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EX-99.2 - PRO FORMA FINANCIAL INFORMATION - Fusion Connect, Inc. | fsnn_ex992.htm |
8-K - CURRENT REPORT - Fusion Connect, Inc. | fsnn_8k.htm |
Exhibit 99.1
BIRCH COMMUNICATIONS HOLDINGS, INC.
ATLANTA, GEORGIA
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED
MARCH 31, 2018
BIRCH COMMUNICATIONS HOLDINGS, INC.
TABLE OF CONTENTS
Consolidated Balance Sheets as of March 31, 2018 (unaudited) and
December 31, 2017
|
1
|
Consolidated Statements of Operations and Comprehensive Income
(Loss) (unaudited) for the Three Months Ended Mach 31, 2018 and
2017
|
2
|
Consolidated Statements of Changes in Stockholders’ Deficit
(unaudited) for the Three Months Ended March 31,
2018
|
3
|
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 2018 and 2017
|
4
|
Notes to Consolidated Financial Statements
(unaudited)
|
5
|
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
|
March 31, 2018
|
December 31, 2017
|
Current assets:
|
(unaudited)
|
(audited)
|
Cash
and cash equivalents
|
$5,177
|
$5,757
|
Accounts
receivable, net of allowance for doubtful accounts of $4,241 and
$4,569, respectively
|
29,929
|
34,921
|
Accounts
receivable - stockholders/employees
|
919
|
920
|
Prepaid
expenses
|
10,253
|
7,549
|
Inventory,
net
|
1,052
|
1,179
|
Other
assets
|
1,513
|
2,505
|
Total
current assets
|
48,843
|
52,831
|
Long-term assets:
|
|
|
Property
and equipment, net
|
81,173
|
85,675
|
Goodwill
|
93,356
|
93,356
|
Intangible
assets, net
|
99,135
|
115,359
|
Other
non-current assets
|
4,780
|
877
|
Total
long-term assets
|
278,444
|
295,267
|
Total
assets
|
$327,287
|
$348,098
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
Current liabilities:
|
|
|
Accounts
payable
|
$53,364
|
$48,784
|
Accrued
telecommunications costs
|
7,328
|
11,048
|
Deferred
customer revenue
|
12,287
|
12,601
|
Other
accrued liabilities
|
30,120
|
34,268
|
Current
portion of capital leases
|
2,539
|
3,003
|
Current
portion of long-term debt
|
30,000
|
30,000
|
Total
current liabilities
|
135,638
|
139,704
|
Long-term liabilities:
|
|
|
Non-current
portion of long-term debt
|
417,179
|
420,936
|
Non-current
portion of long-term capital lease
|
3,343
|
3,823
|
Other
non-current liabilities
|
10,389
|
12,847
|
Total
non-current liabilities
|
430,911
|
437,606
|
Stockholders’ deficit:
|
|
|
Common
stock, $0.01 par value; 10,000 shares authorized, 2,564 shares
issued and outstanding
|
26
|
26
|
Additional
paid-in capital
|
6,050
|
6,050
|
Accumulated
deficit
|
(245,731)
|
(236,477)
|
Accumulated
other comprehensive income (loss)
|
393
|
1,189
|
Total
stockholders’ deficit
|
(239,262)
|
(229,212)
|
Total
liabilities and stockholders’ deficit
|
$327,287
|
$348,098
|
See accompanying notes which are an integral part of these
financial statements.
1
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)
(Amounts in thousands, except per share amounts)
(unaudited)
|
2018
|
2017
|
Revenue
|
$125,831
|
$141,834
|
Cost
of revenue (exclusive of depreciation and amortization, shown
below)
|
70,573
|
80,269
|
Gross Profit
|
$55,258
|
$61,565
|
Operating expenses:
|
|
|
Selling,
general and administrative (exclusive of
depreciation and amortization, shown separately below)
|
31,752
|
40,300
|
Depreciation
and amortization
|
16,237
|
19,206
|
Impairment
losses on intangible assets
|
7,689
|
-
|
Foreign
currency (gain) loss
|
270
|
(35)
|
Total
operating expenses
|
55,948
|
59,471
|
Operating
income (loss)
|
(690)
|
2,094
|
Other (expense) income:
|
|
|
Interest
expense, net
|
(13,325)
|
(11,209)
|
Other
income
|
39
|
74
|
Total
other expense
|
(13,286)
|
(11,135)
|
Loss
before income taxes
|
(13,976)
|
(9,041)
|
Income
tax expense
|
997
|
(1,398)
|
Net
loss
|
$(12,979)
|
$(10,439)
|
Other
comprehensive income (loss):
|
|
|
Cumulative
translation adjustment
|
(796)
|
(498)
|
Comprehensive
income (loss)
|
$(13,775)
|
$(10,937)
|
Net
loss per common share
|
|
|
Basic
|
$(5.06)
|
$(4.07)
|
Diluted
|
$(5.06)
|
$(4.07)
|
Weighted
average common shares outstanding
|
|
|
Basic
|
2,564
|
2,564
|
Diluted
|
2,564
|
2,564
|
See accompanying notes which are an integral part of these
financial statements.
2
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
DEFICIT
(Amounts in thousands)
(unaudited)
|
Common
Stock
|
|
|
|
|
|
|
Shares
|
Par value
|
Additional paid-in capital
|
Accumulatedother comprehensive income
|
Accumulated deficit
|
Total
|
Balance
as of December 31, 2017
|
2,564
|
$26
|
$6,050
|
$1,189
|
$(236,477)
|
$(229,212)
|
Adoption
of ASU 2014-09 (see Note 1)
|
|
|
-
|
(796)
|
3,725
|
3,725
|
Cumulative
translation adjustment
|
|
|
|
|
(12,979)
|
(796)
|
Net
loss
|
|
|
|
|
|
(12,979)
|
Balance
as of March 31, 2018
|
2,564
|
$26
|
$6,050
|
$393
|
$(245,731)
|
$(239,262)
|
See accompanying notes which are an integral part of these
financial statements.
