Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–K
☑ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31,
2017
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________ to________
Commission File Number 001-32421
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact
name of registrant as specified in charter)
|
Delaware
|
|
58-2342021
|
|
(State
or Other Jurisdiction of Incorporation or
Organization)
|
|
(IRS
Employer Identification No.)
|
420 Lexington Avenue, Suite 1718, New York, New York
10170
(Address
of principal executive offices) (Zip Code)
(212) 201-2400
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
|
Name of each exchange on which registered
|
|
Common
Stock, par value $0.01 per share
|
|
The
Nasdaq Capital Market
|
Securities
registered pursuant to Section 12(g) of the Act: Not
Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ 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
☐ No ☑
Indicate
by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☑ No ☐
Indicate
by check mark whether the Registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☑ No ☐
Indicate
by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer”, “non-accelerated filer”, “smaller
reporting company” and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
|
Non-accelerated
filer
|
☐
|
Smaller
reporting company
|
☑
|
|
(do not
check if a smaller reporting company)
|
|
Emerging
growth company
|
☐
|
If an
emerging growth company that prepares its financial statements in
accordance with U.S. GAAP, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The
aggregate market value of the voting common stock held by
non-affiliates of the registrant based upon the closing price of
the common stock reported by The Nasdaq Capital Market on June 30,
2017 of $1.45 per share, was $19,148,262.
Indicate
the number of shares outstanding of the registrant’s common
stock as of the latest practicable date: 35,579,756 shares of
common stock are issued and outstanding as of March 9,
2018.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference
and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into
which the document is incorporated: (1) any annual report to
security holders; (2) any proxy or information statement; and (3)
any prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933.
None.
Table of Contents
|
PART I
|
|
2
|
|
|
|
|
|
Item
1.
|
Business.
|
2
|
|
Item
1A.
|
Risk
Factors.
|
12
|
|
Item
1B.
|
Unresolved
Staff Comments.
|
22
|
|
Item
2.
|
Properties.
|
23
|
|
Item
3.
|
Legal
Proceedings.
|
23
|
|
Item
4.
|
Mine
Safety Disclosures.
|
23
|
|
|
|
|
|
PART II
|
|
24
|
|
|
|
|
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities.
|
24
|
|
Item
6.
|
Selected
Financial Data.
|
24
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
25
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk.
|
33
|
|
Item
8.
|
Financial
Statements.
|
33
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
|
33
|
|
Item
9A.
|
Controls
and Procedures.
|
33
|
|
Item
9B.
|
Other
Information.
|
33
|
|
|
|
|
|
PART III
|
|
34
|
|
|
|
|
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance.
|
34
|
|
Item
11.
|
Executive
Compensation.
|
40
|
|
Item
12.
|
Security
Ownership Of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
45
|
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
47
|
|
Item
14.
|
Principal
Accounting Fees and Services.
|
47
|
|
|
|
|
|
PART IV
|
|
49
|
|
|
|
|
|
Item
15.
|
Exhibits,
Financial Statement Schedules.
|
49
|
|
Item
16.
|
Form
10K Summary.
|
53
|
|
|
|
|
|
SIGNATURES
|
54
|
|
|
|
|
|
|
INDEX
TO EXHIBITS
|
55
|
|
1
PART I
This Form 10-K contains forward-looking statements. These
statements relate to our expectations for future events and future
financial performance. Generally, the words
“anticipates,” “expects,”
“intends,” “may,” “should,”
“plans,” “believes,”
“predicts,” “potential” and similar
expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and
circumstances could differ significantly from those anticipated in
the forward-looking statements. These statements are only
predictions. Actual events or results may differ materially.
Factors which could affect our financial results are described in
Item 1A of this Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no obligation to update
any of the forward-looking statements after the date of this report
to conform such statements to actual results or to changes in our
expectations, except as required by law.
ITEM 1. BUSINESS.
Overview
Fusion
Telecommunications International, Inc. (“Fusion”),
through its various subsidiaries (collectively, “we,”
“us,” “our” or the “Company”),
offers a comprehensive suite of cloud communications, cloud
connectivity, cloud infrastructure, cloud computing, and managed
cloud-based applications solutions to small, medium and large
businesses, and offers domestic and international voice services to
telecommunications carriers worldwide. Our advanced, proprietary
cloud services platforms, as well as our state-of-the art switching
systems, enable the integration of leading edge solutions in the
cloud, increasing customer collaboration and productivity by
seamlessly connecting employees, partners, customers and vendors.
We currently operate our business in two distinct business
segments: Business Services and Carrier Services.
In the
Business Services segment, we are focused on becoming our business
customers’ single source for leveraging the increasing power
of the cloud, providing a robust package of what we believe to be
the essential services that form the foundation for their
successful migration to, and efficient use of, the cloud. Our core
Business Services products and services include cloud voice and
unified communications as a service (“UCaaS”),
improving communications and collaboration on virtually any device,
virtually anywhere, and cloud connectivity services, securely and
reliably connecting customers to the cloud with managed network
solutions that are designed to increase quality and optimize
network efficiency. Our cloud computing and infrastructure as a
service (“IaaS”) solutions are designed to provide our
business customers with a platform on which additional cloud
services can be layered. Complemented by our software as a service
(“SaaS”) solutions such as security and business
continuity, our advanced cloud offerings, including private and
hybrid cloud, storage, backup and recovery and secure file sharing
that allow our customers to experience the increased efficiencies
and agility delivered by the cloud. Fusion’s cloud-based
services are flexible, scalable and can be rapidly deployed,
reducing our customers’ cost of ownership while increasing
their productivity.
Through
our Carrier Services segment, we have agreements with approximately
370 carrier customers and vendors and sell our voice services to
other communications service providers throughout the world.
Customers include U.S.-based carriers sending voice traffic to
international destinations, and foreign carriers sending voice
traffic to the U.S. and internationally. We also purchase domestic
and international voice services from many of our Carrier Services
customers. Our carrier-grade network, advanced switching platform
and interconnections with global carriers on six continents also
reduce the cost of global voice traffic, thereby increasing
profitability and expanding the service delivery capabilities for
our Business Services segment. Since
July 2017, our Carrier Services business has been operated through
Fusion Global Services, LLC (“FGS”), which is currently
60% owned by us and 40% owned by XcomIP, LLC
(“XComIP”). In connection with the Merger (as defined
below), we have agreed to use reasonable best efforts to
effectuate, on or prior to the closing of the Merger, to either (i)
divest our 60% ownership interest in FGS, or (ii) dissolve FGS. See
“Developments in 2017” below.
As a
result of the acquisition of a number of cloud services businesses
over the past five years, Fusion has expanded its business customer
base to over 13,000 customer accounts, increased its distribution
network to over 500 active distribution partners and added a
significant number of network facilities and points of presence,
thus expanding its geographic reach. Through these acquisitions, we
acquired advanced systems and infrastructure and augmented our
management team and employee base with talented, experienced,
well-trained professionals, and further developed a strong platform
for further acquisitions.
2
Fusion
is seeking to capitalize on the rapid growth of the worldwide cloud
services market, which is expected to grow at a three-year compound
annual growth rate (CAGR) of 16.5% to total $411.4 billion, up from
$260.2 billion in 2017, according to Gartner, Inc. The highest
growth is expected to come from cloud system infrastructure as a
service, which is projected to grow at a 27.7% CAGR from 2017 to
2020 to reach $72.0 billion, while cloud application services
(SaaS) is expected to grow at a 19.4% CAGR from 2017 to 2020 to
reach $100.0 billion. We are pursuing a three-tiered growth
strategy, consisting of (i) developing specialized solutions for
key vertical markets (such as legal and healthcare); (ii) targeting
and acquiring additional cloud services companies; and (iii)
implementing measures to accelerate organic growth. Our continuing
effort to deliver advanced cloud solutions to larger companies with
more complex requirements is supported by our proprietary cloud
solutions platform that allows us to rapidly respond to large
enterprise needs for customized or enhanced solutions. We intend to
continue to develop vertically oriented solutions to expand our
revenue opportunities and further differentiate our service suite,
with current efforts directed primarily on the healthcare, legal,
hospitality and real estate verticals. We also intend to acquire
additional cloud services companies that can further expand our
customer base, allow us to provide additional cloud products and
services to our portfolio and gain scale. Our growth strategy for
the Business Services segment includes securing large strategic
distribution partners, increasing our direct as well as indirect
channel sales efforts and upselling solutions to our existing
customer base.
Fusion’s
management team has extensive experience in the technology,
services and communications industry, with demonstrated leadership
in middle market, entrepreneurial, small company, distressed and
M&A environments. We believe that our executive team has the
experience and expertise to drive high value opportunities to the
Company and execute on our acquisition and organic growth
strategies.
Fusion
was incorporated in Delaware and commenced operations in September
1997. We currently have offices in: New York, NY; Fairfield, NJ;
Fort Lauderdale, FL; Atlanta, GA; Redondo Beach, CA; Austin, TX;
Herndon, VA; and Beachwood, OH.
Developments in 2017
On
August 26, 2017, Fusion and its wholly-owned subsidiary, Fusion
BCHI Acquisition LLC, a Delaware limited liability company
(“Merger Sub”), entered into an Agreement and Plan of
Merger, as amended (the “Merger Agreement”) with Birch
Communications Holdings, Inc., a Georgia corporation
(“Birch”). The Merger Agreement provides, among other
things, that upon the terms and conditions set forth therein, Birch
will merge with and into Merger Sub (the “Merger”),
with Merger Sub surviving the Merger. Birch, through its subsidiaries, provides IP-based
communications, cloud and managed services to businesses in all 50
states, the District of Columbia and Canada under the Birch and
Primus brands. Birch provides voice, broadband, Internet access,
hosted services, managed services, wireless voice, wireless data
and other communications, cloud and managed services to its
customer base comprised of small, midsized, and enterprise
businesses.
On the
effective date of the Merger, the outstanding shares of common
stock, par value $0.01 per share, of Birch (other than treasury
shares or shares owned of record by any Birch subsidiary) will be
cancelled and converted into the right to receive, in the
aggregate, that number of shares of our common stock equal to three
times the number of shares of (i) our common stock issued and
outstanding immediately prior to the Effective Time (as defined in
the Merger Agreement)
(but excluding the shares of our
common stock issued by us in a public offering of our shares of
common stock completed in February 2018 as well as certain other
issued and outstanding shares of our common stock (see
“Recent Amendments to Merger Agreement and East West Bank
Waiver” below)), plus (ii) our common stock issued or issuable
upon the conversion of all classes or series of our preferred stock
outstanding immediately prior to the closing of the
Merger, plus (iii) our common stock issuable
upon the exercise of all in-the-money Fusion warrants
(collectively, the “Merger Shares”). Pursuant to
subscription agreements executed by each of the stockholders of
Birch, the Merger Shares will be issued in the name of, and held by
BCHI Holdings, LLC (“BCHI”), a limited liability
company owned by the stockholders of Birch. On the closing date of
the Merger, BCHI and Fusion will enter into a Registration Rights
Agreement governing the registration rights of BCHI in respect of
the Merger Shares and pursuant to which we will agree, among other
things, to use our reasonable best efforts to cause a shelf
registration statement covering the resale of the Merger Shares to
be declared effective by the SEC within 120 days of the closing of
the Merger.
Closing of the Merger is subject to numerous conditions, including
(i) receipt of the requisite approval of Fusion’s voting
shares, which approval was secured by the Company on February 21,
2018, (ii) Fusion obtaining financing for the transaction, which
will be used to retire existing senior debt facilities at Birch and
Fusion, (iii) all existing shares of our preferred stock being
converted into shares of our common stock, and (iii) Fusion using
its reasonable best efforts to cause the Merger Shares to be
approved for listing on The Nasdaq Stock Market, LLC
(“Nasdaq”), including, if necessary, in order to comply
with Nasdaq listing requirements, amending Fusion’s existing
certificate of incorporation prior to the effective time of the
Merger to effect a reverse stock split of our common stock to
satisfy Nasdaq’s minimum pricing requirements (the
“Reverse Stock Split”). If the Reverse Stock Split must
be completed prior to the closing of the Merger, it will be in a
range of up to 5:1, with the final ratio to be determined by our
existing board.
In
addition, prior to the closing of the Merger, Birch is required to
spin-off to the existing Birch shareholders, its US-based consumer
business, which consists of (i) the residential customer base, life
line and consumer wireless business in the United States, and (ii)
its single-line business customer base in the United States. In
addition, as discussed above, we have agreed that on or prior to
the consummation of the Merger, we will use our reasonable best
efforts, on or prior to the closing of the Merger, to either (i)
divest our 60% ownership interest in FGS, or (ii) dissolve
FGS.
3
On the
effective date of the Merger, our certificate of incorporation will
be amended and restated, which amendments will, among other things,
(i) increase the number of authorized shares of our common stock to
150 million and (ii) change our name to “Fusion Connect,
Inc.” From and after the effective time of the Merger, the
size of our Board will be fixed at seven directors. Three
directors, including at least one director who satisfies the Nasdaq
listing standard’s independence requirements, will be
nominated by a nominating committee comprised of our directors
serving on the Board on the date of the nomination and three
directors, including at least one that satisfies the Nasdaq listing
standard’s independence requirements, will be nominated by
BCHI. The seventh director, who must satisfy the Nasdaq listing
standard’s independence requirements, will be nominated by
BCHI, subject to the reasonable consent of the Fusion committee.
Our Chief Executive Officer, Matthew D. Rosen will serve as the
post-Merger Chairman of the Board, and Holcombe T. Green, Jr., a
principal stockholder of Birch, will serve as the post-Merger Vice
Chairman of the Board. Information relating to the post-Merger
Fusion Board and its executive officers will be included in a Form
14F-1 to be filed and mailed to all stockholders of the Company no
less than 10 days prior to consummation of the Merger. The Merger
is currently expected to be completed by mid-April
2018.
The
terms of the Merger Agreement are such that the Merger, if
consummated, will result in a change in control. As a result, the
transaction will be accounted for as a reverse acquisition and
recapitalization, with Birch as the acquirer for accounting
purposes, and the historical financial statements of Birch (other
than the Statements of Stockholders’ Equity) will become the
historical financial statements of the Company.
Recent Amendments to the Merger Agreement and East West Bank
Waiver
On January 24 and January 25, 2018, the parties to the Merger
Agreement entered into a Fourth and Fifth Amendment to the Merger
Agreement, respectively. The primary purpose of the Fourth
Amendment was to further extend that date by which either Fusion or
Birch may terminate the Merger Agreement due to an inability to
secure commitments for the required financing from 120 days from
the date of the Merger Agreement to 220 days from the date thereof
(i.e., April 3, 2018). Under the Fourth Amendment, the parties also
agreed to exclude up to 300,000 shares of our common stock to be
issued in connection with the IQmax, Inc. asset acquisition (as
described below) from the calculation of the number of Merger
Shares to be issued to BCHI at the closing of the Merger. In
addition, the Fourth Amendment also revised Exhibit D to the Merger
Agreement (which exhibit described the proposed spin-off of the
Birch consumer business required as a condition precedent to the
closing) to exclude references to the Canadian business of Birch as
the parties have agreed that such assets and customers will
transfer to Fusion at the closing of the Merger.
Under the Fifth Amendment to the Merger Agreement, the parties
agreed to increase the dollar amount of cash that Fusion could
raise by issuing equity or debt securities in connection with
capital raising activities prior to the closing of the Merger from
$10.0 million to $40.0 million net proceeds) and also agreed that
any shares of common stock issued by us in this offering in an
amount up to $40.0 million (net proceeds) would be
excluded in determining the number of Merger Shares to be issued to
BCHI at the closing of the Merger.
On January 26, 2018, we obtained a waiver under our senior secured
credit facility with East West Bank (the “East West Bank
Credit Facility”) permitting us to sell up to approximately
$30.0 million (net proceeds) of our common stock without having to
use any of those proceeds to prepay amounts outstanding under that
facility (the "January 2018 EWB Waiver"). Prior to receiving the
January 2018 EWB Waiver, we were obligated under the East West Bank
Credit Facility to use any net proceeds for any sale of our equity
securities that are in excess of $4.0 million to pay down
outstanding borrowings thereunder. In addition, on February 23,
2018 we obtained an additional waiver under the East West Bank
Credit Facility permitting us to retain the entire amount of the
net proceeds from the recently completed equity
offering.
On March 12, 2018, the parties to the Merger Agreement entered into
a Sixth Amendment to the Merger Agreement, the sole purpose of
which was to amend the Merger Agreement and the associated form of
stockholders agreement to reduce the number of directors that will
initially serve on the post-Merger Board from nine to
seven.
February 2018 Public Offering of shares of Our Common
Stock
On February 5, 2018, we closed an offering of 12,937,500 shares of
our common stock, including 1,687,500 shares for which the
underwriters exercised their over-allotment option in full, at a
price to the public of $3.20 per share for gross proceeds of $41.4
million. The net proceeds, after underwriting discounts and
commissions, but before estimated expenses of the offering payable
by Fusion, were $38.7 million. As noted above, the shares sold in
this offering will not be counted as issued and outstanding for
purposes of calculating the number of shares of Fusion common stock
to be issued as consideration to BCHI in connection with the
closing of the Merger. As a result, on a post-closing basis, the
dilutive effect of this offering will be shared pro rata by current
Fusion and Birch shareholders with current Fusion shareholders
bearing approximately 25% of the dilution and current Birch
shareholders bearing approximately 75% of the dilution from this
offering. Craig-Hallum Capital Group LLC acted as the sole
book-running manager and B. Riley FBR, Inc. acted as a co-manager
for the offering
4
IQMax Asset Acquisition
On January 24, 2018, Fusion completed the acquisition of
substantially all of the assets of IQMax, Inc.
(“IQMax”), a Charlotte, N.C.-based provider of secure
messaging, enterprise data integration and advanced cloud
communications solutions. The total consideration for this
transaction is $1.0 million, which will be paid in shares of our
common stock. These shares will remain in escrow until 12 months
following the closing of the transaction.
Historical Acquisitions
The
cloud services marketplace continues to be fragmented, with many
providers challenged by a limited product portfolio, a lack of
financial and operational resources and a regional focus. Fusion
believes this market segment offers strong opportunities for
consolidation. We believe that the cross-marketing opportunities
and economies of scale made possible through consolidation make
such acquisitions an attractive vehicle to enhance our growth
profile.
Fusion
integrates the businesses it acquires and organizes the employees
under one management team. Products and services and processes and
procedures are rapidly integrated as well, while sales and support
staff and distribution partners are trained to cross and up-sell
our solutions to our existing and acquired customer bases. We
believe that our integration strategy, in combination with our
increasing expertise and our scalable, robust systems and
infrastructure, will enable us to continue to efficiently integrate
Birch and additional acquisitions in the future.
Since
2012, we have made the following acquisitions:
NBS
In
October 2012, we acquired Network Billing Systems, LLC, and certain
assets and liabilities of its affiliate, Interconnect Services
Group II LLC (collectively, “NBS”), a cloud services
provider delivering cloud voice and UCaaS, cloud connectivity and
managed network services to small, medium and large businesses
nationwide.
Broadvox Cloud Services Business
In
December 2013, we acquired certain assets of Broadvox LLC’s
cloud services business, which delivered cloud-based voice, UCaaS
and cloud connectivity services to small, medium and large
businesses.
PingTone
In
October 2014, we acquired PingTone Communications, Inc.
(“PingTone”), a provider of integrated cloud-based
communications services headquartered in Herndon, VA. This
acquisition added to our customer base, augmented the
Company’s management team and added a direct sales
force.
RootAxcess
In
September 2015, we acquired the customer base, technology platform,
infrastructure and other assets of Chicago-based RootAxcess.
RootAxcess delivered a broad range of cloud solutions, including
IaaS, cloud computing, cloud storage, cloud hosting, virtual data
center, backup and recovery and virtual servers, using both private
and hybrid cloud infrastructure.
Fidelity
In a
two-step transaction completed in December 2015 and February 2016,
we acquired Fidelity Access Networks, Inc. and its various
subsidiaries (collectively, "Fidelity"). Fidelity provided cloud
voice, cloud connectivity, security, data center and cloud storage
services to small, medium, and large businesses, primarily in the
Midwest.
TFB
In
April 2016, we acquired the intellectual property and assets of
Technology for Business Corporation (“TFB”), a provider
of industry leading contact center solutions with a fully
integrated advanced cloud voice platform.
Apptix
In
November 2016, we acquired Herndon, Virginia-based Apptix, Inc.
(“Apptix”), a wholly-owned subsidiary of Apptix ASA
(OSE: APP). Apptix provided cloud-based communications,
collaboration, virtual desktop, compliance, security and cloud
computing solutions to approximately 1,500 business customers
across the U.S.
5
IQMax
In January 2018, we acquired substantially all of the assets of
IQMax. The total consideration for this transaction is $1.0
million, which will be paid in shares of our common stock. These
shares will remain in escrow until 12 months following the closing
of the transaction.
Business Services
Our
cloud-based services are designed to meet the communications,
network and computing requirements of growing businesses, while
maximizing the price-performance ratio. We believe that giving our
customers access to the cloud provides a more cost-effective,
reliable and secure communications and IT experience, and relieves
them of the capital and support burdens associated with more
traditional premise-based services. Additionally, customers can
reduce costs while adding features and functionality and improving
productivity across their company. Fusion is increasingly focused
on providing specialized, market-based solutions to targeted
verticals and larger enterprises, matching our advanced solutions
to key industry-specific customer requirements.
We
currently have over 13,000 business customer accounts. We offer a
suite of advanced cloud-based services, including cloud
communications, which encompasses cloud voice and UCaaS, and cloud
connectivity that provides diverse and redundant access to the
cloud. The Company’s managed network services converge voice
and data applications, which include Internet access, Ethernet over
Copper transmission facilities and Multi-Protocol Level Switching
(“MPLS”) services at speeds ranging from 1.5 Mbps to
100 Gbps. Our cloud computing solutions include private and hybrid
cloud, storage, backup and recovery and secure file sharing.
Security and business continuity are offered as part of every
solution.
Fusion’s
services are designed to provide significant benefits to businesses
of all sizes, with single or multiple locations. The integration of
cloud solutions on our advanced services platforms allow customers
to seamlessly connect people with the information they need to
collaborate effectively, regardless of the device they
use.
Our
cloud solutions are also designed to minimize upfront capital
costs, increase the scalability and flexibility of the
customer’s communications network and service environment,
provide robust features and functionality to increase productivity
and reduce the overall cost of communications.
Our
proprietary cloud communications service platform allows us to
rapidly respond to market requirements for new or enhanced products
and services, as well as customize customer solutions as required
for maximum flexibility, avoiding costly licensing fees and
increasing our control over the service environment. Fusion’s
growing suite of business services includes:
Cloud Voice
Fusion’s
cloud voice service allows a customer to replace its owned or
leased premise-based office telephone system with a
state-of-the-art cloud-based digital telephone system. This
feature-rich solution eliminates the need to own and operate a
costly, complex telephone system, reduces upfront capital costs,
and eliminates the cost of calls between customer locations. The
service provides efficiencies for companies with multiple offices
or a highly mobile workforce, and for companies that are opening a
new office or need to expand or replace existing legacy telephone
systems. All business service options can be configured by the user
in real time using a powerful administrative portal, virtually
eliminating the costs associated with the labor-intensive
reconfiguration of on-site telephone systems. Our contact center
solutions provide advanced call center features and functionality
that can be seamlessly integrated with our cloud voice solutions,
reducing operational costs and increasing cost savings and
efficiency. CRM integration, call recording and real-time
monitoring are built into the contact center solution, increasing
productivity without increasing costs.
Unified Communications
Our
UCaaS offering complements our cloud voice solutions with
integrated service features that seamlessly combine audio, video,
messaging and web services, immediately connecting people with the
information they need to communicate effectively. Our integrated
cloud-based UCaaS collaboration suite is device and location
agnostic, allowing businesses of all sizes to increase productivity
by simplifying communication over the most preferred or available
device. By connecting employees with other employees and customers
via conference call or online meeting, and sharing documents
real-time with a simple click, our UCaaS solution drives
efficiencies while at the same time reducing costs.
Contact Center
Fusion’s
cloud-based, enterprise contact center offering is fully integrated
with our UCaaS solution on our proprietary cloud services platform.
Converging voice, data, web and mobile technologies, it enables
customers to extend the features and functionality of the contact
center throughout the enterprise while providing device and
media-agnostic UCaaS services to the contact center. Comprising a
full range of cost-effective applications once reserved for the
largest enterprises through costly premise-based solutions, our
cloud-based contact center offering delivers comprehensive,
real-time and historical reporting, database integration (CRM, ERP,
etc.), enhanced criteria-based routing and customer-controlled
administration. Fusion’s contact center solution protects
technology investments by providing a seamless migration path to
the cloud, delivering everything a customer needs to monitor,
maintain and manage a successful cloud-based contact center
environment.
6
SIP Trunking
Fusion’s
SIP trunking solution allows a customer to retain and use its
existing telephone system, while connecting to the Fusion network
for access to the cloud, as well as its local services and
inbound/outbound domestic and international long distance services.
Our SIP trunks efficiently and economically provide businesses with
voice channels in any configuration (analog, T-1, PRI, or SIP).
Customers save on their local, long distance, and international
call charges, eliminate traditional line charges, and gain many of
the advantages of cloud voice features and functionality, such as
advanced call handling and out-of-area number portability.
Burstable voice lines accommodate seasonal traffic fluctuations,
marketing campaigns and business continuity requirements. SIP
trunks also eliminate the cost of interoffice calling, and allow
customers to combine their voice and data traffic onto a single
broadband access facility for further cost savings, without having
to abandon their existing technology investment. Fusion’s SIP
trunking solution can be shared across customer locations and is
enhanced by a proprietary administrative portal, which allows
customers to alter call routing in real time and provides increased
efficiency and control.
Cloud Connectivity
Fusion’s
reliable and secure connections to the cloud ensure high levels of
service quality and control. Leveraging our own expanding on-net
network, as well as our relationships with U.S.-based and
international carriers, we offer business customers a full
complement of redundant, flexible and scalable network solutions,
offering true diversity for built-in business continuity. Services
range from dedicated circuits to high-speed broadband that are
available in a variety of bandwidth levels. Fusion offers reliable,
secure and cost-effective Internet access, as well as Ethernet and
MPLS services. We also provide cloud-delivered SD-WAN services that
facilitate optimized access for businesses to cloud services,
private data centers and enterprise applications simultaneously
over both ordinary broadband Internet and private links.
Fusion’s quality of service routers seek to provide the
highest quality voice traffic while reducing customer access costs.
We believe that in addition to providing secure migration and
connection to the cloud, providing a full complement of network
services allows us to address a broader set of customer needs,
delivering increased value and securing customer loyalty in the
process.
Cloud Computing
Fusion’s
cloud computing service centralizes information management,
hardware, network and infrastructure in an off-premise location
that is hosted and managed by Fusion. Offered as private or hybrid
solutions, Fusion’s secure offerings drive efficiencies in
both costs and resources allowing for rapid scalability and
deployment of applications. These offerings provide a predictable,
utility-based OpEx model, which eliminates significant capital
expenditures, removes obsolescence concerns and future-proofs
customer investments.
Managed Applications in the Cloud
Fusion
offers several advanced, industry-specific SaaS solutions to meet
the needs of large enterprises in key vertical markets, especially
those facing the rigorous demands of regulatory requirements and/or
the need to store, secure and move large amounts of customer or
patient data. We believe that these applications represent
significant future revenue potential, as we continue to introduce
them to our existing enterprise customers and
prospects.
Cloud Security: Unified Threat Management (UTM)
Fusion’s
scalable, comprehensive and fully integrated UTM solution secures
enterprise data as well as the network on which it is stored, moved
or retrieved. The Fusion firewall is application, policy and
permission- defined, enabling customers to exercise control over
their own security environments. Continuous monitoring and alerts
help detect, deter and defeat cyberattacks to mitigate against
business disruptions, and malware threats are eliminated with
antivirus and antispyware applications designed to maintain the
highest level of security against external intrusions. Centrally
managed and without requiring a dedicated Internet gateway or
firewall on site, the cloud-based solution drives efficiencies in
network management and staffing, detecting and blocking unwanted
traffic before it impacts the network.
Cloud-Based Storage
Fusion
offers a solution that addresses the explosive growth of data
across all industries with a cost-effective and secure storage
solution hosted in the cloud. This scalable, fully redundant
solution is hosted off-premise, reduces customer data center
footprints and resource requirements, and facilitates additional
SaaS solutions that can be accommodated on the same cloud platform.
Fusion delivers a storage and data back-up assessment service as
part of its storage offering, measuring growth and duplication
benchmarked against best practices. The solution consolidates
requirements across the enterprise, increases efficiency and
achieves economies of scale designed to reduce overall customer
costs.
7
Backup and Recovery
Our
“Backup and Recovery” is an enterprise-grade backup
software solution that provides a single, integrated approach to
data protection. Its comprehensive suite of tools and capabilities
allow businesses to securely protect more data while using less
network capacity and fewer storage resources without having to
deploy multiple point solutions.
Secure File Sharing
Fusion
offers a file sharing solution that allows businesses to share,
sync and transfer important data across multiple platforms, while
keeping security a main priority with military grade encryption.
The solution delivers file access from any location, on any device
to enable flexible and scalable file sharing, restoration and
collaboration.
Secure Mobile Messaging and Data Integration
Our
mobile software solutions seamlessly integrate and transmit
messaging and other information across diverse applications and
platforms in a secure, compliant manner to improve workforce
coordination and collaboration. Our powerful data integration
platform advances the expansion of our cloud ecosystem,
facilitating its integration with a wide range of applications and
business productivity software platforms.
Service Plans
Fusion
offers several different service packages designed to meet specific
customer requirements. Base level plans offer a basic service
package for a low monthly recurring charge (“MRC”).
Additional charges, such as local, long distance, or international
calling, are charged at per minute rates. Other packages may
include a specific number of local or long distance minutes or even
unlimited local or long distance calling. Optional value-added
features for basic services are available for an incremental
monthly charge appropriate for the service.
Cloud
connectivity services such as Internet access services and/or
private line services are charged on a fixed monthly basis, and are
generally based on the bandwidth utilized and the endpoints
involved. Cloud computing services are generally composed of an
upfront charge and an MRC. Fusion’s contracts with its
Business Services customers range from one to five years in
length.
Carrier Services
Fusion’s
Carrier Services segment, which is currently operated through FGS,
provides voice traffic termination employing primarily VoIP
technology. This traffic typically consists of minutes of domestic
and international long distance usage that are terminated to
telephone numbers in the intended destination countries. The
majority of this traffic is international in nature, and terminates
to virtually all countries.
We
employ least cost routing technology and systems in connection with
all of our voice termination services to ensure high quality
termination at the lowest possible cost, thus maximizing profit on
that traffic. Using least cost routing technology, Fusion often
“blends” routes to provide our customers with the
optimal mix of price and quality, or to meet unique customer
requirements for the termination of voice traffic to specific
countries. We also leverage the termination capacity of the Carrier
Business segment obtained through interconnection agreements and
other methods of termination to carry international traffic
generated by our Business Services segment.
All
carrier voice services are priced on a per minute basis, based upon
the destination called, the time of day and the customer’s
overall traffic volume. FGS has reciprocal service agreements with
the majority of its carrier customers, and the pricing in those
agreements may also reflect the pricing provided to FGS for
terminating its traffic. Prices for Internet access or private line
service provided to carriers, as well as pricing for co-location
services, are based on a fixed MRC for the services provided. FGS
has contracts with most of its carrier customers, which typically
have a one-year renewable term, no minimum commitments, and allow
either party to terminate the arrangement without
penalty.
Network
Fusion
operates a robust and reliable carrier-grade network and
infrastructure that delivers high quality, diverse and secure
connections to our cloud services. Our Managed Network Services,
Internet access, Ethernet, MPLS and cloud communications solutions
can be provided either on-net leveraging our own extensive network,
or off-net using the networks of our carrier partners, for truly
diverse and redundant connections.
8
Each of
the Business Services network operations centers
(“NOC”), as well as the NOC maintained by FGS, are
manned 24 hours per day, 7 days per week and employ
state-of-the-art monitoring and alert systems that are designed to
ensure quality of service and a proactive response to potential
customer service issues.
Our
carrier-class network employs digitized, packet-switched service
platforms capable of interfacing with most Internet protocols, as
well as with TDM (time division multiplexing) or circuit-switched
systems, and provides the flexibility necessary to seamlessly
transport our customers’ voice and data traffic throughout
the United States and the world. Internet access is delivered
through dedicated and redundant high-speed interconnections to all
major Internet backbones.
The
Fusion network is characterized by its low cost of deployment and
low recurring costs. It has been constructed to meet actual, rather
than anticipated, customer demand with on-net and off-net
connections to provide ubiquitous access, delivering maximum cost
efficiency without sacrificing quality. This robust network allows
us to provide diverse and redundant network connections with
seamless automatic failover. Our major points of presence include:
New York City; Newark, NJ; Philadelphia, PA; Boston, MA; Atlanta,
GA; Miami, FL; Cleveland, OH; Chicago, IL; Dallas, TX; Los Angeles,
CA; Washington, D.C.; San Jose, CA; Charlotte, NC; Jacksonville,
FL; Columbus, OH; and Little Ferry, NJ.
Key
elements of our network include a proprietary cloud communications
platform, a BroadSoft cloud communications services platform; Cisco
routers and switches, and Acme Packet and Sonus communications
services platforms. These redundant network elements are
interconnected via a dedicated fiber-based gigabit Ethernet
backbone. Most network elements are based on software applications
that execute entirely on off-the-shelf servers and are built for
easy and rapid deployment and scalability, as well as security and
reliability. Fusion has deployed a Global Convergence Solutions
routing and rating management solution that has improved routing,
rating and invoicing capabilities, facilitated cost savings through
overhead reduction and driven efficiencies in route
management.
Fusion’s
centralized network elements are housed in carrier-grade switching
facilities located in secure carrier buildings that house many
other carriers and are interconnected to other major carrier
buildings. These locations allow for cost-effective and rapid
interconnection and capacity expansion to carrier customers, as
well as major enterprise customers. Fusion believes its facility
locations and equipment choices provide the platform required to
support its envisioned growth and will allow it to quickly embrace
emerging technologies as they become commercially available and
viable.
Proprietary Cloud Services Platform
Our
proprietary cloud services platform was designed and developed over
many years by our own team of experienced developers using
advanced, yet proven, technology. This proprietary platform is
scalable, flexible and secure, delivering an integrated portfolio
of cloud-based communications services that enable businesses of
every size to increase productivity and efficiency while
controlling costs. Information management, hardware, network and
infrastructure are centralized off-premise, hosted and managed by
Fusion, allowing customers to rapidly adjust to fluctuating and
unpredictable service demands, drive efficiencies in staff and
space, and eliminate the need for costly technology upgrades. The
architecture of our proprietary platform has been designed to allow
for the seamless integration of additional cloud-based
applications, whether or not developed by Fusion. Not subject to
third party end user licensing fees or technology release
constraints, our proprietary platform allows faster, easier and
more cost-effective introduction of new, business-critical
applications, delivering a unique feature set engineered to quickly
respond to customer demands and market requirements. We
differentiate ourselves from our competitors by combining our
robust carrier-grade network services to enable secure connections
to the cloud, delivering true diversity and a fully integrated
solution for maximum efficiency and cost savings.
Our
proprietary platform has been designed using advanced technologies
and best of breed equipment and provides for geographical diversity
and redundancy. The platform has been designed for scalability as
well as resiliency, and can be easily expanded to accommodate any
required number of connections and customers. Platform solutions
are location and device neutral, serving multiple as well as single
locations nationwide, connecting users to customers and other
employees on desktops, laptops, handsets, tablets and mobile
phones, wherever they may be located. The platform is currently
deployed in two diverse Tier 1 carrier data centers, and such
platform has a fully functional, redundant system whose databases
are constantly in sync. Thus, should one of the data centers be hit
with a catastrophic event, customers should experience no
interruption of service. The result is to ensure proven, reliable
and consistent uptime performance, which is crucial for delivering
mission critical solutions.
Developed
with experienced in-house programmers, the platform requires no
ongoing licensing fees for individual seats or SIP sessions, which
we believe gives Fusion a competitive advantage against many other
service providers. Written in current programming languages and
utilizing proven technologies, the system enjoys efficiencies and
capabilities not found in older legacy type platforms.
9
Sales and Marketing
We
market and sell our business services to small, medium and large
customers through distribution partners, direct sales personnel and
inside sales representatives. Our independent distribution partners
are typically paid commissions based on their sales and,
thereafter, the continued use of our services by the respective
customers. Our sales employees, including direct sales and inside
sales, are typically compensated through a combination of base
salary and commissions based on their actual sales
performance.
Our
distribution partners generally target small-to medium-size
businesses, while our direct sales force focuses on the larger
enterprise customers in our targeted verticals. We believe that our
cloud platform, infrastructure, systems and connectivity provide a
strong competitive advantage in serving these larger enterprise
customers, creating real value with specialized solutions that meet
their more complex and rigorous requirements. Referrals, strategic
relationships and the strength of our corporate relationships are
also a key part of our overall sales and marketing plan. Our
carrier services are sold entirely through our direct sales
force.
Strategy
Our
past acquisitions have been, and the Merger with Birch will be,
important milestones in our strategic roadmap as we work to become
one of the industry’s leading and most successful cloud
services providers. Our plans for growth are supported by an
experienced and tested management team and dedicated staff, as well
as our advanced cloud strategy to organically grow our revenue from
the Business Services segment and to continue to develop vertically
oriented solutions and acquire additional cloud services
companies.
Fusion
intends to continue to grow organically through direct as well as
indirect channel sales efforts; by securing large strategic
distribution partners to extend our geographic and vertical market
reach; and through the up-sale and cross-sale of services to our
existing customer base.
We also
continue to focus our sales and marketing efforts on developing
vertically oriented solutions for targeted markets that require the
kind of specialized solutions made possible by our state-of-the-art
networks and advanced services platforms. Our vertically oriented
solutions, which are currently focused on healthcare, legal
services, hospitality and real estate, offer a substantial
opportunity to gain market share.
Fusion
intends to build on the success of its past acquisitions through
additional acquisitions of other cloud services companies, such as
Birch. We believe that the experience gained in integrating people,
products, systems, platforms and customers positions us well to
advance our growth. We continue to look to acquire other companies
that can expand our customer base and distribution capability, add
additional cloud-based products and services and help us increase
the scale of our operations.
Intellectual Property and Trademarks
We have
several trademarks and service marks, which are supported by a
combination of common law and statutory protection. We also own
numerous domain names, which have been registered with the
Corporation for Assigned Names and Numbers. The following
trademarks are registered with the United States Patent and
Trademark Office; however, except as otherwise noted, they are not
registered at the international level:
●
Fusion®
●
Fusion
(Logo)®
●
Clear
Connections in the Cloud®
●
Apptix®
(also registered with the European Community)
●
Cloud Alliance
Network & Design®
●
Mailstreet®
The
telecommunications and VoIP markets have been characterized by
substantial litigation regarding patent and other intellectual
property rights. Litigation, which could result in substantial cost
and diversion of our efforts, may be necessary to enforce
trademarks and/or service marks issued to us or to determine the
enforceability, scope and validity of the proprietary rights of
others. Legal proceedings to enforce our intellectual property or
defend ourselves against third-party claims of infringement can be
time consuming and costly. Adverse determinations in any litigation
or interference proceeding could subject us to costs related to
changing names, a loss of established brand recognition, or the
need to change the technologies utilized in our
services.
