Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
☐
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 CONNECT, INC.
(Exact
name of registrant as specified in its 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
(Registrants
telephone number, including area code)
Indicate
by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer”, “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 ☑
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date: August
10, 2018.
Title of Each Class
|
|
Number of Shares Outstanding
|
Common
Stock, $0.01 par value
|
|
78,464,037
|
FUSION CONNECT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part 1
Financial Information
|
|
|
|
Item 1.
Financial Statements
|
1
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
|
24
|
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
|
31
|
|
|
Item 4.
Controls and Procedures
|
32
|
|
|
Part II
Other Information
|
|
|
|
Item 1.
Legal Proceedings
|
33
|
|
|
Item
1A. Risk Factors
|
33
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds
|
37
|
|
|
Item 3.
Defaults Upon Senior Securities
|
37
|
|
|
Item 4.
Mine Safety Disclosures
|
37
|
|
|
Item 5.
Other Information
|
37
|
|
|
Item
6. Exhibits
|
37
|
|
|
Signatures
|
38
|
|
|
Index
to Exhibits
|
39
|
As previously disclosed, on May 4, 2018 (the “Birch Closing Date”), Fusion
Connect, Inc., a Delaware corporation (the “Fusion”),
completed the merger (the “Birch Merger”) of its
wholly-owned subsidiary, Fusion BCHI Acquisition LLC (“BCHI
Merger Sub”), with and into Birch Communications Holding,
Inc., a Georgia corporation (“Birch”), in accordance
with the terms of the Agreement and Plan of Merger, dated as of
August 26, 2017, as amended, among Fusion, Birch Merger Sub and
Birch (the “Birch Merger Agreement”). As a result of
the Birch Merger, each then existing subsidiary of Birch became
indirect wholly-owned subsidiaries of Fusion. On May 4, 2018,
Fusion also changed its corporate name from Fusion
Telecommunications International, Inc. to Fusion Connect,
Inc.
For accounting purposes, the Birch Merger is treated as a
“reverse acquisition” under generally acceptable
accounting principles in the United States (“U.S.
GAAP”) and Birch is considered the accounting acquirer.
Accordingly, Birch’s historical results of operations will
replace Fusion’s historical results of operations for all
periods prior to the Birch Merger and, for all periods following
the Birch Merger, the results of operations of the combined company
will be included in the Fusion’s financial
statements.
In addition, as previously disclosed, on June 15, 2018 (the
“MegaPath Closing Date”), the Company (as defined
below) completed its acquisition of MegaPath Holding Corp., a
Delaware corporation (“MegaPath”) through a merger (the
“MegaPath Merger”) of Fusion MPHC Acquisition Corp.
(“MegaPath Merger Sub”), with and into MegaPath, in
accordance with the terms of the Agreement and Plan of Merger,
dated as of May 4, 2018, among the Company, MegaPath, MegaPath
Merger Sub and Shareholder Representative Services, LLC, as
stockholder representative (the “MegaPath Merger
Agreement”).
This quarterly report on Form 10-Q relates to the Company’s
three and six-month periods ended June 30, 2018, which six-month
period includes the date of the completion of the Birch Merger, and
is therefore Fusion’s first quarterly report on Form 10-Q
that includes results of operations for the combined company,
including Birch and MegaPath.
Unless the context otherwise requires, references to the
“Company,” the “combined company”
“we,” “our” or “us” in this
report refer to Fusion and its subsidiaries following the
completion of the Birch Merger and references to
“Fusion” refer to the Company prior to the completion
of the Birch Merger.
Except as otherwise noted, references to “common stock”
in this report refer to common stock, par value $0.01 per share, of
Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split
of its common stock (the “Reverse Split”). Unless noted
otherwise, any share or per share amounts in this report, the
accompanying unaudited condensed consolidated financial statements
and related notes give retroactive effect to the Reverse
Split.