3
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(unaudited)
|
For The Three Months Ended March 31,
|
|
|
2018
|
2017
|
Cash Flows from
Operating Activities:
|
|
|
Net
Loss
|
$(12,979)
|
$(10,439)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
|
|
Depreciation
and amortization
|
16,237
|
19,206
|
Deferred
financing amortization
|
1,166
|
941
|
OID
Interest
|
486
|
394
|
Deferred
taxes
|
(948)
|
-
|
Gain
on disposal of fixed assets
|
(4)
|
(58)
|
Loss
on impairment of intangible assets
|
7,689
|
-
|
Non-cash
share-based compensation
|
-
|
15
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
4,823
|
3,839
|
Inventory,
net
|
115
|
360
|
Prepaid
expenses and other current assets
|
5,642
|
(1,336)
|
Other
assets
|
(3,908)
|
(73)
|
Accounts
payable
|
4,850
|
8,327
|
Other
liabilities
|
(9,065)
|
(717)
|
Net
cash provided by operating activities
|
14,102
|
20,459
|
Cash Flows from Investing Activities:
|
|
|
Purchases
of property and equipment
|
(1,734)
|
(3,130)
|
Capitalization
of customer installation costs and commissions
|
(6,193)
|
(7,791)
|
Proceeds
from disposal of fixed assets
|
4
|
58
|
Net
cash used in investing activities
|
(7,923)
|
(10,863)
|
Cash Flows from Financing Activities:
|
|
|
Proceeds
from notes payable and long-term debt
|
-
|
5,000
|
Repayment
of debt obligation
|
(5,750)
|
(5,625)
|
Payment
of capital lease obligations
|
(940)
|
(1,134)
|
Net
cash used in financing activities
|
(6,690)
|
(1,759)
|
Net increase (decrease) in cash and cash equivalents
|
(511)
|
7,837
|
Cash
and cash equivalents at beginning of period
|
5,757
|
8,208
|
Foreign
currency translation effect on cash
|
(69)
|
(54)
|
Cash
and cash equivalents at end of period
|
$5,177
|
$15,991
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
Interest
paid
|
$15,428
|
$8,363
|
Income
tax paid
|
$-
|
$6
|
Non-cash
purchases of property and equipment
|
$-
|
$-
|
See accompanying notes which are an integral part of these
financial statements.
4
BIRCH COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business
Birch Communications Holdings, Inc., (Birch) (the Company) is the
sole owner of Birch Communications, Inc. (formerly known as Access
Integrated Networks, Inc., incorporated in 1996) which is comprised
of the following wholly-owned consolidated subsidiaries: Birch
Communications of Virginia, Inc., Birch Communications of Kentucky,
LLC, Birch Telecom of Texas Ltd., LLP, Birch Telecom of Kansas,
Inc., Birch Telecom of Missouri, Inc., Birch Telecom of Oklahoma,
Inc., Birch Telecom of the South, Inc., Birch Telecom of the Great
Lakes, Inc., Birch Telecom of the West, Inc., Birch Communications
of the Northeast, Inc., Ionex Communications North, Inc., Ionex
Communications South, Inc., Ionex Communications, Inc., Tempo
Telecom, LLC, Primus Management, ULC, Primus of Puerto Rico, LLC,
Cbeyond, Inc., Cbeyond Communications, LLC (Cbeyond), Birch
Internet Services, Inc., Birch Equipment, Inc., Birch Management
Corporation, Primus Holdings, Inc., Birch Texas Holdings, Inc.,
Birch Telecom, Inc., and Birch Telecom 1996, Inc. The Company is a
competitive local exchange carrier (CLEC) providing services to
primarily small- and medium-sized business customers and to a
lesser extent, residential consumers in 50 states, and Washington
D.C., focusing mainly in the southeastern and southwestern United
States. The Company provides local, long distance, high speed
internet, broadband data, Session Initiation Protocol (SIP)
trunking, Private Branch Exchange (PBX) hosting, email, web hosting
and other ancillary telephony, broadband information technology
(IT) services and internet services. It does so by provisioning
services over its own digital network called the Birch Digital
Network (BDN) or by reselling the services of the incumbent local
exchange carrier (ILEC), such as AT&T, Inc., Verizon and
CenturyLink. Birch is subject to certain regulations and
requirements of the Federal Communications Commission (FCC) and
various state public service commissions and, where required, files
tariffs, price lists and other terms and conditions relating to the
use of their services.
In connection with offering local exchange services, the Company
has entered into two types of agreements with most ILECs. The first
is an Interconnection Agreement (ICA), which vary in length of term
by state and region. The ICA allows the Company to purchase resale
services as well as unbundled network elements (UNE) such as loops
and transport, and the ability to collocate equipment at the
ILEC’s central office (all necessary to build and operate the
BDN). The second type of agreement is the Commercial Agreement
(CA). The CA governs the terms, conditions and prices for the
purchase of unbundled network element replacement services where
UNEs are not available. These agreements allow the Company to enter
new markets with minimal capital expenditures and to offer local
exchange services by purchasing all unbundled network element
platform (UNE-P) required for local service on a wholesale basis.
The terms of the ICA, including pricing terms which are negotiated
and agreed to by the Company and each ILEC, have been approved by
state regulatory authorities in all states in which the ILEC
operates, although they remain subject to review and modification
by such authorities. The Company believes the ICAs and CAs provide
a foundation for it to provide local service on a reasonable basis,
but there can be no assurance on a prospective basis in this regard
as important regulatory, legal and technology issues are ever
changing.
Typically, the Company enters multi-year ICAs with the ILECs. Under
these agreements, prices are either fixed for the life of the
agreement or specific mechanisms for periodic adjustments in prices
are outlined.
5
Note 2. Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated. All
dollars in notes to the consolidated financial statements are
rounded to the nearest thousands, except per share
amounts.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for
interim financial reporting. In management’s opinion, all
normal and recurring adjustments considered necessary for a fair
presentation of the financial position, statements of operations
and cash flows for the periods presented have been included. The
results for the three months ended March 31, 2018 are not
necessarily indicative of the results to be expected for the full
year.
Use of Estimates
Management uses estimates and assumptions in preparing the
consolidated financial statements in accordance with GAAP. These
estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities,
and the reported revenues and expenses. Actual results could vary
from the estimates that were assumed in preparing the consolidated
financial statements.
Reclassifications
Certain reclassifications of prior period amounts have been made to
conform to the current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an
original maturity of three months or less to be cash
equivalents.
Deferred Customer Revenue
Deferred customer revenue represents the liability for advance
billings to customers for local phone service. Customers are billed
in advance for fixed monthly charges.
Concentrations of Credit Risk
Cash and Cash Equivalents
Financial
instruments that potentially subject the Company to credit risk
include cash on deposit with financial institutions in excess of
federally insured limits. At March 31, 2018, the Company had bank
deposits of $3,816 in excess of the FDIC coverage of $250. In
Canada, the Company had bank deposits of C$9,085 in excess of the
CDIC coverage of C$100.
Accounts Receivable
The
Company’s accounts receivable subject the Company to credit
risk, since collateral is generally not required. The
Company’s risk of loss is limited due to the ability to
terminate access on delinquent accounts. The large number of
customers comprising the customer base mitigates the concentration
of risk. As of March 31, 2018, no customer represented more than 10
percent of the Company’s revenues.