10
Competition
Each of
Fusion’s business segments are highly competitive, rapidly
evolving, and subject to constant technological change. In each of
our business segments, we compete with companies that are
significantly larger and have substantially greater market
presence, financial, technical, operational and marketing resources
than we do. In the event that such a competitor expends significant
sales and marketing resources in one or several markets where we
compete with them, we may not be able to compete successfully in
those markets. Specialized cloud services providers, who focus on
one or more cloud services or applications, could adopt aggressive
pricing and promotion practices that could impact our ability to
compete. We also believe that competition will continue to
increase, placing downward pressure on prices. Such pressure could
adversely affect our gross margins if we are not able to reduce our
costs commensurate with the price reductions of our competitors.
Further, the pace of technological change makes it impossible for
us to predict whether we will face new competitors using different
technologies to provide the same or similar services offered or
proposed to be offered by us. If our competitors were to provide
better and more cost effective services than ours, we may not be
able to increase our revenues or capture any significant market
share.
Government Regulation
In the
United States, our services are generally subject to varying
degrees of federal, state and local regulation, including
regulation by the Federal Communications Commission (the
“FCC”) and various state public utility commissions or
public service commissions. We may also be subject to similar
regulation by foreign governments and their
telecommunications/regulatory agencies. While these regulatory
agencies grant us the authority to operate our business, they
typically exercise minimal control over our services and pricing.
However, they do require the filing of various reports, compliance
with public safety and consumer protection standards and the
payment of certain regulatory fees and assessments.
We
cannot provide assurance that the U.S. and foreign regulatory
agencies exercising jurisdiction over us will grant us the required
authority to operate, will allow us to maintain existing authority
so we can continue to operate, or will refrain from taking action
against us if we are found to have provided services without
obtaining the necessary authority. Similarly, if our pricing and/or
terms or conditions of service are not properly filed or updated
with the applicable agencies, or if we are otherwise not fully
compliant with the rules of the various regulatory agencies,
regulators or other third parties could challenge our actions and
we could be subject to forfeiture of our authority to provide
service, or to penalties, fines, fees or other costs.
As a
carrier, Fusion and FGS are subject to FCC regulation under the
Communications Act of 1934, as amended. Fusion and FGS each have
the necessary authority under Section 214 of the Communications Act
to operate as a domestic and international carrier. Generally,
international carrier traffic is subject to minimal regulation by
state and local jurisdictions. Fusion also holds various state
licenses authorizing us to provide intrastate services to our
carrier and end-user customers, and we comply with state reporting,
fee payment, tariffing, and other obligations with respect to these
services. Should we fail at any time to hold the licenses required
to provide our intrastate services, we could be subject to fines
and/or other penalties.
Our
VoIP services are lightly regulated, although certain traditional
telecommunications regulations have been applied to VoIP services.
The FCC requires interconnected VoIP services to comply with: 911
emergency service requirements; registration requirements;
Communications Assistance for Law Enforcement requirements;
obligations to support Universal Service including the Universal
Service Fund (“USF”) and Telecommunications Relay
Services, the North American Numbering Plan Administration, and
Local Number Portability Administration; Customer Proprietary
Network Information requirements; disability access obligations;
Local Number Portability requirements; service discontinuance
notification obligations; outage reporting requirements; and rural
call completion reporting and rules related to ring signal
integrity. The FCC defines interconnected VoIP service as service
that (1) enables real-time, two-way voice communications, (2)
requires a broadband connection from the user’s location, (3)
requires Internet protocol compatible customer premises equipment,
and (4) permits users generally to receive calls that originate on
the public switched telephone network (“PSTN”) and to
terminate calls to the PSTN. Under this definition, Fusion is a
provider of interconnected VoIP service. We believe that our
services are currently compliant with all applicable FCC
requirements, and we and FGS have made and are making the required
contributions to USF and other funds. Should either Fusion or FGS
fail to meet any of the FCC requirements discussed above or fail to
make required contributions in the future, we could be subject to
revocation of our authority to operate or to fines and/or
penalties.
As a
result of the FCC’s preemption of states’ ability to
regulate certain aspects of VoIP service, and a trend in state
legislatures to affirmatively deregulate VoIP services for most
purposes, our VoIP services are subject to relatively few state
regulatory requirements aside from collection of state and local
E911 fees and state Universal Service support obligations. We
believe that our VoIP services are currently compliant with all
applicable state requirements, and we have made and are making the
required contributions to E911, state USF, and other funds. The
state regulatory framework for our VoIP services continues to
evolve, so we, in conjunction with our professional advisors,
monitor the actions of the various state regulatory agencies and
endeavor to ensure that we are in compliance with applicable state
law, including any new statutes or regulations that may be passed.
However, there can be no assurance that we will become aware of all
applicable requirements on a timely basis, or that we will always
be fully compliant with applicable rules and regulations. Should we
fail to be compliant with applicable state regulations, or to file
required reports with state regulatory agencies, we could be
subject to fines and/or penalties.
11
While
we believe VoIP services may be subject to additional federal,
state, local, or international regulation in the future, it’s
uncertain when or how the effects of such regulation could affect
us and our business. If additional regulation does occur, it is
possible that such regulatory agencies may impose surcharges, taxes
or regulatory fees on VoIP service providers. The imposition of any
such surcharges, taxes, or regulatory fees could increase the
Company’s costs and thus reduce or eliminate any competitive
advantage that we might enjoy today.
Employees
As of
December 31, 2017, we had 271 employees, all of which were full
time employees. None of our employees is represented by a labor
union or collective bargaining agreement. We believe that the
relationship between us and our employees is good and, to date, we
have not experienced a work stoppage.
Customer Concentrations and Revenues and Assets by Geographic
Area
For the
years ended December 31, 2017 and 2016, no single customer
accounted for more than 10% of the Company’s consolidated
revenues or accounts receivable.
During
the years ended December 31, 2017 and 2016, 91.8% and 89.5%,
respectively, of the Company’s revenue was derived from
customers in the United States and 8.2 % and 10.5%, respectively,
was derived from international customers. As of December 31, 2017
and 2016, the Company had no assets located outside of the United
States.
Available Information
Our
principal executive offices are located at 420 Lexington Avenue,
Suite 1718, New York, New York 10170. The telephone number at our
executive offices is 212-201-2400 and our main corporate website is
www.fusionconnect.com. The information on the Company’s
website is neither a part of, nor incorporated by reference into,
this report.
We make
available our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, proxy statements and
amendments to those reports and statements filed or furnished
pursuant to Section 13(a), Section 15(d) or Section 14(a) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), free of charge on our website, www.fusionconnect.com,
as soon as reasonably practicable after they are electronically
filed with, or furnished to, the Securities and Exchange Commission
(the “SEC”). Additionally, copies of materials filed by
us with the SEC may be accessed at the SEC’s Public Reference
Room at 100 F Street, N.E., Washington, DC 20549, between the hours
of 10:00 am to 3:00 pm, or at the SEC’s website www.sec.gov.
For information about the SEC’s Public Reference Room, please
call 1-800-SEC-0339.
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the risk factors described below in
evaluating our future prospects. In particular, keep these risk
factors in mind when you read “forward-looking”
statements elsewhere in this report. Forward-looking statements
relate to our expectations for future events and time periods.
Generally, the words “anticipates,”
“expects,” “intends,” “may,”
“should,” “plans,” “believes,”
“predicts,” “potential” and similar
expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and
circumstances could differ significantly from those anticipated in
the forward-looking statements. Any of the following risks could
harm our business, operating results or financial condition and
could result in a complete loss of your investment. Additional
risks and uncertainties that are not yet identified or that we
currently think are immaterial may also harm our business and
financial condition in the future.
Risks Relating to Our Business
Failure to comply with the financial and other covenants contained
in our senior debt facilities is an event of default under these
agreements.
Our
acquisitions have been financed primarily through the issuance of
secured debt with an aggregate principal amount outstanding of
approximately $97.6 million at December 31, 2017. Currently, all
assets of Fusion and its subsidiaries are pledged as collateral
under its senior debt facilities. These facilities contain a number
of affirmative and negative covenants, including but not limited
to, restrictions on the payment of subordinate indebtedness,
incurring additional indebtedness, making capital expenditures,
paying dividends and cash distributions by subsidiaries. Under
these senior facilities, we are also required to comply with
various financial covenants, including leverage ratio, fixed charge
coverage ratio and minimum levels of earnings before interest,
taxes, depreciation and amortization, or EBITDA. Failure to comply
with any of the restrictive or financial covenants contained in
these facilities could result in an event of default and
accelerated demand for repayment of our outstanding debt. We do not
have the financial resources to repay our senior debt if it is
accelerated.
12
As of
September 30, 2016, we were not in compliance with the leverage
ratio covenants contained in our senior credit facilities, and we
received waivers and amendments from the lenders under these
facilities as of September 30, 2016. After giving effect to the
foregoing waiver, we were in compliance with all of the financial
covenants contained in our debt agreements for the years ended
December 31, 2017 and 2016. There can be no assurances however,
that we will continue to be able to obtain such waivers in the
future if we do not comply with the financial covenants contained
in our credit facilities.
We have a history of operating losses and net losses. There can be
no assurance that we will ever achieve profitability or have
sufficient funds to execute our business strategy.
At
December 31, 2017 and 2016, we had a working capital deficit of
$15.4 million and $6.6 million, respectively. At December 31, 2017,
we had a stockholders’ deficit of $1.2 million and at
December 31, 2016, we had stockholders’ equity of $9.2
million. In addition, at December 31, 2017 and 2016, we incurred
net losses applicable to common stockholders of $15.9 million and
$15.1 million, respectively. Our cash flows from operations for the
year ended December 31, 2017 were not sufficient to support our
capital expenditure requirements and other obligations in 2017. We
may not be able to generate profits in the future and may not be
able to support our operations or otherwise establish a return on
invested capital. In addition, we may not have sufficient funds to
execute our business strategy, requiring us to raise additional
funds from the equity markets or other sources, resulting in
further dilution to our equity holders. These losses, among other
things, have had, and may continue to have, an adverse effect on
our working capital, total assets and stockholders’
equity.
The cloud services industry is highly competitive and we may be
unable to compete effectively.
The
cloud services industry is highly competitive, rapidly evolving and
subject to constant technological change. In addition, many of our
current cloud services competitors are significantly larger and
have substantially greater market presence; greater financial,
technical, operational and marketing resources; and more
experience. In the event that any competitor expends significant
sales and marketing resources in one or several markets where we
compete with them, we may not be able to compete successfully in
those markets. We also believe that competition will continue to
increase, placing downward pressure on prices. Such pressure could
adversely affect our gross margins if we are not able to reduce our
costs commensurate with the price reductions of our competitors. In
addition, the pace of technological change makes it impossible for
us to predict whether we will face new competitors using different
technologies to provide the same or similar services offered or
proposed to be offered by us. If our competitors were to provide
better and more cost effective services, we may not be able to
increase our revenues or capture any significant market
share.
Our business is capital intensive, and we do not currently generate
sufficient revenue to offset our operating expenses. If we are
unable to obtain additional funding when required, we may have to
significantly curtail or possibly terminate some of our
operations.
We may
require future capital in order to continue to fund our operating
expenses and to continue to otherwise execute our business plan and
growth strategy. If we are unable to obtain the required funding or
generate revenue sufficient to sustain our operations, we could be
forced to significantly curtail or suspend our operations,
including laying-off employees and selling assets. Additional
capital may not be available to us when needed or on terms that are
acceptable to us, or at all.
We have
historically funded our working capital requirements through the
sale of equity securities of Fusion. The sale of equity securities
to fund operations is dilutive to our existing stockholders. The
terms of our debt facilities currently and may in the future limit
our ability to utilize cash flows generated from our Business
Services segment to fund the Company’s other operations,
including corporate overhead expenses. In the event we are unable
to substantially increase our revenue to fund our operating
expenses, we may be required to continue to fund operations through
additional sales of Fusion’s equity securities. In the past,
limited cash resources restricted our Carrier Services
segment’s ability to purchase termination capacity with
longer payment terms than the terms under which it is able to sell
services to its customers. Should this trend continue, and should
FGS not be disposed of as contemplated by the Merger Agreement, it
could limit our ability to grow our revenues and/or margins, or
limit our ability to achieve our revenue and/or margin targets in
this segment.
13
If we are unable to manage our growth or implement our expansion
strategy, we may increase our costs without increasing our
revenue.
We may
not be able to expand our product offerings, customer base and
markets, or implement the other features of our business strategy
at the rate, or to the extent, presently planned. Our projected
growth will place a significant strain on our administrative,
operational and financial resources and may increase our costs. If
we are unable to successfully manage our future growth, continue to
upgrade our operating and financial control systems, recruit and
hire necessary personnel or effectively manage unexpected expansion
difficulties, we may not be able to maximize revenue or achieve
profitability.
Our ability to grow our business is dependent upon market
developments and traffic patterns, which may lead us to make
expenditures that do not result in increased revenue.
Our
purchase of network equipment and software will be based, in part,
upon our expectations concerning future revenue growth and market
developments. As we expand our network, we will be required to make
significant capital expenditures, including the purchase of
additional network equipment and software. To a lesser extent, our
fixed costs will also increase from the ownership and maintenance
of a greater amount of network equipment including our switching
systems, gateways, routers and other related systems. If our
traffic volume were to decrease, or fail to increase to the extent
expected or necessary to make efficient use of our network, our
costs as a percentage of revenue would increase
significantly.
Changes in technology and service offerings could affect the
ability of our Business Services segment to compete in the
marketplace for cloud communications services.
Our
Business Services segment is subject to rapid and significant
changes in technology, particularly in the emerging areas of cloud
voice, cloud connectivity, cloud storage and cloud computing. Our
industry has evolved significantly in these areas over the past few
years, and is expected to continue to evolve. Emerging technologies
could lead to the development of newer, more convenient, more
cost-effective or otherwise more attractive services. In addition,
the preferences and requirements of business customers are changing
rapidly. Our ability to retain current customers and attract new
customers may be highly dependent on whether we choose the
technologies that will ultimately have the greatest customer
acceptance, are able to adopt these new technologies and offer
competitive new services when appropriate, or can compete
successfully against other service providers that use these new
technologies, many of whom are larger or possess greater financial
or technical resources than we do. The development, introduction
and marketing of such new services in response to new technologies
or new customer demands may require us to increase our capital
expenditures significantly. In addition, new technologies may be
protected by patents or other intellectual property laws and
therefore may only be available to our competitors and not to
us.
Some of our services are dependent upon multiple service platforms,
network elements, and back-office systems that are reliant on third
party providers.
We have
deployed back-office systems and services platforms that enable us
to offer our customers a wide-array of services and features.
Sophisticated back office information and processing systems are
vital to our continued growth and our ability to continue to
monitor costs, invoice customers, provision client orders, and
achieve operating efficiencies. Some of these systems are dependent
upon license agreements with third party vendors. These third party
vendors may cancel or refuse to renew some of these agreements, and
the cancellation or non-renewal of these agreements may harm our
ability to invoice customers and provide services
efficiently.
Our business could be materially and adversely affected in the
event of accusations of infringement of third-party intellectual
rights.
There
has been substantial litigation in the areas in which we operate
regarding intellectual property rights. Regardless of the merits,
accusations and lawsuits concerning claims of infringement or
misuse of another party’s proprietary rights may negatively
affect customer relationships, may divert management’s
attention away from other aspects of our operations and, upon
resolution may have a material adverse effect on our business,
results of operations, financial condition and cash
flows.
If we
were found to be infringing on the intellectual property rights of
a third party, we could be subject to liability for such
infringement, which could be material. We could also be prohibited
from selling certain services or required to redesign certain
services, each of which could have a material adverse effect on our
business and results of operations. These and other outcomes may
result in the loss of a substantial number of existing customers or
prevent our acquisition of new customers; cause us to pay license
fees for intellectual property we are found to have infringed;
cause our costs to increase; materially and adversely affect our
brand in the marketplace and cause a substantial loss of good will;
and cause us to cease certain services or offering certain
features.
We rely upon certain proprietary rights in our technology, systems
and business processes. If our protection of these rights were to
be compromised, it could negatively affect our ability to compete
or to achieve our projected business and financial
results.
Our
ability to compete depends, in part, upon our proprietary rights in
our technology, systems and business processes. In general, our
technology is based on the integration and use of publicly
available hardware components, and is therefore afforded little
protection under existing patent law. Some of our software and
systems, while developed by us, are generally not unique in such a
manner as to allow protection under existing patent law. As a
result, we generally rely on a combination of contractual
restrictions and the general protection afforded by copyright,
trademark and trade secret laws to establish and protect our
proprietary rights. Such limited protection could prove
insufficient and thereby subject us to increased competition or
impact the business or financial results of our
operations.
14
It is
the Company’s policy to require employees, consultants and,
when warranted, certain customers and vendors to execute
confidentiality agreements with us. These agreements provide that
confidential information developed or made known during the course
of the relationship must be kept confidential and not disclosed to
third parties except under certain limited circumstances. If such
arrangements were to prove ineffective in protecting our
confidential information, our business or financial performance
could be negatively impacted.
The
U.S. Patent and Trademark Office has granted Fusion federal
registration for eight trademarks, and Federal registration of
those trademarks will be effective for as long as we continue to
use them and renew their registrations. We may register additional
trademarks and other intellectual property rights in the future,
although there can be no assurance that our effort to register
these trademarks will be successful. Fusion generally does not
register any of its copyrights with the U.S. Copyright Office, but
relies on the protection afforded to such copyrights by the U.S.
Copyright Act, which provides protection to authors of original
works whether published or unpublished and whether registered or
unregistered.
Vulnerabilities to security breaches, cyber intrusions and other
malicious acts could adversely impact our business.
In the current environment, there are numerous and evolving risks
to cybersecurity and privacy, including criminal hackers,
state-sponsored intrusions, industrial espionage, employee
malfeasance, and human or technological error. Computer hackers and
others routinely attempt to breach the security of technology
products, services, and systems such as ours, and those of
customers, third-party contractors and vendors.
Our operations depend on our ability to protect our network from
interruption by damage from unauthorized entry, computer viruses or
other events beyond our control. In the past, we may have been
subject to denial or disruption of service (“DDOS”),
and we may be subject to DDOS attacks in the future. We cannot
assure you that our backup systems, regular data backups, security
protocols, DDOS mitigation and other procedures that are currently
in place, or that may be in place in the future, will be adequate
to prevent significant damage, system failure or data loss.
Critical to our provision of service is the storage, processing,
and transmission of confidential and sensitive data. We store,
process and transmit a wide variety of confidential and sensitive
information including credit card, bank account and other financial
information, proprietary, trade secret or other data that may be
protected by intellectual property laws, customers' and employees'
personally identifiable information, as well as other sensitive
information. We, along with others in the industry, will be subject
to cyber threats and security breaches, given the nature of the
information we store, process and transmit.
Depending on the evolving nature of cyber threats and the measures
we may have to implement to continue to maintain the security of
our networks and data, our profitability may be adversely impacted
or we may have to increase the price of our services which may make
our offerings less competitive with other communications
providers.
If an individual obtains unauthorized access to our network, or if
our network is penetrated, our service could be disrupted and
sensitive information could be lost, stolen or disclosed which
could have a variety of negative impacts, including legal
liability, investigations by law enforcement and regulatory
agencies, and exposure to fines or penalties, any of which could
harm our business reputation and have a material negative impact on
our business. In addition, to the extent we market our services as
compliant with particular laws governing data privacy and security,
such as HIPAA (Health Insurance Portability and Accountability Act)
and the Gramm-Leach-Bliley Act, any security breach that exposes
protected information may make us susceptible to a number of claims
related to our marketing.
Many governments have enacted laws requiring companies to notify
individuals of data security incidents involving certain types of
personal data. In addition, some of our customers contractually
require notification of any data security compromise. Security
compromises experienced by our competitors, by our customers or by
us may lead to public disclosures, which may lead to widespread
negative publicity. Any security compromise in our industry,
whether actual or perceived, could harm our reputation, erode
customer confidence in the effectiveness of our security measures,
negatively impact our ability to attract new customers, cause
existing customers to elect not to renew their contracts with us or
subject us to third-party lawsuits, regulatory fines or other
action or liability, which could materially and adversely affect
our business and operating results.
In contracts with larger enterprises, we sometimes agree to assume
liability for security breaches in excess of the amount of
committed revenue from the contract. In addition, there can be no
assurance that any limitations of liability provisions in our
contracts for a security breach would be enforceable or adequate or
would otherwise protect us from any such liabilities or damages
with respect to any particular claim. We also cannot be sure that
our existing general liability insurance coverage and coverage for
errors or omissions will continue to be available on acceptable
terms or will be available in sufficient amounts to cover one or
more large claims, or that the insurer will not deny coverage as to
any future claim. The successful assertion of one or more large
claims against us that exceed available insurance coverage, or the
occurrence of changes in our insurance policies, including premium
increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on our business,
financial condition and operating results.
15
Our revenue growth is dependent upon our ability to build new
distribution relationships and to acquire new
customers.
Our
ability to grow through efficient and cost effective deployment of
our cloud services is, in part, dependent upon our ability to
identify and contract with local, regional and national entities
that will assist in the distribution of our products and services.
If we are unable to identify, contract with or maintain such
distribution relationships, or if the efforts of these agents are
not successful, we may not grow the customer base or achieve the
revenue level currently envisioned and our results of operations
will be adversely impacted.
We are dependent upon our ability to obtain the necessary
regulatory approvals and licenses to enter new domestic and
international markets in which such approvals are required. Such
approvals may or may not occur as planned and could be
delayed.
Our
ability to enter into new domestic and international markets may,
in certain cases, rely upon our ability to obtain licenses or other
approvals to operate in those markets, our ability to establish
good working relationships with the relevant regulatory authorities
in those jurisdictions or our ability to interconnect to the local
telephone networks in those markets. If we are not able to obtain
the necessary licenses, approvals or interconnections, our ability
to enter these new markets may be delayed or
prevented.
Industry consolidation could make it more difficult for us to
compete.
Companies
offering cloud voice, UCaaS, cloud connectivity, SaaS, IaaS and
other cloud services are, in some circumstances, consolidating. We
may not be able to compete successfully with businesses that have
combined, or will combine, to produce companies with substantially
greater financial, technical, sales and marketing resources, or
with larger client bases, more extended networks or more
established relationships with vendors and distributors. If we were
to experience such heightened competitive pressures, there is a
risk that our revenues may not grow as expected and the value of
our equity securities could decline.
Our ability to provide services is often dependent on our suppliers
and other service providers who may not prove to be
reliable.
A
majority of the voice calls made by our customers are connected
through other communication carriers, which provide us with
transmission capacity through a variety of arrangements. Our
ability to terminate voice traffic in our targeted markets is an
essential component of our ongoing operations. If we do not secure
or maintain operating and termination arrangements, our ability to
increase services to our existing markets and gain entry into new
markets will be limited. Therefore, our ability to maintain and
expand our business is dependent, in part, upon our ability to
maintain satisfactory relationships with other domestic carriers,
Internet service providers, international carriers, fiber optic
cable providers and other service providers, many of which are our
competitors, and upon our ability to obtain their services on a
cost effective basis. In addition, if a carrier with whom we
interconnect does not carry the traffic routed to it, or does not
provide the required capacity, we may be forced to route our
traffic to, or buy capacity from, a different carrier on less
advantageous terms, which could reduce our profit margins or
degrade our network service quality. In the event network service
quality is degraded, it may result in a loss of customers. To the
extent that any of these carriers with whom we interconnect raise
their rates, change their pricing structure or reduce the amount of
capacity they will make available to us, our revenues and
profitability may be adversely affected.
We rely on third party equipment suppliers who may not be able to
provide us the equipment necessary to deliver the services that we
seek to provide.
We are
dependent on third party equipment suppliers, including Cisco,
BroadSoft, Acme Packet and Sonus, for equipment, software and
hardware components. If these suppliers fail to continue product
development and research and development or fail to deliver quality
products or support services on a timely basis, or if we are unable
to develop alternative sources of supply if and as required, such a
failure could result in an inability to deliver the services that
we currently provide or intend to provide, and our financial
condition and results of operations may be adversely
affected.
FGS’s Carrier Services business relies on the cooperation of
other international carriers and incumbent service providers, who
may not always cooperate with us in our attempt to serve a specific
country or market.
In some
cases, the growth of the FGS Carrier Services business requires the
cooperation of other international carriers and/or the incumbent
service provider in order to provide services to or from specific
countries or markets. In the event the incumbent, or another
in-country international carrier, does not cooperate with FGS or
support FGS in its efforts to serve that country, its ability to
provide service to or from that country may be delayed, or the
costs to provide service might increase should it be forced to use
another more expensive carrier. If FGS is unable to develop and
maintain successful relationships with other international carriers
and incumbent operators, its ability to cost-effectively service an
important market could be adversely affected.
16
Because we do business on an international level, we are subject to
an increased risk of tariffs, sanctions and other uncertainties
that may hurt our revenue.
There
are certain risks inherent in doing business internationally,
especially in emerging markets, such as unexpected changes in
regulatory requirements, the imposition of tariffs or sanctions,
licenses, customs, duties, other trade barriers, political risks,
currency devaluations, high inflation, corporate law requirements
and civil unrest. Many of the economies of these emerging markets
are weak and volatile. FGS may not be able to mitigate the effect
of inflation on its operations in these countries by price
increases, even over the long-term. Also, deregulation of the
communications markets in developing countries may or may not
continue. Incumbent service providers, trade unions and others may
resist legislation directed toward deregulation and may resist
allowing FGS to interconnect to their networks. The legal systems
in emerging markets also frequently have insufficient experience
with commercial transactions between private parties, therefore FGS
may not be able to protect or enforce its rights in some emerging
market countries. Governments and regulations may change, thus
impacting the availability of new licenses or the cancellation or
suspension of existing operating licenses. The instability of the
laws and regulations applicable to the FGS Carrier Services
business, as well as their interpretation and enforcement, could
materially impact its business in those countries and adversely
affect its and our financial condition or results of
operations.
The
regulatory treatment of VoIP outside the United States varies from
country to country. Some countries are considering subjecting VoIP
services to the regulations applied to traditional telephone
services and they may assert that FGS is required to register as a
telecommunications carrier in that country or impose other more
onerous regulations. In such cases, our failure to register could
subject us to fines, penalties or forfeiture of our right to do
business in that country. Regulatory developments such as these
could have a material adverse effect on our ability to grow our
international Business Services operations.
Additional taxation and government regulation of the cloud
communications industry may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing
business.
As a
result of changes in regulatory policy, we could be forced to pay
additional taxes on the products and services we provide. We
structure our operations and our pricing based on assumptions about
various domestic and international tax laws, tax treaties and other
relevant laws. Taxation authorities or other regulatory authorities
might not reach the same conclusions about taxation that we have
reached in formulating our assumptions. We could suffer adverse tax
and other financial consequences if our assumptions about these
matters are incorrect or the relevant laws are changed or modified.
In the U.S., our products and services are subject to varying
degrees of federal, state and local regulation, including
regulation by the FCC and various state public utility commissions.
We may also be subject to similar regulation by foreign governments
and their telecommunications and/or regulatory agencies. While
these regulatory agencies grant us the authority to operate our
business, they typically exercise minimal control over our services
and pricing. However, they do require the filing of various
reports, compliance with public safety and consumer protection
standards and the payment of certain regulatory fees and
assessments.
We
cannot assure you that applicable U.S. and foreign regulatory
agencies will grant us the required authority to operate, will
allow us to maintain existing authority so we can continue to
operate or that such agencies will refrain from taking action
against us if we are found to have provided services without
obtaining the necessary authority. Similarly, if our pricing and/or
terms and conditions of service are not properly filed or updated
with the applicable agencies, or if we are otherwise not fully
compliant with the rules of the various regulatory agencies,
regulators or other third parties could challenge our actions and
we could be subject to forfeiture of our authority to provide
service, or to penalties, fines, fees or other costs.
We also
hold various state licenses authorizing us to provide intrastate
services to our carrier and end-user customers, and we comply with
state reporting, fee payment, tariffing and other obligations with
respect to these services. However, in several states where we
provide de minimus intrastate services we may not have fully
complied with applicable licensing requirements. Should we fail at
any time to hold the licenses required to provide our intrastate
services, we could be subject to fines or other
penalties.
In addition to new regulations being adopted, existing laws may be
applied to the Internet, which could hinder our
growth.
New and
existing laws may cover issues that include: sales and other taxes;
user privacy; pricing controls; characteristics and quality of
products and services; consumer protection; cross-border commerce;
copyright, trademark and patent infringement; and other claims
based on the nature and content of Internet materials. Changes to
existing regulations or the adoption of new regulations could delay
growth in demand for our products and services and limit the growth
of our revenue.
17
The effects of natural disasters such as hurricanes or other events
over which we have no control could significantly disrupt our
operations and could have a material adverse impact on our
business.
Our
Carrier Services operations were impacted by Hurricane Sandy in the
Northeast region of the United States in late October of 2012. The
severe weather conditions directly affected the ability of many of
our carrier customers and vendors to connect to us. As a result, we
did not generate the same levels of revenues and gross profit that
we believe we would have generated absent these abnormal
conditions. Any future disruptions to the operation of FGS’
network (should it not be disposed of as contemplated by the Merger
Agreement) or Fusion’s network, including acts of war,
terrorism or other force majeure events, could have a material
adverse impact on our liquidity, financial condition and results of
operations. Although we do carry business interruption insurance,
we cannot assure you that our losses in the event of a natural
disaster or other force majeure event would be completely covered
by insurance.
If we do not retain our executive officers and senior management,
or if we do not continue to attract and retain qualified personnel
and independent sales agents, our ability to execute our business
plan could be adversely affected.
Our
existing executive officers and senior management have extensive
experience in the communications industry, as well as many years of
working together as an integrated management team directing our
day-to-day operations. As a result, we are dependent on those
individuals and the loss of the services of one or more of these
individuals could impair our ability to execute our strategy or
achieve our business and financial objectives.
We do
not have written employment agreements with any of our executive
officers or other members of our senior management team except for
Matthew Rosen, our Chief Executive Officer.
We face
competition for qualified personnel, including management,
technical, financial and sales personnel. We also rely on
independent sales agents to market and sell our services. If we are
unable to attract and retain experienced and motivated personnel,
including independent sales agents, the growth of our business or
the effectiveness of our day-to-day operations may be negatively
impacted and we may not be able to grow our customer base or
achieve our business or financial objectives.
Risks Related to the Merger
The Merger may not be completed within the expected timeframe or at
all, and the failure to complete the Merger may negatively affect
the trading price of our common stock and could adversely affect
our future business and financial results.
The
Merger continues to be subject to a number of risks and
uncertainties, including (1) we and Birch may not be able to obtain
the financing necessary to complete the Merger; (2) we and Birch
may not obtain all necessary regulatory approvals or such approvals
may not be obtained in a timely fashion; and (3) timely
satisfaction of all other closing conditions to the Merger. Failure
to complete the Merger or significant delays in its completion
could negatively affect the trading price of our common stock,
adversely affect our future business and financial results and
could result in our failure to timely realize certain synergies
relating to such acquisition.
Our existing stockholders will experience substantial dilution if
the Merger is consummated.
If the
Merger is consummated, the Birch stockholders (through BCHI) will
receive consideration, in the aggregate, equal to three times the
Merger Shares. Therefore, there will be substantial dilution to the
Fusion stockholders. The Fusion stockholders will have lower equity
participation in the combined company and, as a result, reduced
opportunity to participate in any future earnings or growth of the
combined company and future appreciation in the value of our common
stock than they have prior to the Merger.
If the Reverse Stock Split is consummated, our total market
capitalization may decrease.
If the
Reverse Stock Split is effected prior to the close of the Merger,
the market price per share of our common stock after the Reverse
Stock Split may not increase in proportion to the reduction in the
number of shares of our common stock outstanding before the Reverse
Stock Split, if and when it is effected. Accordingly, the total
market capitalization of our common stock (the aggregate value of
all of our common stock at the then existing market price) after
the Reverse Stock Split may be lower than the total market
capitalization before the Reverse Stock Split. There are numerous
factors and contingencies that could affect our stock price
following a proposed reverse stock split, including, but not
limited to, the status of the market for our stock at the time, our
reported results of operations in future periods, and general
economic, market and industry conditions, and the market price of
our common stock may not be sustainable at the bid price following
such reverse stock split.
18
The existing stockholders of Fusion will comprise a minority of the
combined company after the consummation of the Merger and the Birch
stockholders will nominate a majority of the Board of
Directors.
If the
Merger is consummated, the stockholders of Birch (through BCHI)
will receive consideration equal to three times the number of
shares of common stock outstanding and in-the-money Fusion warrants
immediately prior the effective time of the Merger, subject to
certain exceptions, making them the majority stockholders of the
Company. Furthermore, under the terms of the Merger, BCHI is
entitled to nominate five of the nine directors serving on the
Company’s board of directors after the Merger (subject to
Nasdaq’s independence requirements and one of the designees
being subject to the reasonable consent of the Fusion committee).
Accordingly, BCHI will have substantial influence over the board of
directors and the operations of the Company after the consummation
of the Merger.
The number of shares issuable as consideration will not be affected
by an increase the trading price of our common stock.
The
consideration payable in connection with the Merger is a fixed
number of shares of common stock. Therefore, our stockholders will
not be able to benefit from an increase in the trading price of our
common stock during the pendency of the Merger, with respect to the
consideration payable for Birch. Furthermore, the Merger Agreement
does not provide Fusion with a price-based termination right, a
merger consideration adjustment or other similar
protection.
We may not realize the revenue growth opportunities and cost
synergies that are anticipated from the planned Merger as we may
experience difficulties in integrating Birch’s business with
ours.
The
benefits that are expected to result from the Merger will depend,
in part, on our ability to realize the anticipated revenue growth
opportunities and cost synergies as a result of the planned
acquisition. Our success in realizing these revenue growth
opportunities and cost synergies, and the timing of this
realization, depends on the successful integration of Birch. There
is a significant degree of difficulty and management distraction
inherent in the process of integrating an acquisition as sizable as
Birch. The process of integrating operations could cause an
interruption of, or loss of momentum in, our and Birch’s
activities. Members of our senior management may be required to
devote considerable amounts of time to this integration process,
which will decrease the time they will have to manage our company,
service existing customers, attract new customers and develop new
products or strategies. If senior management is not able to
effectively manage the integration process, or if any significant
business activities are interrupted as a result of the integration
process, our business could suffer. There can be no assurance that
we will successfully or cost-effectively integrate Birch. The
failure to do so could have a material adverse effect on our
business, financial condition or results of
operations.
Even if
we are able to integrate Birch successfully, this integration may
not result in the realization of the full benefits of the growth
opportunities and cost synergies that we currently expect from this
integration, and we cannot guarantee that these benefits will be
achieved within anticipated timeframes or at all. For example, we
may not be able to eliminate duplicative costs. Moreover, we may
incur substantial expenses in connection with the integration of
Birch. While it is anticipated that certain expenses will be
incurred to achieve cost synergies, such expenses are difficult to
estimate accurately, and may exceed current estimates. Accordingly,
the benefits from the planned acquisition may be offset by costs
incurred to, or delays in, integrating the businesses.
The Merger could impact or cause disruptions in our and
Birch’s businesses which could have an adverse effect on our
business, financial condition or results of operations following
the completion of the Merger.
The
Merger could cause disruption in our and Birch’s businesses,
including:
|
●
|
our and
Birch’s current and prospective customers and suppliers may
experience uncertainty associated with the Merger, including with
respect to current or future business relationships with us, Birch
or the combined business and may attempt to negotiate changes in
existing business;
|
|
●
|
our and
Birch’s employees may experience uncertainty about their
future roles with us, which may adversely affect our and
Birch’s ability to retain and hire key
employees;
|
|
●
|
the
Merger may give rise to potential liabilities; and
|
|
●
|
the
attention of our management and that of Birch may be directed
toward the completion and implementation of the Merger and
transaction-related considerations and may be diverted from the
day-to-day business operations of the respective
companies.
|
In
connection with the Merger, we could also encounter additional
transaction and integration-related costs or other factors such as
the failure to realize all of the benefits anticipated in the
Merger. The disruption to Birch’s business could be
exacerbated by a delay in the completion of the
Merger.
19
The debt we expect to incur in connection with the Merger could
have a negative impact on our liquidity or restrict our
activities.
As of
December 31, 2017, we had approximately $97.6 million of
indebtedness outstanding. If the Merger is consummated, effective
upon closing of the Merger we currently expect that our outstanding
indebtedness will be approximately $580 million. New credit
facilities related to the Merger will likely contain various
covenants that limit our ability to engage in specified types of
transactions. Our overall leverage and the terms of our financing
arrangements could:
|
●
|
limit
our ability to obtain additional financing in the future for
working capital, capital expenditures and
acquisitions;
|
|
●
|
make it
more difficult to satisfy our obligations under the terms of our
indebtedness;
|
|
●
|
limit
our ability to refinance our indebtedness on terms acceptable to us
or at all;
|
|
●
|
limit
our flexibility to plan for and adjust to changing business and
market conditions in the industries in which we operate and
increase our vulnerability to general adverse economic and industry
conditions;
|
|
●
|
require
us to dedicate a substantial portion of our cash flow to make
interest and principal payments on our debt, thereby limiting the
availability of our cash flow to fund future acquisitions, working
capital, business activities, and other general corporate
requirements;
|
|
●
|
limit
our ability to obtain additional financing for working capital, to
fund growth or for general corporate purposes, even when necessary
to maintain adequate liquidity, particularly if any ratings
assigned to our debt securities by rating organizations were
revised downward; and
|
|
●
|
subject
us to higher levels of indebtedness than our competitors, which may
cause a competitive disadvantage and may reduce our flexibility in
responding to increased competition.
|
In
addition, the restrictive covenants could require us to maintain
specified financial ratios and satisfy other financial condition
tests. Our ability to meet those financial ratios and tests will
depend on our ongoing financial and operating performance, which,
in turn, will be subject to economic conditions and to financial,
market, and competitive factors, many of which are beyond our
control. A breach of any of these covenants could result in a
default under the instruments governing our
indebtedness.
Birch may have liabilities that are not known, probable or
estimable at this time.
As a
result of the Merger, Birch will become our subsidiary and it will
remain subject to all of its liabilities. There could be unasserted
claims or assessments that we failed or were unable to discover or
identify in the course of performing due diligence investigations
of Birch. In addition, there may be liabilities that are neither
probable nor estimable at this time that may become probable or
estimable in the future. Any such liabilities, individually or in
the aggregate, could have a material adverse effect on our
financial results. We may learn additional information about Birch
that adversely affects us, such as unknown, unasserted or
contingent liabilities and issues relating to compliance with
applicable laws.