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
Fusion Connect, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in
thousands, except par value amounts)
|
June
30,
2018
|
December
31,
2017
|
|
(unaudited)
|
(audited)
|
Current
assets:
|
|
|
Cash and cash
equivalents
|
$13,535
|
$5,757
|
Accounts
receivable, net of allowance for doubtful
|
52,384
|
25,372
|
accounts of $6,077
and $2,652, respectively
|
|
|
Accounts receivable
- stockholders/employees
|
-
|
920
|
Prepaid
expenses
|
10,443
|
6,290
|
Inventory,
net
|
1,618
|
1,142
|
Other
assets
|
4,504
|
2,505
|
Current assets of
discontinued operations
|
-
|
40,038
|
Total current
assets
|
82,484
|
82,024
|
Long-term
assets:
|
|
|
Property and
equipment, net
|
121,294
|
106,557
|
Goodwill
|
217,814
|
89,806
|
Intangible assets,
net
|
183,826
|
68,834
|
Other non-current
assets
|
33,462
|
877
|
Total long-term
assets
|
556,396
|
266,074
|
Total
assets
|
$638,880
|
$348,098
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$76,075
|
$40,315
|
Accrued
telecommunications costs
|
5,277
|
11,048
|
Deferred customer
revenue
|
16,030
|
10,226
|
Other accrued
liabilities
|
41,831
|
23,948
|
Current portion of
capital leases
|
3,027
|
3,003
|
Current portion of
long-term debt
|
24,500
|
26,500
|
Current liabilities
from discontinued operations
|
-
|
34,864
|
Total current
liabilities
|
166,740
|
149,904
|
Long-term
liabilities:
|
|
|
Non-current portion
of long-term debt
|
580,020
|
410,736
|
Non-current portion
of capital lease
|
3,316
|
3,823
|
Other non-current
liabilities
|
7,657
|
12,847
|
Total non-current
liabilities
|
590,993
|
427,406
|
Stockholders’
deficit:
|
|
|
Preferred stock,
$0.01 par value, 10,000 shares authorized,
|
|
|
15 and 0 shares
issued and outstanding, respectively
|
-
|
-
|
Common stock, $0.01
par value; 150,000 shares authorized,
|
|
|
78,415 and 25,161
shares issued and outstanding, respectively
|
784
|
252
|
Additional paid-in
capital
|
145,377
|
5,824
|
Accumulated
deficit
|
(264,752)
|
(236,477)
|
Accumulated other
comprehensive (loss) income
|
(262)
|
1,189
|
Total
stockholders’ deficit
|
(118,853)
|
(229,212)
|
Total liabilities
and stockholders’ deficit
|
$638,880
|
$348,098
|
|
|
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
1
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of
Operations and Comprehensive
Loss
(in thousands)
|
For the Three
Months Ended June 30,
|
For the Six
Months Ended June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
|
|
|
|
|
Revenue
|
$120,803
|
$116,677
|
$223,714
|
$231,743
|
Cost of revenue
(exclusive of depreciation and amortization,
|
|
|
|
|
shown
below)
|
66,189
|
63,039
|
121,316
|
125,899
|
Gross
Profit
|
54,614
|
53,638
|
102,398
|
105,844
|
Operating
expenses:
|
|
|
|
|
Selling, general
and administrative
|
43,001
|
29,009
|
66,767
|
61,334
|
Depreciation and
amortization
|
16,712
|
17,625
|
31,441
|
33,642
|
Impairment losses
on intangible assets
|
-
|
-
|
2,314
|
-
|
Foreign currency
loss (gain)
|
241
|
(131)
|
511
|
(166)
|
Total operating
expenses
|
59,954
|
46,503
|
101,033
|
94,810
|
|
|
|
|
|
Operating (loss)
income
|
(5,340)
|
7,135
|
1,365
|
11,034
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
Interest expense,
net
|
(17,608)
|
(11,852)
|
(29,370)
|
(21,481)
|
Loss on debt
extinguishment
|
(14,414)
|
-
|
(14,414)
|
-
|
Other (expense)
income
|
(211)
|
(28)
|
(168)
|
50
|
Total other
expense
|
(32,233)
|
(11,880)
|
(43,952)
|
(21,431)
|
|
|
|
|
|
Loss before income
taxes
|
(37,573)
|
(4,745)
|
(42,587)
|
(10,397)
|
Income tax benefit
(expense)
|
3,872
|
44
|
4,869
|
(1,354)
|
Net loss from
continuing operations
|
(33,701)
|
(4,701)
|
(37,718)
|
(11,751)
|
Net income (loss)
from discontinued operations
|
15,179
|
(4,743)
|
6,218
|
(8,133)
|
Net
loss
|
(18,522)
|
(9,444)
|
(31,500)
|