6
Other
The
Company faces certain factors, including the following: growth and
expansion which may strain the Company’s resources;
dependence on key personnel; dependence on third-party suppliers of
equipment and communications services; dependence on relationships
with incumbent local exchange carriers; competition from other
competitive local exchange carriers and providers of communications
services; and potential disruption of services due to system
failures.
Property and Equipment
Property and equipment are stated at cost, and depreciation is
computed using the straight-line method over the estimated useful
lives of the assets (generally three to five years). Maintenance
and repairs are charged to expense as incurred. Gains or losses on
the disposal of property and equipment are recognized in operations
in the year of disposition. Amortization of capital lease items is
included in depreciation expense. Depreciation expense for the
three months ended March 31, 2018 and 2017 was $5,968 and $7,389,
respectively.
Amortization
Subscriber Acquisition Costs
The
Company amortizes subscriber acquisition costs over the estimated
life of a customer (84 - 120 months). Amortization expense of
subscriber acquisition costs was $2,537 and $5,487 for the three
months ended March 31, 2018 and 2017, respectively.
IP-Network Transition Costs
The
Company amortizes the one-time charges associated with
transitioning a resale customer to its own IP-Network over a period
of 36 months. Amortization expense of IP-network transition costs
was $3,111 and $2,700 for the three months ended March 31, 2018 and
2017, respectively.
Installation Costs
The
Company amortizes costs relative to the install of new customers
over a period of 36 months. Installation costs include order
entry, provisioning, service coordination and physical installation
of the services. Amortization expense of installation costs was
$2,094 and $1,044 for the three months ended March 31, 2018 and
2017, respectively.
Commissions
Prior
to the adoption of ASU 2014-09 (See Recently Adopted Accounting
Standards), the Company amortized up-front sales commissions paid
to third parties over the contractual service period (7 - 36
months). Amortization of these commissions was $2,161 for the three
months ended March 31, 2017.
Tradenames
The
Company amortizes tradenames and costs over the estimated life of
84 months. Amortization expense of tradenames costs was $2,527 and
$425 for the three months ended March 31, 2018 and 2017,
respectively.
7
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with
provisions of ASC Topic 360, Accounting for the Impairment
or Disposal of Long-Lived Assets. This guidance addresses financial accounting and
reporting for the impairment and disposition of long-lived assets,
including property and equipment and purchased intangible assets.
The Company evaluates the recoverability of long-lived assets for
impairment when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Conditions that
would necessitate an impairment assessment include a significant
decline in the observable market value of an asset, a significant
change in the extent or manner in which an asset is used, or a
significant adverse change that would indicate the carrying amount
of an asset or group of assets is not recoverable. For long-lived
assets to be held and used, the Company recognizes an impairment
loss only if it’s carrying amount is not recoverable through
its undiscounted cash flows and measures the impairment loss, if
any, based on the difference between the carrying amount and fair
value. Long-lived assets held for sale are reported at the lower of
cost or fair value less costs to sell. If impairment is indicated,
the carrying amount of the asset is written down to fair
value.
Goodwill and Purchased Intangible Assets
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted
for under the acquisition method of accounting pursuant to ASC
Topic 805, Business
Combinations. Purchased
intangible assets consist primarily of subscriber bases and
customer relationships, acquired software and technology and other
assets acquired in conjunction with the purchases of businesses and
subscriber bases from other companies. Subscriber bases acquired
directly are valued at cost plus assumed service liabilities, which
approximates fair value at the time of purchase. When management
determines material intangible assets are acquired in conjunction
with the purchase of a company, the Company engages an independent
third party to determine the allocation of the purchase price to
the intangible assets acquired. Certain intangible assets
determined to have definite lives are amortized on a straight-line
basis over their estimated useful lives. Intangible assets subject
to amortization are reviewed for impairment whenever events have
occurred that would indicate an impairment could exist. If the
Company determines that the carrying value is not recoverable, an
impairment charge, reduction in the estimated remaining useful life
or both may be recorded.
The Company accounts for goodwill and intangible assets in
accordance with ASC Topic 350, Goodwill and Other Intangible
Assets, which prohibit the
amortization of certain intangible assets, deemed to have
indefinite lives. Goodwill is not amortized and is tested for
impairment on an annual basis, or more frequently if deemed
necessary. As of March 31, 2018 and December 31, 2017, we had
$93,356 of goodwill. The Company’s 2017 annual goodwill
impairment analysis did not result in an impairment
charge.
Income Taxes
The Company provides for the effect of income taxes on our
financial position and results of operations in accordance with ASC
740, Income Taxes. The Company’s tax positions are evaluated
for recognition using a jurisdiction statute-based threshold, and
those tax positions requiring recognition are estimated
conservatively prior to being realized upon ultimate settlement
with a taxing authority that has knowledge of all relevant
information. Liabilities for income tax matters include amounts for
income taxes, penalties and interest thereon and may incorporate
the result of the potential alternative interpretations of tax laws
and the judgmental nature of the timing of recognition of taxable
income.
Share-Based Compensation and Consulting
The Company has an equity compensation plan providing for the grant
of equity awards. All transactions with nonemployees in which goods
or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the earlier of
the date on which the counter party’s performance is complete
or the date on which it is probable that performance will
occur.
8
Advertising Costs
The Company expenses all advertising costs as incurred. Advertising
expense was $1,022 and $1,320 for the three months ended March 31,
2018 and 2017, respectively.
Foreign Currency
The Company’s foreign subsidiary, Primus Management ULC
(Primus Canada) uses the local currency of its country as its
functional currency. Assets and liabilities are translated into
U.S. dollars at exchange rates at the balance sheet dates.
Revenues, costs and expenses are translated using the average
exchange rates for the period. Gains and losses resulting from the
translation of our consolidated balance sheets and statements of
operations are recorded as a component of accumulated other
comprehensive income. Gains and losses from foreign currency
transactions are recognized as foreign exchange gain (loss) in the
statement of operations.
Comprehensive Income (Loss)
Comprehensive income includes all changes in the Company’s
equity during the period that results from transactions and other
economic events other than transactions with its stockholders. For
the Company, comprehensive income includes the gains or losses
resulting from foreign currency translations.
Distributions to Owners
It is management’s policy to distribute amounts to the
Company’s owners to cover their tax liability related to the
earnings of the Company. “Permitted Tax Distributions,”
as defined in the PNC Bank, National Association Credit Agreement
(2014 Credit Facility), shall be based on good faith estimates by
the Company of net taxable income for the relevant period (or
portion thereof) and subsequent tax distributions shall be
appropriately adjusted to the extent of any excess or deficit in
payments in respect of prior relevant periods or portions
thereof.
Sales, Use and Other Value Added Taxes
The Company’s revenue is recorded net of applicable sales,
use and other value added taxes.
