finance and Audit for Audit Management Solutions, Incorporated since November of 2007. He was directly responsible for the financial, operational, and audit management of both public and private companies during that time, working the banking, telecommunications, mobile marketing, manufacturing, and finance sectors. Additionally, his experience during that time involved reverse mergers, SEC compliance, international operations, and technical accounting matters. Mr. Lethem earned his Bachelor of Arts at the University of Dubuque and MBA from California Coast University. His also holds the following certifications, CIA and CRMA.

 

Mr. Lynn Martin currently serves as the Chief Operating Officer of FTE Networks since being appointed in September 2016. Prior to joining FTE, Mr. Martin was Senior Vice President of the communications, software, and technology division of Nexius where he was responsible for growing the business by delivering end-to-end network solutions for emerging technologies, such as Open Source/NFV/SDN and infrastructure services that provided relevant value to customers and helped them to optimize their businesses. Mr. Martin also served as Executive Director of Telcordia Technologies, where he ran the company’s next generation software product line, was a senior strategist in Accenture’s Network Practice, and spent over a decade at Level 3 Communications as Vice President of Operational Integration and Process Management.

 

8

 

 

Available Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the Exchange Act). Accordingly, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (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. 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.

 

We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 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 our website at www.ftenetwork.com under “Investor Relations.” The information posted or linked on our website is not part of this report. We also make our Annual Report available in printed form upon request at no charge.

 

We also make available on our website, as noted above, or in printed form upon request, free of charge, our 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.

 

Not required for a smaller reporting company.

 

ITEM 1B. Unresolved Staff Comments.

 

None.

 

ITEM 2. Properties.

 

Our corporate headquarters are located at 999 Vanderbilt Beach Road, Suite 601, Naples, Florida, 34108. Our current lease expires November 30, 2022 and has 5,377 square feet. Our subsidiaries lease five additional office/warehouse facilities throughout the United States, which is summarized below. We believe our properties are suitable and adequate for our business needs.

 

Location:  Usage 

Square

Footage

  

Lease Start

Date

  

Lease End

Date

   Monthly Obligation 
Naples, FL  Office   5,377    11/01/2015    11/30/2022   $19,034 
Indianapolis, IN  Office   4,000    01/01/2016    12/31/2018   $2,700 
Dallas, TX  Office   3,000    12/01/2016    11/30/2019   $4,000 
Meridian, IA  Office   1,501    07/01/2017    07/31/202   $2,589 
Naples, FL  Warehouse   4,500    11/01/2015    10/31/2018   $4,770 
Dallas, TX  Office   8,640    5/1/2016    4/30/2019   $4,500 
New York, NY  Office   11,000    10/1/2010    10/31/2021   $38,665 

 

ITEM 3. Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceeding which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties. We are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

ITEM 4. Mine Safety Disclosures.

 

Not applicable.

 

9

 

 

PART II

 

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

 

As of December 31, 2017, our common stock was trading on the NYSE American Market under the symbol FTNW. We uplisted to this exchange from the OTCQX marketplace on December 14, 2017. Our common stock was previously quoted on the OTC Pink sheets until March 1, 2016, when we uplisted to the OTCQB marketplace and the subsequently to the OTCQX marketplace on June 29, 2016.

 

The following table sets for the range of high and low bid information for our common stock for the periods indicated. Such over-the-counter market quotations reflect inter-dealer prices without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

   20171    2016 1 
    High    Low    High    Low 
First Quarter  $28.08    9.78   $39.75   $10.00 
Second Quarter  $26.00    12.25   $22.00   $15.50 
Third Quarter  $16.38    6.25   $21.00   $10.00 
Fourth Quarter  $18.75    5.90   $14.50   $8.00 

 

1 Price adjusted to reflect 1:25 reverse split of common shares effective November 6, 2017.

 

Stockholders of Record

 

There were approximately 800 holders of record of our common stock as of As of March 28, 2018.

 

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.

 

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Equity Compensation Arrangements

 

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 by a majority of the holders of our outstanding capital stock via written consent on November 8, 2017.

 

The following table illustrates the common shares remaining available for future issuance under the 2017 Incentive Plan:

 

   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   47,870   $6.68    2,952,130 
Total   47,870   $6.68    2,952,130 

 

Issuer Purchases of Equity Securities

 

During the year ended December 31, 2017, 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.

 

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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

 

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

 

We completed the acquisition of Benchmark, a leading provider of construction management services based in New York for $74,245 on April 20, 2017. The transaction allows us to offer services to each other’s clients and expand their offerings nationally. As a wholly-owned subsidiary of ours, Benchmark will continue to operate under its current successful model while also offering our “compute to the edge” technology in New York City and the surrounding region. The transaction enables us to expand infrastructure services for ISP through current and future Benchmark client base. Benchmark gives us access to major developers including REITs as potential CrossLayer technology clients. Additionally, the transaction strengthens the opportunity to win contracts from Fortune 100/500 companies and enables Benchmark to access more clients as a public company.

 

We operate primarily in three segments: the infrastructure segment, the technology segment and the staffing segment. The infrastructure segment includes FTE Networks Services (network infrastructure solutions); and Benchmark (construction management), which provides end-to-end interior design, build and support solutions. The technology segment which includes CrossLayer, Inc. (managed network services with first-of-its-kind advanced network and cloud platform) which became operational during October of 2017, with immaterial operations during the balance of the year, and the staffing segment which includes FVP; however, our staffing segment has been relatively inactive during 2017 and 2016.

 

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

 

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

 

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

 

12

 

 

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

 

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. If an asset is still under development, future cash flows include remaining construction costs. There were no impairments during the periods presented.

 

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.

 

13

 

 

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.

 

Consolidated Results of Operations

 

Overview (in thousands)

 

For the years ended December 31, 2017 and 2016 we reported a consolidated net loss of $20,029 and $6,235 resulting in an increase in net loss of $13,794 or 221%. The increase in the consolidated net loss was attributable to several factors, including an increase in compensation expense of $17,099 due to the addition of headcount in selling, general and administrative and the one-time cash bonus of approximately $3,000 primarily attributable to the acquisition, an increase in the amortization expense of acquired intangible assets from the acquisition of $8,976, of which $6,379 was charged to cost of revenues, an increase in the amortization expense of our debt discount and deferred financing costs of $9,394 which is due to the increase in borrowings, an increase in interest expense of $3,547 from additional borrowings primarily due to the acquisition and the transaction expenses of $1,440 associated with the acquisition Benchmark.

 

The net income of the Predecessor for the year ended December 31, 2016 was $16,249 and $254 for the period January 1, 2017 until April 21, 2017 the date we acquired Benchmark.

 

Revenues and Gross Profit

 

Our consolidated revenues for the year ended December 31, 2017 were $243,409, as compared to revenues of $12,269 for the year ended December 31, 2016, resulting in an increase of $231,140. The increase in revenues attributable to Benchmark was $222,886 for the period April 21, 2017 through December 31, 2017, and an increase in FTE revenues of $8,274 for the year ended December 31, 2017. The increase in cost of revenues of $197,545 resulted in a decrease in gross profit margin from 28% to 15% for the year ended December 31, 2016 and 2017, respectively, due to Benchmark’s gross profit margin being lower than FTE’s. Predecessor revenue for the year ended December 31, 2016, totaled $386,924 as compared to $264,975 for the year ended December 31, 2017, (which includes the period pre- and post- acquisition) a decrease $121,969 or 32% and was primarily due to the completion of a several large projects during 2016. In the first half of 2017, the Predecessor’s revenue was lower as Benchmark completed older projects while building its backlog of newly awarded projects. Several of the newly awarded projects began in the fourth quarter of 2017, so we expect revenue to increase in the first half of 2018. Margins for the Predecessor were approximately 17%, exclusive of the impact of the $6,379 amortization which was charged to cost of operations which resulted from our purchase price allocation.

 

Operating Expenses

 

Our operating expenses were $38,641 and $5,823 for the years ended December 31, 2017 and 2016, respectively, representing an increase of $32,818. The increase in operating expenses is primarily due to the following: i) an increase of compensation expense of $17,099, which includes the addition of $12,060 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through December 31, 2017 which were not represented in the corresponding pre-acquisition period in 2016 and $3,000 in a one-time bonus due to the acquisition; ii) an increase of selling, general and administrative expenses of $11,741, which includes the addition of $5,308 of normal operating expenses incurred by Benchmark during the post-acquisition closing period of April 21, 2017 through December 31, 2017 which were not represented in the corresponding pre-acquisition period in 2016; iii) transaction expenses of $1,666 incurred by us during the acquisition of Benchmark and iv) due to an increase in amortization expense of intangible assets of $2,597 related to intangible assets acquired in the Benchmark acquisition. Operating expenses for the Predecessor totaled $46,892 for the year ended December 31, 2016 as compared to $29,022 for the year ended December 31, 2017 (which includes the period pre- and post-acquisition) a decrease of $ 17,870 or 38%. The decrease in operating expenses year-over-year for the Predecessor is due to overall reductions in other selling, general and administrative items primarily commission expense.