(19,884)
|
Other comprehensive
income (loss):
|
|
|
|
|
Cumulative
translation adjustment
|
(655)
|
44
|
(1,451)
|
(256)
|
Comprehensive
loss
|
$(19,177)
|
$(9,400)
|
$(32,951)
|
$(20,140)
|
|
|
|
|
|
Net loss from
continuing operations
|
(33,701)
|
(4,701)
|
(37,718)
|
(11,751)
|
Preferred stock
dividends (see note 5)
|
(787)
|
-
|
(787)
|
-
|
Net loss
attributable to common stockholders
|
$(34,488)
|
$(4,701)
|
$(38,505)
|
$(11,751)
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
loss per common share from continuing operations
|
$(0.59)
|
$(0.19)
|
$(0.92)
|
$(0.47)
|
Basic and diluted
loss per common share from discontinued operations
|
$0.26
|
$(0.19)
|
$0.15
|
$(0.32)
|
|
|
|
|
|
Basic and diluted
weighted average common shares outstanding
|
58,248
|
25,161
|
41,796
|
25,161
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
2
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in
Stockholders’ Deficit
(in thousands)
|
Preferred Stock
|
Common Stock
|
Additional Paid-in
|
Accumulated Other Comprehensive
|
Accumulated
|
Stockholders'
|
||
|
Shares
|
$
|
Shares
|
$
|
Capital
|
Income
|
Deficit
|
Deficit
|
Balance
at December 31, 2017
|
-
|
$-
|
25,161
|
$252
|
$5,824
|
$1,189
|
$(236,477)
|
$(229,212)
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principle
|
-
|
-
|
-
|
-
|
-
|
-
|
3,725
|
3,725
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2018
|
-
|
-
|
25,161
|
252
|
5,824
|
1,189
|
(232,752)
|
(225,487)
|
|
|
|
|
|
|
|
|
|
Preferred
Series D issued (note 16)
|
15
|
-
|
-
|
-
|
15,000
|
-
|
-
|
15,000
|
|
|
|
|
|
|
|
|
|
Payment
of Preferred Series D dividend
|
-
|
-
|
-
|
-
|
-
|
-
|
(500)
|
(500)
|
|
|
|
|
|
|
|
|
|
Distribution of the
Birch Consumer Segment (note 3)
|
-
|
-
|
-
|
-
|
(21,503)
|
-
|
-
|
(21,503)
|
|
|
|
|
|
|
|
|
|
Common
stock issued in Birch reverse acquisition (note 4)
|
-
|
-
|
49,896
|
499
|
131,468
|
-
|
-
|
131,967
|
|
|
|
|
|
|
|
|
|
Common stock issued
in MegaPath acquisition (note 4)
|
-
|
-
|
1,679
|
17
|
6,431
|
-
|
-
|
6,448
|
|
|
|
|
|
|
|
|
|
Common
stock issued in a previous acquisition by the legacy Fusion
company
|
-
|
-
|
129
|
1
|
499
|
-
|
-
|
500
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock, net of costs
|
-
|
-
|
1,524
|
15
|
7,493
|
-
|
-
|
7,508
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
(31,500)
|
(31,500)
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
-
|
-
|
-
|
-
|
-
|
(1,451)
|
-
|
(1,451)
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
-
|
-
|
26
|
-
|
73
|
-
|
-
|
73
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
92
|
-
|
-
|
92
|
Balance
at June 30, 2018
|
15
|
$-
|
78,415
|
$784
|
$145,377
|
$(262)
|
$(264,752)
|
$(118,853)
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash
Flows
(in thousands)
|
For The Six
Months Ended June 30,
|
|
|
2018
|
2017
|
Cash
Flows from Operating Activities:
|
|
|
Net loss from
continuing operations
|
$(37,718)
|
$(11,751)
|
Net loss from
discontinued operations
|
6,218
|
(8,133)
|
Net loss from
continuing operations
|
(31,500)
|
(19,884)
|
|
|
|
Adjustments to
reconcile net loss to net cash
|
|
|
provided by
operating activities
|
|
|
Depreciation and
amortization
|
31,441
|
33,642
|
Deferred financing
amortization
|
2,142
|
1,882
|
OID
Interest
|
1,688
|
850
|
Deferred
taxes
|
(2,453)
|
-
|
Gain on disposal of
fixed assets
|
211
|
(26)
|
Loss on impairment
of property, plant and equipment
|
2,314
|
-
|
Loss on
extinguishment of debt
|
14,414
|
-
|
Non-cash
share-based compensation
|
92
|
30
|
Changes in
operating assets and liabilities:
|
|
|
Accounts
receivable
|
(16,062)
|
3,403
|
Inventory,
net
|
(188)
|
(298)
|
Prepaid expenses
and other current assets
|
945
|
(547)
|
Other
assets
|
(4,786)
|
301
|
Accounts
payable
|
25,935
|
10,129
|
Other
liabilities
|
(7,446)
|
(10,358)
|