Recently adopted accounting standards
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers. Effective January 1, 2018, the Company adopted ASU
2014-09 using the modified retrospective transition method applied
to those contracts which were not complete as of January 1, 2018.
Under the modified retrospective transition method, the Company
recognized the cumulative effect of initial adoption as an
adjustment to its opening accumulated deficit balance. Comparative
information for prior periods has not been restated and continues
to be reported under the accounting standards in effect for those
periods.
Under the new revenue recognition guidance, the Company’s
service revenues continue to be recognized when services are
provided. The new requirement to defer incremental contract
acquisition and fulfillment costs, including sales commissions and
installation costs, and recognize such costs over the period where
control of goods and services are transferred resulted in the
recognition of additional deferred contract costs in the
consolidated balance sheet at the date of adoption.
9
The following table presents the cumulative effect of the changes
made to the consolidated balance sheet at December 31,
2017:
|
December 31,
2017
|
ASU 2014-09 Adjustments
|
January 1,
2018
|
Assets
|
|
|
|
Prepaid
expenses
|
$7,549
|
$2,203
|
$9,752
|
Intangible
assets, net
|
115,359
|
(3,304)
|
112,055
|
Other
non-current assets
|
877
|
4,826
|
5,703
|
Accumulated
deficit
|
$(236,477)
|
$3,725
|
$(232,752)
|
The impact of adoption of ASU 2014-09 on the consolidated statement
of operations and comprehensive income (loss) and consolidated
balance sheets is as follows:
|
For
the Three Months Ended March 31, 2018
|
||
|
Under
ASC
605
|
Effect
of Adoption of
ASU
2014-09
|
As
Reported
|
Revenue
|
$125,831
|
$-
|
$125,831
|
Cost
of revenue
|
70,573
|
-
|
70,573
|
Selling,
general and administrative expense
|
31,357
|
395
|
31,752
|
Depreciation
and amortization
|
16,956
|
(719)
|
16,237
|
Net
income (loss)
|
$(13,303)
|
$324
|
$(12,979)
|
|
As of March 31, 2018
|
||
|
Under
ASC 605
|
Effect of Adoption of
ASU 2014-09
|
As Reported
|
Assets
|
|
|
|
Prepaid
expenses
|
$6,183
|
$4,070
|
$10,253
|
Intangible
assets, net
|
103,075
|
(3,940)
|
99,135
|
Other
non-current assets
|
$870
|
$3,910
|
$4,780
|
The new revenue recognition standard also requires additional
disclosures related to performance obligations; contract asset and
liability balances; deferred commissions and costs to fulfill;
disaggregation of revenue and use of practical expedients in
applying the new guidance. See Note 3. Revenues for these
additional disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock
Compensation: Scope of Modification Accounting, to provide guidance
about which changes to the terms or conditions of a share-based
payment award require an entity to apply modification accounting in
ASC 718. The amendments in the ASU are effective for fiscal years
beginning after December 15, 2017, and should be applied
prospectively to an award modified on or after the adoption date.
The Company adopted the amendments in this ASU effective January 1,
2018. The adoption did not have a material impact on our
consolidated financial statements.
10
Note 3. Revenues
As previously discussed in Note 2, the Company adopted ASU 2014-09
effective January 1, 2018 using the modified retrospective
transition method. The majority of the Company’s revenue is
derived from providing access to the networks and facilities it
operates.
Performance Obligations
A performance obligation is a promise in a contract to transfer a
distinct good or service to the customer, and represents the unit
of account in applying the new revenue recognition guidance. A
contract’s transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the
performance obligation is satisfied. The Company’s
performance obligations are satisfied over time as services are
rendered or at a point in time depending on when the customer
obtains control of the promised goods or services. Revenue is
recognized when obligations under the terms of a contract with the
customer are satisfied; generally, this occurs when services are
rendered.
End customer revenue includes local, long-distance and data and is
comprised of monthly recurring charges, usage charges and initial
nonrecurring charges. Monthly recurring charges include the fees
paid by customers for service and additional features on those
facilities. Monthly recurring charges are recognized over the
period that the corresponding services are rendered to customers.
Usage charges consist of per-use sensitive fees paid for calls
made. Additionally, access charges are comprised of charges paid
primarily by interexchange carriers for the origination and
termination of interexchange toll and toll-free calls. Usage and
access charges are recognized monthly as the services are provided.
Initial nonrecurring charges consist primarily of installation
charges and sales of communications products including customer
premise equipment. In most circumstances, customers can benefit
from the installation with other readily available resources and
the installation is a separate performance obligation. The Company
recognizes installation revenue when the installation is complete.
Customers can also benefit from the equipment sold with other
readily available resources and the revenue is recognized when the
products are delivered to and accepted by customers.
Accounts Receivable
Accounts receivable are stated at the amount management expects to
collect from outstanding balances. Management provides for
uncollectible amounts through a charge to earnings and a credit to
a valuation allowance based on its assessment of the current status
of individual accounts. Balances that are still outstanding after
management has used reasonable collection efforts are written off
through a charge to the valuation allowance and a credit to
accounts receivable.
Deferred Commissions
Direct incremental costs of obtaining a contract, consisting of
sales commissions, are deferred and amortized over the estimated
life of the customer. The Company classifies deferred commissions
as current or noncurrent based on the timing of when it expects to
recognize the expense. The portions of deferred contract costs
included in prepaid expenses and other non-current assets in the
consolidated balance sheet as of March 31, 2018 were $4,070 and
$3,910, respectively. As of January 1, 2018, deferred contract
costs included in prepaid and other non-current assets were $2,203
and $4,826, respectively. Amortization of deferred contract costs
was $1,315 for the three months ended March 31, 2018.
11
Revenue by Category
The following table presents the Company’s revenue by product
line for the three months ended March 31:
|
2018
|
2017
|
Voice
|
$62,720
|
$70,127
|
Network
|
45,202
|
51,811
|
Cloud
|
7,544
|
9,237
|
IT
Services
|
1,057
|
1,237
|
Other
|
9,308
|
9,422
|
Total
Revenue
|
$125,831
|
$141,834
|
Note 4. Earnings per Share
Basic and diluted net income (loss) per share
Basic net income (loss) per share is calculated by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding for the period. Diluted net income (loss) per
share gives effect to all dilutive potential common shares
outstanding during the period including stock options and warrants
using the treasury stock method.