Risks Related to Ownership of our Common Stock
We are unlikely to pay cash dividends on our common stock in the
foreseeable future.
We have
never declared or paid any cash dividends on our common stock. We
intend to retain any future earnings to finance our operations and
expand our business and therefore do not expect to pay any cash
dividends in the foreseeable future. Holders of our outstanding
preferred stock are entitled to receive dividends prior to the
payment of any dividends on our common stock. The payment of
dividends is also subject to provisions of Delaware law prohibiting
the payment of dividends except out of surplus and certain other
limitations, as well as the provisions contained in our debt
facilities.
Our common stock is subject to price volatility unrelated to our
operations.
The
market price of our common stock has fluctuated substantially and
will likely continue to fluctuate due to a variety of factors,
including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in our
industry, trading volume in our common stock, changes in general
conditions in the economy and the financial markets or other
developments affecting our competitors or us. In addition, the
stock market is subject to extreme price and volume fluctuations.
This volatility has had a significant effect on the market price of
our common stock and securities issued by many other companies for
reasons unrelated to operating performance.
In
addition, the market price of our common stock may continue to
fluctuate significantly in response to a number of other factors,
many of which are beyond our control including, but not limited to,
the following:
20
●
ability to
obtain and retain securities analyst coverage;
●
changes in
securities analysts’ recommendations or estimates of our
financial performance;
●
changes in the
market valuations of companies similar to us;
●
announcements by
our competitors of significant contracts, new offerings,
acquisitions, commercial relationships, joint ventures, or capital
commitments; and
●
failure to meet
analysts’ expectations regarding financial
performance.
Furthermore,
companies that have experienced volatility in the market price of
their stock have been subject to securities class action
litigation. A securities class action lawsuit against us,
regardless of its merit, could result in substantial costs and
divert the attention of our management from other business
concerns, which in turn could harm our business.
Our common stock may become subject to the “penny
stock” rules of the SEC, which will make transactions in our
shares cumbersome and may reduce the value of an investment in our
shares.
For so
long as the trading price of our common stock is less than $5.00
per share, our common stock may be considered a "penny stock," and
in such event trading in our common stock would be subject to the
requirements of Rule 15g-9 under the Exchange Act. Under this rule,
broker/dealers who recommend low-priced securities to persons other
than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer must make an
individualized written suitability determination for the purchaser
and receive the purchaser's written consent prior to the
transaction.
SEC
regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining
the penny stock market and its associated risks. These requirements
severely limit the liquidity of securities in the secondary market
because few brokers or dealers are likely to undertake these
compliance activities. In addition to the applicability of the
penny stock rules, other risks associated with trading in penny
stocks could also be price fluctuations and the lack of a liquid
market.
To
date, we have not been considered a “penny stock” due
to an exemption from Rule 15g-9 for companies with average annual
audited revenues for the prior three years of in excess of
$6,000,000 per year. However, should the exclusions from the
definition of a “penny stock” change, or should our
annual revenues fall dramatically, we may become subject to rules
applicable to “penny stocks” and the market for our
shares may be adversely affected.
The elimination of monetary liability against our directors,
officers and employees under our certificate of incorporation and
the existence of indemnification rights in favor of our directors,
officers and employees may result in substantial expenditures by us
and may discourage lawsuits against our directors, officers and
employees.
Our
certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to the Company
and its stockholders to the maximum extent permitted under Delaware
corporate law. Our by-laws also require us to indemnify our
directors to the maximum extent permitted by Delaware corporate
law. We may also have contractual indemnification obligations under
our agreements with our directors, officers and employees. These
indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage
awards against directors, officers and employees, which we may be
unable to recoup. These provisions and resultant costs may also
discourage the Company from bringing a lawsuit against directors,
officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our
stockholders against our directors, officers and employees even
though such actions, if successful, might otherwise benefit the
Company and its stockholders.
Our use of equity to fund operations is dilutive to existing
stockholders and, depending upon the market price of our common
stock at the time of issuance, we may be required to issue shares
of common stock at depressed prices.
Historically,
we have funded a vast majority of our working capital requirements
through the sale of Fusion equity securities. The use of Fusion
equity securities to fund operations is dilutive to our existing
stockholders. Unless we are able to generate substantial revenues
to fund our operating expenses, we may be required to continue to
fund our operations through the sale of additional equity.
Moreover, the dilutive effect on our stockholders caused by the
issuance of new equity is directly impacted by the market price of
our common stock at the time of issuance. If we are required to
issue equity securities at a time when the market price for our
common stock is depressed, we will need to issue more shares than
if the market price was higher, and the dilutive effect on our
stockholders will be greater.
21
The issuance of our common stock upon the exercise of options or
warrants or the conversion of outstanding convertible securities
may cause significant dilution to our stockholders and may have an
adverse impact on the market price of our common
stock.
As of
March 9, 2018, we had 35,579,756 common shares outstanding and
approximately 2,046,585 shares reserved for issuance upon
conversion of outstanding preferred stock, 2,000,988 shares
reserved for the exercise of outstanding warrants, and 3,017,687
shares reserved for the exercise of outstanding stock options. The
issuance of our common shares upon the exercise of stock options or
warrants, or conversion of preferred stock will increase the number
of our publicly traded shares, which could depress the market price
of our common stock.
The
perceived risk of dilution may cause our common stockholders to
sell their shares, which would contribute to a downward movement in
the stock price of our common stock. Moreover, the perceived risk
of dilution and the resulting downward pressure on our common stock
price could encourage investors to engage in short sales of our
common stock. By increasing the number of shares offered for sale,
material amounts of short selling could further contribute to
progressive price declines in our common stock.
We could use preferred stock to fund operations or resist
takeovers, and the issuance of preferred stock may cause additional
dilution.
Our
certificate of incorporation authorizes Fusion to issue up to
10,000,000 shares of preferred stock, of which 5,045 shares of
Series A-1, A-2 and A-4 Preferred Stock (the “Series A
Preferred”) are currently issued and outstanding, and 9,171
shares of our Series B-2 Preferred Stock (the “Series B-2
Preferred”) are currently issued and outstanding. Upon
completion of the Merger, the Series A Preferred and the Series B-2
Preferred will be converted into shares of our common stock. That
notwithstanding, our existing certificate of incorporation gives,
and the amended and restated certificate of incorporation to be
filed in connection with the Merger will give the Board the
authority to issue preferred stock without any further approval of
our stockholders. We may issue additional shares of preferred stock
to raise money to finance our operations. We may authorize the
issuance of the preferred stock in one or more series. In addition,
we may set the terms of preferred stock, including:
●
dividend and
liquidation preferences;
●
voting
rights;
●
conversion
privileges;
●
redemption
terms; and
●
other privileges
and rights of the shares of each authorized series.
The
issuance of large blocks of Fusion’s preferred stock could
have a dilutive effect on our existing stockholders. It can also
negatively impact our existing stockholders’ liquidation
preferences. In addition, while we include preferred stock in our
capitalization to improve our financial flexibility, we could also
issue preferred stock to friendly third parties to preserve control
by present management. This could occur if we become subject to a
hostile takeover that could ultimately benefit our
stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not
applicable to smaller reporting companies.
22
ITEM 2. PROPERTIES.
We are
headquartered in New York, New York and lease offices and
facilities in a number of other locations. Below is a list of our
primary leased offices and other facilities as of December 31,
2017.
|
Location
|
|
Lease
Expiration Date
|
|
Annual
Rent
|
|
Business
Use
|
|
Approx. Sq.
Ft.
|
|
420
Lexington Avenue, Suite 1718, New York, NY 10170
|
|
October
2020
|
|
$666,000
|
|
Lease
of principal executive offices
|
|
9,956
|
|
|
|
|
|
|
|
|
|
|
|
3565
Piedmont Road, N.E., Suite 300, Atlanta, GA 30005
|
|
August
2022
|
|
$261,000
|
|
Lease
of network facilities and office space
|
|
10,509
|
|
|
|
|
|
|
|
|
|
|
|
13921
Park Center Road Herndon, VA 20171
|
|
Month
to month
|
|
$345,000
|
|
Lease
of network facilities and office space
|
|
13,364
|
|
|
|
|
|
|
|
|
|
|
|
23250
Chagrin Blvd. Suite 250 Beachwood, OH 44122
|
|
May
2019
|
|
$93,000
|
|
Lease
of sales and administrative office space
|
|
5,638
|
|
|
|
|
|
|
|
|
|
|
|
695 US
Highway 46 West Suite 200
Fairfield,
NJ 07004
|
|
August
2028
|
|
$203,000
|
|
Lease
of network facilities and office space
|
|
13,511
|
|
|
|
|
|
|
|
|
|
|
|
811
North Catalina Suite 2120
Redondo
Beach, CA 90277
|
|
May
2018
|
|
$31,000
|
|
Lease
of network facilities and office space
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
14205
Burnet Rd. Suite 300 Austin, TX 78728
|
|
September
2020
|
|
$37,000
|
|
Lease
of network facilities and office space
|
|
2,534
|
|
|
|
|
|
|
|
|
|
|
|
1451 W.
Cypress Creek Rd. Suite 300, Room 392
Fort
Lauderdale, FL 33309
|
|
Month
to month
|
|
$42,000
|
|
Lease
of network facilities and office space
|
|
593
|
We
believe that our leased facilities are adequate to meet our current
and future needs.
ITEM 3. LEGAL PROCEEDINGS.
From
time to time, we may be involved in a variety of claims, lawsuits,
investigations and proceedings relating to contractual disputes,
employment matters, regulatory and compliance matters, intellectual
property rights and other litigation arising in the ordinary course
of business. Defending such proceedings can be costly and can
impose a significant burden on management and employees. We do not
expect that the outcome of any such claims or actions will have a
material effect on our liquidity, results of operations or
financial condition. As of December 31, 2017 and 2016, we did not
have any significant ongoing legal matters.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our
common stock is listed on The Nasdaq Capital Market under the
symbol “FSNN.” The following tables list the high and
low sales prices for our common stock for each fiscal quarter
during the two preceding fiscal years.
|
Year Ended
December 31, 2017
|
High
|
Low
|
|
First
Quarter
|
$2.02
|
$1.28
|
|
Second
Quarter
|
$1.90
|
$1.30
|
|
Third
Quarter
|
$3.57
|
$1.11
|
|
Fourth
Quarter
|
$4.08
|
$2.30
|
|
Year Ended December 31, 2016
|
|
|
|
First
Quarter
|
$3.80
|
$1.69
|
|
Second
Quarter
|
$2.09
|
$1.20
|
|
Third
Quarter
|
$2.46
|
$1.30
|
|
Fourth
Quarter
|
$1.71
|
$0.96
|
The
market price for our common stock is highly volatile and fluctuates
in response to a wide variety of factors.
Holders of Record
As of
December 31, 2017, there were 526 holders of record of our common
stock.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock nor
do we anticipate paying any cash dividends on our common stock in
the foreseeable future. Subject to the rights of holders of any of
our outstanding preferred stock, any future determination to pay
dividends will be at the discretion of our board of directors,
subject to applicable law, and will be dependent upon our financial
condition, operating results, capital requirements, general
business conditions, the terms of our outstanding debt and other
factors that our Board considers appropriate.
The
holders of our Series A Preferred are currently entitled to receive
cumulative dividends of 8% per annum payable in arrears, as and
when declared by the Fusion board from January 1, 2008. To date,
the Fusion board has not declared any dividends on any series of
Series A Preferred. The holders of our Series B-2 Preferred are
entitled to receive quarterly dividends at an annual rate of 6%.
These dividends can be paid, at our option, either in cash or in
shares of our common stock. Since the issuance of the Series B-2
Preferred in December 2013 and January 2014, all declared dividends
through September 30, 2017 have been paid in shares of our common
stock. The Company did not declare a dividend on its Series B-2
Preferred for the quarter ended December 31, 2017. In connection
with the Merger, all holders of Series A Preferred and Series B-2
Preferred have been notified that they must convert their shares of
preferred stock into shares of our common stock at the applicable
conversion rate or their interests will be forfeited at the closing
of the Merger.
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not
applicable to smaller reporting companies.
24
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial
statements and the notes related thereto included elsewhere in this
report. This discussion contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements consist of any statement other than a
recitation of historical fact and can be identified by the use of
forward-looking terminology such as “may,”
“expect,” "should," "believes," "plans'" "potential,"
"predicts" “anticipate,” “intend” or
“estimate” or the negative thereof or other variations
thereof or comparable terminology. The reader is cautioned that all
forward-looking statements are speculative, and there are certain
risks and uncertainties that could cause actual events or results
to differ from those referred to in such forward-looking statements
(see Item 1A, “Risk Factors”).
OVERVIEW
Our Business
We
offer a comprehensive suite of cloud communications, cloud
connectivity, cloud computing, and managed cloud-based applications
solutions to small, medium and large businesses, and offer domestic
and international VoIP services to carriers worldwide. Our
advanced, proprietary cloud services platforms, as well as our
state-of-the art switching systems, enable the integration of
leading edge solutions in the cloud, increasing customer
collaboration and productivity by seamlessly connecting employees,
partners, customers and vendors. We currently operate our business
in two distinct business segments: Business Services and Carrier
Services.
In the
Business Services segment, we are focused on becoming our business
customers’ single source for leveraging the increasing power
of the cloud, providing a robust package of what we believe to be
the essential services that form the foundation for their
successful migration to, and efficient use of, the cloud. Our core
Business Services products and services include cloud voice and
UCaaS, improving communication and collaboration on virtually any
device, virtually anywhere, cloud connectivity services, securely
and reliably connecting customers to the cloud with managed network
solutions that are designed to increase quality and optimize
network efficiency, and contact center solutions. Our cloud
computing and IaaS solutions are designed to provide our larger
enterprise customers with a platform on which additional cloud
services can be layered. Complemented by our SaaS solutions such as
security and business continuity, our advanced cloud offerings
include private and hybrid cloud, storage, backup and recovery, and
secure file sharing that allow our customers to experience the
increased efficiencies and agility delivered by the cloud. The
Company’s cloud-based services are flexible, scalable and
rapidly deployed, reducing our customers’ cost of ownership
while increasing their productivity.
Through
our Carrier Services segment, we have agreements with approximately
370 carrier customers and vendors, through which we sell domestic
and international voice services to other carriers throughout the
world. Customers include U.S.-based carriers sending voice traffic
to international destinations, and foreign carriers sending traffic
to the U.S. and internationally. We also purchase domestic and
international voice services from many of our Carrier Services
customers. Our carrier-grade network, advanced switching platform
and interconnections with global carriers on six continents also
reduce the cost of global voice traffic and expand service delivery
capabilities for our Business Services segment. Since September 1,
2017, our Carrier Services business has been operated through FGS,
which is 60% owned by us and 40% owned by XcomIP. As noted
elsewhere in this report, on or prior to the completion of the
Merger we have agreed to use our reasonable best efforts to either
(i) divest our 60% ownership interest in FGS, or (ii) dissolve
FGS.
On
August 26, 2017, Fusion and Merger Sub entered into the
“Merger Agreement” with Birch. The Merger Agreement
provides, among other things, that upon the terms and conditions
set forth therein, Birch will merge with and into Merger Sub, with
Merger Sub surviving the Merger.
On the
effective date of the Merger, all of the outstanding shares of
common stock of Birch will be cancelled and converted into the
right to receive, in the aggregate, that number of shares of our
common stock equal to three times the number of shares of Merger
Shares. The Merger Shares will be issued in the name of, and held
by, BCHI. The terms of the Merger Agreement are such that the
Merger, if consummated, will result in a change in control of
Fusion. As a result, the transaction will be accounted for as a
reverse acquisition and recapitalization, with Birch as the
acquirer for accounting purposes, and the historical financial
statements of Birch (other than the Statement of
Stockholders’ Equity) will become the historical financial
statements of the Company.
Closing
of the Merger is subject to numerous preconditions, including
Fusion obtaining financing for the transaction, which will be used
to retire existing senior debt facilities at Birch and Fusion. Each
of Fusion and Birch has agreed to use reasonable best efforts to
cooperate and arrange and obtain the debt financing necessary to
effect the required refinancing and to complete the transactions
contemplated by the Merger Agreement. On February 13, 2018, we
announced that we had engaged Goldman Sachs, Morgan Stanley and
MUFG as joint lead arrangers and joint bookrunners to arrange
senior secured credit facilities to be entered into in connection
with Merger. These facilities are expected to consist of $570
million senior secured term loans and a revolving credit
facility. In addition,
the Company expects to secure a $10 million subordinated note.
Prior to the closing of the Merger, Birch is required to spin-off
to the existing Birch shareholders its US-consumer business, which
consists of (i) the residential customer base, life line and
consumer wireless business in the United States, and (ii) its
single-line business customer base in the United States. In
addition, prior to the closing of the Merger, we are required to
use our best commercial efforts to dispose of our interests in FGS
or dissolve FGS. The Merger is currently expected to be completed
by mid-April 2018.
25
We
manage our business based on gross profit and gross margin, which
represents net revenue less the cost of revenue, and on net
profitability after excluding certain non-cash and non-recurring
items. The majority of our operations, engineering, information
systems and support personnel are assigned to either the Business
Services or Carrier Services business segment for segment reporting
purposes.
We
continue to focus our sales and marketing efforts on developing
vertically oriented solutions for targeted markets that require the
kind of specialized solutions made possible by our state-of-the-art
network and advanced services platforms. Our vertically oriented
solutions, which are currently focused on healthcare, legal,
hospitality and real estate, offer a substantial opportunity to
gain additional market share.
Recent Acquisitions
In a
two-step transaction completed in December 2015 and February 2016,
we acquired Fidelity. Fidelity provided cloud voice, cloud
connectivity, security, data center and cloud storage services to
small, medium, and large business customers, primarily in the
Midwest.
In
April 2016, we acquired the intellectual property and assets of
TFB, a provider of contact center solutions with an integrated
cloud voice platform. The acquisition provides Fusion with entry
into the contact center market, and provides cross-selling and
up-selling opportunities as TFB's Fortune 500 enterprise customers,
government entities and healthcare organizations are migrated to
Fusion's cloud solutions platform.
In
November 2016, we acquired Apptix. Apptix provided cloud-based
communications, collaboration, virtual desktop, compliance,
security and cloud computing solutions to approximately 1,500
business customers throughout the U.S.
In January 2018, we acquired substantially all of the assets of
IQMax, a provider of secure messaging, enterprise data integration
and advanced cloud communications solutions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”). The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and
the related disclosure of contingent liabilities. We base these
estimates on our historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, and these estimates form the basis for our judgments
concerning the carrying values of assets and liabilities that are
not readily apparent from other sources. We periodically evaluate
these estimates and judgments based on available information and
experience. Actual results could differ from our estimates under
different assumptions and conditions. If actual results
significantly differ from our estimates, our financial condition
and results of operations could be materially
impacted.
We have
identified the policies and significant estimation processes
discussed below as critical to our operations and to an
understanding of our results of operations. For a detailed
discussion on the application of these and other accounting
policies, see Note 2 to the Consolidated Financial Statements
included elsewhere in this report.
Revenue Recognition
We
recognize revenue when persuasive evidence of a sale arrangement
exists, delivery has occurred or services have been rendered, the
sales price is fixed and determinable and collectability is
reasonably assured. We record provisions against revenue for
billing adjustments, which are based upon estimates derived from
factors that include, but are not limited to, historical results,
analysis of credits issued and current economic trends. The
provisions for revenue adjustments are recorded as a reduction of
revenue at the time revenue is recognized.
Our
Business Services revenue includes MRC to customers for whom
services are contracted over a specified period of time, and
variable usage fees charged to customers that purchase our business
products and services. Revenue recognition commences after the
provisioning, testing and acceptance of the service by the
customer. MRC continues until the expiration of the contract, or
until cancellation of the service by the customer. To the extent
that payments received from a customer are related to a future
period, the payment is recorded as deferred revenue until the
service is provided or the usage occurs.
Our
Carrier Services revenue is primarily derived from usage fees
charged to other carriers that terminate voice traffic over our
network. Variable revenue is earned based on the length of a call,
as measured by the number of minutes of duration. It is recognized
upon completion of the call, and is adjusted to reflect the
allowance for billing adjustments. Revenue for each customer is
calculated from information received through our network switches.
Our customized software tracks the information from the switches
and analyzes the call detail records against stored detailed
information about revenue rates. This software provides us with the
ability to complete a timely and accurate analysis of revenue
earned in a period. We believe that the nature of this process is
such that recorded revenues are unlikely to be revised in future
periods.
26
Effective
January 1, 2017, we changed the manner in which we account for
federal and state universal service fees and surcharges in our
consolidated statement of operations. We now include the amounts
collected for these fees and surcharges in revenues, and report the
associated costs in cost of revenues, and this change has been
applied retrospectively in the Company’s consolidated
financial statements for all periods presented. As a result, both
our revenues and cost of revenues for years ended December 31, 2017
and 2016 include $3.3 million and $2.6 million, respectively, of
federal and state universal service fees and
surcharges.
Cost of Revenues
For our
Business Services segment, cost of revenues include the MRC
associated with certain platform services purchased from other
service providers, the MRC associated with private line services
and the cost of broadband Internet access used to provide service
to business customers.
Cost of
revenues for our Carrier Services segment is comprised primarily of
costs incurred from other carriers to originate, transport, and
terminate voice calls for our carrier customers. Thus, the majority
of our cost of revenues for this segment is variable, based upon
the number of minutes actually used by our customers and the
destinations they are calling. Call activity is tracked and
analyzed with customized software that analyzes the traffic flowing
through our network switch. During each period, the call activity
is analyzed and an accrual is recorded for the costs associated
with minutes not yet invoiced. This cost accrual is calculated
using minutes from the system and the variable cost of revenue
based upon predetermined contractual rates. Fixed expenses reflect
the costs associated with connectivity between our network
infrastructure, including our New Jersey switching facility, and
certain large carrier customers and vendors.
Fair Value of Financial Instruments
The
carrying value of certain financial instruments such as accounts
receivable, accounts payable and accrued expenses, approximates
their fair values due to their short term nature. Some of the
warrants issued in conjunction with the issuance of our debt and
equity securities are accounted for in accordance with the guidance
contained in Accounting Standards Codification (“ASC”)
Topic 815, Derivatives and Hedging (“ASC 815”). For
these warrant instruments that are not deemed to be indexed to
Fusion’s stock, we classify the warrant instrument as a
liability at its fair value and adjust the instrument to fair value
at each reporting period. This liability is subject to
re-measurement at each balance sheet date until the underlying
warrants are exercised, and any change in fair value is recognized
in our statement of operations. The fair values of these warrants
have been estimated using option pricing and other valuation
models, and the quoted market price of Fusion’s common stock
(see notes 17 and 18 to the accompanying consolidated financial
statements).
Accounts Receivable
Accounts
receivable is recorded net of an allowance for doubtful accounts.
On a periodic basis, we evaluate our accounts receivable and adjust
the allowance for doubtful accounts based on our history of past
write-offs and collections and current credit conditions. Specific
customer accounts are written off as uncollectible if the
probability of a future loss has been established, collection
efforts have been exhausted and payment is not expected to be
received.
Impairment of Long-Lived Assets
We
periodically review long-lived assets, including intangible assets,
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
If an impairment indicator is present, we evaluate recoverability
by a comparison of the carrying amount of the asset to future
undiscounted net cash flows expected to be generated by the asset.
If the carrying value of the asset exceeds the projected
undiscounted cash flows, we are required to estimate the fair value
of the asset and recognize an impairment charge to the extent that
the carrying value of the asset exceeds its estimated fair value.
We recorded an asset impairment charge of $0.6 million for the year
ended December 31, 2017 and did not record any impairment charges
for the year ended December 31, 2016.
Impairment
testing for goodwill is performed annually in our fourth fiscal
quarter. The impairment test for goodwill uses a two-step approach,
which is performed at the reporting unit level. We have determined
that our reporting units are our operating segments since that is
the lowest level at which discrete, reliable financial and cash
flow information is available. The authoritative guidance provides
entities with an option to perform a qualitative assessment to
determine whether a quantitative analysis is necessary. We
performed qualitative impairment evaluations on our goodwill as of
December 31, 2017 and 2016 and determined that there were no
indications that goodwill was impaired.
Income Taxes
We
account for income taxes in accordance with U.S. GAAP, which
requires the recognition of deferred tax liabilities and assets for
the expected future income tax consequences of events that have
been recognized in our financial statements. Deferred income tax
assets and liabilities are computed for temporary differences
between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established to reduce deferred
income tax assets when we determine that it is more likely than not
that we will fail to generate sufficient taxable income to be able
to utilize the deferred tax assets.
27
Recently Issued Accounting Pronouncements
In July
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815). The amendments in Part I of this update change
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. This
standard is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating the effect
that the new guidance will have on its financial statements and
related disclosures.
During
the first quarter of 2017, the FASB issued ASU 2017-04,
"Intangibles - Goodwill and Other (Topic 350): Simplifying the Test
for Goodwill Impairment." The amendments in this update eliminate
the requirement to perform step two of the goodwill impairment
test, which requires a hypothetical purchase price allocation when
an impairment is determined to have occurred. A goodwill impairment
will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of
goodwill. This standard update is effective as of the first quarter
of 2020; however, early adoption is permitted for any interim or
annual impairment tests performed after January 1, 2017. Fusion
will adopt this standard on January 1, 2018. The adoption of this
standard update will not have a significant impact on
Company’s financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, Restricted Cash,
which clarifies guidance and presentation related to restricted
cash in the statement of cash flows, including stating that
restricted cash should be included within cash and cash equivalents
in the statement of cash flows. The standard is effective for
fiscal years beginning after December 15, 2017, with early adoption
permitted, and is to be applied retrospectively. The Company early
adopted ASU 2016-18 effective January 1, 2017. Adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, which is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018 with early adoption permitted.
Under ASU 2016-02, lessees will be required to recognize for all
leases at the commencement date a lease liability, which is a
lessee’s obligation to make lease payments arising from a
lease measured on a discounted basis, and a right to-use asset,
which is an asset that represents the lessee’s right to use
or control the use of a specified asset for the lease term. The
Company is currently evaluating the effect that the new guidance
will have on its financial statements and related
disclosures.
In
November 2015, the FASB issued ASU No. 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes, which
simplifies the presentation of deferred income taxes by requiring
that deferred tax assets and liabilities be classified as
noncurrent on the balance sheet. The updated standard became
effective as of January 1, 2017. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation –
Stock Compensation, which is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2016. Under ASU 2016-09, all excess tax benefits and tax
deficiencies related to share-based payment awards are to be
recognized as income tax expense or income tax benefit in the
statement of operations. In addition, the tax effects of exercised
or vested awards should be treated as discrete items in the
reporting period in which they occur and excess tax benefits should
be recognized regardless of whether the benefit reduces taxes
payable in the current period. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
In May
2014, the FASB issued new guidance related to revenue recognition,
ASU 2014-09, Revenue from Contracts with Customers (“ASC
606”), which outlines a comprehensive revenue recognition
model and supersedes most current revenue recognition guidance. The
new guidance requires a company to recognize revenue upon transfer
of goods or services to a customer at an amount that reflects the
expected consideration to be received in exchange for those goods
or services. ASC 606 defines a five-step approach for recognizing
revenue: (i) identification of the contract, (ii) identification of
the performance obligations, (iii) determination of the transaction
price, (iv) allocation of the transaction price to the performance
obligations, and (v) recognition of revenue as the entity satisfies
the performance obligations. The new criteria for revenue
recognition may require a company to use more judgment and make
more estimates than under the current guidance. The new guidance
becomes effective in calendar year 2018 and early adoption in
calendar year 2017 is permitted. Two methods of adoption are
permitted: (a) full retrospective adoption, meaning the standard is
applied to all periods presented; or (b) modified retrospective
adoption, meaning the cumulative effect of applying the new
guidance is recognized at the date of initial application as an
adjustment to the opening retained earnings balance.
In
March 2016, April 2016 and December 2016, the FASB issued ASU No.
2016-08, Revenue From Contracts with Customers (ASC 606): Principal
Versus Agent Considerations, ASU No. 2016-10, Revenue From
Contracts with Customers (ASC 606): Identifying Performance
Obligations and Licensing, and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue From Contracts
with Customers, respectively, which further clarify the
implementation guidance on principal versus agent considerations
contained in ASU No. 2014-09. In May 2016, the FASB issued ASU
2016-12, Revenue from Contracts with Customers, narrow-scope
improvements and practical expedients which provides clarification
on assessing the collectability criterion, presentation of sales
taxes, measurement date for non-cash consideration and completed
contracts at transition. These standards will be effective for the
Company beginning in the first quarter of 2018. Early adoption is
permitted.
The
Company will adopt the new standard and related updates effective
January 1, 2018, using the modified retrospective method of
adoption. The Company estimates that, based on available
information, both the impact of the adjustment to opening retained
earnings and the ongoing impact from the deferral of acquisition
costs and activation and installation revenues will not be material
to the Company’s financial statements.
28
RESULTS OF OPERATIONS
The
following table summarizes our results of operations for the years
ended December 31, 2017 and 2016:
|
|
2017
|
2016
|
||
|
|
$
|
%
|
$
|
%
|
|
Revenues
|
$150,530,557
|
100.0
|
$124,654,270
|
100.0
|
|
Cost
of revenues *
|
83,033,401
|
55.2
|
70,667,382
|
56.7
|
|
Gross profit
|
67,497,156
|
44.8
|
53,986,888
|
43.3
|
|
Depreciation
and amortization
|
14,521,046
|
9.6
|
13,096,587
|
10.5
|
|
Asset
impairment charge
|
641,260
|
0.4
|
-
|
-
|
|
Selling,
general and administrative expenses
|
57,724,202
|
38.3
|
48,524,923
|
38.9
|
|
Total
operating expenses
|
72,886,508
|
48.4
|
61,621,510
|
49.4
|
|
Operating loss
|
( 5,389,352)
|
(3.6)
|
( 7,634,622)
|
(6.1)
|
|
Other (expenses) income:
|
|
|
|
|
|
Interest
expense
|
( 8,648,600)
|
(5.7)
|
( 6,742,143)
|
(5.4)
|
|
(Loss)
gain on change in fair value of derivative liability
|
( 909,272)
|
(0.6)
|
265,383
|
0.2
|
|
Loss
on disposal of property and equipment
|
( 311,707)
|
(0.2)
|
(129,119)
|
(0.1)
|
|
Gain
on change in fair value of contingent liability
|
1,011,606
|
0.7
|
-
|
-
|
|
Loss
on extinguishment of debt
|
-
|
-
|
(214,294)
|
(0.2)
|
|
Other
income, net
|
209,235
|
0.1
|
128,987
|
0.1
|
|
Total
other expenses
|
( 8,648,738)
|
(5.7)
|
( 6,691,186)
|
(5.4)
|
|
Loss before income taxes
|
( 14,038,090)
|
(9.3)
|
( 14,325,808)
|
(11.5)
|
|
(Provision)/benefit
for income taxes
|
(61,511)
|
(0.0)
|
1,609,485
|
1.3
|
|
Net loss
|
$(14,099,601)
|
(9.4)
|
$(12,716,323)
|
(10.2)
|
*
Exclusive of depreciation and amortization, shown
separately.
Year Ended December 31, 2017 Compared with Year Ended December 31,
2016
Revenues
Consolidated
revenues were $150.5 million for the year ended December 31, 2017,
as compared to $124.7 million for the year ended December 31, 2016,
an increase of $25.8 million, or 20.8%. Revenues for the Business
Services segment increased by $28.2 million to $117.3 million for
the year ended December 31, 2017, as compared to $89.2 million for
the year ended December 31, 2016. This increase is primarily
attributable to revenue derived from new customers obtained from
our acquisition of Apptix in November 2016 and to customer bases
acquired in November 2016 and March 2017.
Carrier
Services revenue of $33.2 million for the year ended December 31,
2017 reflects a decrease of $2.3 million, or 6.5%, as compared to
the year ended December 31, 2016, due to a reduction in the number
of minutes transmitted over ours and FGS’ network in
2017.
Cost of Revenues and Gross Margin
Consolidated
cost of revenues was $83.0 million for the year ended December 31,
2017, as compared to $70.7 million for the year ended December 31,
2016. This increase is mainly due to additional costs arising from
our acquisition of Apptix and, to a lesser extent, the acquired
customer bases.
Consolidated
gross margin was 44.8% for the year ended December 31, 2017, as
compared to 43.3% for the year ended December 31, 2016, due to a
higher concentration of Business Services revenue, which generates
a higher margin than Carrier Services revenue, within our
consolidated results in 2017. The Business Services gross margin
decreased from 58.6% in 2016 to 56.5% 2017, due to lower margins
associated with revenues from the acquired customer bases. The
Carrier Services gross margin was 3.6 % for the year ended December
31, 2017, as compared to 4.8% in the prior year, mainly due to an
increase in the blended cost per minute of traffic
terminated.
29
Depreciation and Amortization
Depreciation
and amortization expense was $14.5 million for the year ended
December 31, 2017, as compared to $13.1 million for the year ended
December 31, 2016, mainly due to increased amortization expense
related to the intangible assets acquired in the Apptix
acquisition, partially offset by lower depreciation expense
resulting from property and equipment that became fully depreciated
during the year, and depreciation expense of $0.9 million
recognized in 2016 to write off some of our capitalized internal
development costs.
Selling, General and Administrative Expense
Selling,
general and administrative expenses (“SG&A”) was
$57.7 million for the year ended December 31, 2017, as compared to
$48.5 million for the year ended December 31, 2016. This increase
is mainly the result of additional salaries and other employee
related costs of approximately $2.7 million attributable to the
Apptix acquisition. In addition, we incurred higher sales
commissions of $2.5 million as a result of the 20.8% increase in
Business Services revenue, and a $1.5 million increase in cloud
computing software licenses related to customers acquired in the
Apptix transaction. Prior to the Apptix acquisition, this expense
was less significant.
Asset Impairment Charge
During
the year ended December 31, 2017, we recognized an impairment
charge of $0.6 million in connection with the write-down of some
our intangible assets related to the TFB acquisition in
2016.
Operating Loss
Our
operating loss was $5.4 million for the year ending December 31,
2017, as compared to $7.6 million for the year ended December 31,
2016. The decrease is primarily due to the increase in gross profit
of $13.5 million resulting from the increase in Business Services
revenue, largely offset by the increase in SG&A of $9.5 million
and the increase in depreciation and amortization expense of $1.4
million.
Interest Expense
Interest
expense was $8.6 million for the year ended December 31, 2017, as
compared to $6.7 million for the year ended December 31, 2016. The
increase was mainly attributable to an increase of $25 million in
our senior debt in November of 2016 that was incurred under a new
credit facility entered into in connection with our acquisition of
Apptix. Interest expense was also impacted in 2017 by rising
interest rates.
Change in Fair Value of Derivative Liabilities
During
the year ended December 31, 2017, we recognized a loss on the
change in fair value of derivative liabilities of $0.9 million, as
compared to a gain of $0.3 million for the year ended December 31,
2016. These gains and losses are related to warrants we issued to
purchasers of our Series B-2 Preferred in 2013 and 2014, the terms
of which require them to be treated as liabilities and not as
equity instruments. The changes in their fair value are required to
be recorded through the statement of operations at each accounting
period. These warrants are valued using an option pricing model and
other valuation models, such that increases in Fusion’s
common stock price result in a higher valuation of the derivative
and a charge to our income statement, and decreases in
Fusion’s common stock price result in a lower valuation and a
gain being recorded in our income statement.
We
expect that we will be subject to additional fluctuations in our
income statement in 2018 based on changes in Fusion’s common
stock price and the corresponding changes in fair value of our
derivative liabilities associated with our Series B-2 Preferred
warrants. These warrants expire in December of 2018 and January of
2019.
Other Income
and Expenses
At December 31, 2017, the Company
determined that all of the intangible assets related to TFB were
fully impaired, and that the Company would not be required to pay
any royalties under the terms of the purchase agreement. As a
result the Company derecognized the royalty liability of $1
million. We also incurred a loss on disposal of property and
equipment of $0.3 million.
During the year ended December 31, 2016, we recognized a loss on the extinguishment of debt in the amount of $0.2 million when we refinanced our senior secured credit facility in November 2016 (see “Liquidity and Capital Resources”). We also incurred a loss on disposal of property and equipment of $0.1 million.
Income Taxes
For the
year ended December 31, 2016, the Company recorded deferred tax
liabilities of $1.7 million as a result of intangible assets
subject to amortization acquired in business acquisitions that are
not amortizable for income tax purposes. As a result of these
business combinations, the recording of the deferred tax
liabilities resulted in a release of the valuation allowance
against the Company’s deferred tax assets of $1.7 for the
year ended December 31, 2016, with a corresponding income tax
benefit. The tax benefit will be realized as the Company amortizes
the intangible assets over their estimated useful
lives.
Net Loss
Our net
loss for the year ended December 31, 2017 was $14.1 million, as
compared to $12.7 million for the year ended December 31, 2016. The
increase in net loss was largely due to an income tax benefit
recorded in 2016 of $1.6 million.
30
LIQUIDITY AND CAPITAL RESOURCES
Since
our inception, we have incurred significant net losses. At December
31, 2017, we had a working capital deficit of $15.4 million, as
compared to $6.6 million at December 31, 2016, and we had a
stockholders’ deficit of $1.2 million at December 31, 2017,
as compared to stockholders’ equity of $9.2 million at
December 31, 2016. Our consolidated cash balance at December 31,
2017 was $2.5 million, as compared to $7.2 million at December 31,
2016.
During
2017 and 2016, we relied primarily on the sale of Fusion’s
equity securities and the cash generated from our Business Services
segment to fund operations, and we issued additional debt
securities to fund our acquisitions and growth strategy. On
February 5, 2018, we completed a public offering of 12,397,500
shares of our common stock for gross proceeds of $41.4 million. The
net proceeds, after underwriting discounts and commissions but
before estimated offering expenses payable by us, were $38.7
million. We intend to use the net proceeds from this offering for
working capital and other general corporate purposes. On November
16, 2016, we sold 2,213,700 shares of our common stock and received
net proceeds, after offering expenses, of $2.3 million. While we
believe we have sufficient cash to fund our operations and meet our
operating and debt obligations for the next twelve months, we may
be required to raise additional capital to support our business
plan. There can be no assurances that such funds will be available
to the Company as and when needed or on terms acceptable to us, or
at all.
We have
never paid cash dividends on our common stock, and we do not
anticipate paying cash dividends on our common stock in the
foreseeable future. We intend to retain all of our earnings, if
any, for general corporate purposes, and, if appropriate, to
finance the expansion of our business. Subject to the rights of
holders of our outstanding preferred stock, any future
determination to pay dividends is at the discretion of
Fusion’s Board of Directors, and will be dependent upon our
financial condition, operating results, capital requirements,
Delaware law requirements, general business conditions, the terms
of our senior secured credit facilities and other factors that
Fusion’s Board of Directors and senior management consider
appropriate.