Net cash provided
by operating activities - continuing operations
|
10,529
|
27,257
|
Net cash used in
operating activities - discontinued operations
|
(8,614)
|
(1,202)
|
Net
cash provided by operating activities
|
1,915
|
26,055
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
Acquisitions
|
(20,565)
|
-
|
Purchases of
property and equipment
|
(15,369)
|
(17,927)
|
Proceeds from
disposal of fixed assets
|
22
|
26
|
Net cash used in
investing activities - continuing operations
|
(35,912)
|
(17,901)
|
Net cash used in
investing activities - discontinued operations
|
(1,498)
|
(4,713)
|
Net
cash used in investing activities
|
(37,410)
|
(22,614)
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
Proceeds from notes
payable and long-term debt
|
650,000
|
15,000
|
Repayment of debt
obligation
|
(551,494)
|
(11,375)
|
Payment of capital
lease obligations
|
(1,840)
|
(2,210)
|
Deferred financing
costs and discounts
|
(50,383)
|
(4,325)
|
Issuance of Note
Receivable
|
(25,000)
|
-
|
Issuance of
preferred stock
|
14,500
|
-
|
Proceeds from the
sale of common stock
|
7,508
|
-
|
Proceeds from stock
options
|
73
|
-
|
Net cash provided by (used in) financing activities - continuing
operations
|
43,364
|
(2,910)
|
|
|
|
Net increase in
cash and cash equivalents - continuing operations
|
17,981
|
6,446
|
Net (decrease) in
cash and cash equivalents - discontinued operations
|
(10,112)
|
(5,915)
|
Net
increase in cash and cash equivalents
|
7,869
|
531
|
|
|
|
Cash and cash
equivalents at beginning of period
|
5,757
|
8,208
|
Foreign currency
translation effect on cash
|
(91)
|
27
|
Cash and cash
equivalents at end of period
|
$13,535
|
$8,766
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
Interest
paid
|
$19,096
|
$18,064
|
Income tax
paid
|
$-
|
$217
|
Non-cash purchases
of property and equipment
|
$1,157
|
$-
|
Non-cash issuance
of stock for acquisition
|
$138,915
|
$-
|
Non-cash
dividend
|
$500
|
$-
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Notes to Consolidated Financial
Statements
Note 1. Organization and Business
Fusion
Connect, Inc. is a Delaware corporation incorporated in September
1997 (“Fusion”). The Company (as defined below) is a
provider of integrated cloud
solutions, including cloud voice, cloud connectivity, cloud
infrastructure, cloud computing and managed cloud-based
applications, and business services to small, medium and large
businesses.
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 products and services include cloud
voice and Unified Communications-as-a-Service, improving
communication 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 and contact center solutions. Our cloud
computing and Infrastructure-as-a-Service solutions are designed to
provide our larger enterprise customers with a platform on which
additional cloud services can be layered. Complemented
by our Software-as-a-Service 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.
On May
4, 2018 (the “Birch Closing Date”), Fusion, completed
the previously announced merger (the “Birch Merger”) of
its wholly-owned subsidiary, Fusion BCHI Acquisition LLC
(“BCHI Merger Sub”), with and into Birch Communications
Holding, Inc., a Georgia corporation (“Birch”), in
accordance with the terms of the Agreement and Plan of Merger,
dated as of August 26, 2017, as amended, among Fusion, Birch Merger
Sub and Birch (the “Birch Merger Agreement”). As a
result of the Birch Merger, each then existing subsidiary of Birch
became an indirect-wholly owned subsidiary of Fusion. On May 4,
2018, Fusion also changed its corporate name from Fusion
Telecommunications International, Inc. to Fusion Connect,
Inc.
For
accounting purposes, the Birch Merger is treated as a
“reverse acquisition” under generally acceptable
accounting principles in the United States (“U.S.