 

14

 

 

Operating Loss

 

The operating loss decreased by $776 or 32%, from an operating loss of $2,402 for the year ended December 31, 2016 to an operating loss of $1,626 for the year ended December 31, 2017.

 

Other (Expense) Income

 

Other expense was $17,844 for the year ended December 31, 2017, as compared to $3,833 for the year ended December 31, 2016, an increase of $14,011. The increase is primarily due to the amortization of deferred financing costs and debt discounts of $6,349 incurred in 2017 as compared to $725 for the year ended December 31, 2016, an increase of $5,624 year-over-year and financing costs of $5,552 incurred during 2017 as compared to $422 for the year ended December 31, 2016 an increase of $5,130 year-over-year. Interest expense increased by $3,547 for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase in total other expenses was a result of the additional financing costs incurred for the acquisition of Benchmark.

 

Liquidity and Capital Resources

 

Overview (in thousands)

 

As of December 31, 2017, we had operating cash of $15,544 and working capital of $1,897, we had $62,199 in accounts receivable, our current liabilities included the following, net billings in excess of costs and estimated earnings of $19,078, notes payable of $10,488, notes payable to related parties of $8,526 and accounts payable of $30,304 of which $29,067 was attributable to Benchmark.

 

Management’s Liquidity Plans

 

During the year ended December 31, 2017, we incurred a net loss of $20,109 and as of December 31, 2017 had an accumulated deficit of $38,304. Further we have approximately $2,200 of liabilities for unpaid payroll taxes and related penalties and interest. On April 20, 2017, in conjunction with the acquisition of Benchmark, our senior lender amended its existing credit facility to provide for approximately $10.1 million towards the cash purchase price and extension of the maturity date of the existing credit facility to March 31, 2019. Additionally, we incurred approximately $50,000 of debt as part of the Benchmark acquisition, of which $7,500 matures on October 20, 2018, $12,500 matures on April 20, 2019 and $30,000 matures on April 20, 2020. We believe with the acquisition of Benchmark and its annual revenue backlog of $244.0 million, combined with our backlog of orders under master service agreements of approximately $190 million, that we have the ability to support this additional debt and fund all current operations. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings. However, there is no assurance that additional financing will be available if needed or that management will be able to obtain and close financing on terms acceptable to us, or enter into an acceptable installment plan with the IRS, which is scheduled to be presented during 2018, or whether our anticipated future profitable and positive operating cash flow generated through its backlog will coincide with its 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, 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

 

Backlog

 

As of December 31, 2017, we had a backlog of unfilled contracts and master service agreements of approximately $434, which includes $244,000 of Benchmark’s backlog and FTE Networks master service agreements of $190. We define backlog as the value of work-in-hand to be provided for customers as of a specific date where the following conditions are met (with the exception of engineering change orders): (i) the price of the work to be done is fixed; (ii) the scope of the work to be done is fixed, both in definition and amount; and (iii) there is a written contract, purchase order, agreement or other documentary evidence which represents a firm commitment by the customer to pay us for the work to be performed. These backlog amounts are based on contract values and purchase orders and may not result in actual receipt of revenue in the originally anticipated period or at all. We may experience variances in the realization of our backlog because of project delays or cancellations resulting from external market factors and economic factors beyond our control and we may experience such delays or cancellations in the future. Backlog does not include new firm commitments that may be awarded to us by our customers from time to time in future periods. These new project awards could be started and completed in this same future period. Accordingly, our backlog does not necessarily represent the total revenue that could be earned by us in future periods.

 

15

 

 

Cash Flows

 

We expect our liquidity needs to include the payment of interest and principal on our indebtedness, capital expenditures and income taxes. We use our cash inflows to manage the temporary increases in cash demand and utilize our credit facility to manage more significant fluctuations in liquidity caused by growth initiatives.

 

The following table summarizes our cash flow:

 

   For Year Ended December 31 
   2017   2016   Increase (Decrease) 
Net cash provided by (used in):                    
Operating activities  $4,130   $(11,580)  $15,710    135.7%
Investing activities   (20,042)   2,154   $(22,196)   N/M 
Financing activities   30,143    10,632   $19,511    183.5%
Increase in cash  $14,231   $1,206   $13,025    N/M 

N/M – not meaningful

 

Cash Flows for the Years Ended December 31, 2017 and 2016

 

Cash Provided by (Cash Used in) Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2017 was $4,130 as compared to cash used in operating activities of $(11,580) for the year ended December 31, 2016. The increase in cash provided by operating activities was primarily attributable to the profitable operations of Benchmark. For the year ended December 31, 2017 we incurred a net loss of $20,029 which included non-cash charges of approximately $26,725.

 

(Cash Used in) Provided by Investing Activities

 

Net cash used in investing activities for the year ended December 31, 2017, was $(20,042) as compared to cash provided by investing activities of $2,155 for the year ended December 31, 2016. The change in cash from investing activities was primarily due to the acquisition of Benchmark Builder totaling $14,834 (cash paid of $17,250 less cash received of $2,416) and the purchase of property and equipment of $5,208. Net cash provided by investing activities for the year ended December 31, 2016 was from the release of the restricted cash requirement on our senior debt.

 

Cash Provided by Financing Activities

 

Net cash provided by financing activities was $30,144 for the year ended December 31, 2017 compared to $10,632 during the year ended December 31, 2016. During the year ended December 31, 2017, we received cash proceeds of $13,210 from the issuance of senior debt, $15,158 from the issuance of notes payable, $7,500 for Series C notes issued in consideration of the Benchmark acquisition and $3,337 from the sale of our common stock, and $8,281, partially offset by payments on the notes and the payment of deferred financing costs.

 

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.

 

We periodically seek to add growth initiatives by either expanding our network or our markets through organic or internal investments or through strategic acquisitions. We feel we can adjust the timing or the number of our initiatives according to any limitations which may be imposed by our capital structure or sources of financing. At this time, we do not anticipate our capital structure will limit our growth initiatives over the next twelve months.

 

Long-Term Debt and Credit Facilities

 

On October 28, 2015, we entered into an $8,000 senior credit facility (“Facility”). The Facility had a two-year term, and interest payments in the amount of 12%, paid quarterly in arrears. Additionally, there is a “payment in kind” (PIK) provision providing a 4% per annum increase in the principal balance monthly. The Facility is secured by all of our assets.

 

On April 5, 2016, we entered into an amendment agreement (“Amendment No.1”) to the Facility, amending select provisions of the original credit agreement, including equity raises and changes to certain financial and operational covenants. On September 30, 2016, we entered into a second amendment agreement (“Amendment No. 2”) to consolidate a series of short-term bridge loans which were granted to us from time to time during the second and third quarters of 2016 into a $5,000 loan, with a maturity date of April 30, 2017, bearing interest at 12% and a PIK provision of 4%. Amendment No. 2 also amended certain covenants.

 

During March 2017, the Company borrowed an additional $1,500 under the terms of the Facility, originally due April 30, 2017, but subsequently extended to March 31, 2019.

 

On April 20, 2017, as part of the Benchmark acquisition, the Facility was amended (“Amendment No. 3”) to provide for an additional $11,480 of which approximately $10,100 was applied to the cash purchase price and extended the maturity date of the Facility to March 31, 2019. We issued 256,801 shares of our common stock to the senior lender with a fair value of $5,649 as a term of Amendment No. 3. The value of the shares was recorded as a debt discount. During the year ended December 31, 2017, $2,048 was included in amortization of debt discount costs, and $3,601 remained unamortized as of December 31, 2017. Amendment No. 3 included certain covenants regarding debt coverage, EBITDA and revenue.

 

During April 2017, we incurred an extension fee of $480 to extend the terms of the Facility to March 31, 2019. This amount was added to the principal amount of the Facility and interest will accrue at stated rate of the Facility.

 

Additionally, in October and November 2017, we borrowed an additional $1,600 under the terms of the Facility, due March 31, 2019.

 

As of December 31, 2017, and 2016, we were in compliance with our senior debt covenants

 

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.

 

16

 

 

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.

 

None.

 

ITEM 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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 Principal Executive and Accounting Officer, 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 United States generally accepted accounting principles.

 

In connection with the preparation of this Annual Report, management, with the participation of our Principal Executive and Financial Officers, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Principal Executive and Financial Officers concluded that, as of December 31, 2017, our disclosure controls and procedures were not effective.

 

Management’s Assessment of Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (“ICFR”) for the Company. Our internal control system was designed to, in general, provide reasonable assurance to the Company’s management and board regarding the preparation and fair presentation of published financial statements, but because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.