The following table summarizes the basic and diluted net income
(loss) per share calculations:
|
For the Three Months Ended March 31,
|
|
|
2018
|
2017
|
Net
income (loss)
|
$(12,979)
|
$(10,439)
|
Basic
weighted average common shares outstanding
|
2,564
|
2,564
|
Effect
of dilutive securities
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
2,564
|
2,564
|
Basic
income (loss) per common share
|
$(5.06)
|
$(4.07)
|
Diluted
income (loss) per common share
|
$(5.06)
|
$(4.07)
|
12
Note 5. Fair Value
Fair values of assets measured at March 31, 2018 are as
follows:
|
|
Fair Value
Measurements at the End of the Reporting Period Using
|
|
||
|
Fair
Value
|
Quoted Prices in Active Markets for Identical Assets (Level
1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total
Losses
|
Nonrecurring
fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
$5,808
|
$-
|
$-
|
$5,808
|
$(7,689)
|
Prior to the adoption of ASU 2014-09, the Company conducted a
review of the carrying value of commissions and certain
installation costs due to higher than expected churn. An analysis
of the Company’s customer survival rates was used as a basis
for determining how much of the capitalized commissions related to
active customers. The Company’s accounting and finance
management, which report to the chief financial officer, reviewed
and approved the assessment.
The following table includes fair value measurements using
significant unobservable inputs (Level 3):
|
Intangible
Assets
|
|
|
Opening Balance
– December 31, 2017
|
$13,413
|
|
|
Impairment
(1)
|
(7,605)
|
|
|
Closing Balance
– March 31, 2018
|
$5,808
|
(1)
Impairment
includes commissions and installation costs recorded in Canadian
dollars and translated at the balance sheet date. The impairment
recognized in net income for the three months ended March 31, 2018
of $7,689 is translated using the average rate for the
period.
The following table describes the valuation techniques used to
calculate fair values for assets in Level 3:
|
Quantitative
Information about Level 3 Fair Value Measurements
|
||||
|
Fair Value at
March 31, 2018
|
Valuation
Techniques
|
|
Unobservable
Input
|
Range
(Weighted Average)
|
|
|
|
|
|
|
Intangible
assets
|
$ 5,808
|
Discounted cash
flow
|
|
Discount
rate
|
4.5%
|
13
Note 6. Property and Equipment
Property and equipment consists of the following:
|
Estimated Life
Range (years)
|
March 31,
2018
|
December 31, 2017
|
Owned
Assets:
|
|
|
|
Telecommunications
Equipment
|
5 -7
|
$88,410
|
$88,031
|
Leasehold
Improvements
|
Life of
Lease
|
10,682
|
10,637
|
Office
Equipment
|
3 - 5
|
1,846
|
1,857
|
Buildings
and Building Improvements
|
30 - 40
|
1,540
|
1,540
|
Furniture
and Fixtures
|
3 – 7
|
5,395
|
5,387
|
Computer
Software
|
3 – 5
|
32,726
|
32,794
|
Land
|
N/A
|
470
|
470
|
Automobiles
|
2 - 5
|
47
|
56
|
Construction-In-Process
|
N/A
|
4,806
|
3,813
|
|
|
|
|
Total
Owned Assets
|
|
145,923
|
144,585
|
Accumulated
Depreciation
|
|
(88,233)
|
(83,275)
|
Total
Owned Assets, Net
|
|
57,690
|
61,310
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
38,118
|
38,123
|
Accumulated
Depreciation
|
Life of Lease
|
(14,635)
|
(13,758)
|
Total
Assets Under Capital Lease, Net
|
|
23,483
|
24,365
|
|
|
|
|
Property
and Equipment, Net
|
|
$81,173
|
$85,675
|
Note 7. Leases
The Company has entered into various operating and capital leases
for facilities and equipment used in its operations. Aggregate
future minimum rental commitments under operating leases and
maturities of capital lease obligations as of March 31, 2018 are as
follows:
|
Operating
Lease
|
Capital
Lease
|
|
|
|
2018
|
$5,115
|
$2,174
|
2019
|
5,490
|
1,690
|
2020
|
2,826
|
723
|
2021
|
1,147
|
443
|
2022
|
667
|
245
|
Thereafter
|
396
|
1,432
|
|
|
|
|
$15,641
|
$6,707
|
|
|
|
Amounts
Representing Interest
|
|
(825)
|
|
|
|
Present
Value of Minimum Lease Payments
|
|
5,882
|
|
|
|
Current
Portion
|
|
(2,539)
|
|
|
|
Obligations
Under Capital Lease-Net of Current Portion
|
|
$3,343
|
14
The Company had a strategic alignment starting in April 2017 that
included exiting certain facilities. (See Note 16. Restructuring
Event for additional disclosures). Some of these exited facilities
are now under noncancelable subleases and the future minimum
rentals to be received by the Company is $2,327 as of March 31,
2018.
Rental expense charged to operations was $748 and $1,588 for the
three months ended March 31, 2018 and 2017,
respectively.
Property and equipment acquired through capital leases are recorded
at the present value of the future payments due under the lease
agreements, discounted at rates varying from 2.00 to 8.23
percent.
Assets and accumulated amortization under capitalized leases
consists of the following:
|
|
March 31, 2018
|
December 31, 2017
|
Assets
Under Capital Lease
|
|
|
|
Telecommunications
and Office Equipment
|
Life
of Lease
|
$10,845
|
$10,850
|
IRU
(1)
|
20
Years
|
25,326
|
25,326
|
Computer
Software
|
5
Years
|
1,947
|
1,947
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
38,118
|
38,123
|
|
|
|
|
Accumulated
Depreciation
|
|
(14,635)
|
(13,758)
|
Total
Assets Under Capital Lease, Net
|
|
$23,483
|
$24,365
|
(1)
Purchase of network capacity under long-term contracts for the
indefeasible right to use (IRU) fiber network infrastructure owned
by others.
Note 8. Intangible Assets
Intangible assets and accumulated amortization is as
follows:
|
March 31,
2018
|
December 31,
2017
|
|
|
|
Subscriber
Acquisition Costs
|
$106,635
|
$107,351
|
Network
Transition Costs
|
59,165
|
50,939
|
Tradenames
and Trademarks
|
10,246
|
13,146
|
Noncompete
Agreement
|
-
|
3,000
|
Installation
Costs
|
29,971
|
25,658
|
Commissions
|
-
|
44,609
|
|
|
|
Total
Intangible Assets
|
206,017
|
244,703
|
Accumulated
Amortization
|
(106,882)
|
(129,344)
|
|
|
|
Intangible
Assets, Net
|
$99,135
|
$115,359
|
15
Due to the acquisition of Birch’s cloud and business services
units, (see Note 18. Subsequent Events) a review of certain
intangible assets was conducted. This review resulted in changes in
the remaining useful lives of the Company’s tradenames and
trademarks due to the plan to discontinue their use that was
concluded to as part of the finality of the acquisition. An
additional $2,628 of amortization expense was recognized during the
three months ended March 31, 2018. The remaining tradenames and
trademarks will be amortized through December 31, 2018, resulting
in an additional $2,990 of amortization expense to be recognized.