GAAP”) and Birch is considered the accounting acquirer.
Birch was determined to be the
accounting acquirer based on the terms of the Birch Merger
Agreement and other factors, such as relative stock ownership
following the Birch Closing Date. Accordingly, Birch’s
historical results of operations replace Fusion’s historical
results of operations for all periods prior to the Birch Merger
and, for all periods following the Birch Merger, the results of
operations of the combined company will be included in the
Fusion’s financial statements.
In
addition, as previously disclosed, on June 15, 2018 (the
“MegaPath Closing Date”), the Company (as defined
below) completed its acquisition of MegaPath Holding Corp., a
Delaware corporation (“MegaPath”) through a merger (the
“MegaPath Merger”) of Fusion MPHC Acquisition Corp.
(“MegaPath Merger Sub”), with and into MegaPath, in
accordance with the terms of the Agreement and Plan of Merger,
dated as of May 4, 2018, among the Company, MegaPath, MegaPath
Merger Sub and Shareholder Representative Services, LLC, as
stockholder representative (the “MegaPath Merger
Agreement”).
This
quarterly report on Form 10-Q relates to the Company’s three
and six-month periods ended June 30, 2018, which six-month period
includes the date of the completion of the Birch Merger, and is
therefore Fusion’s first quarterly report on Form 10-Q that
includes results of operations for the combined company, including
Birch and MegaPath.
Unless
the context otherwise requires, references to the
“Company,” the “combined company”
“we,” “our” or “us” in this
report refer to Fusion and its subsidiaries following the
completion of the Birch Merger and, as applicable, the MegaPath
Merger and references to “Fusion” refers to the Company
prior to the completion of the Birch Merger.
Except
as otherwise noted, references to “common stock” in
this report refers to common stock, par value $0.01 per share, of
Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split
of its common stock (the “Reverse Split”). Unless noted
otherwise, any share or per share amounts in this report, the
accompanying unaudited condensed consolidated financial statements
and related notes give retroactive effect to the Reverse
Split.
5
See note 4 for additional information on the reverse acquisition
and the Company’s acquisition of MegaPath.
Note 2. Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with Birch’s audited
financial statements and notes thereto included in the Form 8-K
filed by Fusion with the Securities and Exchange Commission
(“SEC”) on May 10, 2018. The December 31, 2017
balance sheet information included herein was derived from the
audited financial statements of Birch as of that date. The
accompanying condensed consolidated financial statements have been
prepared in accordance with US GAAP for interim financial
information, the instructions for Form 10-Q and the rules and
regulations of the SEC. Accordingly, since they are interim
statements, the accompanying unaudited condensed consolidated
financial statements do not include all of the information and
notes required by US GAAP for annual financial statements, but
reflect all adjustments consisting of normal, recurring
adjustments, that are necessary for a fair presentation of the
financial position, results of operations and cash flows for the
interim periods presented. Management believes that the disclosures
made in these unaudited condensed consolidated interim financial
statements are adequate to make the information not misleading.
Interim results are not necessarily indicative of the results that
may be expected for the 2018 fiscal year or for any other future
periods. Certain reclassifications have been made to
the prior period consolidated financial statements
to conform to the current period presentation,
including the transfer of certain assets from intangibles to
property and equipment.
Principles of Consolidation
The financial statements include the accounts of the Company and
each of its wholly-owned subsidiaries. All intercompany accounts
and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of these financial statements requires management
of the Company to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues, expenses and
disclosure of contingent assets and liabilities. Actual
results may differ substantially from these estimates. The results
of operations for the three and six months ended June 30, 2018 are
not necessarily indicative of the results that may be expected for
the full fiscal year or any other future periods.
Segment Reporting
Operating segments are defined as components of an enterprise for
which discrete financial information is available and evaluated
regularly by a company's chief operating decision maker in deciding
how to allocate resources and assess performance. The Company has
only one reportable segment – Business Services.
Notes Receivable
The
Company recorded a notes receivable of $25.0 million in conjunction with the Vector Facility (as herein
defined) and is classified as other non-current assets on its
balance sheet as of June 30, 2018. See note 13 for
additional information relating to the Vector
Facility.
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.
Income Taxes
The
accounting and reporting requirements with respect to accounting
for 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.
6
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. De-recognition of a tax benefit
previously recognized could result in the Company recording a tax
liability that would reduce net assets.