 

Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. The framework used by management in making that assessment was the criteria set forth in the document entitled “2013 Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, (“COSO”). Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of December 31, 2017 and that material weaknesses in ICFR existed as more fully described below.

 

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCAOB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weaknesses which have caused management to conclude that as of December 31, 2017 our internal controls over financial reporting were not effective at the reasonable assurance level:

 

As of December 31, 2017, management has not completed an effective assessment of the Company’s internal controls over financial reporting based on the COSO framework. Management has concluded that, during the period covered by this report, our internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.

 

1. We lack the necessary corporate accounting resources to fully integrate the acquisition of Benchmark
   
2. We did not perform an effective risk assessment or monitor internal controls over financial reporting.
   
3. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the year ended December 31, 2017. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
   
4. We lack the appropriate resources to ensure all required reports are timely compiled and filed.

 

During 2017, the Company began to institute process and procedures towards remediating these weaknesses through the hiring of additional financial personnel, starting the process of documenting its control environment and fully integrating the Benchmark acquisition. The Company is continuing to further remediate these weaknesses as resources permit.

 

17

 

 

We have taken steps to remediate the weakness described above by creating and implementing certain internal control process in both the operations and financial area. Management will continue to adopt financial procedures and controls via internal policies and ensure employees abide by these policies as they apply to financial reporting.

 

Notwithstanding the assessment that our ICFR was not effective and that there are material weaknesses as identified herein, we believe that our consolidated financial statements contained in this Annual Report fairly present our financial position, results of operations and cash flows for the periods covered thereby in all material respects.

 

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm as we are a smaller reporting company and are not required to provide the report.

 

Changes in Internal Control over Financial Reporting

 

 

During the fourth quarter ended December 31, 2017, there were no changes, except as highlighted above, in our internal controls over financial reporting, or in other factors that could significantly affect these controls, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitations of Controls

 

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

 

ITEM 9B. Other Information.

 

None.

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information about the Company’s directors and executive officers is incorporated by reference from the discussion under the heading “Directors and Executive Officers” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders. The information about the Company’s Audit Committee (excluding the Audit Committee Report) and the Audit Committee’s “audit committee financial expert,” is incorporated by reference from the discussion under the heading “Corporate Governance and Board Matters” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders. Information about compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the discussion under the heading “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Information about director and executive officer compensation is incorporated by reference from the discussion under the headings “Directors’ Compensation” and “Executive Compensation” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders.

 

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

 

Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading “Security Ownership of Certain Beneficial Owners and Management” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information about certain relationships and transactions with related parties is incorporated by reference from the discussion under the heading “Certain Relationships and Related Transactions” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders. Information about the independence of each director or nominee for director of the Company during 2017 is incorporated by reference from the discussion under the heading “Corporate Governance and Board Matters” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information about procedures related to the engagement of the independent registered public accountants and fees and services paid to the independent registered public accountants is incorporated by reference from the discussion under the headings “Audit and Other Fees Paid to Independent Registered Public Accounting Firm” and “Pre-Approval Policy for Services by Independent Registered Public Accounting Firm” in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders.

 

18

 

 

PART IV

 

ITEM 15. Exhibits and Financial Statement Schedules.

 

(a) No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or notes thereto.
   
(b) The following exhibits are provided as required by Item 601 of Regulation S-K (§229.601 of this chapter):

 

Exhibit Number   Description
     
2.3   Agreement and Plan of Merger dated June 19, 2013 (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed June 25, 2013).
3.1   Certificate of Amendment to Article of Incorporation dated April 11, 2018 is filed herewith.
3.2   Certificate of Designation of the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).
3.4   Certificate of Designation of Series C Preferred Stock (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the period ended March 31, 2011 filed on May 16, 2011).
3.5   Amendment No. 1 to the Certificate of Designation of the Series C Preferred Stock (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q for the period ended March 31, 2011 filed on May 16, 2011).
3.6   Articles of Merger (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed June 25, 2013).
3.7   Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed June 25, 2013).
3.8   Certificate of Designation of the Series D Preferred Stock (incorporated by reference to Exhibit 3.3 to the Company’s Form 8-K filed June 25, 2013).
3.9   Certificate of Designation of the Series E Preferred Stock (incorporated by reference to Exhibit 3.4 to the Company’s Form 8-K filed June 25, 2013).
3.10   Articles of Merger (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed March 19, 2014).
3.11   Certificate of Designation of the Series F Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K, filed November 3, 2015).
4.5   Form of warrant to purchase common stock granted in connection with the offering of Series A and Series A-1 Preferred Stock, as amended and recirculated July 30, 2008 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K filed January 13, 2009; Company File # 000-31355).
4.6   Form of warrant to purchase common stock granted to the placement agent retained in connection with the offering of Series A and Series A-1 Preferred Stock (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 28, 2007; Company File # 000-31355).
4.7   Form of warrant to purchase common stock granted to affiliates of placement agent retained in connection with the offering of Series A and Series A-1 Preferred Stock (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 28, 2007; Company File # 000-31355).
4.8   Form of warrant to purchase common stock granted in connection with the offering of Series B Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008; Company File # 000-31355).
4.9   Form of warrant to purchase common stock granted in connection with the July 2008 offering of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008; Company File # 000-31355).
4.10   Form of warrant to purchase common stock issued to J. Sherman Henderson and Robert A. Clarkson on July 10, 2008 (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008; Company File # 000-31355).
4.11   Form of the Convertible Promissory Notes, dated January 22, 2009, made and issued by the Company to various investors, in the aggregate principal amount of $500,000 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009; Company File # 000-31355).
4.12   Form of the Warrants, dated January 22, 2009, made and issued by the Company to various investors (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009; Company File # 000-31355).

 

19

 

 

4.13   Form of warrant to purchase common stock granted to the investors in connection with the June 2009 offering of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009; Company File # 000-31355).
4.14   Form of warrant to purchase common stock granted to the investors in connection with the September 2009 Private Placement (incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K filed December 29, 2009; Company File # 000-31355).
4.15   Promissory Note made by the Company to TLP Investments, dated December 31, 2013 (incorporated by reference to Exhibit 4.15 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
4.16   Promissory Note made by the Company to TBK 327 Partners, LLC dated January 23, 2014(incorporated by reference to Exhibit 4.16 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
4.17   Promissory Note made by the Company to TBK 327 Partners, LLC, dated May 16, 2014 (incorporated by reference to Exhibit 4.17 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
4.18   Promissory Note made by the Company to TLP Investments, dated May 16, 2014 (incorporated by reference to Exhibit 4.18 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
10.1   Employment Agreement between the Company and Theresa Carlise, dated February 1, 2013, as amended by Amendment No. 1 to Employment Agreement, dated March 1, 2014 and Amendment No. 2 to Employment Agreement, dated May 14, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
10.2   Securities Purchase Agreement dated June 19, 2013, by and between Focus Venture Partners, Inc. and 5G Investments, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed June 25, 2013).
10.3   Assignment and Consent to Assignment Agreement by and among Focus Venture Partners, Inc., Beacon Enterprise Solutions Group, Inc. and 5G Investments, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed June 25, 2013).
10.4   Amended and Restated Guarantee and Collateral Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed June 25, 2013).
10.6   Pledge and Escrow Agreement dated June 19, 2013, by and among Focus Ventures Partner, Inc., Beacon Enterprise Solutions Group, Inc. and the shareholders of Focus Ventures Partners, Inc.(incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed June 25, 2013).
10.7   Employment Agreement between the Company and John Wood, dated October 14, 2013 (incorporated by reference to Exhibit 10.7 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
10.8   Factoring Agreement, dated May 12, 2014 by and between Focus Fiber Solutions, LLC and Amerifactors Financial Group, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 16, 2014).
10.9   Factoring Agreement, dated May 12, 2014 by and between JusCom, Inc. and Amerifactors Financial Group, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 16, 2014).
10.10   Employment Agreement between the Company and David Lethem dated June 2, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 3, 2014).
10.11   Board Appointment Letter Agreement by and between the Company and John Klumpp dated June 2, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on June 5, 2014). **
10.12   Employment Agreement between the Company and Michael Palleschi dated June 13, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s report on Form 10/A, Amendment 2, filed on June 30, 2015).
10.13   Offer of Settlement by and between the SEC and the Company dated September 8, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 11, 2014).
10.14   Credit Agreement by and among JUS-COM, Inc. Credit Parties, date October 28, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November 3, 2015).
10.15   Form of Initial Term Loan dated November 3, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on November 3, 2015).
10.16   Guaranty and Security Agreement dated October 28, 2015 among JUS-COM, Inc., FTE Networks, Inc, and Grantors (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on November 3, 2015).
10.17   Registration Rights Agreement dated October 28, 2015 by and between FTE Networks, Inc, Lateral Juscom Feeder, LLC and Lateral FTE Feeder LLC (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on November 3, 2015).
10.18   Redemption Rights Agreement dated October 28, 2015 by and between FTE Networks, Inc, Lateral Juscom Feeder, LLC and Lateral FTE Feeder LLC (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on November 3, 2015).