For fully amortized tradenames and trademarks no longer being
utilized by the Company, the full asset value and associated
accumulated amortization have been written off as of March 31,
2018. Additionally, fully amortized noncompete agreements no longer
benefiting the Company were also written off as of March 31,
2018.
The Company also conducted a review of the carrying value of
commissions due to higher than expected churn. The Company
recognized an impairment of $7,689 that has been recognized in net
income (loss) for the period. Upon the adoption of ASU 2014-09, the
remaining value of commissions are now accounted for as a prepaid
expense in the consolidated balance sheet. (See Note 3.
Revenues).
Amortization expense was $10,269 and $11,817 for the three months
ended March 31, 2018, and 2017, respectively. The total residual
value of certain intangible assets acquired through customer and
company acquisitions are $4,540 as of March 31, 2018.
Estimated future amortization expense for intangible assets owned
as of March 31, 2018 is as follows:
Year
|
Amount
|
|
|
2018
|
$25,016
|
2019
|
21,345
|
2020
|
14,743
|
2021
|
9,671
|
2022
|
9,527
|
Thereafter
|
14,293
|
Total
|
$94,595
|
Note 9. Accrued Liabilities
The Company’s other accrued liabilities consists of the
following as of:
|
March 31,
2018
|
December 31,
2017
|
Accrued
other compensation and benefits
|
$3,473
|
$2,462
|
Accrued
bonus
|
9,442
|
10,942
|
Accrued
interest
|
8,591
|
8,326
|
Accrued
facility restructuring liability
|
2,361
|
3,131
|
Accrued
legal settlements
|
12,360
|
13,360
|
Accrued
professional fees
|
1,629
|
1,389
|
Deferred
tax liability
|
1,986
|
2,934
|
Other
accrued expenses
|
667
|
4,571
|
|
|
|
Current
and non-current other accrued liabilities
|
40,509
|
47,115
|
|
|
|
Non-current
portion of deferred taxes
|
(1,986)
|
(2,934)
|
Non-current
portion of accrued legal settlements
|
(7,520)
|
(8,520)
|
Non-current
other
|
(883)
|
(1,393)
|
|
(10,389)
|
(12,847)
|
|
|
|
Current
portion of other accrued liabilities
|
$30,120
|
$34,268
|
16
Note 10. Long-Term Debt
The Company’s long-term debt consists of the following as
of:
|
March 31,
2018
|
December 31,
2017
|
Term
Loan Payable
|
$395,858
|
$401,608
|
Revolver
Loan Payable
|
45,000
|
45,000
|
Promissory
Notes (1)
|
7,116
|
6,774
|
Notes
Payable (1)
|
500
|
500
|
Stock
Repurchase Agreement (2)
|
13,700
|
13,700
|
Deferred
Financing, Net
|
(10,518)
|
(11,683)
|
Debt
Origination Discounts (3)
|
(4,477)
|
(4,963)
|
|
|
|
|
447,179
|
450,936
|
Current
Maturities
|
(30,000)
|
(30,000)
|
|
|
|
Total
Long-Term Debt
|
$417,179
|
420,936
|
1.
See Note 15.
Related Party Transactions for discussion of the subordinated
promissory notes and note payable.
2.
As it is the intent
for the repurchased shares to be retired, the Company has elected
to account for the shares repurchased under the constructive
retirement method. For shares repurchased in excess of par, the
Company allocated the excess value to accumulated
deficit.
3.
Interest expense as
a result of the amortization of debt origination discounts was $486
and $394 for the three months ended March 31, 2018 and 2017,
respectively.
On July 18, 2014, the Company refinanced its existing debt under a
Term Loan Payable (2014 Credit Facility) arrangement totaling
$450,000 with PNC Bank, N.A., as Administrative Agent. The
arrangement also includes $50,000 made available under the Revolver
Loan Payable. The Company capitalized the costs associated with
issuing the debt of $13,770. The debt was issued at a discount of
$9,450. The deferred financing and discount are recognized as
interest expense throughout the term of the loan.
On October 28, 2016, the Company amended the 2014 Credit Facility.
The Company capitalized the costs associated with the amendment of
$4,289. The amended 2014 Credit Facility is due in quarterly
installments of $2,800 through December 31 2016, then $5,625 per
quarter until June 30, 2020. The amended 2014 Credit Facility
matures with the remainder due on July 18th
2020. The interest on the amended 2014
Credit Facility is Libor plus 7.25% for the term loan and Libor
plus 6.75% for the revolver loan payable.
Under the revolver loan payable the Company is required to pay a
commitment fee for unused commitments at a per annum rate of 0.50%.
As of March 31, 2018 and December 31, 2017, $4,791 of the $50,000
Revolver Loan Payable was available due to reductions of $209 for
outstanding letters of credit that collateralize certain of our
obligations to third party vendors.
On May 1, 2016, the Company entered into an installment purchase
agreement to repurchase 147,000 shares of common stock from a
former employee, valued at $13,700. The installments due are as
follows: $1,000 on December 31, 2016, $1,500 on May 1, 2017, $1,000
on December 31, 2017, $3,000 on May 1, 2018, and $7,200 on May 1,
2019. Per the agreement, should the payment of any installment
conflict with a covenant in any material credit agreement of the
Company, the installment will be delayed. The sum delayed will
accrete at a rate of 4% per year. As of March 31, 2018, no payments
have been made due to a material impact to the amended 2014 Credit
Facility, resulting in $118 of interest.
17
On April 12, 2017, the Company entered into a second amendment to
the 2014 Credit Facility. The Company was able to secure an
additional $10,000 to the term loan from its primary lender
Halcion. Additionally, there was a $5,000 commitment from Company
ownership if the Company dropped below $10,000 in liquidity. The
second amended 2014 Credit Facility is due in quarterly
installments of $125 per quarter until June 30, 2020. The
additional term loan matures with the remainder due on July 18,
2020. The Company capitalized the costs associated with the
amendment of $4,675.
The aggregate scheduled maturities of long-term debt as of March
31, 2018 is as follows:
Year
|
Amount
|
|
|
2018
|
$24,250
|
2019
|
30,200
|
2020
|
407,724
|
2021
|
-
|
2022
|
-
|
Thereafter
|
-
|
Total
|
$462,174
|
The credit agreement is secured by all assets of the Company and
its subsidiary.
Note 11. Commitments and Contingencies
Sales Agents’ Agreements
The Company’s marketing strategies focus on providing local
services through a combination of its agent channel and its direct
and internal sales channel.