Stock-Based Compensation
The
Company recognizes expense for its employee stock-based
compensation based on the fair value of the awards on the date of
grant. The fair values of stock options are estimated on the date
of grant using the Black-Scholes option valuation model. The use of
the Black-Scholes option valuation model requires the input of
subjective assumptions. 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 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 more readily
determinable.
Revenue Recognition
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.
Customer revenue includes revenue received from the sale of
integrated cloud solutions and business services and is comprised
of monthly recurring charges, usage charges and initial
nonrecurring charges. Monthly recurring charges include the fees
paid by customers for services. 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 revenue derived from sales of
communications equipment such as phones. The Company recognizes
installation revenue when the installation is
complete.
Deferred Commissions
Direct incremental costs of obtaining a contract, consisting of
sales commissions, are deferred and amortized over the estimated
life of the customer, which is currently 36 months. We calculate
the estimated life of the customer on an annual basis. The Company
classifies deferred commissions as prepaid expenses or other
noncurrent assets based on the timing of when it expects to
recognize the expense.
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.
7
Recent Accounting Pronouncements
The
Company considers the applicability and impact of all Accounting
Standards Updates (“ASUs”). ASUs not discussed below
were assessed and determined to be either not applicable or are
expected to have minimal impact on our consolidated balance sheets
or statements of operations.
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 ASU 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. In April 2018,
the Company early adopted this guidance with respect to its then
outstanding warrants.
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 this 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
effective January 1, 2018. The adoption did not have a material
impact on its 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 of 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 this new guidance
will have on its financial statements and related disclosures. The
Company’s current future lease obligations are disclosed in
note 12 and in Note 6 "Leases" in the Form 8-K filed by Fusion with
the SEC on May 10, 2018.
In May
2014, the FASB issued new guidance related to revenue recognition,
ASU 2014-09, Revenue from
Contracts with Customers (“ASU No. 2014-09”),
which outlines a comprehensive revenue recognition model that
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. ASU No. 2014-09 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
Company adopted this standard effective January 1, 2018, using the
modified retrospective method. Following the adoption, the revenue
recognition for the Company’s sales arrangements remained
materially consistent with our historical
practice.
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. All of these new standards, which are collectively
hereinafter referred to “ASC 606” became effective
beginning with the first quarter of 2018. See note 15 for
further information.
8
Note 3. Discontinued Operations
As a condition to closing the transactions contemplated by
the Birch Merger Agreement (see note 4), Birch was required to
spin-off its U.S.-based consumer customers, wireless customers and
its small business customer-base (which include those business
customers with $111 per month or less of monthly revenue) and
assets associated with the support of those customers
(collectively, the “Birch Consumer Segment”).
Accordingly, prior to closing the Birch Merger on the Birch Closing
Date, Birch distributed the assets and liabilities associated with
the Birch Consumer Segment to the pre-merger Birch shareholders. At
the time of the distribution, the Birch Consumer Segment met the
criteria in ASC 205-20-45 for discontinued operations and, as a
result, the assets, liabilities and results of operations
associated with the Birch Consumer Segment have been classified as
discontinued operations for all periods presented in the
accompanying unaudited condensed consolidated balance sheet,
statements of operations and statements of cash flows.