 

20

 

 

10.19   Voting and Cooperation Agreement dated October 28, 2015 among Lateral Juscom Feeder, LLC, Lateral FTE Feeder LLC and the stockholders of FTE Networks, Inc. (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on November 3, 2015).
10.20   Supporting documents and Credit Agreement dated April 20, 2017 for the acquisition of Benchmark Builders Inc between the Company, Benchmark Builders Incorporated, and Lateral Investment Management Services, LLC(incorporated by reference to the Company’s 8-K filed on April 24, 2017.
14.1   Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K filed January 13, 2009; Company File # 000-31355).
14.2   Stock Purchase Agreement dated March 9, 2017 between FTE Networks Inc. and Benchmark Builders Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 9, 2017)
14.3   Securities Trading Policy adopted by the Board of Directors April 14, 2017
21   Subsidiaries of the Registrant.*
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2   Certification of the Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1   Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
32.2   Certification of the Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002***
101.INS   XBRL Instance Document*
101.SCH   XBRL Schema Document*
101.CAL   XBRL Calculation Linkbase Document*
101.DEF   XBRL Definition Linkbase Document*
101.LAB   XBRL Label Linkbase Document*
101.PRE   XBRL Presentation Linkbase Document*

 

* Filed herewith

 

** Denotes compensatory plan or management contract

 

*** Furnished herewith

 

21

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  FTE NETWORKS, INC.
     
Date: April 17, 2018 By: /s/ Michael Palleschi
    Michael Palleschi
    Principal Executive Officer
     
Date: April 17, 2018 By: /s/ David Lethem
    David Lethem
    Principal Financial Officer

 

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

 

Date: April 17, 2018 By: /s/ Michael Palleschi
    Michael Palleschi
    Chief Executive Officer (principal executive officer)
    Chairman of the Board and Directors
     
Date: April 17, 2018 By: /s/ David Lethem
    David Lethem
    Chief Financial Officer (principal financial officer)
     
Date: April 17, 2018 By: /s/ Luisa Ingargiola
    Luisa Ingargiola
    Director
     
Date: April 17, 2018 By: /s/ Chris Ferguson
    Chris Ferguson
 

 

Director
     
Date: April 17, 2018 By: /s/ Brad Mitchell
    Brad Mitchell
 

 

Director
     
Date: April 17, 2018

By:

/s/ Patrick O’Hare
    Patrick O’Hare
    Director
     
Date: April 17, 2018

By:

/s/ Fred Sacramone
    Fred Sacramone
    Director

 

22

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

 

CONSOLIDATED FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

FOR THE YEAR ENDED DECEMBER 31, 2017 AND 2016  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of December 31, 2017 and 2016 F-3
   
Consolidated Statements of Operations for the Years Ended December 31, 2017 and 2016 F-4
   
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Year Ended December 31, 2017 and 2016 F-5
   
Consolidated Statements of Cash Flows for the Year Ended December 31, 2017 and 2016 F-7
   
Notes to Consolidated Financial Statements F-8

 

F-1

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

FTE Networks Inc. and Subsidiaries

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of FTE Networks, Inc. and Subsidiaries (the “Company”) as of December 31, 2017 and 2016 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31, 2017 and the related notes . We have audited the accompanying balance sheet of Benchmark Builders, Inc. (the “Predecessor”) as of December 31, 2016 and the related statements of operations, stockholders’ equity and cash flows for the period from January 1, 2017 to April 20, 2017 and the year ended December 31, 2016 and the related notes. The financial statements and notes of the Company and the Predecessor are collectively referred to as the “financial statements”. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 , and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, and the financial position of the Predecessor as of December 31, 2016 and for the period from January 1, 2017 to April 20, 2017 and the year ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum llp

 

Marcum llp

 

We have served as the Company’s auditor since 2014.

 

New York, New York

April 17, 2018

 

F-2

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   As of December 31, 
   2017   2016   2016 
ASSETS             (Predecessor) 
Current Assets:               
Cash and cash equivalents  $15,642   $1,412   $4,753 
Accounts receivable, net   62,199    7,020    51,701 
Costs and estimated earnings in excess of billings on uncompleted contract   11,226        9,759 
Other current assets   7,256    2,833    3,174 
Total Current Assets   96,323    11,265   69,387 
                
Property and equipment, net   7,955    3,467    23 
Intangible assets, net   27,696         
Goodwill   35,672         
Total Assets  $167,647   $14,732   $69,410 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)               
Current Liabilities:               
Accounts payable   35,135    2,357    50,714 
Billings in excess of costs and estimated earnings on uncompleted contracts   30,304        5,043 
Due to related parties       100     
Accrued expenses and other current liabilities   9,973    3,202    5,700 
Notes payable, current portion, net of original issue discount and deferred financing costs   10,488    3,444     
Notes payable, related parties, current   8,526    791     
Warrant derivative liability       594     
Total Current Liabilities   94,426    10,488    61,457 
                
Notes payable, non-current portion   1,955    6,530     
Notes payable, related parties, non-current, net of debt discount   38,530         
Senior note payable, non-current portion, net of original issue discount and deferred financing costs   24,143    7,576     
Deferred tax liability   560         
Total Liabilities   159,614    24,596    61,457 
                
Temporary Equity:               
Common stock; $0.001 par value, subject to put provision, 8,000,000 shares authorized and -0- and 444,475 shares issued and outstanding at December 31, 2017 and 2016, respectively       437     
Total Temporary Equity       437     
                
Commitments and contingencies               
                
Stockholders’ Equity (Deficit):               
Preferred stock; $0.01 par value, 5,000,000 shares authorized:               
Series A convertible preferred stock, $1,000 stated value, 4,500 shares designated and 500 shares issued and outstanding at December 31, 2017 and 2016, respectively (liquidation preference $1,484,433)            
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares designated and 295 shares issued and outstanding at December 31, 2017 and 2016, respectively (liquidation preference $914,273)            
Series D convertible preferred stock, $0.01 stated value, 80,000 shares designated -0- shares issued and outstanding at December 31, 2017 and 2016, respectively            
Series G convertible preferred shares, $0.01 par value, 1,780 shares designated and -0- shares issued and outstanding at December 31, 2017 and 2016, respectively               
Common stock; $0.001 par value, 8,000,000 shares authorized and 5,798,281 and 3,120,795 shares issued and outstanding at December 31, 2017 and 2016, respectively   6    3      
Common stock predecessor; $1.00 par value, 10,000 shares authorized issued and outstanding at December 2016           10 
Additional paid-in capital   49,381    11,575     
Shares to be issued   625         
Subscriptions receivable   (3,675)   (2,829)    
Accumulated (deficit) earnings   (38,304)   (19,050)   7,943 
Total Stockholders’ Equity (Deficit)   8,033    (10,301)   7,953 
Total Liabilities and Stockholders’ Equity (Deficit)  $167,647   $14,732   $69,410 

 

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

 

F-3

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

   For the Year Ended December 31,   For the Period Ended
April 20, 2017
   For the Year Ended December 31, 2016 
   2017   2016   (Predecessor)   (Predecessor) 
                 
Revenues, net of discounts  $243,409   $12,269   $42,089   $386,923 
Cost of revenues   206,394    8,848    33,789    322,641 
Gross profit   37,015    3,421    8,300    64,282 
                     
Operating expenses                    
Compensation expense -selling general and administrative   19,413    2,313    5,671    26,144 
Selling, general and administrative expenses   13,477    1,736    2,009    20,748 
Amortization of intangible assets   2,597             
Travel expense   606    319    22     
Occupancy costs   851    745    160     
Loss on sale of asset   31    484         
Transaction expenses   1,666    226         
Total operating expenses   38,641    5,823    7,862    46,892 
Operating income (loss)   (1,626)   (2,402)   438    17,391 
                     
Other expenses                    
Interest expense   (5,819)   (2,272)        
Amortization of deferred financing costs and debt discount   (6,349)   (725)        
Change in warrant fair market valuation       (65)        
Other (expense) income, net   (123)        56    174 
Incentive expenses       (35)        
Extinguishment loss       (314)        
Financing costs   (5,552)   (422)        
Total other expenses, net   (17,843)   (3,833)   56    174 
(Loss) income before provision for income taxes   (19,4769)   (6,235)   494    17,565 
Provision for income taxes   560        240    1,316 
                     