The remaining agents may or may not bring an existing base of
accounts and perform a traditional agent role. They will not be the
end users’ points of contact; all contact for
additions/changes and service/maintenance will be handled directly
by the Company.
The total commissions paid through the Company’s agents and
internal sales channels for the three months ended March 31, 2018
and 2017 was $3,551 and $3,929, respectively. These commissions are
classified as selling, general and administrative expenses and
solely represent commissions paid in respect to agreements with
third party sales agents. These commissions paid capture fees to
the agent related to selling and account retention
activity.
Contingent Receivables
The Company has filed for refunds from the Universal Service
Administrative Company (USAC) and has recorded a receivable of
$3,616 in the consolidated balance sheets for the periods ending
March 31, 2018 and December 31, 2017. The refunds are from
adjustments made to FCC Form 499-A. The actual amount received will
be dependent on the outcome of the USAC audit of the
Company’s filings.
18
Legal Proceedings
We are involved in legal proceedings arising in the ordinary course
of business.
On October 7, 2015, Abante Rooter and Plumbing, Inc. (Abante) filed
a lawsuit against Birch Communications, Inc. in the United States
Georgia Northern District of Atlanta. Abante claimed violations of
the Telephone Consumer Protection Act (TCPA) by Birch
Communications, Inc. and/or certain of its affiliates as a result
of alleged unauthorized contact by third party telemarketing
services engaged by Birch to individuals’ cellular
telephones. On or about July 6, 2016, Abante made a first
settlement demand in the Action for $26 million. Mediation was
conducted and was unsuccessful. Abante filed for certification as a
class action. Birch filed a Motion attacking the Abante’s
expert witness, classification of TCPA violation and class
description and Birch filed a Motion for Summary Judgment. In May
2017, the Company reached a tentative agreement with Abante,
subject to approval by the Court, to settle the case for $12,000
payable in equal quarterly payments over three years. Preliminary
approval to the agreement was granted by Preliminary Approval Order
entered June 8, 2017. Following notice to class members, briefing,
and a fairness hearing held on October 31, 2017, the Final
Settlement Order was entered on December 14, 2017. The $12,000
settlement was accrued as of December 31, 2016. As of March 31,
2018, $9,000 is accrued and unpaid.
In 2015, the Federal Communications Commissions (FCC) launched an
investigation of the Company after reviewing customer complaints.
On December 29, 2016, the Company reached a settlement with the FCC
to pay a $4,200 fine and $1,900 in consumer refunds. As of March
31, 2018, all customer credits have been issued and $3,150 is
accrued and unpaid.
On May 14, 2018 the Company received a letter from Zayo Group
claiming Birch owes Zayo $57,173 pursuant to a certain Indefeasible
Right of Use and Master Service Agreement dated September 4, 2007.
The Company is evaluating this claim and has made no determination
as probable outcome or estimate of liability.
Accruals for litigation loss contingencies are recorded when it is
probable that a liability has been incurred and the amount of loss
can be reasonably estimated.
Note 12. Benefit Plans
The Company’s 401(k) plan covers all employees who have
attained 18 years of age and completed 90 days of service.
Participants may contribute up to the maximum determined by the
federal government each year. The Company’s match is
discretionary. The Company has elected not to partially match
employee contributions in 2017 and 2018.
Employees in Canada are covered under a Registered Retirement
Savings Plan. Eligible employees may make contributions up to their
personal eligible contribution limit under the Canadian Income Tax
Act. There is no employer contribution component.
19
Note 13. Income Taxes
The Company, with the consent of its stockholders, has elected
under the Internal Revenue Code to be an S corporation effective
January 1, 2006. In lieu of corporate income taxes, the
stockholders of an S corporation are taxed on their proportionate
share of the Company’s taxable income. Therefore, no
provision or liability for federal income taxes has been included
in the consolidated financial statements. However, the Company
operates in a few states that do not recognize S corporation
status. The Company recognizes state tax provisions as amounts are
paid to the tax jurisdictions.
Cbeyond has deferred tax assets, which have been fully reserved due
to the uncertainty of their use. As of March 31, 2018, Cbeyond has
federal net operating loss carryforwards of approximately $142,957
and state net operating loss carryforwards of $779, which begin
expiring in 2021. The Company anticipates its net operating losses
will expire before any income tax is generated from timing
differences related to its goodwill. As a result, Cbeyond has a net
deferred tax liability of $1,986 and $2,934 as of March 31, 2018
and December 31, 2017, respectively. Primus Holdings Inc. and
Primus Management ULC are taxable as corporations in Canada. Primus
has net deferred tax assets of $256 as of March 31, 2018 and
December 31, 2017. The deferred assets are primarily attributable
to different cost recovery methods for fixed assets and customer
lists.
The following table provides information regarding our deferred tax
assets and liabilities as of:
|
March
31,
2018
|
December
31,
2017
|
Deferred
tax assets:
|
|
|
Net
operating loss (federal and state)
|
$30,527
|
$35,294
|
Deferred
rent
|
959
|
959
|
Share-based
compensation expense
|
2,659
|
2,659
|
Voice
regulated revenue transfer to Birch
|
12,600
|
12,600
|
Other
|
701
|
297
|
Gross deferred tax
assets
|
47,446
|
51,809
|
Deferred
tax liabilities:
|
|
|
Allowance
for doubtful accounts
|
(931)
|
(766)
|
Depreciation
|
(4,316)
|
(4,566)
|
Intangible
assets
|
(7,376)
|
(7,376)
|
Goodwill
|
(1,986)
|
(2,934)
|
Gross deferred tax
liabilities
|
(14,609)
|
(15,642)
|
Net deferred tax
assets
|
32,837
|
36,167
|
Valuation
allowance
|
(30,851)
|
(33,233)
|
Net deferred tax
liabilities
|
1,986
|
2,934
|
Less non-current
net deferred tax liabilities
|
1,986
|
2,934
|
Current net
deferred tax liabilities
|
$-
|
$-
|
|
|
|
Primus net deferred
tax assets
|
$256
|
$256
|
On December 22, 2017, the Tax Cuts and Jobs Act tax reform
legislation was signed into law. The legislation makes significant
changes in the U.S. tax law including a reduction in the corporate
tax rates, changes to net operating loss carryforwards and
carrybacks, and a repeal of the corporate alternative minimum tax.
The legislation reduced the U.S. corporate tax rate from the
current rate of 35% to 21%. As a result of the enacted law, Cbeyond
was required to revalue its net deferred tax asset at the rate in
effect during their scheduled reversal. This revaluation resulted
in deferred tax expense which was immediately offset by a reduction
in the valuation allowance.