The holders of the
Series B-2 Preferred are entitled to receive quarterly dividends at
an annual rate of 6%. These dividends can be paid, at the
Company’s option, either in cash or, under certain
circumstances, in shares of Fusion’s common stock. For the
year ended December 31, 2017, the Board declared dividends of $0.5
million on the Series B-2 Preferred, which, as permitted by the
terms of the Series B-2 Preferred, was paid in the form of 256,706
shares of Fusion common stock. No dividends were declared or
paid on the Series B-2 Preferred for the quarter ended December 31,
2017. In connection with the Merger, all shares of Series B-2
Preferred and all outstanding shares of Series A Preferred will
either be converted into shares of Fusion common stock or forfeited
in accordance with their terms.
On
November 14, 2016, contemporaneously with an acquisition, we
entered into the East West Credit Agreement with East West Bank, as
administrative agent and the lenders identified therein
(collectively, the “East West Lenders”). Under the East
West Credit Agreement, the East West Lenders extended us a (i)
$65.0 million term loan and (ii) $5.0 million revolving credit
facility (which includes up to $4 million in
“swingline” loans that may be accessed on a short-term
basis). The proceeds of the term loan were used to retire the $40
million that was outstanding under a previously existing credit
facility, and to fund the cash portion of the purchase price of the
Apptix acquisition in the amount of $23.1 million.
Borrowings
under the East West Credit Agreement are evidenced by notes bearing
interest at rates to be computed based upon either the then current
“prime” rate of interest or “LIBOR” rate of
interest, as selected by us at the time of borrowing. Interest on
borrowings that we designate as “base rate” loans bear
interest at the greater of the prime rate published by the Wall
Street Journal or 3.25% per annum, in each case plus 2% per annum.
Interest on borrowings that we designate as “LIBOR
rate” loans bear interest at the LIBOR rate published by the
Wall Street Journal, plus 5% per annum. The current interest rate
is 6.25% per annum.
From
January 1, 2017 through January 1, 2018, we were required to repay
the term loan in equal monthly payments of $270,833. Since January
2, 2018, those monthly payments increased to $541,667 and will
remain at that amount through the November 12, 2021 maturity date
of the term loan, when the remaining $36.8 million of principal is
due. Borrowings under the revolving credit facility are also
payable on the November 12, 2021 maturity date of the East West
Credit Facility. During the year ended December 31, 2017, we paid
down $1.5 million of the $3.0 million that was outstanding under
the revolving credit facility, and at December 31, 2017, $61.8
million was outstanding under the term loan and $1.5 million was
outstanding under the revolving credit facility.
Under
the East West Credit Agreement:
●
We are subject to a
number of affirmative and negative covenants, including but not
limited to, restrictions on paying indebtedness subordinate to our
obligations to the East West Lenders, incurring additional
indebtedness, making capital expenditures, dividend payments and
cash distributions by subsidiaries.
●
We are required to
comply with various financial covenants, including leverage ratio,
fixed charge coverage ratio and minimum levels of earnings before
interest, taxes, depreciation and amortization; and our failure to
comply with any of the restrictive or financial covenants could
result in an event of default and accelerated demand for repayment
of this indebtedness.
●
We granted the East
West Lenders security interests in all of our assets, as well as
our 60% membership interest in FGS and the capital stock of our
Fusion NBS Acquisition Corp. subsidiary (“FNAC”) and
each of its subsidiaries.
●
Fusion and its
subsidiaries other than FNAC and FGS (and future subsidiaries of
both) guaranteed FNAC’s obligations, including FNAC’s
repayment obligations thereunder.
31
On
November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries
other than FNAC entered into the Fifth Amended and Restated
Securities Purchase Agreement (the “Praesidian
Facility”) with Praesidian Capital Opportunity Fund III,
L.P., Praesidian Capital Opportunity Fund III-A, LP and United
Insurance Company of America (collectively, the “Praesidian
Lenders”). The Praesidian Facility amends and restates a
prior facility, pursuant to which FNAC previously sold its Series
A, Series B, Series C, Series D, Series E and Series F senior notes
in an aggregate principal amount of $33.6 million (the “SPA
Notes”). The proceeds from the SPA Notes were used to finance
previous acquisitions within our Business Services segment. These
notes require payments of monthly interest in the amount of $0.3
million and the entire principal amount of the notes are due on May
12, 2022. The current interest rate is 10.8% per
annum.
The
Praesidian Facility contains financial covenants that are
substantially similar to those contained in the East West Credit
Agreement. At December 31, 2017, we were in compliance with all of
the financial covenants under the East West Credit Agreement and
the Praesidian Facility.
On
February 13, 2018, the Company announced that it had engaged
Goldman Sachs, Morgan Stanley and MUFG as joint lead arrangers and
joint bookrunners to arrange senior secured credit facilities to be
entered into in connection with Merger. These facilities are
expected to consist of $570 million senior secured term loans and a
revolving credit facility. These facilities will be used to retire
amounts outstanding under the East West Credit Agreement and the
Praesidian Facility as well as all existing senior debt at
Birch.
The Merger is currently expected to be completed by mid-April
2018. Should the Merger not be completed, however, we
believe we have sufficient cash to service our debt and fund our
operations for the next twelve months. We may be required to raise
additional capital to support our business plan and there can be no
assurances that such funds will be available to the Company as and
when needed or on terms acceptable to us, or at all.
The
following table sets forth a summary of our cash flows for the
periods indicated:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Net
cash provided by operating activities
|
$5,321,096
|
$326,287
|
|
Net
cash used in investing activities
|
(4,568,443)
|
(27,598,005)
|
|
Net
cash (used in)/provided in financing activities
|
(5,444,175)
|
26,815,115
|
|
Net
decrease in cash and cash equivalents
|
(4,691,522)
|
(456,603)
|
|
Cash
and cash equivalents, including restricted cash, beginning of
year
|
7,249,063
|
7,705,666
|
|
Cash
and cash equivalents, including restricted cash, end of
year
|
$2,557,541
|
$7,249,063
|
Cash
provided by operating activities was $5.3 million and $0.3 million
for the years ended December 31, 2017 and 2016, respectively. The
following table illustrates the primary components of our cash
flows from operations:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Net
loss
|
$(14,099,601)
|
$(12,716,323)
|
|
Non-cash
expenses, gains and losses
|
18,871,033
|
13,164,671
|
|
Changes
in accounts receivable
|
(3,331,828)
|
578,134
|
|
Changes
in accounts payable and accrued expenses
|
5,350,183
|
(1,254,445)
|
|
Other
|
(1,468,691)
|
554,250
|
|
Cash
provided by operating activities
|
$5,321,096
|
$326,287
|
Cash
used in investing activities was $4.6 million for the year ended
December 31, 2017, as compared to $27.6 million for the year ended
December 31, 2016. Our capital expenditures were $4.3 million in
2017, as compared to $4.8 million in 2016. For the year ended
December 31, 2016, we paid $23.3 million in cash for acquisitions,
primarily for Apptix, net of cash acquired.
Cash
used in financing activities was $5.4 million for the year ended
December 31, 2017, and cash provided by financing activities was
$26.8 million for the year ended December 31, 2016. During the year
ended December 31, 2017, we made total payments under our senior
secured credit facility in the amount of $4.8 million, made
payments under capital lease obligations of $1.1 million and
payments for obligations under asset purchase agreements of $0.6
million, partially offset by proceeds we received from the exercise
of warrants in the amount of $1.0 million. During 2016, we received
$66.7 million of proceeds, net of transaction costs, upon our
entering into the East West Credit Agreement, retired a $40.0
million credit facility, received $2.3 million from the sale of
Fusion common stock and made payments on equipment financing
obligations of $1.0 million.
32
OTHER MATTERS
Inflation
We do
not believe inflation has a significant effect on our operations at
this time.
Off Balance Sheet Arrangements
Through
December 31, 2017, we did not have any relationships with
unconsolidated organizations or financial partnerships, such as
structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance sheet
arrangements or other commercially narrow or limited
purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable for smaller reporting companies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
Company’s consolidated financial statements required by this
Item are included after Item 16 of this report.
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
We
maintain disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Exchange Act that are
designed to ensure that information required to be disclosed in
Exchange Act reports is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms
of the SEC and that such information is accumulated and
communicated to our management, including our principal executive
officer and our principal financial officer, to allow timely
decisions regarding required disclosure. Any controls and
procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control
objectives.
Our
management, with the participation of our principal executive
officer and our principal financial officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2017. Based upon that
evaluation and subject to the foregoing, our principal executive
officer and principal financial officer concluded that our
disclosure controls and procedures were effective to accomplish
their objectives. In designing and evaluating our disclosure
controls and procedures, management recognizes that any disclosure
controls and procedures, no matter how well designed and operated,
can provide only reasonable assurances of achieving the desired
control objectives. In addition, the design of disclosure controls
and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment
in evaluating the benefits of possible controls and procedures
relative to their costs.
Management’s Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act). Management conducted an assessment
of the effectiveness of our internal control over financial
reporting based on criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the
assessment, management concluded that the internal control over
financial reporting was effective as of December 31, 2017 to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance
with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Under
the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of any changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15D-15(f) under the Exchange Act) that occurred
during the quarter ended December 31, 2017. Based on that
evaluation, our principal executive officer and principal
accounting officer concluded that there has not been any material
change in our internal control over financial reporting during the
quarter ended December 31, 2017 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
Not
applicable.
33
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The
members of the Company’s Board of Directors (the
“Board”) and the Company’s executive officers,
together with their respective ages and certain biographical
information are set forth below, along with, in the case of
Directors, a description of the qualifications that led the Board
to conclude that the individual should serve as a Director. As
discussed elsewhere in this report, in the event the Merger is
consummated, significant changes to the Company’s executive
officers and Directors are anticipated:
|
Name
|
Age
|
Position
|
|
Marvin
S. Rosen
|
77
|
Chairman of the
Board
|
|
Philip
D. Turits
|
84
|
Secretary,
Treasurer and Director
|
|
Matthew
D. Rosen
|
46
|
Chief
Executive Officer and Director
|
|
Jack
Rosen
|
71
|
Director
|
|
William
Rubin
|
65
|
Director
|
|
Paul C.
O'Brien
|
78
|
Director
|
|
Michael
J. Del Giudice
|
75
|
Director
|
|
Larry
Blum
|
75
|
Director
|
|
Gordon
Hutchins, Jr.
|
68
|
President and Chief
Operating Officer
|
|
Michael
R. Bauer
|
45
|
Chief
Financial Officer
|
|
Jonathan
Kaufman
|
58
|
Chief
Strategy Officer
|
|
James
P. Prenetta, Jr.
|
55
|
Executive Vice
President and General Counsel
|
|
Jan
Sarro
|
63
|
Executive Vice
President – Marketing and Business Development
|
|
Russell
P. Markman
|
67
|
President, Business
Services
|
|
Lisa
Taranto
|
50
|
Vice
President, Finance and Principal Accounting Officer
|
Board of Directors and Executive Officers
Marvin S. Rosen, Chairman of the Board
Marvin
Rosen co-founded the Company in 1997. He has served as the Chairman
of the Board since November 2004, Vice Chairman of the Board from
December 1998 to November 2004 and has been a member of the Board
since March 1998. He served as our Chief Executive Officer from
April 2000 to March 2006. In January 2014, he rejoined the
international law firm of Greenberg Traurig LLP as a shareholder
specializing in corporate securities matters. He previously was a
shareholder of that firm and also acted as Of Counsel for a number
of years. Mr. Rosen was Finance Chairman for the Democratic
National Committee from September 1995 to January 1997. Currently,
he serves on the Board of Directors of the Robert F. Kennedy Center
for Justice and Human Rights and the Howard Gilman Foundation. Mr.
Rosen served on the Board of Directors of Terremark Worldwide, Inc.
from 2000 until its sale to Verizon in 2011. The Board believes
that Mr. Rosen’s background as the co-founder and former
Chief Executive Officer of the Company, a securities attorney and
as a former director of a another public company provides him with
the industry, financial, legal, and leadership experience to advise
the Board on strategic and tactical matters. Mr. Rosen’s son,
Matthew Rosen, is our Chief Executive Officer, and serves on our
Board of Directors.
Philip D. Turits, Secretary, Treasurer, and Director
Mr.
Turits co-founded the Company in 1997 and has served as a Director
since September 1997, as Secretary since October 1997, as Treasurer
since March 1998 and as Vice Chairman of the Board from March 1998
to December 1998. From September 1991 to February 1996, Mr. Turits
served as Treasurer and Chief Operating Officer for Larry Stuart,
Ltd., a consumer products company, and prior to 1991 he served as
President and Chief Executive Officer of Continental Chemical
Company. The Board believes that Mr. Turits’ background as
the co-founder and Secretary/Treasurer of the Company and an
experienced corporate executive provides him with the operational,
financial and leadership experience necessary to provide valuable
guidance to management, particularly in the financial aspects of
our business.
Matthew D. Rosen, Chief Executive Officer and Director
Mr.
Rosen has served as a Director since May 2005 and has been our
Chief Executive Officer since March 2006. He served as our
President from March 2006 until March 2008, as our Chief Operating
Officer from August 2003 to March 2006, as our Executive Vice
President and Chief Operating Officer from February 2002 to August
2003, as our Executive Vice President and President of Global
Operations from November 2000 to January 2002 and as our President
of US Operations from March 2000 to November 2000. The Board
believes that Mr. Rosen’s background as our current Chief
Executive Officer and as our former Chief Operating Officer, a
senior executive in the telecommunications industry, an experienced
operations executive and a former investment banker provides him
with the industry, operational, financial and leadership experience
to advise the Board on all aspects of the Company’s business.
Mr. Rosen is the son of our Chairman of the Board, Marvin
Rosen.
34
Jack Rosen, Director
Mr.
Rosen has served as a Director since July 2012. Mr. Rosen is the
founder and has been the Chief Executive of Rosen Partners LLC, a
residential and commercial real estate development firm, for more
than the past five years. He is also the current Chairman of the
American Council for World Jewry, Inc. and the current President of
the American Jewish Congress. In addition, Mr. Rosen oversees a
wide array of healthcare, cosmetic and telecommunications business
ventures throughout the U.S., Europe and Asia. Mr. Rosen currently
serves on the Advisory Board of Altimo, an investment company in
Russia, Turkey and the Commonwealth of Independent States,
operating in the field of mobile and fixed-line communications. Mr.
Rosen is currently a member of the Council on Foreign Relations, an
independent, nonpartisan membership organization, think tank, and
publisher. The Board believes that Mr. Rosen’s background as
a leader in many international organizations and as a corporate
director in the telecommunications industry provides him with the
leadership experience necessary to provide valuable direction and
guidance to executive management and the Board.
William Rubin, Director
Mr.
Rubin has served as a Director since February 2012. Since 1992, he
has been President of the Rubin Group, a consulting firm
representing clients before governmental entities. Previously, he
was Assistant Insurance Commissioner and Treasurer of the State of
Florida, where he was directly responsible for all activities
related to the Florida State Board of Administration, the agency
that manages the investments for Florida’s pension funds. Mr.
Rubin also serves as an advisor to many large companies, primarily
health care companies doing business in Florida. The Board believes
that Mr. Rubin’s background as a senior governmental official
and a lobbyist provides him with the financial and leadership
experience to be a valuable advisor to executive management and the
Board.
Paul C. O’Brien, Director
Mr.
O’Brien has served as a Director since August 1998. Since
January 1995, he has served as the President of the O’Brien
Group, Inc., a consulting and investment firm. From February 1988
to December 1994, he was the President and Chairman of New England
Telephone (a subsidiary of NYNEX), now Verizon, a
telecommunications company. Mr. O'Brien also serves on the Board of
Directors of Astrobotics and The Computer Merchant and is the
Chairman of the Board of Jumpstart Micro Inc. The Board believes
that Mr. O’Brien’s background as President of a
consulting and investment firm, former Chairman of a major
telecommunications company and a corporate director provides him
with the industry, operational, financial, and leadership
experience necessary to effectively guide the Board on all aspects
of the Company’s business.
Michael J. Del Giudice, Director
Mr. Del
Giudice has served as a Director since November 2004. He is a
Senior Managing Director of Millennium Capital Markets LLC and
Senior Managing Director of MCM Securities LLC, both of which he
founded in 1996. Mr. Del Giudice also serves as Chairman of
Carnegie Hudson Resources, LLC, founded in 2012. Mr. Del Giudice
has been a Member of the Board of Directors of Consolidated Edison
Company of New York, Inc. since 1999, and is currently a member of
its Audit Committee and Chairman of its Corporate Governance and
Nominating Committee. Mr. Del Giudice served as a director of Reis,
Inc. from 2007 to 2013 and was a director of Barnes and Noble, Inc.
from 1999 to September 2010. He is also Vice Chairman of the New
York Racing Association. Mr. Del Giudice was a General Partner and
Managing Director at Lazard Freres & Co. LLC from 1985 to 1995.
From 1983 to 1985, Mr. Del Giudice was Chief of Staff to New York
Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy
Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as
Chief of Staff to the then Speaker of the New York Assembly. The
Board believes that Mr. Del Giudice’s background as a Senior
Managing Director of securities and investment firms, an investment
banker, Chief of Staff to a Governor and an active corporate
director provides him with the financial and leadership experience
to be a valuable advisor to executive management and the
Board.
Larry Blum, Director
Mr.
Blum has served as a Director since February 2012. He has been a
Senior Advisor for Marcum LLP (formerly known as Marcum Rachlin),
independent registered public accountants, since 2011. For more
than 18 years, Mr. Blum served as the Managing Partner of Rachlin
LLP, directing the firm’s growth to its position as
Florida’s largest independent accounting and business
advisory firm up until its merger with Marcum LLP in 2009. Mr. Blum
has also served as a litigation advisor and is a member of the
Florida Bar. The Board believes that Mr. Blum’s background as
a former managing partner of a public accounting firm and his
expertise in the areas of strategic planning, mergers and
acquisitions and domestic and international taxation provides him
with the financial and leadership experience to be a valuable
advisor to executive management and the Board.
35
Gordon Hutchins, Jr., President and Chief Operating
Officer
Mr.
Hutchins has served as our President and Chief Operating Officer
since March 2008. Mr. Hutchins served as our Executive Vice
President from December 2005 to March 2008 and as Acting Chief
Financial Officer from January 2010 to April 2016. Prior to joining
us, Mr. Hutchins served as President and Chief Executive Officer of
SwissFone, Inc., a telecommunications carrier. Prior to joining
SwissFone, Mr. Hutchins served as President and Chief Executive
Officer of STAR Telecommunications, Inc., an international
telecommunications carrier. Mr. Hutchins has also served as
President and Chief Executive Officer of GH Associates, Inc., a
management-consulting firm that he founded.During his early career,
Mr. Hutchins served as President and Chief Executive Officer of LDX
NET, Inc., a fiber optic network company, and held positions with
MCI, McDonnell Douglas Corporation and AT&T.
Michael R. Bauer, Chief Financial Officer
Mr.
Bauer has served as our Chief Financial Officer since April 13,
2016. Prior to joining the Company, Mr. Bauer served as Chief
Financial Officer at GTT Communications Inc. from June 2012 to June
2015. Prior to serving as GTT’s Chief Financial Officer, Mr.
Bauer served as its acting Chief Financial Officer, Principal
Accounting Officer and Treasurer from December 2011 to June 2012
and as its Vice President, Finance and Controller from June 2009 to
December 2011. Mr. Bauer has over 20 years of broad finance and
accounting experience. Prior to joining GTT, Mr. Bauer led the
financial planning and analysis and investor relations efforts at
MeriStar Hospitality Corporation. Mr. Bauer began his career with
Arthur Andersen in audit and business advisory
services.
Jonathan Kaufman, Chief Strategy Officer
Mr.
Kaufman has served as our Chief Strategy Officer since January
2015. Prior to assuming that position, Mr. Kaufman served as
President, Business Services, from October 2012 (the date we
acquired his company, Network Billing Systems, LLC, a company he
founded in 1998) until January 2015. From its founding until its
sale in 2012, Mr. Kaufman served as Chief Executive Officer of
Network Billing Systems. Prior to founding Network Billing Systems,
Mr. Kaufman served as Chief Executive Officer of Target Telecom
Inc., a telecommunications service company that he founded in 1984
and sold to WorldCom in 1996.
Russell P. Markman, President Business Services
Mr.
Markman has served as our President Business Services since January
2015. Prior to assuming that role, Mr. Markman served as Executive
Vice President, Business Services from October 2012 to January
2015. Prior to our acquisition of Network Billing Systems in
October 2012, Mr. Markman served as President of that company from
January 2009 to October 2012. Prior to becoming President of
Network Billing Systems, Mr. Markman served as Vice President,
Operations from October 2003 to October 2012. Prior to joining
Network Billing Systems, Mr. Markman established the alternate
channel distribution program for commercial sales at RCN
Corporation, where he served as Director of Commercial
Sales.
James P. Prenetta, Jr., Executive Vice President and General
Counsel
Mr.
Prenetta has served as our Executive Vice President and General
Counsel since June 2017 and previously served in that role from May
2014 through January 2015. From January 2015 to June 2017, Mr.
Prenetta acted as Corporate Counsel to Fusion. From September 2009
to January 2017, Mr. Prenetta served as General Counsel and
Corporate Secretary for Hibernia NGS Limited and its various
subsidiaries. Prior to joining Hibernia Networks, Mr. Prenetta
served as Senior Vice President, General Counsel and Corporate
Secretary for One Communications Corporation and its predecessor
CTC Communications Corp. from January 2004 to September 2009. From
2003 to 2009, Mr. Prenetta also served as special counsel to
Columbia Ventures Corporation, an investment firm.
Jan Sarro, Executive Vice President – Marketing and Business
Development
Ms.
Sarro has served as our Executive Vice President of Marketing and
Business Development since November 2012. Prior to assuming that
role, Ms. Sarro served as our Executive Vice President –
Corporate Services from March 2008 to October 2012, as our
Executive Vice President, Carrier Services from April 2005 to March
2008, and as our Vice President of Sales and Marketing from March
2002 to April 2005. Prior to joining the Company, Ms. Sarro served
as President of the Americas for Viatel, Inc., a global,
facilities-based communications carrier. Ms. Sarro has over 30
years of experience in the telecommunications industry. Ms. Sarro
has also held senior executive marketing and sales management
positions at Argo Communications, FTC Communications, TRT
Communications and WorldCom.
Lisa Taranto, Vice President, Finance and Principal Accounting
Officer
Ms.
Taranto has served as our Principal Accounting Officer since August
2015 and as our Vice President, Finance since January 2014. From
January 2014 until August 2015, she also held the position of Vice
President, Accounting. Prior to joining us, Ms. Taranto served as
Vice President, Finance and Accounting for Broadvox, LLC and from
January 2006 to January 2011 served as Vice President, Accounting
and Financial Operations for Cypress Communications. From May 2003
to April 2005, Ms. Taranto held senior financial management roles
at AirGate PCS (a Sprint Company), where she built the company's
settlements operations organization and held a position on that
company's external controls and disclosures committee. Ms. Taranto
has over 25 years of financial management experience in the
communications industry. Earlier in her career, Ms. Taranto held
executive management roles at MCI/Verizon Business, where she led
the Global Financial Operations and IT Revenue Systems
organizations.
36
Board of Directors
The
Board oversees our business affairs and monitors the performance of
senior management. In accordance with our corporate governance
principles, the Board does not involve itself in the day-to-day
operations of the Company. The Directors keep themselves informed
through discussions with the Chief Executive Officer and our other
executive officers of the Company, by reading the reports and other
materials that we send them and by participating in Board and
committee meetings. If any Director resigns, dies or is otherwise
unable to serve out his or her term, or if the Board increases the
number of Directors, the Board may fill any vacancy by a vote of a
majority of the Directors then in office. A Director elected to
fill a vacancy serves for the unexpired term of his or her
predecessor. Except as otherwise provided by Delaware law, any
director or the entire board may be removed, with or without cause,
by a majority of the shares then entitled to vote at an election of
directors.
Our
By-laws provide that the Board shall consist of not less than one
Director and that a Director’s term extends from the date of
his or her election until our next annual meeting of stockholders.
Through Board action, the number of directors of the Company has
been set at no less than seven and no more than 17. The Board
currently consists of eight members.
During
2017, 14 meetings of the Board were held all of which were
telephonic. All incumbent directors, other than Jack Rosen and
William Rubin attended at least 75% of the total meetings of the
Board; and all directors attended at least 75% of the total
meetings of the Committees on which they served.
Committees of the Board
The
Board has established a Compensation and Nominating Committee (the
“Compensation Committee”), a Strategic and Investment
Banking Committee (the “Strategic Committee”) and an
Audit Committee (the “Audit Committee” and together
with the Compensation Committee and the Strategic Committee,
hereinafter referred to as the “Committees”) to devote
attention to specific subjects and to assist the Board in the
discharge of its responsibilities. The functions of the Committees
and their current members are set forth below:
Compensation Committee
The
primary functions of the Compensation Committee are
to;
●
evaluate and
assess, on an annual basis, the performance of the Chief Executive
Officer;
●
make
recommendations to the Board regarding base salaries, annual
incentive awards (equity and/or cash) and long-term incentive
awards for the Chief Executive Officer and, in consultation with
the Chief Executive Officer, for other executive
officers;
●
establish
performance objectives for executive officers under our incentive
compensation plans with particular consideration to appropriate
levels of risk-taking incentives;
●
make
recommendations to the Board regarding employment agreements,
severance agreements, change in control agreements and similar
arrangements;
●
retain
compensation consultants to be used to assist in the evaluation of
the compensation of the Chief Executive Officer and other executive
officers and obtain advice and assistance from internal and outside
legal, accounting or other advisors;
●
review
and recommend to the Board the nominees for election as Directors
and assist the Board in identifying and attracting qualified
candidates;
●
periodically
review and assess the adequacy and levels of Director compensation;
and
●
periodically
review succession plans for key executive officer
positions.
During
2017, the members of our Compensation Committee were Michael J. Del
Giudice – Chairman, Paul C. O'Brien and Larry Blum, each of
whom was a non-employee member of our Board. During 2017, the
Compensation Committee held six meetings. The Board has determined
that each of these Directors is independent within the meaning of
Nasdaq Rule 5605(a)(2). The charter of the Compensation Committee
is posted on our website (www.fusionconnect.com), and a copy of
that charter can be obtained by contacting our Corporate Secretary
at:
37
Fusion Telecommunications International, Inc.
Attention: Corporate
Secretary 420 Lexington Avenue, Suite 1718
New York, New York 10170
The
information on our website is neither incorporated by reference
herein nor otherwise made a part of this report.
Audit
Committee
Our
Audit Committee’s primary function is to assist the Board in
fulfilling its oversight responsibilities by reviewing the
integrity of our financial statements, our internal control
systems, our auditing, accounting and financial reporting processes
(including those associated with the Sarbanes-Oxley Act of 2002)
and the qualification and independence of our independent
accountants. The Audit Committee’s primary duties are
to:
●
serve as an
independent and objective party to monitor our quarterly and annual
financial reporting process and the adequacy of our internal
control systems;
●
review
and appraise the audit efforts of our independent accountants;
and
●
provide
an open avenue of communication among the independent accountants,
financial and senior management and the Board.
To
fulfill its responsibilities and duties, the Audit
Committee:
●
reviews and
discusses with management and the independent accountants our
annual audited financial statements and any reports or other
financial information submitted to any governmental body or to the
public;
●
reviews
with management and the independent accountants the Company’s
quarterly financial statements prior to the filing of the
Company’s Quarterly Reports on Form 10-Q or prior to release
of earnings for the quarter;
●
reviews and
approves any related-party transactions;
●
appoints
and replaces the independent accountants and approves the
professional fees to be paid to the independent accountants,
including the range of audit and non-audit fees;
●
reviews with the
independent auditors all critical accounting policies and practices
being used by the Company;
●
ensures
the independence of the independent accountants by preapproving all
auditing and non-audit services to be performed for the Company,
ensures the rotation of audit partners as required by law, and
discusses with the independent auditors the matters required to be
discussed by applicable auditing standards;
●
reviews any
significant disagreements among management and the independent
accountants in connection with the preparation of the
Company’s financial statements;
●
establishes
procedures relating to the receipt, retention and treatment of
complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential,
anonymous submission by employees of concerns regarding
questionable accounting and auditing matters; and
●
establishes,
reviews and updates periodically our Code of Ethics to ensure that
management has established a system to monitor and enforce our Code
of Ethics.
During
2017, the members of our Audit Committee were Paul C. O'Brien
– Chairman, Michael Del Giudice and Larry Blum, each of whom
was a non-employee member of our Board. Our Board has determined
that Michael Del Giudice is our Audit Committee Financial Expert
within the meaning of SEC Rules. Our Board has also determined that
each of the Directors serving on our Audit Committee is independent
within the meaning of Nasdaq Rule 5605(a)(2). The Audit Committee
charter is posted on our website (www.fusionconnect.com), and a
copy of the charter can also be obtained by contacting our
Corporate Secretary. The information on our website is neither
incorporated by reference nor otherwise made a part of this report.
The Audit Committee held four meetings in 2017.
38
Strategic
and Investment Banking Committee
The
members of our Strategic Committee are Marvin S. Rosen –
Chairman, Michael Del Giudice and Philip D. Turits. Our Strategic
Committee evaluates and recommends investment strategies with
investment banks and brokerage houses and assists in the evaluation
of potential mergers and acquisitions candidates. The Strategic
Committee does not currently have a written charter. The Strategic
Committee acts at the direction of the Board. The Strategic
Committee held no meeting in 2017.
Board
Role in Risk Oversight
The
Board has overall responsibility for risk oversight, with a
particular focus on those areas of risk that might have the most
significant impact on the Company. These risk oversight
responsibilities are primarily discharged through the Audit
Committee and the Compensation Committee. The roles of these
committees in risk evaluation are as follows:
Audit Committee. The Audit Committee
oversees the risk management policies and practices related to the
financial reporting process and to our published financial
statements. In addition, the Audit Committee from time to time
reviews those risk management policies and practices with executive
management and our auditors, to insure full compliance and the
minimization of finance-related risks.
Compensation Committee. The Compensation
Committee oversees the risk management policies and practices
related to compensation and compensation-related risks, as well as
possible risks related to succession planning. This oversight
responsibility specifically includes working with executive
management in relation to employee compensation policies, practices
and programs.
Fusion’s
executive officers direct the day-to-day implementation and
monitoring of the management policies and practices established by
the Board and its committees. As part of its periodic meetings with
executive management, the Board reviews the Company’s risk
management policies and practices.
Audit Committee Report
With
respect to the year ended December 31, 2017, in addition to its
other work, the Audit Committee:
●
reviewed and
discussed with management and EisnerAmper, LLP (“EA”),
our independent registered public accounting firm, our audited
consolidated financial statements as of December 31, 2017 and the
year then ended;
●
discussed with
EisnerAmper, LLP the matters required to be discussed by Statement
on Auditing Standards No. 61, “Communication with Audit
Committees,” as amended, with respect to its review of the
findings of Eisner Amper LLP during its examination of our
financial statements; and
●
received from
EisnerAmper, LLP written affirmation of its independence as
required by the Independence Standards Board Standard No. 1,
“Independence Discussions with Audit Committees.” In
addition, the Audit Committee discussed with EisnerAmper, LLP its
independence and determined that the provision of non-audit
services was compatible with maintaining auditor
independence.
Based
on the review and discussion summarized above, the Audit Committee
recommended that the Board include the audited consolidated
financial statements in the 2017 Annual Report on Form 10-K for
filing with the SEC.
Submitted
by:
/s/
Paul C. O’Brien, Chairman
/s/
Michael Del Giudice
/s/
Larry Blum
Shareholder Communications with Directors
The
Board recommends that communications with the Board be initiated in
writing and addressed as follows:
Fusion
Telecommunications International, Inc.
Attention: Corporate Secretary- Shareholder
Communications
420 Lexington Avenue, Suite 1718 New York, New York
10170
39
This
centralized process will assist the Board in reviewing and
responding to stockholder communications in an appropriate manner.
The name of any specific Director recipient should be noted in the
communication. The Board has instructed our Corporate Secretary to
forward such correspondence only to the intended recipient;
however, the Board has also instructed our Corporate Secretary,
prior to forwarding any correspondence, to review such
correspondence and, in his or her discretion, not to forward
certain items if they are deemed of a commercial or frivolous
nature or otherwise inappropriate for the Board's consideration. In
such cases, some of that correspondence may be forwarded elsewhere
within the Company for review and possible response.
Code of Ethics
Since
2004, we have had a Corporate Code of Ethics, the current version
of which applies to all members of our Board, the Chief Executive
Officer, any other principal executive officer, the Chief Financial
Officer and Corporate Controller. To receive a copy of our Code of
Ethics, a stockholder may write to Fusion Telecommunications
International, Inc., Attention: Corporate Secretary, 420 Lexington
Avenue, Suite 1718, New York, New York 10170 or may contact our
Corporate Secretary’s office at (212) 201-2407. A copy of our
Code of Ethics has been incorporated by reference as an exhibit to
this report and is also posted on our website
(www.fusionconnect.com). Disclosure of amendments to, or waivers
of, provisions of the Code of Ethics will be publicly disclosed in
accordance with applicable rules and regulations and will be made
available upon request in the manner indicated above.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16 (a) of the Exchange Act requires that every person who is
directly or indirectly the beneficial owner of more than 10% of any
class of any equity security (other than an exempted security)
which is registered pursuant to Section 12, or who is a director or
an officer of the issuer of such security, file the ownership
reports required by Section 16 of the Exchange Act.
Based
solely upon the Company’s review of Forms 3 and 4 and
amendments thereto furnished to us during or with respect to our
most recent fiscal year, and Forms 5 and amendments thereto
furnished to us with respect to our most recent fiscal year and any
written representation from a reporting person (as defined in Item
405 of Regulation S-K) that no Form 5 is required, during the
Company’s most recent fiscal year the following Section 16
officers and directors and beneficial owners of more than 10% of
any class of our equity securities failed to timely file one form
each: Mr. Turits failed to timely file one Form 4 reporting two
transactions and Apptix ASA failed to file one Form 3.
ITEM 11. EXECUTIVE COMPENSATION.
Executive Officers Summary Compensation Table
The
following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for our Named Executive
Officers.
|
|
|
|
Salary
|
Bonus
|
Stock
Awards
|
Option
Awards
|
All
Other
Compensation
|
Total
|
|
Name and Principal Position (1)
|
Year
|
($)
|
(2)($)
|
(3)
($)
|
(4)
($)
|
(5)
($)
|
($)
|
|
|
Matthew D.
Rosen
|
|
2017
|
$425,000
|
$212,500
|
$-
|
$1,703,930
|
$1,917
|
$2,343,847
|
|
Chief Executive
Officer
|
|
2016
|
$425,000
|
$350,000
|
$-
|
$259,230
|
$2,102
|
$1,036,332
|
|
|
|
|
|
|
|
|
|
|
|
Gordon Hutchins,
Jr.,
|
|
2017
|
$275,000
|
$-
|
$-
|
$-
|
$424
|
$275,424
|
|
President &
Chief Operating Officer
|
|
2016
|
$275,000
|
$60,000
|
$-
|
$72,584
|
$456
|
$408,040
|
|
|
|
|
|
|
|
|
|
|
|
Michael R.
Bauer,
|
|
2017
|
$250,000
|
$-
|
$-
|
$-
|
$517
|
$250,717
|
|
Chief Financial
Officer
|
|
2016
|
$179,006
|
$41,000
|
$99,550
|
$57,031
|
$468
|
$377,055
|
40
(1)
Included in
these columns are amounts earned, though not necessarily paid to
the Named Executive Officer, during the corresponding fiscal year.
Named Executive Officers consists of: (i) our Principal Executive
Officer regardless of compensation level, and (ii) our two most
highly compensated executive officers (other than our Principal
Executive Officer), who were serving as such on December 31, 2017
and whose total 2017 compensation exceeded $100,000.
(2)
In
the first quarter of 2018, in connection with the completion of the
public offering of our common stock in January 2018, Mr. Rosen, Mr.
Hutchins and Mr. Bauer received a bonus payment in the amount of
$187,500, $60,000 and $40,000, respectively.
(3)
Reflects 55,000
shares of the Company's common stock that vest ratably over a
period of three years that Mr. Bauer received in connection with
his appointment as Chief Financial Officer.
(4)
Reflects the
dollar amount recognized for financial statement reporting purposes
for the fiscal years ended December 31, 2017 and 2016, for
restricted stock and option awards. The value attributable to
restricted share and option awards is computed based on aggregate
grant date fair value in accordance with Financial Accounting
Standards Board ASC Topic 718, and the assumptions made in the
valuations of the restricted shares and option awards are included
in Note 2 (Summary of Significant Accounting Policies – Stock
Based Compensation) of the notes to our consolidated financial
statements for the year ended December 31, 2017 included elsewhere
in this report. Pursuant to SEC rules, the amounts shown exclude
the impact of estimated forfeitures related to service-based
vesting conditions.
(5)
Represents life
insurance premiums paid by us.
Employment Agreements, Termination of Employment and
Change-In-Control Arrangements
On November 5, 2015, we executed an employment agreement with
Matthew D. Rosen, our Chief Executive Officer. The term of Mr.
Rosen's employment agreement with the Company will expire on
October 31, 2018. The Company and Mr. Rosen intend to negotiate and
enter into a new employment agreement to take effect upon
expiration of such existing contract, or sooner. Mr. Rosen’s
employment agreement provides (i) for an annual base salary of not
less than $425,000 (subject to annual review for cost of living
increases, performance and market conditions), (ii) for an annual
bonus equal to at least 50% of base salary if the Company achieves
positive adjusted EBITDA, and (iii) that in the event his
employment is terminated (a) by the Company without
“cause” (as defined in his employment agreement), or
(b) by Mr. Rosen for “good reason” (as defined in his
employment agreement), including as a result of a resignation by
Mr. Rosen for any reason within six months following a change in
control of the Company (as defined in his agreement), he will
receive unpaid base salary accrued through the effective date of
the termination plus any pro-rata bonus that would be payable had
he completed a full year of employment and a lump sum payment
(within 30 days of the effective date of said transaction) equal to
200% of his base salary then in effect and 200% of his highest
annual bonus for the three years preceding his
termination. In addition, upon any such termination of
employment, all stock options held by Mr. Rosen would vest in full.
Mr. Rosen’s employment agreement also provides that the
Company will cooperate in good faith to afford Mr. Rosen the right
to exercise his stock options in full immediately prior to a change
in control.
Mr. Rosen’s employment agreement also includes a one year
non-disclosure, employee non-solicitation and non-compete
provisions.
In the event of a sale of the Company or substantially all of the
assets of the Company and its subsidiaries for cash or securities
or a combination thereof, Mr. Rosen is entitled to a one-time bonus
equal to the following: (i) if the Company’s stockholders
receive aggregate consideration of
up to $149,999,999, Mr. Rosen is entitled to receive a special
bonus equal to 2.5% of such consideration paid/distributed to the
Fusion stockholders; (ii) 3.5% of such consideration if such
consideration is between $150 million and $249,999,999; (iii) 4.5%
if such consideration is between $250 million and $349,999,999; and
(iv) 5% if such consideration exceeds $350
million. The Compensation Committee, with
advice of counsel, has determined that the proposed
merger between the Company and Birch does not trigger the payment
of the one-time bonus contemplated by this provision of Mr. Rosen's
employment agreement. That fact notwithstanding, and
considering that the structure of the Birch transaction was not
contemplated by the terms of Mr. Rosen’s employment
agreement, the Compensation
Committee has determined that a special one-time transaction bonus
is warranted and, subject to closing of the Merger, intends to pay
him a special one-time bonus.