Net (loss) income   (20,029)   (6,235)   254    16,249 
Preferred stock dividends   (80)   (79)        
Net (loss) income attributable to common shareholders   (20,109)   (6,314)   254    16,249 
                     
Loss per common share:                    
Basic and diluted   (4.23)  $(0.10)          
                     
Weighted average number of common shares outstanding                    
Basic and diluted   4,748,563    2,590,806           

 

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

 

F-4

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016

(in thousands, except for share information)

 

   Preferred stock   Common   Paid in   Subscription   Shares to be   Accumulated   Total 
   Shares   Amount   Shares   Amount   Capital   Receivable   Issued   Deficit   Equity 
January 1, 2016 (1)   2,357,113    24    93,245   $-   $3,055   $(205)  $-   $(12,816)  $(9,942)
Stock incentive to investors   285,644    3    -    -    962    (930)   -    -    35 
Common Shares issued to employees             201,160    -    2,589    (2,569)   -    -    20 
Common Shares issued to settle debt             152,376    -    1,798    -    -    -    1,798 
Common Shares issued to consultant             33,660    -    446    -    -    -    446 
Common Shares issued for equity raise             303,800    -    2,628    -              2,628 
Series F adjustment to transfer agent records   48,270    -    -    -         -    -    -      
Series F issued to directors and employees for compensation   231,041    2    -    -    150    -    -    -    152 
Conversion of Series D to Common Stock   (1,830,759)   (18)   1,465,607    2    16    -    -    -    - 
Conversion of Series F to Common Stock   (1,090,514)   (11)   872,411    1    10    -    -    -    - 
Repayment of Subscription Receivable             -    -    -    875    -    -    875 
Accrued Dividends -Preferred Stock             -    -    (79)   -    -    -    (79)
Net Loss             -    -    -    -    -    (6,234)   (6,234)
December 31, 2016   795    -    3,122,259   $3   $11,575   $(2,829)  $-   $(19,050)  $(10,301)
Adjustment adoption of ASU 2017-11 (2)                                      775    775 
Common Shares sold to investors   -    -    221,511    -    2,702    625         -    3,328 
Common Shares issued to employees   -    -    167,206    -    3,862    (3,044)        -    818 
Common Shares issued to settle debt   -    -    371,234    1    3,551         -    -    3,552 
Common Shares Issued to consultant   -    -    119,525    -    1,682         -    -    1,682 
Common Shares issued board fee   -    -    6,800    -    75         -    -    75 
Common shares issued to Senior Lender   -    -    256,801    -    5,649         -    -    5,649 
Common shares issued to settle legal matter   -    -    9,181    -    125         -    -    125 
Common shares issued to Benchmark sellers   -    -    1,069,538    1    21,657         -    -    21,658 
Common Shares issue to investor relations firm   -    -    10,951    -    183         -    -    183 
Reclassification from temporary equity   -    -    444,275    1    437         -         438 
Share- based compensation   -    -    -    -    108    1,573    -         1,681 
Shares to be issued   -    -    -    -    (2,511)        625         1,886 
Warrants issued in connection with additional borrowings senior debt, net of debt issuance costs   -    -    -    -    366                   366 
Accrued Dividends -Preferred Stock   -    -    -    -    (80)                  (80)
Net Loss   -    -    -    -                   (20,029)   (20,029)
December 31, 2017   795    -    5,798,281   $6   $49,381   $(3,675)  $625   $(38,304)  $8,033 

 

(1)Includes adjustment for the transfer agent shares effected for the 1 for 25 reverse split on November 11, 2017.
(2)The Company elected to adopt Accounting Standard Update 2017-11 retrospectively to outstanding financial instruments with down round features by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit of $775 as of January1, 2017

 

F-5

 

 

Predecessor

Statements of Stockholders’ Equity

For the Year Ended December 31, 2017 and Period Ended April 20, 2017

 

   Common   Retained   Total Stockholders’ 
   Stock   Earnings   Equity 
Balance, December 31, 2015  $10    7,924   $7,934 
Distribution to Stockholders   -    (16,230)   (16,230)
Net income   -    16,249    16,249 
Balance, December 31, 2016  $10   $7,943   $7,953 
Distribution to Stockholders   -    (5,349)   (5,349)
Net income   -    203    203 
Balance, April 20, 2017  $10    2,797   $2,807 

 

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

 

F-6

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

   Years Ended December 31,   For the Period Ended   For the Year Ended 
           April 20,   December 31, 
   2017   2016   2017   2016 
           (Predecessor)   (Predecessor) 
Cash flows from operating activities:                    
Net income (loss)  $(20,029)  $(6,234)  $254   $16,249 
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:                  
Amortization of deferred financing costs   2,843    725         
Change in warrant valuation       65         
Provision for bad debts   551    30         
Extinguishment loss       314         
Late fee on senior debt   541             
Debt financing expense   531              
Share-based compensation   1,681    618         
Depreciation   870    516    6    19 
Amortization of intangible assets   8,976              
Amortization of original issue discount   5,167    219         
Payment in kind interest-debt   934    330         
Payment in kind interest related party   1,310              
Stock incentive expense to investors   0    35         
Loss on sale of asset   31              
Benefit from deferred income taxes   (599)            
Changes in operating assets and liabilities:                 
Accounts receivable   (41,106)   (5,603)   37,097    11,401 
Other current assets   5,888    (786)   (1,062)   3,185 
Accounts payable and accrued liabilities   17,463    (1,809)   (37,752)   (10,032)
Billings in excess of costs and estimated earnings on uncompleted contracts   19,078        2,332    7,7112 
Net cash provided by (used in) operating activities   4,130    (11,580)   3,042    5,730 
                     
Cash flows from investing activities:                    
Net cash paid for Benchmark Builders, Inc. acquisition (Note 3)   (14,834)            
Purchase of property and equipment   (5,208)   (848)   (30)   14 
Restricted cash account       3,003         
Net cash (used in) provided by investing activities   (20,042)   2,155    (30)    14 
                     
Cash flows from financing activities :                    
Proceeds from issuance of notes payable, gross   12,158    8,281         
Payments on notes payable   (5,342)   (570)        
Proceeds from issuance of senior debt payable, gross   13,210             
Series C notes consideration for Benchmark acquisition   7,500             
Payments on notes payable - related parties   (112)   (146)        
Proceeds from notes payable-related parties       504         
Proceeds from repayment of subscriptions receivable   0    875         
Proceeds from sale of common stock   3,338    2,628         
Distributions to stockholders              
Payment of deferred financing costs   (610)   (940)   (5,349)   (14,984)
Net cash provided by (used in) financing activities   30,142    10,632    (5,349)   (14,984)
                     
Net change in cash   14,230    1,207    (2,336)   (9,268)
Cash, beginning of period   1,412    205    4,752    14,021 
Cash, end of period  $15,642    1,412   $2,416    4,753 
                     
Supplemental Disclosure of Cash Flow Information:                    
Cash paid for interest  $1,959   $1,382   $     
Cash paid for income taxes  $2,167   $   $1,187    1,108 
                     
Noncash investing and financing activities:                    
Common shares issued to settle legal matter  $125   $146   $     
Common shares reclassified from Temporary Equity  $437   $   $     
Common shares issued for notes payable and other debt  $3,551   $1,320   $     
Common shares issued for accounts payable       477          
Common shares issued to senior lender  $5,650   $         
Common shares issued to Board members  $75   $         
Issuance of notes payable for the purchase of fixed assets  $   $590   $     
Common shares issued to employees under agreement for future services  $3,862             
Common shares issued to consultants for services to be rendered  $1,568             
Common shares issued to investor relation firm for services to be rendered  $182             
Series A, B notes consideration for Benchmark acquisition  $74,245             
Common shares issued as consideration for Benchmark acquisition  $21,658             
Accrued dividends preferred stock  $80    79         

 

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

 

F-7

 

 

FTE NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands)

 

NOTE 1. Description of Business and Basis of Presentation

 

Description of Business

 

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

 

On April 20, 2017, FTE acquired Benchmark Builders, Inc. (“Benchmark” or “Predecessor”). Benchmark is a full-service general contracting management and general contracting firm in the New York metropolitan area. See Note 3. Acquisitions. The Company and Benchmark operate in similar segments. Audited predecessor financial statements has been provided in these consolidated financial statements since the operations of the company before the acquisition of Benchmark were insignificant relative to the operations acquired.

 

Basis of Presentation and Consolidation

 

The accompanying consolidated financial statements include all accounts of the Company and its wholly-owned subsidiaries. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) All significant intercompany balances and transactions have been eliminated in consolidation.