20
The 2016, 2015 and 2014 Consolidated Birch and Cbeyond returns have
been filed and are subject to examination by the Internal Revenue
Service for three years from filing. The 2016 Primus returns have
not been filed and are in process, however, estimated tax payments
have been made and anticipated interest and penalties of $316 have
been accrued. The Company has accrued $2,535 for Primus’ 2017
income tax liability, and an additional $172 related to anticipated
penalties and interest.
Income tax expense for the three months ended March 31, 2018 and
2017 was $997 and $1,398, respectively.
For financial reporting purposes, income before income taxes
includes the following components:
|
For the Three Months Ended
March 31,
|
|
|
2018
|
2017
|
United
States
|
$(11,802)
|
$(12,595)
|
Foreign
|
(2,174)
|
3,554
|
Total
|
$(13,976)
|
$(9,041)
|
Note 14. Stock Incentive Plan
The Company sponsors a stock incentive plan (the Plan) that
provides for the granting of stock options to senior and general
management, to encourage continued employment and to provide
recognition for services that have contributed or will contribute
to the success of the Company. Under the Plan, the Company may
grant options to select employees and counsel to acquire shares of
the Company’s common stock at the fair value at the date of
grant. Options are generally granted at a price (established by the
board of directors based on third-party valuation analysis) equal
to the most recent valuation analysis price as of the option grant
date. The number of shares and the exercise schedules are
determined at the sole discretion of the Company. The Company, at
March 31, 2018, had no shares outstanding or exercisable under the
stock option plan.
A summary status of the options is presented as
follow:
|
March 31, 2018
|
December 31, 2017
|
||
|
Shares
|
Weighted Average Exercise Price
|
Shares
|
Weighted Average Exercise Price
|
|
|
|
|
|
Outstanding,
Beginning
|
-
|
$-
|
37,000
|
$22.58
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
(37,000)
|
22.58
|
Cancelled
|
-
|
|
-
|
|
Outstanding,
Ending
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
Options
Exercisable
|
-
|
$-
|
-
|
$-
|
The Company recorded share-based compensation expense of $15 for
the three months ended March 31, 2017. No expense was recognized in
the three months ended March 31, 2018.
21
Note 15. Related Party Transactions
BirCan Holdings, LLC Transaction
On October 28, 2016, the owners of BCHI transferred their
membership interests of BirCan Holdings, LLC, in exchange for
subordinated notes to the shareholders of $6,000. The interest on
the subordinated notes is 12% of the unpaid balance. As of March
31, 2018 and December 31, 2017, respectively, the Company has
accrued $1,116 and $774 of interest as additional debt per the
terms of the agreement. The Company also incurred a $500 note
payable in the exchange. Real property valued at $3,901 and
personal property valued at $2,630 were transferred to the
Company.
Note 16. Restructuring Event
The
Company had a strategic alignment starting in April 2017 that
included a reduction in headcount, facility costs and other
operating costs. As of March 31, 2018, restructuring costs totaled
$8,870.
The
following table summarizes changes to the accrued liability
associated with the restructuring as of December 31, 2017 and March
31, 2018:
|
Employee
Costs
(1)
|
Facility
Exit
Costs
(2)
|
Other
Costs
|
Total
|
Expenses
|
$2,184
|
$5,032
|
$286
|
$7,502
|
Payments
|
(2,077)
|
(1,901)
|
(262)
|
(4,240)
|
Accrued Liability
as of December 31, 2017
|
$107
|
$3,131
|
$24
|
$3,262
|
|
|
|
|
|
Expenses
|
996
|
329
|
43
|
1,368
|
Payments
|
(847)
|
(1,099)
|
(67)
|
(2,013)
|
Accrued Liability
as of March 31, 2018
|
$256
|
$2,361
|
$-
|
$2,617
|
(1)
The remaining
employee-related liability will be paid within 12 months and
approximates fair value due to the short discount
period.
(2)
These charges
represent the present value of expected lease payments and direct
costs to obtain a sublease, reduced by estimated sublease rental
income. The timing and amount of estimated cash flows will continue
to be evaluated each reporting period.
Note 17. Tempo Transaction
Tempo
provides prepaid and lifeline voice and data services through
prepaid calling cards, lifeline wireless plans and home phone
service. On March 1, 2018, Birch entered into a non-binding
agreement to negotiate and sell the Company’s Tempo Telecom
LLC (Tempo) wireless subscribers with a transaction close date no
later than March 30, 2018. The transaction did not close before
March 30, 2018 and no further agreements were reached. Instead,
Tempo was transferred in a distribution to the owners as a part of
the larger transaction to sell Birch to Fusion Telecommunications
International, Inc. (n/k/a Fusion Connect, Inc.) (Fusion) which
closed on May 4, 2018. (See Note 18. Subsequent
Events).
22
Note 18. Subsequent Event
On May
4, 2018 (the “Closing Date”), Fusion completed the
various transactions contemplated by the Agreement and Plan of
Merger, dated August 26, 2017, as amended (the “Birch Merger
Agreement”), by and among Fusion, Fusion BCHI Acquisition
LLC, a wholly-owned subsidiary of Fusion (“BCHI Merger
Sub”), and Birch Communications Holdings, Inc.
(“Birch”). As contemplated by the Birch Merger
Agreement, on the Closing Date Birch merged with and into BCHI
Merger Sub (the “Birch Merger”), with BCHI Merger Sub
surviving the Birch Merger as a wholly-owned subsidiary of
Fusion.
On the
Closing Date, all of 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) were cancelled and
converted into the right to receive, approximately 50,000,000
shares (the “Merger Shares”) of Fusion Common Stock.
Pursuant to subscription agreements executed by each of the
shareholders of Birch, the Merger Shares were issued in the name
of, and are now held by, BCHI Holdings, LLC (the Surviving
Company).
The
outstanding principal and accrued interest on BCHI’s term and
revolver loans totaling $443,798 were paid upon closing the
transaction. The Surviving Company refinanced this debt under a new
credit facility dated May 4, 2018. Additionally, $3,000 of the
promissory notes, $1,000 of the stock appreciation bonus and $500
for notes payable were also paid at closing. New amended and
restated promissory notes were issued by the Surviving Company for
the remaining outstanding balance and accrued and unpaid interest
to the shareholders of $3,726. Under the new agreements, the
interest on the subordinated notes remains at 12% of the unpaid
balance. The installments due are as follows: $1,092 on September
30, 2018, $1,092 on December 31, 2018 and the entire remaining
outstanding principal balance with all accrued but unpaid interest
on March 31, 2019.
As of
the transaction date, Birch’s residential services units and
prepaid and lifeline voice and data services units will be
distributed to the pre-acquisition Birch shareholders and operate
as a separate business entity. In accordance with ASC 205-20
Discontinued Operations, this component Birch will be accounted for
as an entity to be disposed of other than by sale
23