Mr. Rosen’s employment agreement also provides that the Board
will, within 90 days following execution of the employment
agreement, develop a plan that enables Mr. Rosen to obtain a 5%
equity stake in the Company within three years from the date of his
employment agreement. On November 13, 2017, the Board granted and
Mr. Rosen agreed to accept options to purchase 822,298 shares of
our common stock in satisfaction of this obligation, two thirds of
these options vested on the date of grant and the remaining
one-third vested on February 3, 2018. The exercise price of these
options, which is $2.51, was set at the closing price of our common
stock on November 10, 2017 (the last trading day before the grant
was approved by the Board).
41
In 2016, the Company declared a special bonus to Mr. Rosen in the
amount of $535,500 for bonus amounts due but not paid by the
Company for periods prior to 2014.
Gordon Hutchins Jr. serves as our President and Chief Operating
Officer. Mr. Hutchins does not have a written employment
agreement with the Company. Effective January 1, 2015,
Mr. Hutchins’ annual salary was increased to
$275,000. Mr. Hutchins is entitled to receive a bonus
of up to 25% of his annual salary if the Company achieves
designated corporate performance metrics.
Michael R. Bauer serves as our Chief Financial Officer. Mr. Bauer
does not currently have a formal employment agreement with the
Company. However, his offer letter provides that his annual salary
is $250,000 and he is entitled to receive a bonus of up to 25% of
his annual salary if the Company achieves designated corporate
performance metrics. In connection with his appointment as Chief
Financial Officer, in 2016 Mr. Bauer received a grant of 55,000
generally restricted shares of our common stock, which shares vest
ratably over a three year period and which shares (along with stock
options granted to Mr. Bauer) vest in the event of a change in
control of the Company (as defined in his offer letter). In the
event Mr. Bauer’s employment is terminated (i) within six
months following a change in control, except for
“Cause” (as defined in his offer letter), or (ii) by
the Company “Without Cause” (as defined in his offer
letter), or (iii) due to a resignation by Mr. Bauer for “Good
Reason” (as defined in his offer letter) then the Company is
obligated to pay him severance in an amount equal to salary and the
cost of health benefit continuation for a period of six months (in
a lump sum or installments, at the election of the
Company).
Determination of Executive Compensation
The
compensation of our Chief Executive Officer is determined by the
Compensation Committee. The compensation of our other
executive officers is determined by the Compensation Committee, in
consultation with the Chief Executive Officer. In determining the
levels and forms of compensation to be paid to our executive
officers, the Compensation Committee considers overall Company
performance, departmental or business segment performance,
individual executive performance and experience, internal equity
with regard to other executive positions, general economic
conditions, and typical levels and forms of compensation at
similarly-sized companies with business models similar to
ours.
In
considering levels and forms of compensation at other companies,
the Compensation Committee relies not only on its own knowledge,
but also on published salary reviews and compensation studies for
companies with business models similar to ours, for specific
executive positions and for industry in general.
Our
goal is to provide each of our executive officers with a total
compensation package (base salary, the potential for a
performance-based annual cash bonus, and time-based equity
incentives) that is competitive. We endeavor to
appropriately balance the levels of fixed compensation and
“at risk” compensation, as well as the levels of cash
compensation and equity incentives.
In
addition to cash-based and equity-based compensation, our executive
officers are eligible to participate in the benefit programs that
are offered to all of our employees, including medical insurance,
dental insurance, life insurance, a 401(k) plan, and a variety of
other elective benefit plans. We do not offer
perquisites or other significant benefits to our executive officers
that are not otherwise available to all of our
employees.
2017 Director Compensation
Our
Directors do not receive cash compensation for their services on
the Board or Committees. However, they are reimbursed for
out-of-pocket expenses incurred in attending Board and Committee
meetings. In addition, until 2017, we annually granted
Directors stock options for their services, the amount of which was
determined by the Compensation Committee. Due to the pending Merger
with Birch, no options were granted to the Directors in 2017.
The following table provides information relating to
compensation paid to the Directors for the 2017 fiscal
year.
|
Name
|
Fees Earned Or Paid In Cash
(S)
|
Stock Awards ($)
|
Option Awards
($)
|
Non-Equity Incentive Plan
Compensation
|
Nonqualified Deferred Compensation
Earnings
|
All Other
Compensation ($)
|
Total ($) (1)
|
|
Marvin S.
Rosen
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Michael J. Del
Giudice
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Jack
Rosen
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Paul C.
O'Brien
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Philip D.
Turits
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
William
Rubin
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
Larry
Blum
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
$-
|
|
(1)
|
The
table does not include amounts reimbursed for expenses incurred in
attending Board and Committee meetings.
|
42
2016 Equity Incentive Plan
On
October 28, 2016, our stockholders approved the 2016 Fusion
Telecommunications International, Inc. 2016 Equity Incentive Plan
(the “2016 Plan”), which was previously adopted by the
Board on August 22, 2016. The 2016 Plan provides for the grant of
incentive stock options, non-qualified stock options, stock
appreciation rights (“SARs”), restricted stock,
restricted stock units, stock grants, stock units, performance
shares, performance share units and performance cash (collectively
“awards”). The 2016 Plan also permits the grant of
awards that are intended to qualify for the
“performance-based compensation” exception to the $1.0
million limitation on the deduction of compensation imposed by
Section 162(m) of the Internal Revenue Code of 1986, as
amended. The 2016 Plan supersedes and replaces the
2009 Plan (as defined below), which plan remains in effect solely
with respect to outstanding awards that have not been exercised,
forfeited, canceled, expired or otherwise terminated. The 2016 Plan
provides a long-term, equity-based incentive designed to assist our
retention of key personnel, align the interests of our Directors,
executive officers and employees with those of our stockholders and
focus participants on the achievement of long-term business
objectives that will increase share value.
The
total number of shares of common stock reserved under the 2016 Plan
is an amount equal to 10% of our shares outstanding from
time-to-time on a fully-diluted basis, plus shares from any
award granted under the 2009 Plan that terminates, expires or
lapses in any way following the effective date of the 2016 Plan. In
addition, the 101,749 shares not granted under the 2009 Plan
are also available for grant under the 2016 Plan. Subject to
the express provisions of the 2016 Plan, if any award granted under
the 2016 Plan terminates, expires, or lapses for any reason, or is
paid in cash, any stock subject to or surrendered will again be
stock available for the grant of an award under the 2016 Plan. The
exercise of a stock-settled SAR, or broker-assisted
“cashless” exercise of an option (or a portion thereof)
will reduce the number of shares of our common stock available for
issuance pursuant to the 2016 Plan by the entire number of shares
of our common stock subject to that SAR or option (or applicable
portion thereof), even though a smaller number of shares of our
common stock will be issued upon such an exercise. Also, shares of
our common stock tendered to pay the exercise price of an option or
tendered or withheld to satisfy a tax withholding obligation
arising in connection with an award will not become available for
use under the 2016 Plan.
The
2016 Plan contains the following provisions, which the Company
believes reflect best practices for equity-compensation plans: (i)
prohibits the grant of stock options and SARs with discounted
exercise prices, (ii) prohibits the repricing of stock options and
SARs without stockholder approval, (iii) prohibits the
recycling of awards tendered in payment of an option or withheld to
satisfy tax obligations; (iv) contains a definition of change in
control whereby potential acceleration of awards will only occur in
the event of an actual change in control transaction; (v) includes,
as a general rule, double-trigger vesting following a change in
control; and (vi) imposes a $500,000 limit on the value of awards
that may be granted to any one participant who is a non-employee
director during any 12-month period.
The
2016 Plan is administered by the Compensation
Committee. The Compensation Committee determines, from
time to-time, those of our executive officers, Directors and
employees to whom awards will be granted, the amount of the awards
granted to each individual, the vesting schedule of the awards and
all other terms and conditions of the award. As of March 9, 2018,
the Company had granted options to purchase 1,920,348 shares of
Fusion common stock under the 2016 Plan. No other forms of awards
have been granted.
2009 and 1998 Stock Option Plans
On
December 17, 2009, the stockholders approved and ratified our 2009
Stock Option Plan (the “2009 Plan”), which was
previously adopted by the Board in March 2009. This plan
replaced our 1998 Stock Option Plan, the term of which expired as
to new option grants.
The
number of shares reserved for issuance under the 2009 Plan was
1,260,000. The 2009 Plan is administered by the
Compensation Committee. As of March 9, 2018, there were
outstanding options to purchase 1,082,449 shares of common stock
under the 2009 Plan. Options to purchase 15,130 shares of common
stock also remain outstanding under the now expired 1998 Stock
Option Plan, with such options expiring at various dates through
2020.
43
Outstanding Equity Awards at Year End
The
following table provides information concerning unexercised options
and stock awards that have not vested for each Named Executive
Officer as of December 31, 2017. The table gives effect
to the 1:50 reverse split completed by us in May 2014.
|
|
|
OPTION
AWARDS
|
STOCK AWARDS
|
|||||||
|
Name
|
Number of
securities underlying unexercised options (#)
exercisable
|
Number of
securities underlying unexercised options (#)
unexercisable
|
Equity incentive plan awards; Number of
securities underlying unexercised unearned options
(#)
|
Option exercise prices
($)
|
Grant
Date
|
Option expiration
date
|
Number of shares or units of stock that have
not vested (#)
|
Market value of shares or units of stock that
have not vested ($)
|
Equity incentive plan awards; Number of
unearned shares, units or other rights that have not vested
(#)
|
Equity incentive plan awards; Market or Payout
Value of unearned shares, units or other rights that have not
vested (#)
|
|
Matthew D.
Rosen
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
-
|
-
|
$15.50
|
3/26/2008
|
3/26/2018
|
-
|
-
|
-
|
-
|
|
|
7,000
|
-
|
-
|
$5.50
|
3/26/2009
|
3/26/2019
|
-
|
-
|
-
|
-
|
|
|
8,750
|
-
|
-
|
$6.00
|
4/14/2010
|
4/14/2020
|
-
|
-
|
-
|
-
|
|
|
8,750
|
-
|
-
|
$4.50
|
10/19/2011
|
10/19/2021
|
-
|
-
|
-
|
-
|
|
|
10,000
|
|
-
|
$5.50
|
10/17/2012
|
10/17/2022
|
-
|
-
|
-
|
-
|
|
|
71,236
|
-
|
-
|
$4.25
|
7/29/2013
|
7/29/2023
|
-
|
-
|
-
|
-
|
|
|
28,986
|
-
|
-
|
$3.52
|
10/17/2014
|
10/17/2024
|
-
|
-
|
-
|
-
|
|
|
51,014
|
-
|
-
|
$3.45
|
10/17/2014
|
10/17/2024
|
-
|
-
|
-
|
-
|
|
|
100,000
|
-
|
-
|
$2.07
|
10/7/2015
|
10/6/2025
|
-
|
-
|
-
|
-
|
|
|
85,000
|
165,000
|
-
|
$1.26
|
11/5/2016
|
11/11/2026
|
-
|
-
|
-
|
-
|
|
|
550,940
|
271,358
|
-
|
$2.51
|
11/09/2017
|
11/9/2017
|
-
|
-
|
-
|
-
|
|
Total
|
928,676
|
436,358
|
-
|
|
|
|
-
|
-
|
-
|
-
|
|
Gordon
Hutchins, Jr.
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
-
|
-
|
$15.50
|
3/26/2008
|
3/26/2018
|
-
|
-
|
-
|
-
|
|
|
4,000
|
-
|
-
|
$5.50
|
3/26/2009
|
3/26/2019
|
-
|
-
|
-
|
-
|
|
|
5,000
|
-
|
-
|
$6.00
|
4/14/2010
|
4/14/2020
|
-
|
-
|
-
|
-
|
|
|
6,500
|
-
|
-
|
$4.50
|
10/20/2011
|
10/19/2021
|
-
|
-
|
-
|
-
|
|
|
6,500
|
|
-
|
$5.50
|
10/17/2012
|
10/17/2022
|
-
|
-
|
-
|
-
|
|
|
20,342
|
-
|
-
|
$4.25
|
7/29/2013
|
7/29/2023
|
-
|
-
|
-
|
-
|
|
|
25,000
|
-
|
-
|
$3.52
|
10/17/2014
|
10/17/2024
|
-
|
-
|
-
|
-
|
|
|
35,000
|
-
|
-
|
$2.07
|
10/7/2015
|
10/6/2025
|
-
|
-
|
-
|
-
|
|
|
23,800
|
46,200
|
-
|
$1.26
|
11/5/2016
|
11/11/2026
|
|
|
|
|
|
Total
|
130,142
|
46,200
|
-
|
|
|
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael R.
Bauer
|
18,700
|
36,300
|
-
|
$1.26
|
11/11/2016
|
11/11/2026
|
36,300
|
$65,703(1)
|
-
|
-
|
|
Total
|
18,700
|
36,300
|
-
|
|
|
|
36,300
|
$65,703(1)
|
-
|
-
|
|
(1)
|
The
value attributed to the restricted shares issued to Mr. Bauer is
computed in accordance with FASB ASC Topic 718. Pursuant to SEC
rules, the amounts shown exclude the impact of estimated
forfeitures related to service-based vesting conditions. All
options vest ratably over three years from their grant date subject
to acceleration in certain circumstances.
|
||||||||||
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table presents information regarding the beneficial
ownership of each class of our voting securities as of March 9,
2018 by:
|
●
|
each
person who beneficially owns more than 5% of our voting
securities;
|
|
●
|
each of
our Directors and named executive officers (as defined in Item
402(a)(3) of Regulation S-K) individually; and
|
|
●
|
all
executive officers and Directors as a group.
|
The
Company’s voting securities consist of our common stock and
our Series B-2 Preferred, which generally vote as a single class on
all matters. Each share of our common stock is entitled
to one vote per share. Each share of our Series B-2
Preferred is entitled to 200 votes (which represents the number of
shares of our common stock into which each share of our Series B-2
Preferred is convertible. As of March 9, 2018, the total number of
voting securities issued and outstanding (“Voting
Shares”) was 37,423,127 consisting of (a) 35,579,756 Voting
Shares evidenced by 35,579,756 shares of our common stock, and (b)
1,834,200 Voting Shares evidenced by 9,171 shares of Series B-2
Preferred. In the event the Merger with Birch is consummated, it is
anticipated that all outstanding preferred stock will be retired on
or prior to the effective date of the Merger.
Unless
otherwise indicated, the address of each beneficial owner in the
following table is c/o Fusion Telecommunications International,
Inc., 420 Lexington Avenue, Suite 1718, New York, NY 10170. We
believe that all persons, unless otherwise noted, named in the
following table have sole voting and investment power with respect
to all Voting Shares shown as being owned by them. Under U.S.
securities laws, a person is considered to be the beneficial owner
of securities owned by him/her (or certain persons whose ownership
is attributed to him/her) and that can be acquired by him/her
within 60 days from that date, including upon the exercise of
options, warrants or convertible securities.
We
determine a beneficial owner’s percentage ownership by
assuming that options, warrants or convertible securities that are
held by such owner, but not those held by any other person, and
which are exercisable within 60 days of March 9, 2018, have been
exercised or converted.
|
|
|
Number of Voting Shares
Beneficially
Owned
|
Percentage of Voting Shares
|
|
|
|
|
|
|
William
Rubin
|
(1)
|
204,334
|
*
|
|
Matthew D.
Rosen
|
(2)
|
1,319,327
|
5.6%
|
|
Marvin S.
Rosen
|
(3)
|
2,013,072
|
9%
|
|
Larry
Blum
|
(4)
|
64,391
|
*
|
|
Michael J. Del
Giudice
|
(5)
|
74,079
|
*
|
|
Jack
Rosen
|
(6)
|
126,038
|
*
|
|
Gordon Hutchins,
Jr.
|
(7)
|
124,838
|
*
|
|
Paul C.
O’Brien
|
(8)
|
118,432
|
*
|
|
Philip D.
Turits
|
(9)
|
146,401
|
*
|
|
Michael R.
Bauer
|
(10)
|
36,666
|
*
|
|
All Directors and
Executive Officers as a Group (15 persons)
|
|
4,841,637
|
13.4%
|
*Less
than 1% of outstanding shares.
________________________
|
(1)
|
Includes
(i) 11,150 shares of Fusion common stock issuable upon the exercise
of options, (ii) 200 shares of Series B-2 Preferred convertible
into 40,000 shares of Fusion common stock; and (iii) 20,132 shares
of Fusion common stock issuable upon the exercise of Fusion common
stock purchase warrants.
|
|
(2)
|
Includes
1,167,134 shares of Fusion common stock issuable upon the exercise
of options, (ii) 14,695 shares of Fusion common stock issuable upon
the exercise of Fusion common stock purchase warrants; (iii) 76
shares of Series B-2 Preferred convertible into 15,200 shares of
Fusion common stock; and (iv) 50 shares of Series A-1 Preferred and
5 shares of Series A-2 Preferred convertible into a total of 823
shares of Fusion common stock.
|
45
|
(3)
|
Includes
(i) 230,158 shares of Fusion common stock issuable upon the
exercise of Fusion common stock purchase warrants, (ii) 11,500
shares of Fusion common stock issuable upon the exercise of
options, (iii) 722 shares of Series B-2 Preferred convertible into
144,400 shares of Fusion common stock; (iv) 1,610 shares of Fusion
common stock held by a Delaware Trust Custodian IRA of Mr. Rosen;
and (v) 50 shares of Series A-1 Preferred and 25 shares of Series
A-2 Preferred convertible into a total of 1,375 shares of Fusion
common stock.
|
|
(4)
|
Includes
(i) 42,185 shares of Fusion common stock held by trusts for which
his wife serves as trustee, (ii) 4,456 shares of Fusion common
stock issuable upon the exercise of Fusion common stock purchase
warrants held by trusts for which his wife serves as trustee, (iii)
11,150 shares of Fusion common stock issuable upon the exercise of
options; and (iv) 33 shares of Series B-2 Preferred convertible
into 6,600 shares of Fusion common stock held by trusts for which
his wife serves as trustee.
|
|
(5)
|
Includes
(i) 11,500 shares of Fusion common stock issuable upon the exercise
of options, (ii) 320 shares of Fusion common stock issuable upon
the exercise of Fusion common stock purchase warrants, (iii) 11,381
shares of Fusion common stock held in the name of Catskill Investor
Group, LLC, (iv) 5 shares of Series B-2 Preferred convertible into
1,000 shares of Fusion common stock, and (v) 200 shares of Series
A-1 Preferred and 75 shares of Series A-2 Preferred owned by
Catskill Investor Group, LLC, that are convertible into a total of
4,811 shares of Fusion common stock.
|
|
(6)
|
Includes
(i) 9,600 shares of Fusion Common Stock issuable upon the exercise
of Fusion common stock purchase warrants held in the name of
Rosen-Kaiyuan, LLC, of which Jack Rosen is the managing
member, (ii) 53,868 shares of Fusion common stock held by
Rosen Partners, LLC and 12,095 shares of Fusion common stock held
by Rosen-Kaiyuan, LLC, (iii) 11,150 shares of Fusion Common Stock
issuable upon the exercise of options, (iv) 150 shares
of Series B-2 Preferred convertible into 30,000 shares of Fusion
common stock held in the name of Rosen-Kaiyuan, LLC, and (v) 200
shares of Series A-1 Preferred and 50 shares of Series A-2
Preferred convertible into a total of 4,121 shares of Fusion common
stock.
|
|
(7)
|
Includes
(i) 118,592 shares of Fusion common stock issuable upon the
exercise of options, and (ii) 25 shares of Series A-2 Preferred
convertible into a total of 690 shares of Fusion common
stock.
|
|
(8)
|
Includes
(i) 11,500 shares of Fusion common stock issuable upon the exercise
of options, (ii) 3,200 shares of Fusion common stock issuable
upon the exercise of Fusion common stock purchase warrants, (iii)
50 shares of Series B-2 Preferred convertible into 10,000 shares of
Fusion common stock, and (iv) 100 shares of Series A-1 Preferred
convertible into 1,371 shares of Fusion common stock.
|
|
(9)
|
Includes
(i) 29 shares of Fusion common stock held by his wife, (ii) 320
shares of Fusion common stock issuable upon the exercise of Fusion
Common Stock purchase warrants, (iii) 54,834 shares of Fusion
common stock issuable upon the exercise of options, (iv) 5 shares
of Series B-2 Preferred convertible into 1,000 shares of Fusion
common stock, (v) 25 shares of Series A-1 Preferred and 30
shares of Series A-2 Preferred convertible into a total of 1,171
shares of Fusion common stock.
|
|
(10)
|
Reflects
the vested portion of restricted stock.
|
Equity Compensation Plans
The
following table sets forth securities authorized for issuance under
our equity compensation plans as of December 31, 2017.
|
Plan
Category
|
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
|
|
Equity Compensation
Plans Approved by Stockholders
|
3,017,927
|
$2.38
|
504,910
|
|
|
|
|
|
|
Equity Compensation
Plans Not Approved by Stockholders
|
None
|
None
|
None
|
|
Total
|
3,017,927
|
2.38
|
504,910
|
46
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Officer and Director Loans to Company
In
November 2016, Marvin Rosen, Chairman of the Company, converted
$250,000 of his outstanding promissory note to the Company into
217,391 shares of our common stock at a price of $1.15 per share.
Of these shares, 21,739 shares were issued at Mr. Rosen's direction
in the name of his son, Matthew Rosen, the Company’s Chief
Executive Officer.
In
December 2015, Matthew D. Rosen, converted $25,000 owed to him by
the Company (for a partial bonus payable to him under the terms of
his employment contract) into 11,468 shares of our common stock at
a price of $2.18 per share. See “Executive
Compensation,” included elsewhere in this
report.
In
December 2015, Marvin Rosen converted $300,000 of his outstanding
promissory note to the Company into 137,615 shares of our common
stock at a price of $2.18 per share.
Engagement for Tax Services
Since
March 6, 2014, the Company has engaged Marcum LLP to prepare the
Company’s tax returns and to provide related tax advisory
services. The Company paid this firm approximately
$205,000 and $135,000 for the years ended December 31, 2017 and
2016, respectively. Larry Blum is a Senior Advisor to and a
former partner of Marcum.
Director Independence
We
apply the standards of Nasdaq Rule 5605(a)(2) for determining the
independence of the members of our Board and Committees. Based upon
our application of those standards, the Board has determined that
the following members of the Board are independent:
Larry
Blum
Jack
Rosen
William
Rubin
Paul C.
O'Brien
Michael
J. Del Giudice
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The
aggregate fees billed to the Company by the Company’s
independent registered public accounting firm, EA, for each of the
years ended December 31, 2017 and 2016 are as follows:
Audit and Audit-Related Fees
The
fees billed for professional services rendered by EA for the years
ended December 31, 2017 and 2016 were approximately $0.2
million. The fees billed for professional services
included fees associated with the audit of the Company’s
annual financial statements, reviews of the Company’s
quarterly financial statements and consent for the Company’s
registration statement.
Tax Related Fees
There
were no fees billed for tax-related services by EA during the year
ended December 31, 2017 and 2016.
All Other Fees
Fees
for other services that were not included in the categories above
billed by EA during the years ended December 31, 2017 and 2016 were
approximately $149,000 and $90,000, respectively. These fees were
primarily for audit and due diligence services related to business
acquisition transactions undertaken by the Company.
47
Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Accountants
Consistent
with SEC policies regarding auditor independence, the Audit
Committee has the responsibility for appointing, setting
compensation, and overseeing the work of the independent
accountants. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit
and permissible non-audit services provided by the independent
accountant.
Prior
to engagement of the independent accounting firm for the audit of
the Company’s 2018 consolidated financial statements,
management will submit to the Audit Committee for approval an
aggregate of services expected to be rendered during that year for
each of the three categories of services.
Audit
and audit-related services include audit work performed in the
preparation of annual financial statements, reviews of the
Company’s interim financial statements and work that
generally only the independent accountants can reasonably be
expected to provide, including comfort letters, statutory audits,
employee benefit plan audits and attest services and consultation
regarding financial accounting and/or reporting
standards.
Other
Fees are those fees associated with services not captured in the
other categories, including due diligence and other audit services
related to mergers and acquisitions.
Prior
to engagement, the Audit Committee pre-approves these services by
category of service. During the year, circumstances may arise when
it may become necessary to engage the independent accounting firm
for additional services not contemplated in the original
pre-approval. In those instances, the Audit Committee requires
specific pre-approval before engaging the independent
accountant.
The
Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must
report, for informational purposes only, any pre-approval decisions
to the Audit Committee at its next scheduled meeting.
In
2017, all audit and permissible non-audit services provided by the
independent accountants were preapproved by the Audit
Committee.
48
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Financial Statements.
The
consolidated financial statements filed as part of this Annual
Report on Form 10-K are identified in the Index to Consolidated
Financial Statements.
(a) (2) Exhibits.
The
following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the SEC.
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Certificate
of Incorporation (*)
|
|
|
|
Certificate
of Amendment to Certificate of Incorporation (14)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-1
Preferred Stock, as amended (16)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-2
Preferred Stock, as amended (17)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-4
Preferred Stock, as amended (18)
|
|
|
|
Certificate of
Designations of Preferences, Rights and Limitations of Series B-2
Senior Cumulative Convertible Preferred Stock
(19)
|
|
|
|
Certificate of
Elimination of Series A Convertible Redeemable Preferred Stock, Series B Convertible Redeemable
Preferred Stock, Series C Convertible Redeemable Preferred Stock,
Series A-3 Cumulative Convertible Preferred Stock and Series B-1
Cumulative Convertible Preferred Stock (24)
|
|
|
|
Bylaws
(*)
|
|
|
|
1998
Stock Option Plan (*)
|
|
|
|
2009
Stock Option Plan (15)
|
|
|
|
2016
Equity Incentive Plan (14)
|
|
|
|
Employment
Agreement, dated as of November 5, 2015, between registrant and
Matthew D. Rosen (12)
|
|
|
|
Form
of Warrant to Purchase Common Stock (*)
|
|
|
|
Lease
Agreement between registrant and SLG Graybar Sublease, LLC for
Suite 1718 at 420 Lexington Avenue, New York, NY
office (*)
|
|
|
|
Lease Modification Agreement dated November 19,
2014, between registrant and SLG Graybar Sublease, LLC for the 420
Lexington Avenue, New York, NY office (13)
|
|
|
|
Lease Agreement between registrant and Fort
Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida
office, as amended (*)
|
|
|
|
Sixth Amendment dated July 23, 2014, to Lease
Agreement between registrant and Fort Lauderdale Crown Center,
Inc., for the Fort Lauderdale, Florida office
(28)
|
|
|
|
Seventh Amendment, dated August 2015, to Lease
Agreement between registrant and Fort Lauderdale Crown Center,
Inc., for the Fort Lauderdale, Florida office
(25)
|
|
|
|
Eight Amendment, dated July 8, 2016, to Lease
Agreement between registrant and Fort Lauderdale Crown Center,
Inc., for the Fort Lauderdale, Florida office
(25)
|
|
|
|
Form
of Promissory Note and Security Agreement (2)
|
|
|
|
Non-Competition
Agreement between registrant and Marvin Rosen (*)
|
|
|
|
Form
of Warrant (3)
|
|
|
|
Membership
Interest Purchase and Sale Agreement dated January 30th, 2012
between the registrant, Network Billing Systems,
LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK
Trust (4)
|
|
|
|
Asset
Purchase and Sale Agreement dated January 30th, 2012 between the
registrant, Interconnect Systems Group II LLC, Jonathan
Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan
Kaufman as trustee of the LKII Trust (4)
|
|
|
|
Amendment
No. 1 dated June 6, 2013 to the Asset Purchase and Sale Agreement
dated January 30th, 2012 between the registrant,
Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman
as trustee of the JK Trust and Jonathan Kaufman as
trustee of the LKII Trust (10)
|
49
|
10.12
|
|
Reserved
|
|
|
|
Amendment
No. 1 dated June 6, 2013 to the Membership Interest Purchase and
Sale Agreement dated January 30th, 2012
between the registrant, Network Billing Systems, LLC, Jonathan
Kaufman, and Christiana Trust as trustee of the LK
Trust (10)
|
||
|
|
Amendment
No. 2 dated August 20, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 2 dated August 20, 2012 to the Membership Interest Purchase and
Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana
Trust as trustee of the LK Trust (5)
|
||
|
|
Amendment
No. 3 dated September 21, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Interconnect Services
Group II LLC, Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 3 dated September 21, 2012 to the Membership Interest Purchase
and Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana Trust
as trustee of the LK Trust (5)
|
||
|
|
Amendment
No. 4 dated October 24, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Interconnect Services
Group II LLC, Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 4 dated October 24, 2012 to the Membership Interest Purchase
and Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana Trust
as trustee of the LK Trust (5)
|
||
|
|
Lease
Agreement dated June 30, 2017, between LMR USA LLC and Network
Billing Systems LLC for the 695 US Route 46
West, Fairfield, NJ office (21)
|
||
|
|
Series
A Promissory Note dated October 29, 2012 payable to Praesidian Fund
III (5)
|
||
|
|
Series
B Promissory Note dated October 29, 2012 payable to Praesidian Fund
III (5)
|
||
|
|
Series
A Promissory Note dated October 29, 2012 payable to Praesidian Fund
III-A (5)
|
||
|
|
Series
B Promissory Note dated October 29, 2012 payable to Praesidian Fund
III-A (5)
|
||
|
|
Praesidian
Fund III Common Stock Purchase Warrant dated October 29, 2012
(5)
|
||
|
|
Praesidian
Fund III-A Common Stock Purchase Warrant dated October 29, 2012
(5)
|
||
|
|
Intellectual
Property Security Agreement dated as of October 29, 2012 by the
registrant and Network Billing Systems, LLC,
in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian
Capital Opportunity Fund III-A, LP, and Plexus
Fund II, LP (5)
|
||
|
|
Right
of First Refusal Agreement dated as of October 29, 2012 by and
among the registrant, Praesidian Capital Opportunity
Fund
III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund
II, LP and Praesidian Capital Opportunity Fund
III as agent (5)
|
||
|
|
Management Rights Agreement dated as of October
29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp. and
Praesidian Capital Opportunity Fund III (5)
|
||
|
|
Management Rights Agreement dated as of October
29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp. and
Praesidian Capital Opportunity Fund III-A (5)
|
||
|
|
Management
Rights Agreement dated as of October 29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp., and Plexus
Fund II, LP (5)
|
||
|
|
Asset
Purchase and Sale Agreement effective as of August 30, 2013 by and
among the registrant, Fusion Broadvox Acquisition
Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC
(6)
|
||
|
|
First Amendment to the Asset Purchase and Sale
Agreement effective as of November 15, 2013 by and
among the
registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress
Communications, LLC (7)
|
||
|
|
Second Amendment to the Asset Purchase and Sale
Agreement effective as of December 16, 2013 by and
among the
registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress
Communications, LLC (8)
|
||
|
|
Third
Amendment to Securities Purchase Agreement is entered into as of
December 16, 2013, by and among Fusion NBS Acquisition Corp, the registrant, Network Billing Systems, LLC,
Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital
Opportunity Fund III-A, LP, and Plexus Fund II, LP, and Praesidian
Capital Opportunity Fund III, LP as agent (9)
|
||
50
|
|
Form
of Common Stock Purchase Warrant (9)
|
||
|
|
Form
of Registration Rights Agreement (9)
|
||
|
|
Form
of Series C Note (9)
|
||
|
|
Form
of Series D Note dated December 31, 2013 (9)
|
||
|
|
Form
of Management Rights Letter dated December 31, 2013
(9)
|
||
|
|
Form
of Lenders’ Warrant dated December 31, 2013 (9)
|
||
|
|
Joinder Agreement dated as of December 31, 2013 by
and among the registrant,
Fusion NBS Acquisition Corp., Fusion BVX
LLC in favor of Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital Opportunity Fund III-A, LP, Plexus
Fund
II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and
United Insurance Company of America (9)
|
||
|
|
Assignment
and Assumption Agreement dated as of December 31, 2013 by and among
BroadvoxGo!, LLC, Cypress Communications,
LLC, the registrant, and
Fusion BVX, LLC (9)
|
||
|
|
Bill
of Sale dated as of December 31, 2013 delivered by BroadvoxGo!, LLC
and Cypress Communications, LLC (9)
|
||
|
|
Limited
Trademark License Agreement dated as of December 31, 2013 by and
among Broadvox, LLC; the registrant and
Fusion BVX LLC (9)
|
||
|
|
Form
of Series E Note, dated as of October 31, 2014 (11)
|
||
|
|
Agreement and Plan of Merger, dated as of October
15, 2014, by and among the
registrant, Fusion PTC Acquisition Inc., PingTone
Communications, Inc., the Majority Stockholders of PingTone
Communications, Inc. and J Shelby Bryan, as
Stockholders Representative (11)
|
||
|
|
Stock
Purchase and Sale Agreement, dated as of December 8, 2015, by and
among Fusion NBS Acquisition Corp., Mitch
Marks, Ron Kohn and Robert Marks (13)
|
||
|
|
Credit
Agreement dated as of November 14, 2016 by and among Fusion NBS
Acquisition Corp., and East West Bank and
the Other Lenders from time to time party hereto (26)
|
||
51
|
|
Waiver
dated January 26, 2018 to Credit Agreement, dated as of November
14, 2016, as amended, by and among Fusion
NBS Acquisition Corp., Fusion Telecommunications International,
Inc., Network Billing Systems, L.L.C., Fusion
BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Access Networks,
LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix,
Inc., Fusion BCHI Acquisition LLC, East West
Bank, as Administrative Agent, Swingline Lender, an Issuing Bank
and a Lender and each other Lender from time to
time party to the Credit Agreement. (22)
|
||
|
|
Consent dated
January 8, 2018 to Credit Agreement, dated as of November 14, 2016,
as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International, Inc., Network
Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC, Fidelity Access
Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc.,
Fusion BCHI Acquisition LLC, East West Bank, as
Administrative Agent, Swingline Lender, an Issuing Bank and a
Lender and each other Lender from time to time
party to the Credit Agreement. (22)
|
||
|
|
Consent dated
February 23, 2018 to Credit Agreement, dated as of November 14,
2016, as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International, Inc., Network
Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC, Fidelity Access
Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc.,
Fusion BCHI Acquisition LLC, East West Bank, as
Administrative Agent, Swingline Lender, an Issuing Bank and a
Lender and each other Lender from time to time
party to the Credit Agreement. (1)
|
||
|
|
Subordination Agreement dated as of November 14,
2016 by and among Fusion NBS Acquisition
Corp., the
registrant, Network
Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX
LLC, Fidelity Telecom, LLC, Fidelity Access Networks,
Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix,
Inc., Praesidian Capital Opportunity Fund
III, LP, and East West Bank (26)
|
||
|
|
Intercreditor
and Subordination Agreement dated as of November 14, 2016 by and
among Marvin Rosen, the registrant and
East West Bank (26)
|
||
|
|
Pledge
and Security Agreement dated as of November 14, 2016 by and among
each of the Grantors Party thereto and East
West Bank (26)
|
||
|
|
Guaranty dated as of November 14, 2016
from the registrant,
Network Billing Systems, LLC, PingTone Communications,
Inc., Fusion
BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc.,
Fidelity Connect, LLC, Fidelity Voice Services, LLC
and
Apptix, Inc. to East West Bank (26)
|
||
|
|
Intellectual
Property Security Agreement dated as of November 14, 2016 by and
among Fusion NBS Acquisition Corp., Fusion
Telecommunications International, Inc., Network Billing Systems,
LLC, PingTone Communications, Inc., Fusion BVX
LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc.,
Fidelity Connect, LLC, Fidelity Voice Services, LLC,
Apptix,
Inc., and East West Bank (26)
|
||
|
|
Fifth
Amended and Restated Securities Purchase Agreement and Security
Agreement, dated as of November 14, 2016, by and among Fusion NBS Acquisition Corp., as
borrower, the registrant,
Network Billing Systems, L.L.C., Fusion BVX,
LLC,
PingTone Communications, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC,
Fidelity Access Networks, Inc., Apptix, Inc., Praesidian Capital
Opportunity Fund III, L.P., Praesidian Capital Opportunity
Fund III-A, LP and United Insurance Company of America (26)
|
||
|
|
Consent dated
January 8, 2018 to Fifth Amended and Restated Securities Purchase
Agreement and Security Agreement, dated as of
November 14, 2016, as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International,
Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC,
Apptix, Inc., Fusion BCHI Acquisition LLC, Praesidian Capital
Opportunity Fund III, LP, Praesidian Capital
Opportunity Fund III-A, LP, and United Insurance Company of
America. (26)
|
||
|
|
Consent dated February 15, 2018 to Fifth Amended
and Restated Securities Purchase Agreement and Security Agreement,
dated as of November 14, 2016, as amended, by and among Fusion NBS
Acquisition Corp., Fusion Telecommunications International, Inc.,
Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC, Fidelity Access
Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect
LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI
Acquisition LLC, Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital Opportunity Fund III-A, LP, and United
Insurance Company of America. (1)
|
||
52
|
|
Stock Purchase and Sale Agreement dated November
14, 2016 by and among Fusion NBS Acquisition
Corp., the
registrant
and Apptix ASA (26)
|
||
|
|
Common Stock Purchase Agreement dated November 14,
2016 by and among the
registrant and the Purchasers (25)
|
||
|
|
Office
Lease, as amended between Chagrin-Green, LLC and Fidelity Access
Networks, LLC (25)
|
||
|
|
First
Amendment to Lease Agreement dated as of August 2015 by and between
Piedmont Center, 1-4 LLC and the registrant (25)
|
||
|
|
Agreement
and Plan of Merger, dated as of August 26, 2017, by and among
Fusion Telecommunications International, Inc., Fusion
BCHI Acquisition LLC, and Birch Communications Holdings, Inc.
(20)
|
||
|
|
First Amendment to
Agreement and Plan of Merger, dated as of September 15, 2017, by
and among Fusion Telecommunications International,
Inc., Fusion BCHI Acquisition LLC and Birch Communications
Holdings, Inc.(21)
|
||
|
|
Second Amendment to
Agreement and Plan of Merger, dated as of September 29, 2017, by
and among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (21)
|
||
|
|
Amended and
Restated Third Amendment to Agreement and Plan of Merger, dated as
of October 27, 2017, by and among Fusion
Telecommunications International, Inc., Fusion BCHI Acquisition LLC
and Birch Communications Holdings, Inc.(21)
|
||
|
|
Fourth Amendment to
Agreement and Plan of Merger, dated as of January 24, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (22)
|
||
|
|
Fifth Amendment to
Agreement and Plan of Merger, dated as of January 25, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (22)
|
||
|
|
Sixth Amendment to
Agreement and Plan of Merger, dated as of March 12, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (27)
|
||
|
|
Code
of Ethics of registrant (27)
|
||
|
|
List
of Subsidiaries (1)
|
||
|
|
Consent
of EisnerAmper LLP (1)
|
||
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
|
||
|
|
Certification
of President Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (1)
|
||
|
|
Section
1350 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (1)
|
||
|
|
Section
1350 Certification of President Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
|
||
|
101.INS
|
|
XBRL
Instance Document(1) ***
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document (1) ***
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document (1)
***
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document (1)
***
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document (1) ***
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document (1)
***
|
|
|
*
|
Originally filed with the Company’s Registration Statement
no. 33-120412 and incorporated herein by reference.
|
|
|
|
|
**
|
Originally filed with the Company’s Registration Statement
no. 33-120206 and incorporated herein by reference.
|
|
|
|
|
***
|
Pursuant
to Rule 406T of Regulation S-T, these interactive data files are
deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933, as
amended, except as expressly set forth by specific reference in
such filing, are deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and otherwise are not
subject to liability under those sections.
|
(1) Filed herewith.