 

Segments

 

The Company operates under three segments in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segments”, (“ASC No. 280”). Operating segments as defined in ASC No. 280, are components of public entities that engage in business activities from which they may earn revenues and incur expenses for which separate financial information is available and which is evaluated regularly by the Company’s chief operating decision maker (“CODM”) in deciding how to assess performance and allocate resources. The three primary segments are the infrastructure segment, technology segment and staffing segment. The Company is reporting as one segment per ASC No. 280 as the revenue, profit and loss, and assets of the technology segment are immaterial and the staffing segment was relatively inactive for each of the years ended December 31, 2017 and 2016.

 

Reverse stock split

 

On November 6, 2017, the Board approved, without action by the shareholders of the Company, a Certificate of Amendment to the Company’s Certificate of Incorporation to implement a 25-for-1 reverse stock split of the Company’s Common Stock with an effective date of November 6, 2017. On the effective date of the reverse split each 25 shares of issued Common Stock were converted automatically into one share of Common Stock. The number of authorized shares of the Company’s Common Stock was reduced from 200,000,000 shares to 8,000,000 shares. All Common Stock shares and per-share amounts have been retroactively adjusted to give effect to the reverse split.

 

Use of Estimates

 

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

 

F-8

 

 

Reclassifications

 

The Company refinanced its senior debt in which the maturity date was extended to March 31, 2019, as part of the Benchmark acquisition. At the time of filing its Form 10-K for 2016, the Company inadvertently did not reclassify approximately $4,167 of senior debt that had been included in short-term notes. As the debt was refinanced prior to the issuance of its Form 10-K, it should have been presented as long-term. These reclassifications had no effect on previously reported total assets, total liabilities or stockholders’ equity.

 

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

 

Note 2. SUMMARY OF SIGNIFICANT POLICIES

 

Revenue and Cost of Goods Sold Recognition

 

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications (“ASC”) 605 Revenue Recognition (“ASC No. 605”) which provides guidance on the recognition, presentation and disclosure of revenue. In general, revenue is recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. Revenue from telecommunication services is derived from construction projects performed under master and other service agreements as well as from contracts for specific projects or jobs requiring the construction and installation of an entire infrastructure system or specified units within an entire infrastructure system. The Company provides services under unit-price or fixed-price master service or other service agreements under which the Company furnishes specified units of service for a fixed-price per unit of service and revenue is recognized upon completion of the defined project due to its short-term nature. Revenue from fixed-price contracts provides for a fixed amount of revenue for the entire project, subject to certain additions for changed scope or specifications. Such contracts provide that the customer accept completion of progress to date and compensate the Company for services rendered, which may be measured in terms of costs incurred, units installed, hours expended or some other measure of progress. Contract costs include all direct materials, labor and subcontracted costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and the operational costs of capital equipment. Much of the materials associated with the Company’s work are customer-furnished and are therefore not included in contract revenue and costs.

 

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

 

The Company may incur costs subject to change orders, whether approved or unapproved by the customer, and/or claims related to certain contracts. Management determines the probability that such costs will be recovered based upon engineering studies and legal opinions, past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer. The Company treats such costs as a cost of contract performance in the period incurred if it is not probable that the costs will be recovered or defers costs and/or recognizes revenue up to the amount of the related cost if it is probable that the contract price will be adjusted and can be reliably estimated. As of December 31, 2017, and 2016, such amounts were not material. The Company actively engages in substantive meetings with its customers to complete the final approval process, and generally expects these processes to be completed within one year. The amounts ultimately realized upon final acceptance by its customers could be higher or lower than such estimated amounts.

 

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

 

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

 

F-9

 

 

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

 

Costs and estimated earnings in excess of billings on uncompleted contracts and Billings in excess of costs and estimated earnings on uncompleted contracts

 

In accordance with normal practice in the construction industry, the Corporation includes asset and liability accounts relating to construction contracts in current assets and liabilities even when such amounts are realizable or payable over a period in excess of one year. For the year ended December 31, 2017, the Company has included retainage payable as part of Billings in excess of costs and estimated earnings on uncompleted contracts. Retainage payable is anticipated to be paid within the next twelve months. The Company has also included any unbilled retention receivable as part of costs and estimated earnings in excess of billings on uncompleted contracts and such amounts are also expected to be billed and collected within the next twelve months.

 

Cash and Cash Equivalents

 

Cash consisting of interest-bearing demand deposits is carried at cost, which approximates fair value. The Company considers cash in banks and holdings of highly liquid investments with original maturities of three months or less when purchased to be cash or cash equivalents. At various times throughout the year, and as of December 31, 2017, some accounts held at financial institutions were in excess of the federally insured limit of $250,000. The Company reduces its exposure to credit risk by maintaining its cash deposits with major financial institutions and monitoring their credit ratings. The Company has not experienced any losses on these accounts and believes credit risk to be minimal.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses due to the inability of its customers to make the required payments. Management analyzes the collectability of trade accounts and other receivables and the adequacy of the allowance for doubtful accounts on a regular basis taking into consideration the aging of the account balances, historical bad debt experience, customer concentration, customer credit-worthiness, customer financial condition and credit report and the current economic environment. In addition, an allowance is established when it is probable that a specific receivable is not collectible and the loss can be reasonably estimated. Amounts are written off against the allowance when they are considered to be uncollectible.

 

If estimates of collectability of trade accounts and other receivables change or should customers experience unanticipated financial difficulties, additional allowances may be required. Management monitors and evaluates the allowance for doubtful accounts quarterly and is adjusted to maintain the allowance at a level considered adequate to provide for uncollectible amounts. The allowance for doubtful accounts is included in general and administrative expenses in the Consolidated Statements of Operations.

 

Accounts Receivable

 

The following table presents accounts receivable, net for the years ended December 31, 2017 and 2016:

 

    December 31,  
                (Predecessor)  
    2017     2016     2016  
Uncompleted contracts   $ 39,612           $ 24,046  
Completed contracts     8,555             27,825  
Accounts receivable   $ 4,510     $ 1,853        
Unbilled receivable     10,077       5,286        
Allowance for doubtful accounts     (555 )     (119 )     (170 )
Accounts receivable, net   $ 62,199     $ 7,020     $ 51,701  

 

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

 

F-10

 

 

Customer Concentration

 

Accounts receivable and revenue from the Company’s major customers as of December 31, 2017 and 2016 are as follows:

 

(in thousands)  Revenues   % of Total Revenue 
   2017   2016   2017   2016 
Customer A  $46,727   $    210%   %
Customer B  $29,971   $    13%   %
Customer C  $   $6,333        52%
Customer D  $   $1,805        14%

 

(in thousands)  Revenues (Predecessor)   % of Total Revenue 
   For the period Ended April 21, 2017   2016   2017   2016 
Customer A  $12,541   $97,449    31%   25%
Customer B  $7,439   $88,630    19%   23%
Customer C  $6,381   $40,857    16%   11%

 

(in thousands)  Accounts Receivable   % of Total Accounts Receivable  
  2017   2016   2016   2017   2016   2016 
      (Predecessor)        
Customer A  $7,513   $    10,085    20%   %   19%
Customer B  $18,477   $    9,009    49%   %   17%
Customer C  $   $4,625    7,721    %   66%   15 

 

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

 

Deferred Financing Costs and Amortization of Deferred Financing Cost

 

Deferred financing costs relate the Company’s debt instruments, the short and long-term portions of which are reflected as a deduction from the carrying amount of the related debt instruments, including the Company’s senior debt. Deferred financing costs are amortized using the straight-line method over the term of the related debt instrument which approximates the effective interest method.

 

Long-Lived Assets

 

The Company’s long-lived assets consist primarily of property and equipment and finite-lived intangible assets. Property and equipment are stated at cost or if acquired in a business combination, at the acquisition date fair value. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.

 

Property and equipment under capital leases are depreciated over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense as incurred. The carrying amount of assets sold or retired and the related accumulated depreciation are eliminated in the year of disposal, with resulting gains or losses on disposition of property and equipment included in other income or expense. When the Company identifies assets to be sold, those assets are valued based on their estimated fair value less costs to sell, classified as held-for-sale and depreciation is no longer recorded. Estimated losses on disposals are included within operating expenses.

 

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

 

F-11

 

 

Goodwill and Indefinite-Lived Intangible Assets

 

The Company has goodwill and certain indefinite-lived intangible assets that have been recorded in connection with the acquisition of a business. Goodwill and indefinite-lived assets are not amortized, but instead are tested for impairment at least annually. Goodwill represents the excess of the purchase price of an acquired business over the estimated fair value of the underlying net tangible and intangible assets acquired. The Company tests goodwill resulting from acquisitions for impairment annually on March 1, or whenever events or changes in circumstances indicate an impairment. For purposes of the goodwill impairment test, the Company has determined that it currently operates as a single reporting unit. If it is determined that an impairment has occurred, the Company adjusts the carrying value accordingly, and charges the impairment as an operating expense in the period the determination is made. Although the Company believes goodwill is appropriately stated in the consolidated financial statements, changes in strategy or market conditions could significantly impact these judgments and require an adjustment to the recorded balance. There were no impairments during the periods presented.