(2) Filed as an Exhibit to the Company’s Annual Report on
Form 10K filed on April 13, 2011 and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 15, 2006 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company’s Annual Report on
Form 10K filed on March 30, 2012 and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 2, 2012 and incorporated herein by
reference.
(6) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on September 4, 2013 and incorporated herein by
reference.
(7) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 21, 2013 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 19, 2013 and incorporated herein by
reference.
(9) Filed as an Exhibit to the Company’s Current Report on
Form 8K/A filed on January 7, 2014 and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company’s Quarterly Report on
Form 10Q filed on August 14, 2013 and incorporated herein by
reference.
(11) Filed as an Exhibit to the Company’s Current Report on
Form 8K dated November 3, 2014 and incorporated herein by
reference.
(12) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 10, 2015 and incorporated herein by
reference.
(13) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 14, 2015 and incorporated herein by
reference.
(14) Filed as an Exhibit to the Company’s Quartelry Report on
Form 10-Q filed on November 14, 2016 and incorporated herein by
reference.
(15) Filed as an Exhibit to the Company’s Annual Report Form
10K filed on March 28, 2016 and incorporated herein by
reference.
(16) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 15, 2006 as amended by Exhibit 3.1(i) to
the Company's Current Report on Form 8K filed on April 2, 2014 and
incorporated herein by reference.
(17) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on May 10, 2007 as amended by Exhibit 3.1(j) to the
Company's Current Report on Form 8K filed on April 2, 2014 and
incorporated herein by reference.
(18) Identical to the Certificate of Rights and Preferences for the
Series A2 Preferred Stock filed as an exhibit to the
Registrant’s Current Report on Form 8K on May 10, 2007 as
amended by Exhibit 3.1(k) to the Company's Current Report on Form
8K filed on April 2, 2014 and incorporated herein by
reference.
(19) Filed as an Exhibit to the Company’s Current Report on
Form 8K/A filed on January 7, 2014 and incorporated herein by
reference.
(20) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on August 30, 2017 and incorporated herein by
reference.
(21) Filed as an Exhibit to the Company’s Quarterly Report on
Form 10Q filed on November 13, 2017 and incorporated herein by
reference.
(22) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on January 29, 2018 and incorporated herein by
reference.
(23) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on March 12, 2018 and incorporated herein by
reference.
(24) Filed as an Exhibit to the Company’s Registration
Statement no. 333222127 and incorporated herein by
reference.
(25) Filed as an Exhibit to the Company’s Annual Report on
Form 10-K
filed on March 21, 2017 and incorporated herein by
reference.
(26) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 18, 2016 and incorporated herein by
reference.
(27) Filed as an Exhibit to the Company’s Annual Report on
Form 10-K
filed on March 31, 2006 and incorporated herein by
reference.
(28)
Filed as
an Exhibit to the Company’s Annual Report on Form
10-K
filed on March 30, 2015 and incorporated herein by
reference.
ITEM 16. FORM 10-K SUMMARY.
Not
Required.
53
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized
on the date indicated.
|
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
|
||
|
|
|
|
|
|
Date:
March 22, 2018
|
By:
|
/s/
MATTHEW D.
ROSEN
|
|
|
|
|
Matthew
D. Rosen
|
|
|
|
|
Chief
Executive Officer and Principal Executive Officer
|
|
|
|
|
|
|
|
Date:
March 22, 2018
|
By:
|
/s/
MICHAEL R.
BAUER
|
|
|
|
|
Michael
R. Bauer
|
|
|
|
|
Chief
Financial Officer, Principal Financial Officer
|
|
|
Date:
March 22, 2018
|
By:
|
/s/
LISA TARANTO
|
|
|
|
|
Lisa
Taranto
|
|
|
|
|
Principal
Accounting Officer
|
|
|
|
|
|
|
POWER OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Matthew D. Rosen and Michael
R. Bauer, jointly and severally, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons
in the capacities and on the date indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
MARVIN S. ROSEN
|
|
Chairman
of the Board
|
|
|
|
Marvin
S. Rosen
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
PHILIP D. TURITS
|
|
Director
|
|
|
|
Philip
D. Turits
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
MATTHEW D. ROSEN
|
|
Chief
Executive Officer and Director
|
|
|
|
Matthew
D. Rosen
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
JACK ROSEN
|
|
Director
|
|
|
|
Jack
Rosen
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
WILLIAM RUBIN
|
|
Director
|
|
|
|
William
Rubin
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
LARRY BLUM
|
|
Director
|
|
|
|
Larry
Blum
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
PAUL C. O’BRIEN
|
|
Director
|
|
|
|
Paul C.
O'Brien
|
|
|
|
March
22, 2018
|
|
|
|
|
|
|
|
/s/
MICHAEL J. DEL GIUDICE
|
|
Director
|
|
|
|
Michael
J. Del Giudice
|
|
|
|
March
22, 2018
|
54
INDEX TO EXHIBITS
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
Certificate
of Incorporation (*)
|
|
|
|
Certificate
of Amendment to Certificate of Incorporation (14)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-1
Preferred Stock, as amended (16)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-2
Preferred Stock, as amended (17)
|
|
|
|
Certificate of
Designation of the Rights and Preferences of the Series A-4
Preferred Stock, as amended (18)
|
|
|
|
Certificate of
Designations of Preferences, Rights and Limitations of Series B-2
Senior Cumulative Convertible Preferred Stock
(19)
|
|
|
|
Certificate of
Elimination of Series A Convertible Redeemable Preferred Stock, Series B Convertible Redeemable
Preferred Stock, Series C Convertible Redeemable Preferred Stock,
Series A-3 Cumulative Convertible Preferred Stock and Series B-1
Cumulative Convertible Preferred Stock (24)
|
|
|
|
Bylaws
(*)
|
|
|
|
1998
Stock Option Plan (*)
|
|
|
|
2009
Stock Option Plan (15)
|
|
|
|
2016
Equity Incentive Plan (14)
|
|
|
|
Employment
Agreement, dated as of November 5, 2015, between registrant and
Matthew D. Rosen (12)
|
|
|
|
Form
of Warrant to Purchase Common Stock (*)
|
|
|
|
Lease
Agreement between registrant and SLG Graybar Sublease, LLC for
Suite 1718 at 420 Lexington Avenue, New York, NY
office (*)
|
|
|
|
Lease Modification Agreement dated November 19, 2014, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (13) | |
|
|
Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (*) | |
|
|
Sixth Amendment dated July 23, 2014, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (28) | |
|
|
Seventh Amendment, dated August 2015, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (25) | |
|
|
Eight Amendment, dated July 8, 2016, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (25) | |
|
|
Form
of Promissory Note and Security Agreement (2)
|
|
|
|
Non-Competition
Agreement between registrant and Marvin Rosen (*)
|
|
|
|
Form
of Warrant (3)
|
|
|
|
Membership
Interest Purchase and Sale Agreement dated January 30th, 2012
between the registrant, Network Billing Systems,
LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK
Trust (4)
|
|
|
|
Asset
Purchase and Sale Agreement dated January 30th, 2012 between the
registrant, Interconnect Systems Group II LLC, Jonathan
Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan
Kaufman as trustee of the LKII Trust (4)
|
|
|
|
Amendment
No. 1 dated June 6, 2013 to the Asset Purchase and Sale Agreement
dated January 30th, 2012 between the registrant,
Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman
as trustee of the JK Trust and Jonathan Kaufman as
trustee of the LKII Trust (10)
|
55
|
10.12
|
|
Reserved
|
|
|
|
Amendment
No. 1 dated June 6, 2013 to the Membership Interest Purchase and
Sale Agreement dated January 30th, 2012
between the registrant, Network Billing Systems, LLC, Jonathan
Kaufman, and Christiana Trust as trustee of the LK
Trust (10)
|
||
|
|
Amendment
No. 2 dated August 20, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 2 dated August 20, 2012 to the Membership Interest Purchase and
Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana
Trust as trustee of the LK Trust (5)
|
||
|
|
Amendment
No. 3 dated September 21, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Interconnect Services
Group II LLC, Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 3 dated September 21, 2012 to the Membership Interest Purchase
and Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana Trust
as trustee of the LK Trust (5)
|
||
|
|
Amendment
No. 4 dated October 24, 2012 to the Asset Purchase and Sale
Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Interconnect Services
Group II LLC, Jonathan Kaufman, Lisa Kaufman as
trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII
Trust (5)
|
||
|
|
Amendment
No. 4 dated October 24, 2012 to the Membership Interest Purchase
and Sale Agreement dated January 30, 2012 between
the registrant, Fusion NBS Acquisition Corp., Network Billing
Systems, LLC, Jonathan Kaufman and Christiana Trust
as trustee of the LK Trust (5)
|
||
|
|
Lease
Agreement dated June 30, 2017, between LMR USA LLC and Network
Billing Systems LLC for the 695 US Route 46
West, Fairfield, NJ office (21)
|
||
|
|
Series
A Promissory Note dated October 29, 2012 payable to Praesidian Fund
III (5)
|
||
|
|
Series
B Promissory Note dated October 29, 2012 payable to Praesidian Fund
III (5)
|
||
|
|
Series
A Promissory Note dated October 29, 2012 payable to Praesidian Fund
III-A (5)
|
||
|
|
Series
B Promissory Note dated October 29, 2012 payable to Praesidian Fund
III-A (5)
|
||
|
|
Praesidian
Fund III Common Stock Purchase Warrant dated October 29, 2012
(5)
|
||
|
|
Praesidian
Fund III-A Common Stock Purchase Warrant dated October 29, 2012
(5)
|
||
|
|
Intellectual
Property Security Agreement dated as of October 29, 2012 by the
registrant and Network Billing Systems, LLC,
in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian
Capital Opportunity Fund III-A, LP, and Plexus
Fund II, LP (5)
|
||
|
|
Right
of First Refusal Agreement dated as of October 29, 2012 by and
among the registrant, Praesidian Capital Opportunity
Fund
III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund
II, LP and Praesidian Capital Opportunity Fund
III as agent (5)
|
||
|
|
Management Rights Agreement dated as of October
29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp. and
Praesidian Capital Opportunity Fund III (5)
|
||
|
|
Management Rights Agreement dated as of October
29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp. and
Praesidian Capital Opportunity Fund III-A (5)
|
||
|
|
Management
Rights Agreement dated as of October 29, 2012 by and among the
registrant, Fusion NBS Acquisition Corp., and Plexus
Fund II, LP (5)
|
||
|
|
Asset
Purchase and Sale Agreement effective as of August 30, 2013 by and
among the registrant, Fusion Broadvox Acquisition
Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC
(6)
|
||
|
|
First Amendment to the Asset Purchase and Sale
Agreement effective as of November 15, 2013 by and
among the
registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress
Communications, LLC (7)
|
||
|
|
Second Amendment to the Asset Purchase and Sale
Agreement effective as of December 16, 2013 by and
among the
registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress
Communications, LLC (8)
|
||
|
|
Third
Amendment to Securities Purchase Agreement is entered into as of
December 16, 2013, by and among Fusion NBS Acquisition Corp, the registrant, Network Billing Systems, LLC,
Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital
Opportunity Fund III-A, LP, and Plexus Fund II, LP, and Praesidian
Capital Opportunity Fund III, LP as agent (9)
|
||
56
|
|
Form
of Common Stock Purchase Warrant (9)
|
||
|
|
Form
of Registration Rights Agreement (9)
|
||
|
|
Form
of Series C Note (9)
|
||
|
|
Form
of Series D Note dated December 31, 2013 (9)
|
||
|
|
Form
of Management Rights Letter dated December 31, 2013
(9)
|
||
|
|
Form
of Lenders’ Warrant dated December 31, 2013 (9)
|
||
|
|
Joinder Agreement dated as of December 31, 2013 by
and among the registrant,
Fusion NBS Acquisition Corp., Fusion BVX
LLC in favor of Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital Opportunity Fund III-A, LP, Plexus
Fund
II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and
United Insurance Company of America (9)
|
||
|
|
Assignment
and Assumption Agreement dated as of December 31, 2013 by and among
BroadvoxGo!, LLC, Cypress Communications,
LLC, the registrant, and
Fusion BVX, LLC (9)
|
||
|
|
Bill
of Sale dated as of December 31, 2013 delivered by BroadvoxGo!, LLC
and Cypress Communications, LLC (9)
|
||
|
|
Limited
Trademark License Agreement dated as of December 31, 2013 by and
among Broadvox, LLC; the registrant and
Fusion BVX LLC (9)
|
||
|
|
Form
of Series E Note, dated as of October 31, 2014 (11)
|
||
|
|
Agreement and Plan of Merger, dated as of October
15, 2014, by and among the
registrant, Fusion PTC Acquisition Inc., PingTone
Communications, Inc., the Majority Stockholders of PingTone
Communications, Inc. and J Shelby Bryan, as
Stockholders Representative (11)
|
||
|
|
Stock
Purchase and Sale Agreement, dated as of December 8, 2015, by and
among Fusion NBS Acquisition Corp., Mitch
Marks, Ron Kohn and Robert Marks (13)
|
||
|
|
Credit
Agreement dated as of November 14, 2016 by and among Fusion NBS
Acquisition Corp., and East West Bank and
the Other Lenders from time to time party hereto (26)
|
||
57
|
|
Waiver
dated January 26, 2018 to Credit Agreement, dated as of November
14, 2016, as amended, by and among Fusion
NBS Acquisition Corp., Fusion Telecommunications International,
Inc., Network Billing Systems, L.L.C., Fusion
BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Access Networks,
LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix,
Inc., Fusion BCHI Acquisition LLC, East West
Bank, as Administrative Agent, Swingline Lender, an Issuing Bank
and a Lender and each other Lender from time to
time party to the Credit Agreement. (22)
|
||
|
|
Consent dated
January 8, 2018 to Credit Agreement, dated as of November 14, 2016,
as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International, Inc., Network
Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC, Fidelity Access
Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc.,
Fusion BCHI Acquisition LLC, East West Bank, as
Administrative Agent, Swingline Lender, an Issuing Bank and a
Lender and each other Lender from time to time
party to the Credit Agreement. (22)
|
||
|
|
Consent dated
February 23, 2018 to Credit Agreement, dated as of November 14,
2016, as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International, Inc., Network
Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC, Fidelity Access
Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc.,
Fusion BCHI Acquisition LLC, East West Bank, as
Administrative Agent, Swingline Lender, an Issuing Bank and a
Lender and each other Lender from time to time
party to the Credit Agreement. (1)
|
||
|
|
Subordination Agreement dated as of November 14,
2016 by and among Fusion NBS Acquisition
Corp., the
registrant, Network
Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX
LLC, Fidelity Telecom, LLC, Fidelity Access Networks,
Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix,
Inc., Praesidian Capital Opportunity Fund
III, LP, and East West Bank (26)
|
||
|
|
Intercreditor
and Subordination Agreement dated as of November 14, 2016 by and
among Marvin Rosen, the registrant and
East West Bank (26)
|
||
|
|
Pledge
and Security Agreement dated as of November 14, 2016 by and among
each of the Grantors Party thereto and East
West Bank (26)
|
||
|
|
Guaranty dated as of November 14, 2016
from the registrant,
Network Billing Systems, LLC, PingTone Communications,
Inc., Fusion
BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc.,
Fidelity Connect, LLC, Fidelity Voice Services, LLC
and
Apptix, Inc. to East West Bank (26)
|
||
|
|
Intellectual
Property Security Agreement dated as of November 14, 2016 by and
among Fusion NBS Acquisition Corp., Fusion
Telecommunications International, Inc., Network Billing Systems,
LLC, PingTone Communications, Inc., Fusion BVX
LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc.,
Fidelity Connect, LLC, Fidelity Voice Services, LLC,
Apptix,
Inc., and East West Bank (26)
|
||
|
|
Fifth
Amended and Restated Securities Purchase Agreement and Security
Agreement, dated as of November 14, 2016, by and among Fusion NBS Acquisition Corp., as
borrower, the registrant,
Network Billing Systems, L.L.C., Fusion BVX,
LLC,
PingTone Communications, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC,
Fidelity Access Networks, Inc., Apptix, Inc., Praesidian Capital
Opportunity Fund III, L.P., Praesidian Capital Opportunity
Fund III-A, LP and United Insurance Company of America (26)
|
||
|
|
Consent dated
January 8, 2018 to Fifth Amended and Restated Securities Purchase
Agreement and Security Agreement, dated as of
November 14, 2016, as amended, by and among Fusion NBS Acquisition
Corp., Fusion Telecommunications International,
Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone
Communications, Inc., Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC,
Apptix, Inc., Fusion BCHI Acquisition LLC, Praesidian Capital
Opportunity Fund III, LP, Praesidian Capital
Opportunity Fund III-A, LP, and United Insurance Company of
America. (26)
|
||
|
|
Consent dated February 15, 2018 to Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and United Insurance Company of America. (1) | ||
58
|
|
Stock Purchase and Sale Agreement dated November
14, 2016 by and among Fusion NBS Acquisition
Corp., the
registrant
and Apptix ASA (26)
|
||
|
|
Common Stock Purchase Agreement dated November 14,
2016 by and among the
registrant and the Purchasers (25)
|
||
|
|
Office
Lease, as amended between Chagrin-Green, LLC and Fidelity Access
Networks, LLC (25)
|
||
|
|
First
Amendment to Lease Agreement dated as of August 2015 by and between
Piedmont Center, 1-4 LLC and the registrant (25)
|
||
|
|
Agreement
and Plan of Merger, dated as of August 26, 2017, by and among
Fusion Telecommunications International, Inc., Fusion
BCHI Acquisition LLC, and Birch Communications Holdings, Inc.
(20)
|
||
|
|
First Amendment to
Agreement and Plan of Merger, dated as of September 15, 2017, by
and among Fusion Telecommunications International,
Inc., Fusion BCHI Acquisition LLC and Birch Communications
Holdings, Inc.(21)
|
||
|
|
Second Amendment to
Agreement and Plan of Merger, dated as of September 29, 2017, by
and among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (21)
|
||
|
|
Amended and
Restated Third Amendment to Agreement and Plan of Merger, dated as
of October 27, 2017, by and among Fusion
Telecommunications International, Inc., Fusion BCHI Acquisition LLC
and Birch Communications Holdings, Inc.(21)
|
||
|
|
Fourth Amendment to
Agreement and Plan of Merger, dated as of January 24, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (22)
|
||
59
|
|
Fifth Amendment to
Agreement and Plan of Merger, dated as of January 25, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (22)
|
||
|
|
Sixth Amendment to
Agreement and Plan of Merger, dated as of March 12, 2018, by and
among Fusion Telecommunications
International, Inc., Fusion BCHI Acquisition LLC and Birch
Communications Holdings, Inc. (27)
|
||
|
|
Code
of Ethics of registrant (27)
|
||
|
|
List
of Subsidiaries (1)
|
||
|
|
Consent
of EisnerAmper LLP (1)
|
||
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
|
||
|
|
Certification
of President Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (1)
|
||
|
|
Section
1350 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (1)
|
||
|
|
Section
1350 Certification of President Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (1)
|
||
|
101.INS
|
|
XBRL
Instance Document(1) ***
|
|
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document (1) ***
|
|
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document (1)
***
|
|
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document (1)
***
|
|
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document (1) ***
|
|
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document (1)
***
|
|
|
*
|
Originally
filed with the Company’s Registration Statement no. 33-120412
and incorporated herein by reference.
|
|
|
|
|
**
|
Originally
filed with the Company’s Registration Statement no. 33-120206
and incorporated herein by reference.
|
|
|
|
|
***
|
Pursuant to Rule
406T of Regulation S-T, these interactive data files are deemed not
filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as
amended, except as expressly set forth by specific reference in
such filing, are deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and otherwise are not
subject to liability under those sections.
|
(1) Filed herewith.
(2) Filed as an Exhibit to the Company’s Annual Report on
Form 10K filed on April 13, 2011 and incorporated herein by
reference.
(3) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 15, 2006 and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company’s Annual Report on
Form 10K filed on March 30, 2012 and incorporated herein by
reference.
(5) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 2, 2012 and incorporated herein by
reference.
(6) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on September 4, 2013 and incorporated herein by
reference.
(7) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 21, 2013 and incorporated herein by
reference.
(8) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 19, 2013 and incorporated herein by
reference.
(9) Filed as an Exhibit to the Company’s Current Report on
Form 8K/A filed on January 7, 2014 and incorporated herein by
reference.
(10) Filed as an Exhibit to the Company’s Quarterly Report on
Form 10Q filed on August 14, 2013 and incorporated herein by
reference.
(11) Filed as an Exhibit to the Company’s Current Report on
Form 8K dated November 3, 2014 and incorporated herein by
reference.
(12) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 10, 2015 and incorporated herein by
reference.
(13) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 14, 2015 and incorporated herein by
reference.
(14) Filed as an Exhibit to the Company’s Quartelry Report on
Form 10-Q filed on November 14, 2016 and incorporated herein by
reference.
(15) Filed as an Exhibit to the Company’s Annual Report Form
10K filed on March 28, 2016 and incorporated herein by
reference.
(16) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on December 15, 2006 as amended by Exhibit 3.1(i) to
the Company's Current Report on Form 8K filed on April 2, 2014 and
incorporated herein by reference.
(17) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on May 10, 2007 as amended by Exhibit 3.1(j) to the
Company's Current Report on Form 8K filed on April 2, 2014 and
incorporated herein by reference.
(18) Identical to the Certificate of Rights and Preferences for the
Series A2 Preferred Stock filed as an exhibit to the
Registrant’s Current Report on Form 8K on May 10, 2007 as
amended by Exhibit 3.1(k) to the Company's Current Report on Form
8K filed on April 2, 2014 and incorporated herein by
reference.
(19) Filed as an Exhibit to the Company’s Current Report on
Form 8K/A filed on January 7, 2014 and incorporated herein by
reference.
(20) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on August 30, 2017 and incorporated herein by
reference.
(21) Filed as an Exhibit to the Company’s Quarterly Report on
Form 10Q filed on November 13, 2017 and incorporated herein by
reference.
(22) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on January 29, 2018 and incorporated herein by
reference.
(23) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on March 12, 2018 and incorporated herein by
reference.
(24) Filed as an Exhibit to the Company’s Registration
Statement no. 333222127 and incorporated herein by
reference.
(25) Filed as an Exhibit to the Company’s Annual Report on
Form 10-K
filed on March 21, 2017 and incorporated herein by
reference.
(26) Filed as an Exhibit to the Company’s Current Report on
Form 8K filed on November 18, 2016 and incorporated herein by
reference.
(27) Filed as an Exhibit to the Company’s Annual Report on
Form 10-K
filed on March 31, 2006 and incorporated herein by
reference.
(28)
Filed as
an Exhibit to the Company’s Quarterly Report on Form
10-Q
filed on March 30, 2015 and incorporated herein by
reference.
60
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Index to Consolidated Financial Statements
|
Report of Independent Registered Public Accounting
Firm
|
|
|
F- 2
|
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
F- 3
|
|
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
F- 4
|
|
|
|
|
|
|
Consolidated Statements of Changes in Stockholders'
Equity
|
|
|
F- 5
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
F- 6
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
F- 7
|
F-1
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and Stockholders of
Fusion
Telecommunications International, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Fusion
Telecommunications International, Inc. and Subsidiaries (the
“Company") as of December 31, 2017 and 2016, and the related
consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the years
then ended, and the related notes (collectively referred to as the
“financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the
consolidated financial position of the Company as of December 31,
2017 and 2016, and the consolidated results of their operations and
their cash flows for each of the years then ended, 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 audit 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.
Emphasis of
Matter
As
discussed in Note 25, the Company has entered into an Agreement and
Plan of Merger with Birch Communication Holdings, Inc.,
and the terms of
the Merger Agreement are such that the merger, if consummated, will
result in a change of control.
/s/
EisnerAmper LLP
We have
served as the Company’s auditor since 2014.
EISNERAMPER
LLP
New
York, New York
March
22, 2018
F-2
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
CONSOLIDATED BALANCE SHEETS
|
|
December 31, 2017
|
December 31, 2016
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
and cash equivalents
|
$2,530,388
|
$7,221,910
|
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
|
approximately
$700,000 and $427,000, respectively
|
12,963,068
|
9,359,876
|
|
Prepaid
expenses and other current assets
|
2,091,244
|
1,084,209
|
|
Total current assets
|
17,584,700
|
17,665,995
|
|
Property
and equipment, net
|
12,856,534
|
14,248,915
|
|
Security
deposits
|
615,585
|
630,373
|
|
Restricted
cash
|
27,153
|
27,153
|
|
Goodwill
|
34,773,629
|
35,689,215
|
|
Intangible
assets, net
|
56,156,023
|
63,617,471
|
|
Other
assets
|
43,937
|
77,117
|
|
TOTAL ASSETS
|
$122,057,561
|
$131,956,239
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
Current liabilities:
|
|
|
|
Term
loan - current portion
|
$6,500,000
|
$2,979,167
|
|
Obligations
under asset purchase agreements - current portion
|
227,760
|
546,488
|
|
Equipment
financing obligations
|
1,206,773
|
1,002,578
|
|
Accounts
payable and accrued expenses
|
25,089,046
|
19,722,838
|
|
Total current liabilities
|
33,023,579
|
24,251,071
|
|
Long-term liabilities:
|
|
|
|
Notes
payable - non-related parties, net of discount
|
31,953,163
|
31,431,602
|
|
Notes
payable - related parties
|
928,081
|
875,750
|
|
Term
loan
|
54,222,668
|
60,731,204
|
|
Indebtedness
under revolving credit facility
|
1,500,000
|
3,000,000
|
|
Obligations
under asset purchase agreements
|
222,240
|
890,811
|
|
Equipment
financing obligations
|
590,601
|
1,237,083
|
|
Derivative
liabilities
|
872,900
|
348,650
|
|
Total liabilities
|
123,313,232
|
122,766,171
|
|
Commitments and contingencies
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
Preferred
stock, $0.01 par value, 10,000,000 shares authorized,
|
|
|
|
14,216
and 17,299 shares issued and outstanding
|
142
|
174
|
|
Common
stock, $0.01 par value, 90,000,000 shares authorized,
|
|
|
|
22,471,133
and 20,642,028 shares issued and outstanding
|
224,712
|
206,422
|
|
Capital
in excess of par value
|
195,865,425
|
192,233,032
|
|
Accumulated
deficit
|
(197,264,083)
|
(183,249,560)
|
|
Total
Fusion Telecommunications International, Inc. stockholders'
(deficit) equity
|
(1,173,804)
|
9,190,068
|
|
Noncontrolling
interest
|
(81,867)
|
-
|
|
Total stockholders'
(deficit) equity
|
(1,255,671)
|
9,190,068
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$122,057,561
|
$131,956,239
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Revenues
|
$150,530,557
|
$124,654,270
|
|
Cost
of revenues, exclusive of depreciation and
|
|
|
|
amortization,
shown separately below
|
83,033,401
|
70,667,382
|
|
Gross profit
|
67,497,156
|
53,986,888
|
|
Depreciation
and amortization
|
14,521,046
|
13,096,587
|
|
Selling,
general and administrative expenses
|
57,724,202
|
48,524,923
|
|
Asset
impairment charge
|
641,260
|
-
|
|
Total
operating expenses
|
72,886,508
|
61,621,510
|
|
Operating loss
|
(5,389,352)
|
(7,634,622)
|
|
Other (expenses) income:
|
|
|
|
Interest
expense
|
(8,648,600)
|
(6,742,143)
|
|
(Loss)
gain on change in fair value of derivative liabilities
|
(909,272)
|
265,383
|
|
Loss
on disposal of property and equipment
|
(311,707)
|
(129,119)
|
|
Loss
on extinguishment of debt
|
-
|
(214,294)
|
|
Gain
on change in fair value of contingent liability
|
1,011,606
|
-
|
|
Other
income, net
|
209,235
|
128,987
|
|
Total
other expenses
|
(8,648,738)
|
(6,691,186)
|
|
Loss
before income taxes
|
(14,038,090)
|
(14,325,808)
|
|
(Provision)
benefit for income taxes
|
(61,511)
|
1,609,485
|
|
Net loss
|
(14,099,601)
|
(12,716,323)
|
|
Less:
Net loss attributable to non-controlling interest
|
85,078
|
-
|
|
Net loss attributable to Fusion Telecommunications International,
Inc.
|
(14,014,523)
|
(12,716,323)
|
|
Preferred
stock dividends
|
(1,837,527)
|
(2,388,007)
|
|
Net loss attributable to common stockholders
|
(15,852,050)
|
(15,104,330)
|
|
|
|
|
|
Basic and diluted loss per common share:
|
$(0.72)
|
$(0.98)
|
|
Weighted average common shares outstanding:
|
|
|
|
Basic
and diluted
|
21,969,601
|
15,406,184
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT)
|
|
Preferred
Stock
|
Common
Stock
|
Capital
in Excess of Par Value
|
Accumulated
Deficit
|
Total
Fusion Telecommunications International, Inc. Equity
(Deficit)
|
Non-controlling
interest
|
Stockholders'
Equity (Deficit)
|
||
|
|
Shares
|
$
|
Shares
|
$
|
|
|
|
|
|
|
Balance at December
31, 2015
|
23,324
|
$234
|
12,788,971
|
$127,890
|
$184,859,082
|
$(170,533,237)
|
$14,453,969
|
$-
|
$14,453,969
|
|
Net
loss
|
|
|
|
|
|
(12,716,323)
|
(12,716,323)
|
-
|
(12,716,323)
|
|
Conversion of
preferred stock into common stock
|
(6,025)
|
(60)
|
1,205,000
|
12,050
|
(11,990)
|
-
|
-
|
-
|
-
|
|
Dividends on
preferred stock
|
-
|
-
|
1,140,568
|
11,406
|
(11,406)
|
-
|
-
|
-
|
-
|
|
Proceeds from the
sale of common stock
|
-
|
-
|
2,213,700
|
22,137
|
2,323,009
|
-
|
2,345,146
|
-
|
2,345,146
|
|
Conversion of related
party note to common stock
|
-
|
-
|
217,391
|
2,174
|
247,826
|
-
|
250,000
|
-
|
250,000
|
|
Adjustment for prior
issuances and conversions of warrants
|
-
|
-
|
-
|
-
|
338,972
|
-
|
338,972
|
-
|
338,972
|
|
Adjustment for
fractional shares
|
-
|
-
|
685
|
8
|
(8)
|
-
|
-
|
-
|
-
|
|
Cancellation of
common stock issued to PingTone Sellers
|
-
|
-
|
(51,380)
|
(514)
|
(179,830)
|
-
|
(180,344)
|
-
|
(180,344)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
853,458
|
-
|
853,458
|
-
|
853,458
|
|
Issuance of common
stock - Apptix acquisition
|
-
|
-
|
2,997,926
|
29,979
|
3,597,511
|
-
|
3,627,490
|
-
|
3,627,490
|
|
Issuance of
restricted stock
|
-
|
-
|
55,000
|
550
|
99,000
|
-
|
99,550
|
-
|
99,550
|
|
Issuance of common
stock for services rendered
|
-
|
-
|
74,167
|
742
|
117,408
|
-
|
118,150
|
-
|
118,150
|
|
Balance at December
31, 2016
|
17,299
|
174
|
20,642,028
|
206,422
|
192,233,032
|
(183,249,560)
|
9,190,068
|
-
|
9,190,068
|
|
Conversion of
preferred stock into common stock
|
(3,083)
|
(32)
|
1,011,955
|
10,119
|
(10,087)
|
-
|
-
|
-
|
-
|
|
Non-controlling
interest (40%) in FGS
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,211
|
3,211
|
|
Dividends on
preferred stock
|
-
|
-
|
256,706
|
2,567
|
(2,567)
|
-
|
-
|
-
|
-
|
|
Exercise of common
stock purchase warrants
|
-
|
-
|
686,318
|
6,862
|
967,214
|
-
|
974,076
|
-
|
974,076
|
|
Issuance of common
stock for services rendered
|
-
|
-
|
125,870
|
1,259
|
178,191
|
-
|
179,450
|
-
|
179,450
|
|
Reclassification of
derivative liability
|
-
|
-
|
-
|
-
|
385,022
|
-
|
385,022
|
-
|
385,022
|
|
Forfeiture of common
stock award by employee
|
-
|
-
|
(5,938)
|
(59)
|
(8,552)
|
-
|
(8,611)
|
-
|
(8,611)
|
|
Cancellation of
common stock issued in 2016 acquisition
|
-
|
-
|
(300,000)
|
(3,000)
|
(360,000)
|
-
|
(363,000)
|
-
|
(363,000)
|
|
Cashless exercise of
warrants
|
-
|
-
|
54,194
|
542
|
(542)
|
-
|
-
|
-
|
-
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(14,014,523)
|
(14,014,523)
|
(85,078)
|
(14,099,601)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
2,483,714
|
-
|
2,483,714
|
-
|
2,483,714
|
|
Balance at December
31, 2017
|
14,216
|
$142
|
22,471,133
|
$224,712
|
$195,865,425
|
$(197,264,083)
|
$(1,173,804)
|
$(81,867)
|
$(1,255,671)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$(14,099,601)
|
$(12,716,323)
|
|
Adjustments to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
Depreciation
and amortization
|
14,521,047
|
13,096,587
|
|
Deferred
taxes
|
-
|
(1,669,485)
|
|
Asset
impairment charge
|
641,260
|
-
|
|
Gain
on change in fair value of contingent liability
|
(1,011,606)
|
-
|
|
Loss
on disposal of property and equipment
|
311,707
|
129,119
|
|
Stock-based
compensation
|
2,483,714
|
878,343
|
|
Issuance
of common stock for services rendered
|
179,450
|
118,150
|
|
Loss
on extinguishment of debt
|
-
|
214,294
|
|
Amortization
of debt discount and deferred financing fees
|
836,189
|
663,046
|
|
Loss
(gain) on the change in fair value of derivative
liability
|
909,272
|
(265,383)
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(3,331,828)
|
578,134
|
|
Prepaid
expenses and other current assets
|
(1,501,871)
|
585,928
|
|
Other
assets
|
33,180
|
(31,678)
|
|
Accounts
payable and accrued expenses
|
5,350,183
|
(1,254,445)
|
|
Net cash provided by operating activities
|
5,321,096
|
326,287
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of property and equipment
|
(4,345,358)
|
(4,766,214)
|
|
Proceeds
from the sale of property and equipment
|
167,245
|
234,753
|
|
Contribution
from noncontrolling interest
|
3,211
|
-
|
|
Payment
for acquisitions, net of cash acquired
|
(558,329)
|
(23,273,892)
|
|
Refunds
of purchase price from acquisitions
|
150,000
|
262,683
|
|
Return
(payment) of security deposits
|
14,788
|
(55,335)
|
|
Net cash used in investing activities
|
(4,568,443)
|
(27,598,005)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from the exercise of common stock purchase warrants
|
974,076
|
-
|
|
Proceeds
from the sale of common stock, net of offering costs
|
-
|
2,345,146
|
|
Proceeds
from term loan
|
-
|
65,000,000
|
|
Repayments
of notes payable
|
-
|
(571,484)
|
|
Repayments
of term loan
|
(3,250,000)
|
(25,000,000)
|
|
(Repayments)
proceeds from revolving debt, net
|
(1,500,000)
|
(12,000,000)
|
|
Payment
of financing fees
|
-
|
(1,323,250)
|
|
Payments
for obligations under asset purchase agreements
|
(548,892)
|
(641,665)
|
|
Payments
on equipment financing obligations
|
(1,119,359)
|
(993,632)
|
|
Net cash (used in) provided by financing activities
|
(5,444,175)
|
26,815,115
|
|
Net change in cash and cash equivalents
|
(4,691,522)
|
(456,603)
|
|
Cash and cash equivalents, including restricted cash, beginning of
year
|
7,249,063
|
7,705,666
|
|
Cash and cash equivalents, including restricted cash, end of
year
|
$2,557,541
|
$7,249,063
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Fusion
Telecommunications International, Inc. is a Delaware corporation
incorporated in September 1997 (“Fusion” and together
with its subsidiaries, the “Company,” “we,”
“us” and “our”). The Company is
a provider of integrated cloud solutions, including cloud voice,
cloud connectivity, cloud infrastructure, cloud computing, and
managed cloud-based applications to businesses of all sizes, and
voice over IP (“VoIP”) - based voice services to
carriers. The Company currently operates in two business
segments, Business Services and Carrier Services.
Note 2.
Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the
consolidated accounts of Fusion and its wholly-owned and partially
owned subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and in accordance with Regulation
S-X of the Securities and Exchange Commission (the
“SEC”). All intercompany balances and transactions have
been eliminated in consolidation.
Effective
September 1, 2017, Fusion transferred 40% of its membership
interests in Fusion Global Services LLC (“FGS”) to
XcomIP, LLC (“XcomIP”), in exchange for which XcomIP
contributed assets of its carrier business to FGS. In connection
with this transaction, Fusion and XcomIP also executed a members
agreement under which Fusion has agreed to provide up to $750,000
in working capital to FGS. The Company has determined that, based
on the terms of the members agreement, it has a controlling
financial interest in FGS under the guidance set forth in
Accounting Standards Codification (“ASC”) 810,
Consolidation, therefore the accounts of FGS are consolidated into
Fusion’s consolidated financial statements as of and for the
year ended December 31, 2017. Prior to the transfer of membership
interests to XcomIP, Fusion transferred its Carrier Services
business to FGS.
Effective
January 1, 2017, the Company changed the manner in which it
accounts for federal and state universal service fees and
surcharges in its consolidated statement of operations. The Company
now includes the amounts collected for these fees and surcharges in
revenues, and reports the associated costs in cost of revenues, and
this change has been applied retrospectively in the Company’s
consolidated financial statements for all periods presented. As a
result, both the Company’s revenues and cost of revenues for
years ended December 31, 2017 and 2016 include $3.3 million and
$2.6 million, respectively, of federal and state universal service
fees and surcharges.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the year. On an on-going basis, the
Company evaluates its estimates, including, but not limited to,
those related to recognition of revenue, allowance for doubtful
accounts; fair value measurements of its financial instruments;
useful lives of its long-lived assets used in computing
depreciation and amortization; impairment assessment of goodwill
and intangible assets; accounting for stock options and other
equity awards, particularly related to fair value estimates,
accounting for income taxes, contingencies, and litigation. Changes
in the facts or circumstances underlying these estimates could
result in material changes, and actual results could differ from
those estimates. These changes in estimates are recognized in the
period they are realized.
Reclassifications
Certain
reclassifications have been made to the prior year’s
financial statements in order to conform to the current
year’s presentation. Specifically, approximately $76,000 due
from the counterparty to the Company’s purchase of customer
bases (see note 5) has been reclassified as a reduction to the
liability due to the same counterparty. The reclassification had no
impact on results of operations as previously
reported.
F-7
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term,
highly-liquid investments with maturities of three months or less
at the date of purchase. As of December 31, 2017 and 2016, the
carrying value of cash and cash equivalents approximates fair value
due to the short period of time to maturity.
Restricted Cash
Restricted cash consists of certificates of deposit that serve to
collateralize outstanding letters of credit. Restricted cash is
recorded as current or non-current assets in the consolidated
balance sheets depending on the duration of the restriction and the
purpose for which the restriction exists. At December 31, 2017 and
2016, the Company had certificates of deposit collateralizing a
letter of credit aggregating approximately $27,000. The letter of
credit is required as security for one of the Company’s
non-cancelable operating leases for office facilities.
Revenue Recognition
The
Company recognizes revenue when persuasive evidence of a sale
arrangement exists, delivery has occurred or services have been
rendered, the sales price is fixed and determinable, and
collectability is reasonably assured. The Company records
provisions against revenue for billing adjustments, which are based
upon estimates derived from factors that include, but are not
limited to, historical results, analysis of credits issued and
current economic trends. The provisions for revenue adjustments are
recorded as a reduction of revenue when the revenue is recognized.
Below is a summary of the changes in the provisions against revenue
for the years ended December 31, 2017 and 2016:
|
|
Balance at Beginning of Period
|
Additions to Reserve
|
Posted Credits and other Adjustments
|
Balance at End of Period
|
|
Year
ended December 31, 2017
|
$389,257
|
2,118,418
|
(1,918,155)
|
$589,520
|
|
|
|
|
|
|
|
Year
ended December 31, 2016
|
$223,045
|
2,582,163
|
(2,415,951)
|
$389,257
|
The
Company’s Business Services revenue includes fixed revenue
earned from monthly recurring services provided to customers, for
whom charges are contracted for over a specified period of time,
and from variable usage fees charged to customers that purchase the
Company’s Business Services products and services. Revenue
recognition commences after the provisioning, testing and
acceptance of the service by the customer. The recurring customer
charges continue until the expiration of the contract, or until
cancellation of the service by the customer. To the extent that
payments received from a customer are related to a future period,
the payment is recorded as deferred revenue until the service is
provided or the usage occurs.
Carrier
Services revenue is primarily derived from usage fees charged to
other carriers that terminate voice traffic over the
Company’s network. Variable revenue is earned based on the
length of a call, as measured by the number of minutes of duration.
It is recognized upon completion of the call, and is adjusted to
reflect the Company’s allowance for billing adjustments.
Revenue for each customer is calculated from information received
through the Company’s network switches. The Company’s
customized software tracks the information from the switches and
analyzes the call detail records against stored detailed
information about revenue rates. This software provides the Company
with the ability to complete a timely and accurate analysis of
revenue earned in a period. The Company believes that the nature of
this process is such that recorded revenues are unlikely to be
revised in future periods.
Cost of Revenues
Cost of
revenues for the Company’s Business Services segment consist
of fixed expenses which include monthly recurring charges
associated with certain platform services purchased from other
service providers, monthly recurring costs associated with private
line services and the cost of broadband Internet access used to
provide service to business customers.
For the
Company’s Carrier Services segment, cost of revenues is
comprised primarily of costs incurred from other carriers to
originate, transport, and terminate voice calls for the
Company’s carrier customers. Thus, the majority of the
Company’s cost of revenues for this segment is variable,
based upon the number of minutes actually used by the
Company’s customers and the destinations they are calling.
Call activity is tracked and analyzed with customized software that
analyzes the traffic flowing through the Company’s network
switch. During each period, the call activity is analyzed and an
accrual is recorded for the costs associated with minutes not yet
invoiced. This cost accrual is calculated using minutes from the
system and the variable cost of revenue based upon predetermined
contractual rates. Fixed expenses reflect the costs associated with
connectivity between the Company’s network infrastructure,
including its New Jersey switching facility, and certain large
carrier customers and vendors.
F-8
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable is recorded net of an allowance for doubtful accounts.
On a periodic basis, the Company evaluates accounts receivable and
records an allowance for doubtful accounts based on the
Company’s history of past write-offs, collections experience
and current credit conditions. Specific customer accounts are
written off as uncollectible when collection efforts have been
exhausted and payments are not expected to be received. During the
periods presented, the Company has not experienced any significant
defaults on its accounts receivable.
Below
is a summary of the changes in allowance for doubtful accounts for
the years ended December 31, 2017 and 2016 (in
thousands):
|
|
Balance at Beginning of Period
|
Additions - Charged to Expense
|
Deductions - Write-offs, Payments and other
Adjustments
|
Balance at End of Period
|
|
Year
ended December 31, 2017
|
$427
|
1,135
|
(862)
|
$700
|
|
|
|
|
|
|
|
Year
ended December 31, 2016
|
$309
|
388
|
(270)
|
$427
|
Business Combinations
Business
combinations are accounted for using the purchase method of
accounting, whereby the purchase price of the acquisition,
including the fair value of contingent consideration, is allocated
to the assets acquired and liabilities assumed using the fair
values determined by management as of the acquisition date. The
results of operations of all business acquisitions are included in
our Consolidated Financial Statements from the date of
acquisition.
Goodwill
as of the acquisition date, if any, is measured as the excess of
consideration transferred over the net of the acquisition date fair
values of the assets acquired and the liabilities assumed. While
the Company uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value assets
acquired and liabilities assumed at the acquisition date, the
Company’s estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, to the extent the
Company identifies adjustments to the purchase price or the
purchase price allocation, the Company records adjustments to the
assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or
liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of
operations.
All
transaction costs incurred in connection with a business
combination are expensed as incurred and are reflected in selling,
general and administrative expense in the accompanying consolidated
statements of operations.
Goodwill
Goodwill
is the excess of the acquisition cost of a business combination
over the fair value of the identifiable net assets acquired.
Goodwill at December 31, 2017 and 2016 was $34.8 million and $35.7
million, respectively. All of the Company’s goodwill is
attributable to its Business Services segment.
F-9
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
following table presents the changes in the carrying amounts of
goodwill during the years ended December 31, 2017 and
2016:
|
Balance
at December 31, 2015
|
$27,060,297
|
|
Fidelity
purchase price adjustment*
|
134,216
|
|
TFB
acquisition*
|
993,637
|
|
Apptix
acquisition
|
7,091,065
|
|
Customer
base acquisition*
|
410,000
|
|
Balance
at December 31, 2016
|
35,689,215
|
|
Increase
in goodwill associated with a 2016 acquisition
|
7,414
|
|
Settlement
of litigation with Apptix sellers (see note 16)
|
(513,000)
|
|
Adjustment
to goodwill associated with acquisition of customer
bases
|
(410,000)
|
|
Balance
at December 31, 2017
|
$34,773,629
|
|
* - See note 5 for discussion of acquisitions
|
Goodwill
is not amortized and is tested for impairment on an annual basis in
the fourth quarter of each fiscal year and whenever events or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying
amount.
The
impairment test for goodwill uses a two-step approach, which is
performed at the reporting unit level. The Company has determined
that its reportable segments are its reporting units (see Note 23)
since that is the lowest level at which discrete, reliable
financial and cash flow information is available. Step one compares
the fair value of the reporting unit (calculated using a market
approach and/or a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a
potential impairment and step two must be performed. Step two
compares the carrying value of the reporting unit’s goodwill
to its implied fair value, which is the fair value of the reporting
unit less the fair value of the unit’s assets and
liabilities, including identifiable intangible assets. If the
implied fair value of goodwill is less than its carrying amount, an
impairment is recognized.
In
testing goodwill for impairment, the Company has the option to
first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more
likely than not (more than 50%) that the estimated fair value of a
reporting unit is less than its carrying amount. If the Company
elects to perform a qualitative assessment and determines that an
impairment is more likely than not, it is then required to perform
a quantitative impairment test, otherwise no further analysis is
required. The Company also may elect not to perform the qualitative
assessment and, instead, proceed directly to the quantitative
impairment test.
The
Company performed a quantitative impairment analysis on its
goodwill as of December 31, 2017 and 2016 and determined that
goodwill was not impaired.
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
If an impairment indicator is present, the Company evaluates
recoverability by a comparison of the carrying amount of the assets
to future undiscounted net cash flows expected to be generated by
the assets. If the carrying value of the asset exceeds the
projected undiscounted cash flows, the Company is required to
estimate the fair value of the asset and recognize an impairment
charge to the extent that the carrying value of the asset exceeds
its estimated fair value. The Company recorded an impairment charge
related to its intangible assets in the amount of $0.6 million in
the year ended December 31, 2017 and did not record any impairment
charges for the year ended December 31, 2016.
Property and Equipment
Property
and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets
as follows:
|
Asset
|
|
Estimated Useful
Lives
|
|
|
|
|
|
Network equipment
|
|
5 - 7 Years
|
|
Furniture and fixtures
|
|
3 - 7 Years
|
|
Computer equipment and software
|
|
3 - 5 Years
|
|
Customer premise equipment
|
|
2 - 3 Years
|
F-10
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Leasehold
improvements are depreciated over the shorter of the estimated
useful lives of the assets or the term of the associated lease.
Maintenance and repairs are recorded as a period expense, while
betterments and improvements are capitalized.
The
Company capitalizes a portion of its payroll and related costs for
the development of software for internal use and amortizes these
costs over three years. During the years ended December 31, 2017
and 2016, the Company capitalized costs pertaining to the
development of internally used software in the amount of $2.0
million and $1.2 million, respectively.
Fair Value of Financial Instruments
The
Company applies fair value accounting for all financial assets and
liabilities and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a recurring basis. Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for
assets and liabilities which are required to be recorded at fair
value, the Company considers the principal or most advantageous
market in which it would transact and the market-based risk
measurements or assumptions that market participants would use in
pricing the asset or liability, such as risks inherent in valuation
techniques, transfer restrictions and credit risk. Fair value is
estimated by applying the following hierarchy, which prioritizes
the inputs used to measure fair value into three levels and bases
the categorization within the hierarchy upon the lowest level of
input that is available and significant to the fair value
measurement:
●
Level 1 applies
to assets or liabilities for which there are quoted prices in
active markets for identical assets or liabilities that the Company
has the ability to access at the measurement date.
●
Level 2 applies
to assets or liabilities for which there are inputs other than
quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly, such as quoted prices
for similar assets or liabilities in active markets; quoted prices
for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active
markets).
●
Level 3 applies
to assets or liabilities for which fair value is derived from
valuation techniques in which one or more significant inputs are
unobservable, including the Company's own assumptions.
The
estimated fair value of financial instruments is determined by the
Company using available market information and valuation
methodologies considered to be appropriate. At December 31, 2017
and 2016, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximate their
fair values due to their short maturities.
Derivative Financial Instruments
The
Company accounts for equity and equity indexed instruments with
down round provisions issued in conjunction with the issuance of
debt or equity securities of the Company in accordance with the
guidance contained in Accounting Standards Codification
(“ASC”) Topic 815, Derivatives and Hedging (“ASC
815”). For warrant instruments that are not deemed to be
indexed to Fusion’s common stock, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in the
Company’s statements of operations (see notes 17 and 18). The
fair values of the warrants have been estimated using option
pricing and other valuation models, and the quoted market price of
Fusion’s common stock (see notes 17 and 18).
Stock-Based Compensation
The
Company recognizes expense for its employee stock-based
compensation based on the fair value of the award at the date of
grant. The fair values of stock options are estimated using the
Black-Scholes option valuation model. The use of the Black-Scholes
option valuation model requires the input of subjective
assumptions. Measured compensation cost, net of estimated
forfeitures, is recognized ratably over the vesting period of the
related stock-based compensation award. For transactions in which
goods or services are the consideration received from non-employees
in return for the issuance of equity instruments, the expense is
recognized in the period when the goods and services are received
at the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is determined to be a
more reliable measurement.
F-11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Advertising and Marketing
Advertising
and marketing expense includes cost for promotional materials and
trade show expenses for the marketing of the Company’s
products and services. Advertising and marketing expenses were $0.5
million and $0.7 million for the years ended December 31, 2017 and
2016, respectively.
Income Taxes
The
accounting and reporting requirements with respect to income taxes
require an asset and liability approach. Deferred income tax assets
and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred income tax assets
to the amount expected to be realized.
In
accordance with U.S. GAAP, the Company is required to determine
whether a tax position of the Company is more likely than not to be
sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax
benefit to be recognized is measured as the largest amount of
benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Derecognition of a tax benefit previously
recognized could result in the Company recording a tax liability
that would reduce net assets. Based on its analysis, the Company
has determined that it has not incurred any liability for
unrecognized tax benefits as of December 31, 2017 and
2016.
No
interest expense or penalties have been recognized as of December
31, 2017 and 2016. During the years ended December 31, 2017 and
2016, the Company recognized no adjustments for uncertain tax
positions.
Recently Issued Accounting Pronouncements
In July
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815). The amendments in Part I of this update change
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. This
standard is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating the effect
that the new guidance will have on its financial statements and
related disclosures.
During
the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment. The amendments in this update eliminate the requirement
to perform step two of the goodwill impairment test, which requires
a hypothetical purchase price allocation when an impairment is
determined to have occurred. A goodwill impairment will now be the
amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. This
standard update is effective as of the first quarter of 2020;
however, early adoption is permitted for any interim or annual
impairment tests performed after January 1, 2017. Fusion will adopt
this standard on January 1, 2018. The adoption of this standard
update will not have a significant impact on Company’s
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, Restricted Cash,
which clarifies guidance and presentation related to restricted
cash in the statement of cash flows, including stating that
restricted cash should be included within cash and cash equivalents
in the statement of cash flows. The standard is effective for
fiscal years beginning after December 15, 2017, with early adoption
permitted, and is to be applied retrospectively. The Company early
adopted ASU 2016-18 effective January 1, 2017. Adoption of this
standard did not have a material impact on the Company’s
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases, which is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018 with early adoption permitted.
Under ASU 2016-02, lessees will be required to recognize for all
leases at the commencement date a lease liability, which is a
lessee’s obligation to make lease payments arising from a
lease measured on a discounted basis, and a right to-use asset,
which is an asset that represents the lessee’s right to use
or control the use of a specified asset for the lease term. The
Company is currently evaluating the effect that the new guidance
will have on its financial statements and related
disclosures.
In
November 2015, the FASB issued ASU No. 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes, which
simplifies the presentation of deferred income taxes by requiring
that deferred tax assets and liabilities be classified as
noncurrent on the balance sheet. The updated standard became
effective as of January 1, 2017. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
F-12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
In
March 2016, the FASB issued ASU No. 2016-09, Compensation –
Stock Compensation, which is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2016. Under ASU 2016-09, all excess tax benefits and tax
deficiencies related to share-based payment awards are to be
recognized as income tax expense or income tax benefit in the
statement of operations. In addition, the tax effects of exercised
or vested awards should be treated as discrete items in the
reporting period in which they occur and excess tax benefits should
be recognized regardless of whether the benefit reduces taxes
payable in the current period. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
In May
2014, the FASB issued new guidance related to revenue recognition,
ASU 2014-09, Revenue from Contracts with Customers (“ASC
606”), which outlines a comprehensive revenue recognition
model and supersedes most current revenue recognition guidance. The
new guidance requires a company to recognize revenue upon transfer
of goods or services to a customer at an amount that reflects the
expected consideration to be received in exchange for those goods
or services. ASC 606 defines a five-step approach for recognizing
revenue: (i) identification of the contract, (ii) identification of
the performance obligations, (iii) determination of the transaction
price, (iv) allocation of the transaction price to the performance
obligations, and (v) recognition of revenue as the entity satisfies
the performance obligations. The new criteria for revenue
recognition may require a company to use more judgment and make
more estimates than under the current guidance. The new guidance
becomes effective in calendar year 2018 and early adoption in
calendar year 2017 is permitted. Two methods of adoption are
permitted: (a) full retrospective adoption, meaning the standard is
applied to all periods presented; or (b) modified retrospective
adoption, meaning the cumulative effect of applying the new
guidance is recognized at the date of initial application as an
adjustment to the opening retained earnings balance.
In
March 2016, April 2016 and December 2016, the FASB issued ASU No.
2016-08, Revenue From Contracts with Customers (ASC 606): Principal
Versus Agent Considerations, ASU No. 2016-10, Revenue From
Contracts with Customers (ASC 606): Identifying Performance
Obligations and Licensing, and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue From Contracts
with Customers, respectively, which further clarify the
implementation guidance on principal versus agent considerations
contained in ASU No. 2014-09. In May 2016, the FASB issued ASU
2016-12, Revenue from Contracts with Customers, narrow-scope
improvements and practical expedients which provides clarification
on assessing the collectability criterion, presentation of sales
taxes, measurement date for non-cash consideration and completed
contracts at transition. These standards will be effective for the
Company beginning in the first quarter of 2018. Early adoption is
permitted.
The
Company will adopt the new standard and related updates effective
January 1, 2018, using the modified retrospective method of
adoption. The Company estimates that, based on available
information, both the impact of the adjustment to opening retained
earnings and the ongoing impact from the deferral of acquisition
costs and activation and installation revenues will not be material
to the Company’s financial statements.
Note 3. Loss per Share
Basic
and diluted loss per share is computed by dividing (i) loss
available to common stockholders by (ii) the weighted-average
number of shares of common stock outstanding during the period,
increased by the number of shares underlying such warrants with a
nominal exercise price as if such exercise had occurred at the
beginning of the year.
The
following table sets forth the computation of the Company’s
basic and diluted net loss per share during the years ended
December 31, 2017 and 2016:
|
|
Years
Ended December 31,
|
|
|
|
2017
|
2016
|
|
Numerator
|
|
|
|
Net
loss attributable to Fusion Telecommunications International,
Inc.
|
$(14,014,523)
|
$(12,716,323)
|
|
Undeclared
dividends on Series A-1, A-2 and A-4 Convertible Preferred
Stock
|
(403,600)
|
(404,706)
|
|
Conversion
price reduction on Series B-2 Preferred Stock (see note
16)
|
(623,574)
|
-
|
|
Series
B-2 warrant exchange (see note 16)
|
(347,191)
|
-
|
|
Dividends
declared on Series B-2 Convertible Preferred Stock
|
(463,162)
|
(1,983,301)
|
|
Net
loss attributable to common stockholders
|
$(15,852,050)
|
$(15,104,330)
|
|
|
|
|
|
Denominator
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
21,969,601
|
15,406,184
|
|
|
|
|
|
Loss per share
|
|
|
|
Basic
and diluted
|
$(0.72)
|
$(0.98)
|
F-13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
For the
years ended December 31, 2017 and 2016, the following outstanding
securities were excluded from the calculation of diluted earnings
per common share because of their anti-dilutive
effects:
|
|
For the Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Warrants
|
2,000,988
|
2,902,862
|
|
Convertible
preferred stock
|
2,045,979
|
2,628,389
|
|
Stock
options
|
3,017,927
|
2,183,723
|
|
|
7,064,894
|
7,714,974
|
The net
loss per common share calculation includes a provision for
preferred stock dividends on the Company’s outstanding Series
A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-4
Preferred Stock (collectively, the “Series A Preferred
Stock”) of $0.4 million for the years ended December 31, 2017
and 2016. As of December 31, 2017, Fusion’s Board of
Directors had not declared any dividends on the Series A Preferred
Stock, and the Company had accumulated $5.1 million of preferred
stock dividends.
Fusion’s
Board of Directors declared dividends in the aggregate of $1.4
million and $2.0 million for the years ended December 31, 2017 and
2016, respectively, related to the Company’s Series B-2
Convertible Preferred Stock (the “Series B-2 Preferred
Stock”), which, as permitted by the terms of the Series B-2
Preferred Stock, was paid in the form of 256,706 and 1,140,568
shares of Fusion’s common stock for the years ended December
31, 2017 and 2016, respectively. No dividends were declared or paid
on the Series B-2 Preferred Stock for the quarter ended December
31, 2017. The dividends paid in 2016 include an additional $1.2
million in dividends paid in the form of 666,667 shares of
Fusion’s common stock to a holder of 5,000 shares of Series
B-2 Preferred Stock in connection with the holder’s agreement
to convert all of its Series B-2 Preferred Stock holdings into
shares of Fusion’s common stock.
Note 4. Stock-Based Compensation
The
Company's stock-based compensation plan provides for the issuance
of stock options to the Company’s employees, officers, and
directors. The Compensation Committee of Fusion’s Board of
Directors approves all awards that are granted under the Company's
stock-based compensation plan.
The
Company's 2016 Equity Incentive Plan, ratified by the
Company’s stockholders on October 28, 2016, reserves a number
of shares of common stock equal to 10% of the Company’s
shares outstanding from time to time on a fully diluted basis. The
plan provides for the grant of incentive stock options, stock
appreciation rights, restricted stock, restricted stock units,
stock grants, stock units, performance shares and performance share
units to employees, officers, non-employee directors of, and
consultants to the Company. Options under the plan typically vest
in annual increments over a three or four year period, expire ten
years from the date of grant and are issued at exercise prices no
less than 100% of the fair market value at the time of
grant.
The following table summarizes the stock option activity under the
Company’s stock plans for the years ended December 31, 2017
and 2016:
|
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
|
Outstanding
at December 31, 2015
|
1,158,251
|
$4.96
|
8.43
years
|
|
Granted
|
1,135,650
|
1.31
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(89,826)
|
2.51
|
|
|
Expired
|
(20,352)
|
69.46
|
|
|
Outstanding
at December 31, 2016
|
2,183,723
|
2.56
|
8.56
years
|
|
Granted
|
949,298
|
2.37
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
( 85,802)
|
1.65
|
|
|
Expired
|
( 29,292)
|
17.32
|
|
|
Outstanding
at December 31, 2017
|
3,017,927
|
2.38
|
8.26
years
|
|
Exercisable
at December 31, 2017
|
1,860,667
|
2.81
|
7.82
years
|
F-14
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
Company recognized compensation expense of $2.5 million and $0.9
million related to stock options for the years ended December 31,
2017 and 2016, respectively. These amounts are included in selling,
general, and administrative expenses in the accompanying
consolidated statements of operations.
The
following range of assumptions were used to determine the fair
value of the stock options granted under the Company’s
stock-based compensation plan using the Black-Scholes
option-pricing model:
|
|
Year Ended December 31,
|
|
|
|
2017
|
2016
|
|
Dividend
yield
|
0.0%
|
0.0%
|
|
Expected
volatility
|
92.40%
|
92.40%
|
|
Average
Risk-free interest rate (%)
|
2.00-2.43
|
1.21-2.23
|
|
Expected
life of stock option term (years)
|
8.00
|
6.86-8.00
|
The
following table summarizes additional information regarding
outstanding and exercisable options under the stock option plans at
December 31, 2017:
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|||||||
|
Range
of Exercise Prices
|
Options
Outstanding
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Aggregate
intrinsic Value
|
Options
Exercisable
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Price
|
Aggregate
intrinsic Value
|
|
$1.14 - $1.72
|
1,116,100
|
8.74
|
$1.29
|
|
346,148
|
8.57
|
$1.27
|
|
|
$1.74 - $2.67
|
1,268,898
|
9.10
|
2.34
|
|
918,715
|
8.96
|
2.33
|
|
|
$2.72 - $4.24
|
327,395
|
6.82
|
3.48
|
|
291,989
|
6.74
|
3.48
|
|
|
$4.25 - $7.00
|
290,364
|
4.77
|
4.83
|
|
288,645
|
4.76
|
4.83
|
|
|
$7.50 - $15.50
|
15,170
|
0.24
|
15.40
|
|
15,170
|
0.24
|
15.44
|
|
|
|
3,017,927
|
8.26
|
2.38
|
$4,620,526
|
1,860,667
|
7.82
|
2.81
|
$2,243,741
|
The
weighted-average estimated fair value of stock options granted was
$1.96 and $1.08 during the years ended December 31, 2017 and 2016,
respectively. No stock options were exercised during the years
ended December 31, 2017 and 2016. As of December 31, 2017, there
was approximately $1.2 million of total unrecognized compensation
cost related to stock options granted under the Company’s
stock incentive plans, which is expected to be recognized over a
weighted-average period of 1.52 years.
During
the year ended December 31, 2016, the Company issued 55,000 shares
of restricted stock to an employee valued at $99,950, which vests
over a three year period. The Company recognized compensation
expense in connection with this grant in the approximate amount of
$33,000 for the year ended December 31, 2017.
Note 5. Acquisitions
Apptix
On
November 14, 2016, Fusion NBS Acquisition Corp.
(“FNAC”), a subsidiary of Fusion, entered into a Stock
Purchase and Sale Agreement (the “Apptix Purchase
Agreement”) with Apptix, ASA (the “Seller”),
pursuant to which FNAC acquired all of the issued and outstanding
capital stock of Apptix, Inc., a wholly-owned subsidiary of the
Seller (“Apptix”). Apptix provided cloud-based
communications, collaboration, virtual desktop, compliance,
security and cloud computing solutions to approximately 1,500
business customers across the U.S.
The
purchase price paid by FNAC for Apptix was $26.7 million, including
an adjustment for the closing date cash on hand. The purchase price
was paid with (i) $23,063,484 in cash, and (ii) 2,997,926 shares of
Fusion’s common stock (the “Seller Shares”),
valued at $1.21 per share. The cash portion of the purchase price
was funded through a new senior secured facility entered into
simultaneously with the Apptix acquisition (see note 14). Upon
acquisition, Apptix became a wholly-owned subsidiary of FNAC. The
acquisition was accounted for as a business combination. The
allocation of the purchase price as of the acquisition date is as
follows:
F-15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
|
Cash
|
$67,071
|
|
Accounts
receivable
|
2,207,024
|
|
Prepaid
expenses and other current assets
|
620,270
|
|
Property
and equipment
|
2,878,877
|
|
Deferred
tax liability
|
(1,633,853)
|
|
Covenant
not to compete
|
1,417,000
|
|
Customer
contracts
|
20,948,000
|
|
Accrued
liabilities
|
(6,904,479)
|
|
Goodwill
|
7,091,065
|
|
Total
purchase price
|
$26,690,975
|
The
customer relationship intangible assets have estimated useful lives
of 5 to 15 years, and the non-compete agreement has a useful life
of one year. In August 2017, in connection with the settlement of
litigation with Apptix, FNAC was paid $150,000 in cash and Apptix
surrendered 300,000 shares of Fusion common stock valued at $0.4
million, resulting in a reduction to goodwill of $0.5 million. In
November 2017, the Company changed its estimate of property tax
liabilities assumed in the acquisition as of the acquisition date,
resulting in a $0.2 million reduction to goodwill.
The Company underwent a compliance audit for the use of certain
software licenses by one of the Company’s recently acquired
businesses. The Company is negotiating with the software vendor
with regard to a settlement and based upon the initial meeting with
the vendor, the Company has recorded an estimate for the accrual in
accounts payable and accrued expenses in the accompanying
consolidated balance sheet. There can be no assurances that this
matter will be settled and, if settled, the amount that would be
paid in any such settlement.
The
results of operations of Apptix are reflected in the
Company’s consolidated statement of operations effective
November 14, 2016. The following table provides certain unaudited
pro forma financial information for the Company for the year ended
December 31, 2016 as if the acquisition of Apptix had been
consummated effective as of January 1, 2016 (in
millions):
|
|
2016
|
|
Revenues
|
$141.3
|
|
Net
loss
|
$(16.5)
|
Technology for Business
On March 31, 2016, the Company completed the acquisition of
substantially all of the assets of Technology for Business
Corporation (“TFB”), a provider of contact center
solutions, for an estimated purchase price of $1.3 million
consisting of $0.3 million in cash and a royalty fee equal to ten
percent of the collected monthly recurring revenues derived from
sales of the cloud version of the proprietary call center software
and maintenance services. The estimated royalty fee of $1.1 million
was recognized as a non-current liability in the condensed
consolidated balance sheet as of December 31, 2016.
|
Accounts
receivable, net
|
$80,845
|
|
Prepaid
expenses and other current assets
|
5,535
|
|
Proprietary
technology
|
889,000
|
|
Covenant
not to compete
|
8,000
|
|
Customer
contracts
|
99,000
|
|
Current
liabilities
|
( 687,130)
|
|
Accrued
royalty
|
(1,111,606)
|
|
Goodwill
|
993,637
|
|
Total
cash purchase price
|
$277,281
|
The acquisition of the assets of TFB did not have a material effect
on the Company’s results of operations or financial
condition. At December 31, 2017, the Company determined that all of
the intangible assets related to TFB were fully impaired, and that
the Company would not be required to pay any royalties under the
terms of the purchase agreement. As a result the Company recognized
an impairment charge of $0.6 million to write-off the remaining
book value of the acquired intangible assets and derecognized the
royalty liability of $1.1 million, which is reflected in the
accompanying consolidated statement of operations for the year
ended December 31, 2017.
F-16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Customer Base Acquisitions
In a
two-step transaction, the Company completed customer base
acquisitions on November 18, 2016 and March 1, 2017 with two
parties.
On November 18, 2016, the Company entered into a purchase agreement
pursuant to which the Company assumed obligations to provide
services to the seller’s customer base. In connection with
that transaction, the Company recognized goodwill and a
corresponding obligation to the seller in the amount of $0.4
million. The Company also agreed to pay additional
consideration to the seller if it was able to facilitate the
assignment of certain additional customers to the
Company.
On March 1, 2017, the Company entered into an additional asset
purchase agreement with another party pursuant to which the
Company assumed obligations to provide services to a customer base
and also purchased the outstanding accounts receivables associated
with that customer base having a value of approximately $0.6
million. As this customer base is within the scope of the November
2016 agreement, the Company is required to pay consideration to the
seller in an estimated aggregate amount of $1.7 million. The
March 2017 agreement also provides for a management period
during which the Company will be responsible for all aspects of the
customer relationship with respect to the acquired customer base
until such time as all regulatory approvals have been obtained, and
the Company’s consolidated statement of operations includes
the revenue associated with the customer base acquisition effective
March 1, 2017. The March 2017 agreement also provides for a
transition period during which the seller thereunder will provide
certain services and assistance to the Company. The transition
period related to the March 2017 Agreement ended in February 2018
and on February 23, 2018, the Company purchased the remaining
assets related to this customer base for a de minimis
amount.
The aggregate amount payable by the Company under the November 2016
and March 2017 agreements totals $2.3 million, comprised of the
$0.6 million paid for the accounts receivable and the $1.7 million
of contingent consideration related to the customer base which, as
provided for in the November 2016 agreement, was valued at a
multiple of monthly revenue and will be paid over a period of 18
months. The March 2017 agreement resulted in a reduction
to the goodwill in the amount of $0.4 million. These agreements did
not have a material effect on the Company’s results of
operations or financial condition.
Fidelity
In a
two-step transaction completed in December 2015 and February 2016,
FNAC acquired all of the outstanding equity securities of Fidelity
Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice
Services, LLC, Fidelity Access Networks, Inc., and Fidelity
Telecom, LLC (hereinafter collectively referred to as
“Fidelity”). Fidelity provides customers with a suite
of cloud based services, including cloud voice, cloud connectivity,
cloud computing and cloud storage.
The
purchase price paid to Fidelity shareholders was $29.9 million,
consisting of $28.4 million in cash and 696,508 shares of
Fusion’s common stock valued at $1.5 million (based upon the
volume weighted average price of the common stock over a ten
trading day period ending four trading days prior to the closing
date). The acquisition was funded through borrowings under a credit
facility of approximately $27.5 million and cash on hand of
approximately $0.9 million. At closing, $1.5 million of the cash
portion of the purchase price was placed into escrow to protect the
Company against any breaches in the sellers’ representations,
warranties and covenants in the purchase agreement, to be released
in accordance with the terms of the related escrow
agreement.
The
allocation of the purchase price as of the acquisition date is as
follows:
|
Cash
|
$503,059
|
|
Accounts
receivable, net
|
273,809
|
|
Prepaids
|
44,735
|
|
Property
and equipment
|
1,111,699
|
|
Covenant
not to compete
|
618,000
|
|
Customer
contracts
|
19,243,000
|
|
Accrued
liabilities
|
(692,606)
|
|
Deferred
tax liability
|
(7,710,536)
|
|
Goodwill
|
16,502,971
|
|
Total
purchase price
|
$29,894,133
|
The
amount of goodwill recognized is primarily attributable to the
expected contributions of Fidelity to the overall corporate
strategy in addition to synergies and acquired workforce of the
acquired business. None of the goodwill or intangible assets
recognized is expected to be deductible for income tax purposes.
The intangible assets subject to amortization consist of customer
relationships and non-compete agreements, with an estimated useful
life of 14 and 5 years, respectively. During the year ended
December 31, 2016, $0.4 million of the foregoing escrowed portion
of the purchase price was remitted back to the Company, resulting
in a decrease in the purchase price and a corresponding reduction
in goodwill. Also during the year ended December 31, 2016, the
Company increased goodwill by $0.5 million due to changes in the
estimated fair values of assets and liabilities at
acquisition.
F-17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
All of
the forgoing acquisitions are included as part of the Business
Services business segment (See Note 12).
Note 6. Intangible Assets
All of
the Company’s identifiable intangible assets are associated
with its Business Services segment and as of December 31, 2017 and
2016 are comprised of:
|
|
December 31, 2017
|
December 31, 2016
|
||||
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradename
|
$1,093,400
|
$(672,314)
|
$421,086
|
$1,093,400
|
$(501,982)
|
$591,418
|
|
Proprietary
technology
|
5,781,000
|
(5,005,400)
|
775,600
|
6,670,000
|
(4,036,915)
|
2,633,085
|
|
Non-compete
agreement
|
12,120,043
|
(11,701,307)
|
418,736
|
12,128,043
|
(9,891,892)
|
2,236,151
|
|
Customer
relationships
|
67,614,181
|
(13,073,580)
|
54,540,601
|
65,948,181
|
(7,827,697)
|
58,120,484
|
|
Favorable
lease
|
218,000
|
(218,000)
|
-
|
218,000
|
(181,667)
|
36,333
|
|
Total
acquired intangibles
|
$86,826,624
|
$(30,670,601)
|
$56,156,023
|
$86,057,624
|
$(22,440,153)
|
$63,617,471
|
Aggregate
amortization expense for each of the five years subsequent to
December 31, 2017 is expected to be as follows:
|
Year
|
Amortization
Expense
|
|
2018
|
$6,361,523
|
|
2019
|
5,469,042
|
|
2020
|
5,458,742
|
|
2021
|
5,284,375
|
|
2022
|
4,612,642
|
Note 7. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets at December 31, 2017 and 2016 are
as follows:
|
|
December 31, 2017
|
December 31, 2016
|
|
Insurance
|
$18,639
|
$160,262
|
|
Rent
|
16,326
|
5,389
|
|
Marketing
|
55,801
|
74,665
|
|
Software
subscriptions
|
610,191
|
419,431
|
|
Commissions
|
46,755
|
159,146
|
|
Network
costs
|
817,704
|
-
|
|
Other
|
525,828
|
265,316
|
|
Total
|
$2,091,244
|
$1,084,209
|
F-18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 8. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following at December
31, 2017 and 2016:
|
|
December 31, 2017
|
December 31, 2016
|
|
Trade
accounts payable
|
$9,336,838
|
$6,358,548
|
|
Accrued
license fees
|
2,881,331
|
2,881,331
|
|
Accrued
sales and federal excise taxes
|
3,496,697
|
2,863,363
|
|
Deferred
revenue
|
1,283,969
|
1,874,641
|
|
Accrued
network costs
|
2,151,271
|
1,416,000
|
|
Accrued
sales commissions
|
911,192
|
819,106
|
|
Property
and other taxes
|
759,770
|
581,956
|
|
Accrued
payroll and vacation
|
422,097
|
421,733
|
|
Customer
deposits
|
383,032
|
365,249
|
|
Interest
payable
|
7,263
|
304,409
|
|
Credit
card payable
|
114,209
|
265,985
|
|
Accrued
USF fees
|
728,826
|
249,825
|
|
Accrued
bonus
|
333,337
|
249,361
|
|
Professional
and consulting fees
|
171,163
|
164,878
|
|
Rent
|
163,030
|
127,781
|
|
Other
|
1,945,021
|
778,672
|
|
Total
|
$25,089,046
|
$19,722,838
|
Note 9. Property and Equipment
At
December 31, 2017 and 2016, property and equipment is comprised of
the following:
|
|
December 31, 2017
|
December 31, 2016
|
|
Network
equipment
|
$20,350,334
|
$13,716,468
|
|
Furniture
and fixtures
|
436,697
|
421,689
|
|
Computer
equipment and software
|
1,934,984
|
5,868,370
|
|
Customer
premise equipment
|
7,650,496
|
9,695,643
|
|
Vehicles
|
55,884
|
55,884
|
|
Leasehold
improvements
|
1,069,670
|
1,188,207
|
|
Assets
in progress
|
-
|
383,137
|
|
Total
|
31,498,065
|
31,329,398
|
|
Less:
accumulated depreciation
|
(18,641,531)
|
(17,080,483)
|
|
Total
|
$12,856,534
|
$14,248,915
|
Depreciation
expense was $5.9 million and $7.5 million for the years ended
December 31, 2017 and 2016, respectively. For the years ended
December 31, 2017 and 2016, $2.2 million and $3.2 million,
respectively, of the Company’s property and equipment were
financed under equipment financing obligations.
Note 10. Equipment Financing Obligations
During
the years ended December 31, 2017 and 2016, the Company entered
into several equipment financing or capital lease arrangements to
finance the purchase of network hardware and software utilized in
the Company’s operations. These arrangements require monthly
payments over a period of 24 to 48 months with interest rates
ranging between 5.3% and 6.6%.