 

Income Taxes

 

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

 

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

 

Stock-Based Compensation

 

Compensation expense for all stock-based employee and director compensation awards granted is based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718, Stock Compensation (“ASC Topic 718”). The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, which is generally the option vesting term. Vesting terms vary based on the individual grant terms.

 

The Company estimates the fair value of stock-based compensation awards on the date of grant using the Black-Scholes-Merton option pricing model. This method considers among other factors, the expected term of the award and the expected volatility of the Company’s stock price. Expected terms are calculated using the Simplifies Method, volatility is determined based on the Company’s historical stock price and the discount rate is based upon treasure tares with instruments of similar expected terms.

 

Derivatives

 

The Company accounts for derivative instruments in accordance with ASC Topic 815, Derivatives and Hedging (ASC 815) and all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet.

 

The Company uses estimates of fair value to value its 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, The Company’s 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 The Company’s liabilities), relying first on observable data from active markets. Additional adjustments may be made for factors including liquidity, credit, bid/offer spreads, etc., depending on current market conditions. Transaction costs are not included in the determination of fair value. When possible, The Company seeks to validate the model’s output to market transactions. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.

 

F-12

 

 

Fair Value of Financial Instruments

 

The Company adopted the Financial Accounting Standards Board (“FASB”) standard related to fair value measurement at inception. The standard defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The standard applies under other accounting standards 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. As a basis for considering such assumptions, the standard established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

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

 

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

 

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

 

The Company’s financial instruments consist of accounts and other receivables, accounts payable and notes payable. The recorded values of accounts and other receivable and accounts payable approximate fair values due to the short maturities of such instruments. Recorded values for notes payable and related liabilities approximate fair values, since their amortization of deferred financing cost stated or imputed interest rates are commensurate with prevailing market rates for similar obligations.

 

The following table summarizes the valuation of the Company’s derivatives by the above fair value hierarchy levels as of December 31, 2017 and 2016 using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3):

 

December 31, 2017  Level 1   Level 2   Level 3   Total 
Warrant derivative liability  $             

 

The following table summarizes the change in fair value of the warrants from inception through December 31, 2016.

 

December 31, 2016  Level 1   Level 2   Level 3   Total 
Warrant derivative liability  $   $   $   $(594)

 

   Warrant Liability 
Balance January 1, 2016  $ 
Warrants issued in conjunction with financings   529 
Change in warrant fair value market valuation   65 
Balance December 31, 2016   594 
Warrants issued in conjunction with financings   181 
Reclassification of warrant liability to equity (1)_   (775)
Balance December 31, 2017    

 

(1)During the fourth quarter of 2017, the Company elected to adopted ASU 2017-11 by applying ASU 2017-11 retrospectively to outstanding financial instruments with down round features by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit of $775 as of January 1, 2017. The Company calculates the fair value at inception and records the warrant on the consolidated balance sheet in additional paid in capital.

 

The Company did not hold any Level 3 assets at December 31, 2017.

 

F-13

 

 

Equity

 

The Company applies the classification and measurement principles enumerated in Accounting Standards Codification (“ASC”) 815 “Derivatives and Hedging” with respect to accounting for its issuance of preferred stock. The Company evaluates convertible preferred stock at each reporting date for appropriate balance sheet classification.

 

Advertising

 

Advertising costs, if any, are expensed as incurred. For the years ended December 31, 2017 and 2016, the Company spending on advertising was not material.

 

Net Loss Per Common Share

 

Basic net loss per share is computed by dividing net loss attributable to common stockholders (the numerator) by the weighted average number of common shares outstanding for the period (the denominator). Diluted net loss per common share attributable to common shareholders is computed by dividing net loss by the weighted average number of common shares outstanding during the period adjusted for the dilutive effects of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. The Company incurred losses for the years ended December 31, 2017 and 2016.

 

The Company had the following common stock equivalents at December 31, 2017 and 2016.

 

   2017   2016 
Convertible preferred stock, Series A   27,523    26,687 
Convertible preferred stock, Series A-1   17,464    15,746 
Common stock warrants   979,925    669,925 
Restricted stock units   126,465,    89,160 
Options   47,870     
Total potentially dilutive shares   1,199,247    801,518 

 

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

 

Liquidity and Managements’ Plans

 

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update, (“ASU”), 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40) (“ASC 205-40”), the Company has the responsibility to evaluate whether conditions and/or events raise substantial doubt about its ability to meet its future financial obligations as they become due within one year after the date that the financial statements are issued. As required by ASC 205-40, this evaluation shall initially not take into consideration the potential mitigating effects of plans that have not been fully implemented as of the date the financial statements are issued. Management has assessed the Company’s ability to continue as a going concern in accordance with the requirement of ASC 205-40.

 

As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2017 the Company has incurred a net loss of $20,109. The Company has a history of losses and as of December 31, 2017 it had an accumulated deficit of $38,304. Further it has approximately $2,200 of liabilities for unpaid payroll taxes and the related penalties and interest. On April 20, 2017, in conjunction with the acquisition of Benchmark, our senior lender amended its existing credit facility to provide for approximately $10.1 million towards the cash purchase price and extension of the maturity date of the existing credit facility to March 31, 2019. Additionally, the Company, in conjunction with the Benchmark acquisition, took on approximately $50,000 of debt, $7,500 which matures on October 20, 2018, $12,500 which matures on April 20, 2019, $30,000 which matures on April 20, 2020. The Company believes with the acquisition of Benchmark and it annual revenues of $264,955 and a backlog of $130,995 as of December 31, 2017, combined with the Company’s orders under master service agreements of approximately $190,000 its sources of cash will be sufficient to alleviate substantial doubt. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings. Management believes it will have sufficient cash to provide for its projected needs to maintain operations and working capital requirements for at least the next 12 months from the date of filing this annual report.

 

F-14

 

 

Recently Issued Accounting Standards

 

In July 2017, the FASB issued ASU 2017-11 – Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 is intended to reduce the complexity associated with the issuer’s accounting for certain financial instruments with characteristics of liabilities and equity. Specifically, the Board determined that a down round feature (as defined) would no longer cause a freestanding equity-linked financial instrument (or an embedded conversion option) to be accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings. ASU 2017-11 is effective for fiscal years, and interim periods within fiscal years beginning after beginning after December 15, 2018. Early adoption is permitted. The Company elected to adopt ASU 2017-11 during the year ended December 31, 2017 by applying ASU 2017-11 retrospectively to outstanding financial instruments with down round features by means of a cumulative-effect adjustment to the Company’s beginning accumulated deficit of $775 as of January1, 2017.

 

In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” ASU 2017-04, which removes Step 2 from the goodwill impairment test. Goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. It is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed with a measurement date after January 1, 2017. The Company does not anticipate that this standard will have a material impact on its financial statements.

 

In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business”, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The impact of this standard will be limited to future business acquisitions.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed in U.S. GAAP and will thereby reduce the current diversity in practice. ASU 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early application permitted. The Company does not anticipate that this standard will have a material impact on its financial statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” ASU 2016-09. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for fiscal years and interim periods within those years, beginning after December 15, 2016, with different methodologies for each aspect of the standard. The Company adopted the new standard on January 1, 2017, without a material impact on its consolidated financial statements.

 

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition” and some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition - Construction-Type and Production-Type Contracts.” The core principle of ASU 2014-09 is that revenue is recognized when the transfer of goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. ASU 2014-09 requires the disclosure of sufficient information to enable readers of the Company’s financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. ASU 2014-09 also requires disclosure of information regarding significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 provides two methods of retrospective application. The first method would require the Company to apply ASU 2014-09 to each prior reporting period presented. The second method would require the Company to retrospectively apply ASU 2014-09 with the cumulative effect recognized at the date of initial application.

 

ASC 606 requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time based on when control of goods and services transfer to a customer. The Company has performed a detailed review of our contract portfolio and compared historical accounting policies and practices to the new standard. The Company has engaged external resources to assist in the efforts of establishing appropriate presentation and disclosure changes.

 

F-15

 

 

The Company adopted new revenue recognition guidance using the modified retrospective transition method effective for the quarter ending March 31, 2018, applying the guidance to contracts with customers that were not substantially complete as of January 1, 2018. The financial results for reporting periods after January 1, 2018 will be presented under the new guidance, while financial results for prior periods will continue to be reported in accordance with the prior guidance and our historical accounting policy. The Company has evaluated the impact of the new guidance on a substantial portion of its contracts with customers, including identification of differences that will result from the new requirements. Based on the analysis performed to date, the Company determined that fixed-price contracts, which comprise substantially all of the Company’s revenue, will most often represent a single performance obligation. The Company will measure progress toward completion utilizing the cost-to-cost method, which represents a change from its prior practice of measuring completion based on engineering estimates of the physical percentage completed for the projects. Accordingly, the adoption of ASC 606 may result in a change in the timing of recognition of both contract revenue and cost from its prior practices. In addition, the Company expects to add qualitative and quantitative disclosures around disaggregation of revenue, remaining performance obligation, and other impacts to the Company’s contract revenue balances. The Company does not anticipate that the adoption of ASU 2014-09 will have a material effect on the Company’s consolidated financial statements.

 

Note 3. Acquisitions

 

On April 20, 2017, FTE acquired all of the issued and outstanding shares of common stock of Benchmark Builders, Inc. (“Benchmark”), The purchase price consisted of (i) cash consideration of approximately $17,250 (ii) 1,069,538 shares of FTE common stock with a fair value of $21,658, (iii) convertible promissory notes in the aggregate principal amount of $12,500 to certain stockholders of Benchmark (the “Series A Notes”, which mature on April 20, 2019) and (iv) promissory notes in the aggregate principal amount of $30,000 to certain stockholders of Benchmark (the “Series B Notes”, which mature on April 20, 2020). On April 20, 2017, the Company’s senior lender, amended the original credit agreement to provide for approximately $10,110 towards the cash purchase price of the Benchmark acquisition, refinancing this new advance with the existing debt and extending the maturity date of the facility to March 31, 2019. See Note 8, Senior Debt. In addition, certain sellers of Benchmark provided approximately $7,500 towards the cash purchase price for which they received promissory notes (the “Series C Notes”, which mature on October 20, 2018). The acquisition has been accounted for as a business combination in accordance with ASC Topic 805. Benchmark is a full-service general contracting management and general contracting firm, significantly expanding the Company’s presence in the New York area.

 

The following table summarizes the consideration transferred for the acquisition of Benchmark:

 

Cash consideration  $17,250 
Shares of common stock   21,658 
Series A notes*   11,263 
Series B notes*   24,574 
Less: Receivable from Benchmark   (500)
Merger consideration  $74,245 

 

*: Series A and B notes were recorded at fair value.

 

F-16

 

 

The following table summarizes the acquisition date fair value of the purchase price allocation assigned to each major class of assets acquired and liabilities assumed as of April 20, 2017, the closing date for Benchmark:

 

ASSETS ACQUIRED     
Cash  $2,416 
Accounts receivable   14,625 
Other current assets   10,272 
Property and equipment   47 
Total identifiable assets acquired   27,360 
Fair value of intangible assets acquired:     
Contracts in progress   10,632 
Trademarks and tradenames   2,749 
Customer relationships   22,743 
Non-compete   548 
Total fair value of intangible assets acquired   36,672 
      
Goodwill   35,672 
Total Assets Acquired   99,704 
      
LIABILITIES ASSUMED     
Accounts payable   15,393 
Accrued expenses and other current liabilities   10,066 
Total Liabilities Assumed   25,459 
      
Total consideration transferred  $74,245 

 

Goodwill of $35,672 was recorded related to this acquisition. The Company believes the goodwill related to the acquisition was a result of the expected growth platform to be used for expanding the business. As of April 20, 2017, goodwill is expected to be fully deductible for tax purposes and will be amortized over 15 years.

 

The operating results of Benchmark for the period from April 21, 2017 to December 31, 2017 included revenues of $222,866 and net income of $10,242 and are included in the consolidated statements of operations for the year ended December 31, 2017. The net income in the Company’s Consolidated Statements of Operations reflects $8,976 of amortization expense for the year ended December 31, 2017, in connection with Benchmark’s intangible assets. The Company incurred a total of $1,666 in transaction costs in connection with the acquisition, which are included in the consolidated statement of operations for the year ended December 31, 2017, respectively. See Note 6. Goodwill and Intangible Assets, for information regarding the goodwill and intangible assets of the Benchmark acquisition.

 

Unaudited Supplemental Pro Forma Information

 

The pro forma results presented below include the effects of the Company’s 2017 acquisition of Benchmark as if the acquisition occurred on January 1, 2016. The pro forma net loss for the years ended December 31, 2017 and 2016 includes the additional depreciation and amortization resulting from the adjustments to the value of property and equipment and intangible assets resulting from purchase accounting and elimination of transaction costs. The pro forma results also include interest expense associated with debt used to fund the acquisitions. The pro forma results do not include any anticipated synergies or other expected benefits of the acquisitions. The unaudited pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2016.

 

The unaudited pro forma combined results, which assumes the transaction was completed on January 1 are as follows for the twelve months ended December 31, 2017 and 2016:

 

   Revenue   Net Loss   loss per Share   Weighted
Average
Shares
 
2017 supplemental pro forma from January 1, 2017 through December 31, 2017  $285,498   $(9,063)   (1.89)   4,973,910 
2016 supplemental pro forma from January 1, 2016 through December 31, 2016  $317,068   $(2,634)   (2.37)   6,237,689 

 

F-17

 

 

Note 4. OTHER CURRENT ASSETS

 

Other current assets consist of the following:

 

   December 31, 
   2017   2016   2016 
           (Predecessor) 
Other receivables, net of reserves of $450 and $150, respectively  $874   $1,233   $350 
Prepaid insurance   1,398    45    2,824 
Prepaid city and state taxes   2,318         
Prepaid contract costs for work in process   64    409     
Prepaid operating expenses   2,602    1,146     
Other current assets  $7,256   $2,833   $3,174 
                

 

Note 5. PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consist of the following:

 

   Estimated    
   Life   December 31,
   (in years)   2017   2016   2016 
               (Predecessor) 
Machinery and equipment   6-8    $1,686   $1,596   $21 
Vehicles and trailers   7-10     2,276    1,925     
Network services platform   5    4,884    434     
Computer equipment and software   2-5 years    793    325    137 
         9,639    4,280    158 
Less: accumulated depreciation        (1,684)   (813)   (135)
Property and equipment, net       $7,955   $3,467   $23 

 

The Company completed the development of the new network infrastructure services platform on October 11, 2017.

 

Depreciation expense for the years ended December 31, 2017 and 2016, was $635 and $516, respectively. Depreciation expense for the period ended April 21, 2017 and December 31, 2016 was $11 and $19, respectively, for the Predecessor.

 

The Company leases various equipment under capital leases. Assets held under capital leases are included in property and equipment as follows:

 

   December 31, 
   2017   2016 
Machinery & equipment  $1,548   $1,413 
Less: accumulated depreciation   (438)   (232)
   $1,110   $1,181 

 

NOTE 6. INTANGIBLE ASSETS AND GOODWILL

 

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

 

Identifiable intangible assets consisted of the following at December 31, 2017:

 

   Weighted average
remaining useful
life (months)
   Gross
Carrying
Amount
   Accumulated
Amortization
   Net
Carrying
Amount
 
Indefinite- Lived Intangible                    
Goodwill      $35,672   $   $35,672 
                     
Definite- Lived Intangibles                    
Trademarks and tradenames   75.7    2,749    272    2,477 
Customer relationships   75.7    22,743    2,247    20,496 
Contracts in progress   9.7    10,632    6,379    4,253 
Non-compete   51.7    548    78    470 
Total Definite Intangible Assets        36,672    8,976    27,696 
Total Intangible Assets       $72,344   $8,976   $63,368 

 

F-18

 

 

Amortization expense for the years ended December 31, 2017 and 2016 totaled $8,976 and $-0-. For the year ended December 31, 2017, amortization expense of $2,595 was charged to operating expenses and $6,379 was charged to cost of revenues.

 

Expected future amortization expense consists of the following for each of the following fiscal years ended December 31:

 

2018  $8,004 
2019   3,751 
2020   3,751 
2021   3,751 
2022   3,676 
Thereafter   4,763 
Total  $27,696 

 

NOTE 7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

As of December 31, 2017, and 2016, accrued expenses and other current liabilities consist of the following:

 

   December 31, 
   2017   2016   2016 
           (Predecessor) 
Accrued interest payable [1]  $1,568   $365   $ 
Accrued dividends payable   611    531     
Accrued compensation expense [2]   2,503    2,300    2,018 
Accrued bonuses   2,587          
Accrued taxes   182        362 
Other accrued expense   2,523    6    3,320 
Accrued expenses, current  $9,973   $3,202   $5,700 

 

[1] Accrued interest payable as of December 31, 2017 and 2016 includes approximately $300 of estimated penalties and interest associated with prior period unpaid payroll taxes.
   
[2] Accrued compensation includes $1,863 in both December 31, 2017 and 2016, associated with prior period unpaid payroll taxes.

 

F-19