F-19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
Company’s equipment financing obligations at December 31,
2017 and 2016 are as follows:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Equipment
financing obligations
|
$1,797,374
|
$2,239,661
|
|
Less:
current portion
|
(1,206,773)
|
(1,002,578)
|
|
Long-term
portion
|
$590,601
|
$1,237,083
|
The
estimated principal payments under capital lease agreements for the
years ending subsequent to December 31, 2017 are as
follows:
|
Year ending December 31:
|
Principal
|
|
2018
|
$1,206,773
|
|
2019
|
502,589
|
|
2020
|
88,012
|
|
|
$1,797,374
|
Note 11. Supplemental Disclosure of Cash Flow
Information
Supplemental
cash flow information for the years ended December 31, 2017 and
2016 is as follows:
|
|
Years Ended December 31,
|
|
|
Supplemental Cash Flow Information
|
2017
|
2016
|
|
Cash
paid for interest
|
$7,756,230
|
$5,806,910
|
|
Cash
paid for income taxes
|
$-
|
$-
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing
Activities
|
|
|
|
Property
and equipment acquired under capital leases or equipment financing
obligations
|
$677,071
|
$188,497
|
|
Conversion
of preferred stock into common stock
|
$3,083,000
|
$-
|
|
Dividend
on Series B-2 preferred stock paid with the issuance of Fusion
common stock
|
$463,162
|
$1,983,301
|
|
Common
stock issued for acquisitions
|
$-
|
$3,627,490
|
|
Obligations
under asset purchase agreements
|
$968,035
|
$1,521,606
|
Note 12. Obligations Under Asset Purchase Agreements
In
connection with certain acquisitions and asset purchases completed
by the Company during 2015, 2016 and 2017, the Company has various
obligations to the sellers, mainly for payments of portions of the
purchase price that have been deferred under the terms of the
respective asset purchase agreements. Such obligations to sellers
or other parties associated with these transactions as of December
31, 2017 and December 31, 2016 are as follows:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Root
Axcess
|
$-
|
$166,668
|
|
Customer
base acquisitions
|
450,000
|
334,025
|
|
Technology
For Business, Inc.
|
-
|
936,606
|
|
|
450,000
|
1,437,299
|
|
Less:
current portion
|
(227,760)
|
(546,488)
|
|
Long-term
portion
|
$222,240
|
$890,811
|
In
connection with the purchase of the assets of TFB in March 2016,
the Company recorded a contingent liability of $1.1 million (see
Note 5). The contingent liability was based on an estimated royalty
fee based on future revenues. At December 31, 2017, the Company
determined that it would not be required to pay any royalties under
the terms of the purchase agreement. As a result, the Company
reduced its obligations under asset purchase agreements by this
amount, and this reduction is reflected in the accompanying consolidated statement of
operations for the year ended December 31,
2017.
F-20
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 13. Secured Credit Facilities
At
December 31, 2017 and 2016, secured credit facilities are comprised
of the following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Term
loan
|
$61,750,000
|
$65,000,000
|
|
Less:
|
|
|
|
Deferred
financing fees
|
(1,027,332)
|
(1,289,629)
|
|
Current
portion
|
(6,500,000)
|
(2,979,167)
|
|
Term
loan - long-term portion
|
$54,222,668
|
$60,731,204
|
|
|
|
|
|
Indebtedness
under revolving credit facility
|
$1,500,000
|
$3,000,000
|
On November 14, 2016, Fusion NBS Acquisition Corp.
(“FNAC”), a wholly-owned subsidiary of Fusion, entered
into a new credit agreement (the “East West Credit
Agreement”) with East West Bank, as administrative agent and
the lenders identified therein (collectively with East West Bank,
the “East West Lenders”). Under the East West Credit
Agreement, the East West Lenders extended FNAC (i) a $65.0 million
term loan and (ii) a $5.0 million revolving credit facility (which
includes up to $4 million in “swingline” loans that may
be accessed on a short-term basis). The proceeds of the term loan
were used to retire $40 million that was outstanding under a
previously existing credit facility, and to fund the cash portion
of the purchase price of FNAC’s acquisition Apptix (see note
5). In connection with the retirement of the previous credit
facility, FNAC recognized a loss on the extinguishment of debt in
the amount of $0.2 million in the year ended December 31,
2016.
Borrowings
under the East West Credit Agreement are evidenced by promissory
notes bearing interest at rates computed based upon either the then
current “prime” rate of interest or “LIBOR”
rate of interest, as selected by FNAC. Interest on borrowings that
FNAC designates as “base rate” loans bear interest at
the greater of the prime rate published by the Wall Street Journal
or 3.25% per annum, in each case plus 2% per annum. Interest on
borrowings that FNAC designates as “LIBOR rate” loans
bear interest at the LIBOR rate of interest published by the Wall
Street Journal, plus 5% per annum, and the rate of interest on the
term loan ranged from 6.02% to 6.61% for the year ended December
31, 2017.
From
January 1, 2017 through January 1, 2018, the Company is required to
repay the term loan in equal monthly payments of $270,833 and
thereafter the monthly payments increase to $541,667 until the
maturity date of the term loan on November 12, 2021, when the
remaining $36.8 million of principal is due. Borrowings under the
revolving credit facility are also payable on the November 12, 2021
maturity date of the facility. At December 31, 2017 and 2016, $1.5
million and $3.0 million, respectively, was outstanding under the
revolving credit facility.
In
conjunction with the execution of the East West Credit Agreement,
the Company and the East West Lenders also entered into (i) an IP
Security Agreement under which the Company has pledged intellectual
property to the East West Lenders to secure payment of the East
West Credit Agreement, (ii) Subordination Agreements under which
certain creditors of the Company and the East West Lenders have
established priorities among them and reached certain agreements as
to enforcing their respective rights against the Company, and (iii)
a Pledge and Security Agreement under which Fusion and FNAC have
each pledged its equity interest in its subsidiaries to the East
West Lenders.
Under
the East West Credit Agreement:
●
The
Company is subject to a number of affirmative and negative
covenants, including but not limited to, restrictions on paying
indebtedness subordinate to its obligations to the East West
Lenders, incurring additional indebtedness, making capital
expenditures, dividend payments and cash distributions by
subsidiaries.
●
The
Company is required to comply with various financial covenants,
including leverage ratio, fixed charge coverage ratio and minimum
levels of earnings before interest, taxes, depreciation and
amortization; and its failure to comply with any of the restrictive
or financial covenants could result in an event of default and
accelerated demand for repayment of its indebtedness.
●
The
Company granted the East West Lenders security interests in all of
our assets, as well as our 60% membership interest in FGS and the
capital stock of our Fusion NBS Acquisition Corp. subsidiary
(“FNAC”) and each of its
subsidiaries.
●
Fusion and its
subsidiaries (and future subsidiaries of both) have guaranteed
FNAC’s obligations, including FNAC’s repayment
obligations thereunder.
F-21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
At
December 31, 2017, the Company was in compliance with all of the
financial covenants contained in the East West Credit
Agreement.
On January 26, 2018, the Company obtained a waiver under its senior
secured credit facility with East West Bank (the “East West
Bank Credit Facility”) permitting the Company to sell up to
approximately $30.0 million (net proceeds) of its common stock
without having to use any of those proceeds to prepay amounts
outstanding under that facility (the "January 2018 EWB Waiver").
Prior to receiving the January 2018 EWB Waiver, the Company was
obligated under the East West Bank Credit Facility to use any net
proceeds for any sale of its equity securities that are in excess
of $4.0 million to pay down outstanding borrowings thereunder. In
addition, on February 23, 2018 the Company obtained an additional
waiver under the East West Bank Credit Facility permitting the
Company to retain the entire amount of the net
proceeds.
Note 14. Notes Payable – Non-Related Parties
At
December 31, 2017 and 2016, notes payable – non-related
parties are comprised of the following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Subordinated
notes
|
$33,588,717
|
$33,588,717
|
|
Discount
on subordinated notes
|
(1,040,167)
|
(1,368,629)
|
|
Deferred
financing fees
|
(595,387)
|
(788,486)
|
|
Total
notes payable - non-related parties
|
31,953,163
|
31,431,602
|
|
Less:
current portion
|
-
|
-
|
|
Long-term
portion
|
$31,953,163
|
$31,431,602
|
On
November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries
other than FNAC entered into the Fifth Amended and Restated
Securities Purchase Agreement (the “Restated Purchase
Agreement”) with Praesidian Capital Opportunity Fund III,
L.P., Praesidian Capital Opportunity Fund III-A, LP and United
Insurance Company of America (collectively, the “Praesidian
Lenders”). The Restated Purchase Agreement amends the
previous purchase agreement, pursuant to which FNAC previously sold
its Series A, Series B, Series C, Series D, Series E and Series F
senior notes in an aggregate principal amount of $33.6 million (the
“SPA Notes”). The Company pays interest monthly at a
rate of 10.8% and recognized interest expense of approximately $3.6
million and $3.7 million during 2017 and 2016,
respectively.
The
Restated Purchase Agreement amends the previous purchase agreement
to (i) provide the Praesidian Lenders’ consent to the
acquisition of Apptix, (ii) join Apptix as a guarantor and credit
party under the Restated Purchase Agreement, (iii) modify certain
financial covenants such that the covenants are now substantially
similar to those contained in the East West Credit Agreement, and
(iv) extend the maturity date of the SPA Notes to May 12, 2022. The
Praesidian Lenders also entered into a subordination agreement with
the East West Lenders pursuant to which the Praesidian Lenders have
subordinated their right to payment under the Restated Purchase
Agreement and the SPA Notes to repayment of the Company’s
obligations under the East West Credit Agreement. For the year
ended December 31, 2017, the Company was in compliance with all of
the financial covenants contained in the Restated Purchase
Agreement.
Note 15. Notes Payable-Related Parties
At
December 31, 2017 and 2016, components of notes payable –
related parties are comprised of the following:
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
Notes
payable to Marvin Rosen
|
$928,081
|
$928,081
|
|
Discount
on notes
|
-
|
(52,331)
|
|
Total
notes payable - related parties
|
$928,081
|
$875,750
|
The
note payable to Marvin Rosen, Fusion’s Chairman of the Board,
is subordinated to borrowings under the East West Credit Agreement
and the Restated Purchase Agreement. This note is unsecured, pays
interest monthly at an annual rate of 7%, and matures 120 days
after the Company’s obligations under the East West Credit
Agreement and the Restated Purchase Agreement are paid in
full.
For the
years ended December 31, 2017 and 2016, the Company paid interest
on the notes payable to Mr. Rosen in the amount of $0.1 million.
During the year ended December 31, 2016, Mr. Rosen converted
$250,000 of the outstanding notes into 217,391 shares
Fusion’s common stock in conjunction with Fusion’s
private placement of common stock in November of 2016 (see note
16).
F-22
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 16. Equity Transactions
Common Stock
On
October 28, 2016, Fusion’s Stockholders ratified an amendment
to the Company’s Certificate of incorporation to increase the
number of authorized common shares to 90,000,000. At December 31,
2017 and 2016, there were 22,471,133 and 20,642,028 shares of
common stock outstanding, respectively.
In
March 2017, the Company entered into exchange agreements with
certain holders of Fusion’s outstanding warrants whereby the
outstanding warrants were exchanged for new warrants (the
“2017 Warrants”), which warrants permitted the holders
to exercise and purchase, for a limited period of 60 days,
unregistered shares of Fusion’s common stock at a discount of
up to 10% below the closing bid price of Fusion’s common
stock at the time of exercise but in no event at a price of less
than $1.30 per share. In connection with these exchange agreements,
the warrant holders exchanged outstanding warrants and thereafter
exercised 2017 Warrants to purchase 561,834 shares of common stock
on March 31, 2017 at an exercise price of $1.39 per share. The
Company received proceeds from the exercise of the 2017 Warrants in
the amount of $0.8 million, which were used for general corporate
purposes. In connection with the exchange agreements, all of the
2017 Warrants were immediately exercised and none remained
outstanding as of December 31, 2017. As a result of the exchange,
the Company recorded a preferred stock dividend in the amount of
$0.3 million for the difference in fair value of the warrants that
were exchanged (see note 3). In October of 2017, warrants to issue
124,484 shares of common stock were exercised, and the Company
received cash proceeds of $0.2 million.
During
the year ended December 31, 2017, 104,000 warrants were exercised
on a cashless basis and, as a result, the Company issued 54,194
shares of common stock to the holders of those
warrants.
During
the year ended December 31, 2017, Fusion issued 125,870 shares of
its common stock valued at approximately $0.2 million for services
rendered. Also during year ended December 31, 2017, (i)
Fusion’s Board of Directors declared dividends on the Series
B-2 Preferred Stock that were paid in the form of 256,706 shares of
Fusion common stock (see note 4), and (ii) an officer of the
Company forfeited a portion of his 2016 restricted stock award and
5,938 shares of common stock were returned to the
Company.
On
November 14, 2016, Fusion issued 2,997,926 shares of common stock
as partial consideration in the Apptix acquisition transaction. In
August 2017, in connection with the settlement of litigation with
Apptix, FNAC was paid $150,000 in cash and Apptix surrendered
300,000 shares of Fusion common stock valued at $363,000 to the
Company.
On
November 16, 2016, Fusion sold an aggregate of 2,213,700 shares of
common stock to 20 accredited investors in a private placement
transaction, and received net proceeds of $2.3 million. In
connections with this transaction, Mr. Rosen converted $250,000 of
his outstanding notes into 217,391 shares of common
stock.
During
the year ended December 31, 2016, 6,025 shares of Series B-2
Preferred Stock were converted into 1,205,000 shares of common
stock. Also during the year ended December 31, 2016, the
Fusion’s Board of Directors declared dividends of $2.0
million on outstanding shares of Series B-2 Preferred Stock, which
were paid in the form of 1,140,568 shares of common stock as
permitted by the terms of the Series B-2 Preferred
Stock.
During
the year ended December 31, 2016, 51,380 shares of common stock
previously issued to the sellers in a 2014 business acquisition
were cancelled by mutual agreement between the Company and the
sellers. Also during the year ended December 31, 2016, 55,000
shares of restricted common stock valued at $0.1 million were
issued to one of Fusion’s executive officers and 74,167
shares of common stock valued at $0.1 million were issued to a
third party for services rendered.
Preferred Stock
Fusion is authorized to issue up to 10,000,000 shares of preferred
stock. At December 31, 2017 and 2016, there were 5,045 shares of
Series A Preferred Stock issued and outstanding. In addition, as of
December 31 2017 and 2016, there were 9,171 and 12,254 shares of
Series B-2 Preferred Stock issued and outstanding,
respectively.
The holders of the Series A Preferred Stock are entitled to receive
cumulative dividends of 8% per annum payable in arrears, when and
if declared by Fusion’s Board of Directors. As of December
31, 2017, no dividend had been declared by the Fusion Board of
Directors with respect to any series of Series A Preferred Stock,
and the Company had accumulated approximately $5.1 million of
preferred stock dividends. The Series A Preferred Stock is
convertible at the option of the holder at any time at conversion
prices ranging from $34.50 per share to $72.94 per share.
The
Company is not permitted to pay dividends on its Series A Preferred
Stock without the consent of the holders or in case of a forced
conversion. At December 31, 2017, if the Series A Preferred Stock
were convertible into the Company’s common stock, such shares
would convert into an aggregate of 211,800 shares of common stock
(inclusive of accrued and unpaid
dividends).
F-23
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The holders of the shares of Series B-2 Preferred Stock are
entitled to receive a cumulative 6% annual dividend payable
quarterly in arrears when and if declared by the Fusion Board of
Directors, in cash or shares of Fusion common stock, at the option
of the Company. Commencing January 1, 2016, Fusion has the right to
force the conversion of the Series B-2 Preferred Stock into Fusion
common stock at a conversion price of $5.00 per share; provided
that the volume weighted average price for its common stock is at
least $12.50 for ten consecutive trading days.
On
March 31, 2017, the Company agreed with certain holders of its
Series B-2 Preferred Stock to convert their shares of Series B-2
Preferred Stock into shares of Fusion common stock at a conversion
price of $3.00 per share (a two dollar reduction from the specified
conversion price). As a result, 2,958 shares of Series B-2
Preferred Stock were converted into a total of 986,665 shares of
Fusion common stock, and the Company recorded a preferred stock
dividend of $0.6 million for the value of the incremental number of
shares of Fusion common stock issued in connection with the
reduction in the conversion price of the Series B-2 Preferred Stock
(see note 3). In December of 2017, 125 shares of Series B Preferred
Stock were converted into 25,290 shares of common
stock.
The
following table summarizes the activity in the Company’s
various classes of preferred stock for the years ended December 31,
2017 and 2016:
|
|
Series A-1
|
Series A-2
|
Series A-4
|
Series B-2
|
Total
|
|||||
|
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
|
Balance
at December 31, 2015
|
2,375
|
$24
|
2,625
|
$26
|
45
|
$-
|
18,279
|
$184
|
23,324
|
$234
|
|
Conversion
of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,025)
|
(60)
|
(6,025)
|
(60)
|
|
Balance
at December 31, 2016
|
2,375
|
24
|
2,625
|
26
|
45
|
-
|
12,254
|
124
|
17,299
|
174
|
|
Conversion
of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,083)
|
(32)
|
(3,083)
|
(32)
|
|
Balance
at December 31, 2017
|
2,375
|
$24
|
2,625
|
$26
|
45
|
$-
|
9,171
|
$92
|
14,216
|
$142
|
Each
share of Series B-2 Preferred Stock has a stated value of $1,000,
and is convertible into shares of Fusion’s common stock at
the option of the holder at a conversion price of $5.00 per share,
subject to adjustment. At December 31, 2017, the Series B-2
Preferred Stock is convertible into an aggregate of 1,834,200
shares of Fusion’s common stock.
The
holders of Series B-2 Preferred Stock have liquidation rights that
are senior to those afforded to holders of the Company’s
other equity securities, and are entitled to vote as one group with
holders of Fusion’s common stock on all matters brought to a
vote of such holders (with each share of Series B-2 Preferred Stock
being entitled to that number of votes into which the registered
holder could have converted the Series B-2 Preferred Stock on the
record date for the meeting at which the vote will be cast).
Holders of common stock are also entitled to vote as a separate
class on all matters adversely affecting (within the meaning of
Delaware law) such class.
Warrants
In
connection with various debt and equity financing transactions and
other agreements, the Company has issued warrants to purchase
shares of Fusion’s common stock. All of the outstanding
warrants are fully exercisable as of December 31, 2017. The
following table summarizes the information relating to warrants
issued and the activity during the years ended December 31, 2017
and 2016:
|
|
Number
of Warrants
|
Per
share Exercise Price
|
Weighted
Average Exercise Price
|
|
Outstanding
at December 31, 2015
|
3,011,764
|
$3.95 to $10.15
|
$6.14
|
|
Granted
in 2016
|
-
|
-
|
|
|
Exercised
in 2016
|
-
|
-
|
|
|
Expired
in 2016
|
(108,902)
|
$4.00-$7.00
|
$5.00
|
|
Outstanding
at December 31, 2016
|
2,902,862
|
$4.25-$10.15
|
$6.18
|
|
Granted
in 2017
|
65,000
|
$1.50
|
$1.50
|
|
Exercised
in 2017
|
(359,067)
|
$1.39-$1.56
|
$1.48
|
|
Expired
in 2017
|
(607,807)
|
$4.50-$10.15
|
$6.81
|
|
Outstanding
at December 31, 2017
|
2,000,988
|
|
$5.06
|
F-24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 17. Derivative Liability
The
Company has issued warrants to purchase shares of Fusion’s
common stock in connection with certain debt and equity financing
transactions. These warrants are accounted for in accordance with
the guidance contained in ASC
Topic 815, ‘Derivatives and Hedging’
(“ASC 815”). For warrant instruments that do not meet
an exclusion from derivative accounting, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until the
warrant is exercised or expires, and any change in fair value is
recognized in the Company’s statement of operations. The
Company has 361,150 outstanding warrants at December 31, 2017 which
provide for a downward adjustment of the exercise price if the
Company were to issue common stock at an issuance price or issue
convertible debt or equity securities with an exercise price that
is less than the exercise price for these warrants.
The
following assumptions were used to determine the fair value of the
warrants for the year ended December 31, 2017 and
2016:
|
|
Year ended December 31,
|
|
|
|
2017
|
2016
|
|
Stock
price ($)
|
3.75
|
1.50
|
|
Adjusted
exercise price ($)
|
1.55
|
1.65
|
|
Expected
volatility (%)
|
84.10
|
71.40
|
|
Time
to maturity (years)
|
1.25
|
2.0
|
During
the year ended December 31, 2016, the Company adjusted the
valuation of its derivative liability for warrants issued in
December 2013 and January 2014 and its valuation of certain
warrants exercised during 2015. The amount of the adjustment was a
net $772,022 impact on the condensed consolidated statements of
operations resulting from the loss on the change in the fair value
of the derivative and an additional $0.3 million impact to capital
in excess of par and a $0.4 million increase in derivative
liability in the condensed consolidated balance sheets (see Note
18). The Company has evaluated these adjustments in accordance with
ASC 250-10-S99, SEC Materials (formerly SEC Staff Accounting
Bulletin 99, Materiality) and concluded that both quantitatively
and qualitatively the adjustments were not material. These
adjustments were also evaluated by management in their assessment
of internal controls over financial reporting.
During
the year ended December 31, 2017 $0.4 million of the derivative
liability was reclassified into equity as a result of warrant
exercises.
At
December 31, 2017 and 2016, the fair value of the derivative was
$0.9 million and $0.3 million, respectively. For the year ended
December 31, 2017, the Company recognized a loss on the change in
fair value of the derivative liability in the amount of $0.9
million, and the Company recognized a gain on the change in the
fair value of this derivative of $0.3 million for the year ended
December 31, 2016.
Note 18. Fair Value Disclosures
The
following table represents the fair value of the liability measured
at fair value on a recurring basis, by level within the fair value
hierarchy:
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
As of December 31, 2017
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Contingent
purchase price liability (see note 12)
|
-
|
-
|
$227,760
|
$227,760
|
|
Non-current
liabilities:
|
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$222,240
|
$222,240
|
|
Derivative
liability (see note 17)
|
-
|
-
|
$872,900
|
$872,900
|
|
As of December 31, 2016
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$100,000
|
$100,000
|
|
Non-current
liabilities:
|
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$836,606
|
$836,606
|
|
Derivative
liability (see note 17)
|
-
|
-
|
$348,650
|
$348,650
|
F-25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
following table reconciles the changes in the derivative liability
categorized within Level 3 of the fair value hierarchy for the
years ended December 31, 2017 and 2016:
|
Balance
at December 31, 2015
|
$953,005
|
|
Change
in fair value included in net loss
|
(1,037,405)
|
|
Adjustment
for prior issuances and exercise of warrants
|
433,050
|
|
Balance
at December 31, 2016
|
348,650
|
|
Change
in fair value included in net loss
|
909,272
|
|
Warrant
exercises (see note 12)
|
(385,022)
|
|
Balance
at December 31, 2017
|
$872,900
|
Note 19. Income Taxes
The
provision (benefit) for income taxes for the years ending December
31, 2017 and 2016 consists of the following:
|
|
2017
|
2016
|
|
Current
|
|
|
|
Federal
|
-
|
-
|
|
State
|
$61,511
|
$60,000
|
|
|
61,511
|
60,000
|
|
|
|
|
|
Deferred
|
|
|
|
Federal
|
-
|
(1,493,485)
|
|
State
|
-
|
(176,000)
|
|
|
-
|
(1,669,485)
|
|
|
|
|
|
Tax
provision (benefit)
|
$61,511
|
$(1,609,485)
|
For the
year ended December 31, 2016, the Company recorded deferred tax
liabilities of $1.7 million as a result of intangible assets
subject to amortization acquired in business acquisitions that are
not amortizable for income tax purposes. As a result of these
business combinations, the recording of the deferred tax
liabilities resulted in a release of the valuation allowance
against the Company’s deferred tax assets of $1.7 for the
year ended December 31, 2016, with a corresponding income tax
benefit. The tax benefit will be realized as the Company amortizes
the intangible assets over their estimated useful lives (see Note
5).
The
following reconciles the Federal statutory tax rate to the
effective income tax rate for the years ended December 31, 2017 and
2016:
|
|
2017
|
2016
|
|
|
%
|
%
|
|
Federal
statutory rate
|
(34.0)
|
(34.0)
|
|
State
net of federal tax
|
(2.9)
|
(3.4)
|
|
Permanent
and other items
|
4.9
|
1.2
|
|
Effect
of change in tax rate
|
98.5
|
-
|
|
Change
in valuation allowance
|
(66.0)
|
25.0
|
|
|
0.5
|
(11.2)
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets,
management evaluates whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Based on management’s evaluation, it is more
likely than not that the net deferred tax assets will not be
realized and as such a valuation allowance has been recorded as of
December 31, 2017 and 2016.
F-26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
components of the Company's deferred tax assets and liabilities
consist of the following at December 31, 2017 and
2016:
|
|
2017
|
2016
|
|
Deferred
income tax assets:
|
|
|
|
Net
operating losses
|
$29,447,000
|
$43,292,000
|
|
Allowance
for doubtful accounts
|
105,000
|
99,000
|
|
Derivative
liability
|
500,000
|
391,000
|
|
Accrued
liabilities
|
1,016,000
|
910,000
|
|
Other
|
55,000
|
83,000
|
|
|
31,123,000
|
44,775,000
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
Intangible
assets
|
5,700,000
|
9,943,000
|
|
Property
and equipment
|
718,000
|
761,000
|
|
|
6,418,000
|
10,704,000
|
|
Deferred
tax asset, net
|
24,705,000
|
34,071,000
|
|
|
|
|
|
Less:
valuation allowance
|
(24,705,000)
|
(34,071,000)
|
|
|
|
|
|
Net
deferred tax assets
|
$-
|
$-
|
At
December 31, 2017 and 2016, the Company had federal net operating
loss carryforwards of approximately $127.0 million and $122.0
million, respectively, which expire in varying amounts through
December 31, 2037. Pursuant to Code Sec. 382 of the Internal
Revenue Code (“the Code”), the utilization of net
operating loss carryforwards may be limited as a result of a
cumulative change in stock ownership of more than 50% over a
three-year period. The Company underwent such a change and
consequently, the utilization of a portion of the net operating
loss carryforwards is subject to certain limitations.
Impact of 2017 Tax Reform
On
December 22, 2017 the Tax Cuts and Jobs Act (the “Tax
Act”) was enacted in the United States. Among its many
provisions, the Tax Act reduces the U.S. corporate income tax rate
from 35% to 21%; requires companies to pay a one-time transition
tax on certain unrepatriated earnings of foreign subsidiaries;
eliminates the corporate alternative minimum tax (AMT); creates a
new limitation on deductible interest expense; and changes rules
related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017. As a result
of the Tax Act, the Company remeasured its deferred tax assets and
liabilities to reflect the new statutory federal rate of 21% which
resulted in a net adjustment of approximately $13.8 million to
deferred income tax expense for the year ended December 31, 2017.
This adjustment was offset by a reduction in the valuation
allowance.
Note 20. Commitments and Contingencies
Operating Leases
The
Company has various non-cancelable operating lease agreements for
office facilities. A summary of the approximate lease commitments
under non-cancelable leases for years ending subsequent to December
31, 2017 are as follows:
|
Year ending December 31:
|
|
|
2018
|
$1,200,000
|
|
2019
|
1,246,000
|
|
2020
|
1,104,000
|
|
2021
|
500,000
|
|
2022
|
417,000
|
|
Thereafter
|
1,397,000
|
F-27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Rent
expense for all operating leases was $1.5 million and $1.6 million
for the years ended December 31, 2017 and 2016, respectively.
Certain of the Company’s leases include fixed rent escalation
schedules or rent escalations based upon a fixed percentage. The
Company recognizes rent expense (including escalations) on a
straight-line basis over the lease term.
Legal Matters
The
Company is from time to time involved in claims and legal actions
arising in the ordinary course of business. Management does not
expect that the outcome of any such claims or actions will have a
material effect on the Company’s liquidity, results of
operations or financial condition. In addition, due to the
regulatory nature of the communications industry, the Company
periodically receives and responds to various inquiries from state
and federal regulatory agencies. Management does not expect the
outcome of any such claims, legal actions or regulatory inquiries
to have a material impact on the Company’s liquidity, results
of operations or financial condition.
Note 21. Profit Sharing Plan
On June
1, 1997, the Company adopted a defined contribution profit sharing
plan, which covers all employees who meet certain eligibility
requirements. Contributions to the plan are made at the discretion
of the Board of Directors. No contributions to the profit sharing
plan were made for the years ended December 31, 2017 and
2016.
Note 22. Concentrations
Major Customers
For the
years ended December 31, 2017 and 2016, no single customer
accounted for more than 10% of the Company’s consolidated
revenues or consolidated accounts receivable.
Geographic Concentrations
The
Company’s operations are significantly influenced by economic
factors and risks inherent in conducting business in foreign
countries, including government regulations, currency restrictions
and other factors that may significantly affect management’s
estimates and the Company’s performance.
For the
years ended December 31, 2017 and 2016, the Company generated
approximate revenues from customers as follows:
|
|
2017
|
2016
|
|
United
States
|
$138,212,257
|
$111,863,657
|
|
International
Customers
|
12,318,300
|
12,790,613
|
|
|
$150,530,557
|
$124,654,270
|
Revenues
by geographic area are based upon the location of the
customers.
Credit Risk
The
Company maintains its cash balances in high credit quality
financial institutions. The Company’s cash balances may, at
times, exceed the deposit insurance limits provided by the Federal
Deposit Insurance Corp.
Note 23. Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise
for which separate financial information is available and evaluated
regularly by a company's chief operating decision maker in
determining how to allocate resources and assess
performance.
The
Company has two reportable segments – “Carrier
Services” and “Business Services.” These segments
are organized by the products and services that are sold and the
customers that are served. The Company measures and evaluates its
reportable segments based on revenues and gross profit margins. The
Company’s measurement of segment gross profit exclude the
Company’s executive, administrative and support costs. The
Company’s segments and their principal activities consist of
the following:
F-28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Carrier Services
Carrier
Services includes the termination of domestic and international
carrier traffic utilizing primarily VoIP
technology. VoIP permits a less costly and more rapid
interconnection between the Company and international
telecommunications carriers, and generally provides better profit
margins for the Company than other technologies. The
Company currently interconnects with approximately 370 carrier
customers and vendors, and is working to expand its interconnection
relationships, particularly with carriers in emerging markets.
Since September 1, 2017, the Company has operated its Carrier
Services business segment through FGS (see note 2).
Business Services
Through
this operating segment, the Company provides a comprehensive suite
of cloud communications, cloud connectivity, cloud computing and
managed cloud-based applications to small, medium and large
businesses. These services are sold through both the
Company’s direct sales force and its partner sales channel,
which utilizes the efforts of independent third-party distributors
to sell the Company’s products and services. The Business Services segment
includes the Company’s acquisition of Apptix effective as of
November 14, 2016 and TFB effective as of March 31,
2016.
Operating
segment information for the years ended December 31, 2017 and 2016
is summarized as follows:
|
|
Year ended December 31, 2017
|
|||
|
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
|
Revenues
|
$33,188,930
|
$117,341,627
|
$-
|
$150,530,557
|
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
31,981,586
|
51,051,815
|
-
|
83,033,401
|
|
Gross
profit
|
1,207,344
|
66,289,812
|
-
|
67,497,156
|
|
Depreciation
and amortization
|
340,835
|
13,568,673
|
611,538
|
14,521,046
|
|
Selling,
general and administrative expenses
|
2,314,530
|
48,566,229
|
6,843,443
|
57,724,202
|
|
Interest
expense
|
-
|
(8,385,595)
|
(263,005)
|
(8,648,600)
|
|
Loss
on change in fair value of derivative liability
|
-
|
-
|
(909,272)
|
(909,272)
|
|
Asset
impairment charge
|
-
|
641,260
|
-
|
641,260
|
|
Gain
on change in fair value of contingent liability
|
-
|
1,011,606
|
-
|
1,011,606
|
|
Loss
on disposal of property and equipment
|
-
|
(311,707)
|
-
|
(311,707)
|
|
Other
(expenses) income, net
|
(9,454)
|
329,855
|
(111,166)
|
209,235
|
|
Income
tax provision
|
-
|
(61,511)
|
-
|
(61,511)
|
|
Net
loss
|
$(1,457,475)
|
$(3,903,702)
|
$(8,738,424)
|
$(14,099,601)
|
|
|
|
|
|
|
|
Capital
expenditures
|
$35,442
|
$4,986,988
|
$-
|
$5,022,430
|
|
|
|
|
|
|
|
Total
assets
|
$2,888,933
|
$116,807,604
|
$2,361,024
|
$122,057,561
|
|
|
|
|
|
|
F-29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
|
|
Year ended December 31, 2016
|
|||
|
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
|
Revenues
|
$35,484,101
|
$89,170,169
|
$-
|
$124,654,270
|
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
33,783,130
|
36,884,252
|
-
|
70,667,382
|
|
Gross
profit
|
1,700,971
|
52,285,917
|
-
|
53,986,888
|
|
Depreciation
and amortization
|
153,567
|
12,033,551
|
909,469
|
13,096,587
|
|
Selling,
general and administrative expenses
|
2,710,880
|
40,331,439
|
5,482,604
|
48,524,923
|
|
Loss
on disposal of property and equipment
|
-
|
(129,119)
|
-
|
(129,119)
|
|
Interest
expense
|
-
|
(6,442,224)
|
(299,919)
|
(6,742,143)
|
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
265,383
|
265,383
|
|
Loss
on extinguishment of debt
|
-
|
(214,294)
|
-
|
(214,294)
|
|
Other
income (expenses)
|
-
|
165,882
|
(36,895)
|
128,987
|
|
Income
tax benefit
|
-
|
1,609,485
|
-
|
1,609,485
|
|
Net
loss
|
$(1,163,476)
|
$(5,089,343)
|
$(6,463,504)
|
$(12,716,323)
|
|
|
|
|
|
|
|
Total
assets
|
$6,265,402
|
$125,690,837
|
$-
|
$131,956,239
|
|
|
|
|
|
|
|
Capital
expenditures
|
$-
|
$4,954,711
|
$-
|
$4,954,711
|
Note 24. Related Party Transactions
Since
March 6, 2014, the Company has engaged a third party tax advisor to
prepare its tax returns and to provide related tax advisory
services. The Company paid this firm approximately $0.2 million and
$0.1 million for the years ended December 31, 2017 and 2016,
respectively. Larry Blum, a member of Fusion’s Board of
Directors, is a Senior Advisor and a former partner of this tax
advisor.
Note 25. Proposed Merger Transaction
On
August 26, 2017, Fusion and its wholly owned subsidiary, Fusion
BCHI Acquisition LLC, a Delaware limited liability company
(“Merger Sub”), entered into an Agreement and Plan of
Merger, as subsequently amended (the “Merger
Agreement”) with Birch Communications Holdings, Inc., a
Georgia corporation (“Birch”). The Merger Agreement,
provides, among other things, that upon the terms and conditions
set forth therein, Birch will merge with and into Merger Sub (the
“Merger”), with Merger Sub surviving such
merger.
On the
effective date of the Merger, the outstanding shares of common
stock, par value $0.01 per share, of Birch (other than treasury
shares or shares owned of record by any Birch subsidiary) will be
cancelled and converted into the right to receive, in the
aggregate, that number of shares of Fusion common stock equal to
three times the number of shares of (i) Fusion common stock issued
and outstanding immediately prior to the Effective Time (as defined
in the Merger Agreement) (but excluding the shares of our common
stock issued by us in a public offering of our shares of common
stock completed in February 2018 (see note 26) as well as certain
other issued and outstanding shares of our common stock, plus
(ii) the number of shares of our common stock issued or
issuable upon the conversion of all classes or series of our
preferred stock outstanding immediately prior to the closing of the
Merger, plus (iii) the number of shares of Fusion common stock
issuable upon the exercise of all in-the-money Fusion warrants (the
“Merger Shares”). Pursuant to subscription agreements
executed by each of the stockholders of Birch, the Merger Shares
will be issued in the name of, and held by BCHI Holdings, LLC
(“BCHI”), a limited liability company owned by the
stockholders of Birch. On the closing date of the Merger, BCHI and
Fusion will enter into a Registration Rights Agreement governing
the registration rights of the BCHI in respect of the Merger Shares
and pursuant to which Fusion will agree, among other things, to use
reasonable best efforts to cause a shelf registration statement
covering the resale of the Merger Shares to be declared effective
by the SEC within 120 days of the closing of the
Merger.
Fusion,
Birch and Merger Sub each made customary representations,
warranties and covenants in the Merger Agreement, including, among
others, covenants by each of Fusion and Birch to, subject to
certain exceptions, (a) conduct its business in the ordinary
course, (b) preserve intact its business organization and
significant business relationships, preserve satisfactory
relationships with its officers and key employees and maintain its
current rights and franchises, (c) maintain insurance on material
assets, and (d) maintain all permits, each during the interim
period between the execution of the Merger Agreement and the
earlier of the consummation of the Merger or termination of the
Merger Agreement.
F-30
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Closing of the Merger is subject to numerous conditions, including
(i) receipt of the requisite approval of Fusion’s voting
shares, which approval was secured by the Company on February 21,
2018, (ii) Fusion obtaining financing for the transaction, which
will be used to retire existing senior debt facilities at Birch and
Fusion, (iii) all existing shares of our preferred stock being
converted into shares of our common stock, and (iv) Fusion using
its reasonable best efforts to cause the Merger Shares to be
approved for listing on The Nasdaq Stock Market, LLC
(“Nasdaq”), including, if necessary, in order to comply
with Nasdaq listing requirements, amending Fusion’s existing
certificate of incorporation prior to the effective time of the
Merger to effect a reverse stock split of our common stock to
satisfy Nasdaq’s minimum pricing requirements (the
“Reverse Stock Split”). If the Reverse Stock Split must
be completed prior to the closing of the Merger, it will be in a
range of up to 5:1, with the final ratio to be determined by our
existing board.
In addition, prior to the closing of the Merger, Birch is required
to spin-off to the existing Birch stockholders, its US-based
consumer business, which consists of (i) the residential customer
base, life line and consumer wireless business in the United
States, and (ii) its single-line business customer base in the
United States. In addition, as discussed above, we have agreed that
on or prior to the consummation of the Merger, we will use our
reasonable best efforts to either (i) divest our 60% ownership
interest in FGS or (ii) dissolve FGS.
On the effective date of the Merger, the certificate of
incorporation of Fusion will be amended and restated, which
amendments will, among other things, (i) increase the number of
authorized shares of Fusion common stock to 150,000,000 and (ii)
change the name of Fusion to “Fusion Connect, Inc.” The
Merger is currently expected to be completed by mid-April
2018.
The
terms of the Merger Agreement are such that the Merger, if
consummated, will result in a change in control. As a result, the
transaction will be accounted for as a reverse acquisition and
recapitalization, with Birch as the acquirer for accounting
purposes, and the historical financial statements of Birch will
become the historical financial statements of the
Company.
Note 26. Subsequent Events
(a)
On February 5,
2018, the Company closed an underwritten public offering of
12,937,500 shares of its common stock, including 1,687,500 shares
for which the underwriters exercised their over-allotment option in
full, at a price to the public of $3.20 per share for gross
proceeds of $41.4 million. The net proceeds, after underwriting
discounts and commissions, but before estimated expenses of the
offering payable by the Company, were $38.7 million.
Pursuant to the
terms of the Merger Agreement, the shares sold in the offering will
not be counted as issued and outstanding for purposes of
calculating the number of shares of Fusion common stock to be
issued as consideration to the Birch shareholders in connection
with the closing of the Merger. As a result, on a post-closing
basis, the dilutive effect of this offering will be shared pro rata
by current Fusion and Birch shareolders with current Fusion
stockholders bearing approximately 25% of the dilution and current
Birch shareholders bearing approximately 75% of the dilution from
this offering.
(b)
In
January 2018, the Company acquired substantially all of the assets
of IQMax, a provider of secure messaging, enterprise data
integration and advanced cloud communications solutions. The total
consideration for this transaction is $1.0 million, which will paid
in shares of the Company’s common stock. These shares will
remain in escrow until 12 months following the closing of the
transaction. This acquisition is not expected to have a material
effect on the Company’s consolidated financial
statements.
F-31