Summarized
results for discontinued operations are as follows (in
thousands):
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Revenues
|
$7,848
|
$24,988
|
$30,768
|
$51,755
|
Cost
of revenues, exclusive of depreciation and
|
|
|
|
|
amortization,
shown separately below
|
5,035
|
16,791
|
20,482
|
34,199
|
Gross profit
|
2,813
|
8,197
|
10,286
|
17,556
|
|
|
|
|
|
Selling,
general and administrative expenses
|
3,824
|
7,763
|
11,809
|
15,738
|
Depreciation
and amortization
|
500
|
3,684
|
2,008
|
6,873
|
Impairment
losses on intangible assets
|
-
|
-
|
5,379
|
-
|
Total
operating expenses
|
4,324
|
11,447
|
19,196
|
22,611
|
Operating loss on discontinued operations
|
(1,511)
|
(3,250)
|
(8,910)
|
(5,055)
|
|
|
|
|
|
Other (expenses) income:
|
|
|
|
|
Interest
expense
|
(607)
|
(1,493)
|
(2,169)
|
(3,078)
|
Gain
on extinguishment of debt
|
17,297
|
-
|
17,297
|
-
|
|
|
|
|
|
Net income (loss) on discontinued operations
|
$15,179
|
$(4,743)
|
$6,218
|
$(8,133)
|
The
carrying amounts of assets and liabilities associated with
discontinued operations are as follows (in thousands):
|
December
31,
2017
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
approximately
$1,917, respectively
|
$9,549
|
Prepaid
expenses
|
1,259
|
Inventory
|
37
|
Property
and equipment, net
|
1,708
|
Goodwill
|
3,550
|
Intangible
assets
|
23,935
|
Total current assets of discontinued operations
|
$40,038
|
|
|
Accounts
payable and accrued expenses
|
$8,469
|
Deferred
customer revenue
|
2,375
|
Other
accrued liabilities
|
10,320
|
Debt
|
13,700
|
Total current liabilities of discontinued operations
|
$34,864
|
|
|
9
Note 4. Acquisitions
Birch
On the Birch Closing Date, Birch merged with and into BCHI Merger
Sub, with BCHI Merger Sub surviving the merger as a wholly-owned
subsidiary of Fusion. For accounting purposes, the Birch
Merger is treated as a “reverse acquisition” under U.S.
GAAP and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer
based on the terms of the Birch Merger Agreement and other factors,
such as relative stock ownership of the Company following the Birch
Merger. Accordingly, Birch’s historical results of
operations replace Fusion’s historical results of operations
for all periods prior to the Birch Merger and, for all periods
following the Birch Merger, the results of operations of the
combined company will be included in the Fusion’s financial
statements. All share numbers and
other information about equity securities prior to the acquisition
of Birch in this report relate to legacy
Fusion.
On the Birch 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, in the
aggregate, 49,896,310 shares (the “Merger Shares”) of
Fusion common stock, which constituted approximately 65.5% of the
then issued and outstanding shares of Fusion common stock on that
date. Pursuant to subscription agreements executed by each of the
former shareholders of Birch, the Merger Shares were issued in the
name of, and are held by, BCHI Holdings, LLC, a Georgia limited
liability company (“BCHI Holdings”).
The fair value of assets acquired and liabilities assumed as a
result of the Birch and Fusion combination is based upon
management’s estimates which have been derived, in part, from
an analysis provided by an independent third-party valuation firm.
The assumptions are subject to change for a period of up to
one year from date of the Birch Merger. Critical estimates in
valuing certain intangible assets include but are not limited to
future expected cash flows from customer relationships and the
trade name, present value and discount rates. Management’s
estimates of fair value are based upon assumptions believed to be
reasonable, but which are inherently uncertain and unpredictable
and, as a result, actual results may differ from those
estimates.
The preliminary purchase price allocation is as follows (in
thousands):
|
|
Useful life (in
years)
|
Purchase
consideration for invested capital
|
$221,172
|
|
Less:
debt
|
(89,205)
|
|
Total
purchase consideration for equity
|
$131,967
|
|
|
|
|
Cash
|
$28,176
|
|
Accounts
receivable
|
8,684
|
|
Other current
assets
|
2,444
|
|
Property and
equipment
|
13,008
|
|
Other noncurrent
assets
|
1,220
|
|
Intangible
assets:
|
|
|
Developed
technology
|
4,710
|
3
|
Trademark
|
49,500
|
10
|
Customer
relationships
|
41,100
|
15
|
Goodwill
|
99,253
|
|
Deferred
revenue
|
(1,200)
|
|
Other
liabilities, including debt
|
(114,928)
|
|
|
$131,967
|
|
|
|
|
The excess of the purchase price over the assets acquired and
liabilities assumed represents goodwill. The goodwill is primarily
attributable to the synergies expected to arise from the
combination and is not expected to be deductible for tax
purposes.
10
MegaPath Holding Corporation
On June 15, 2018, the MegaPath Closing Date, the Company completed
its acquisition of MegaPath. As required by the terms of the
MegaPath Merger Agreement, the Company paid approximately $61.5
million of the $71.5 million purchase price in cash, with
approximately $10 million of the purchase price paid in 1,679,144
shares of Fusion’s common stock, at an agreed upon price of
$5.775 per share. As a result of the fixed price at which the
Fusion shares were issued, from an accounting standpoint, the total
purchase price actually paid by Fusion was $68.3 million. Of the
cash consideration, $2.5 million was deposited into an escrow
account to be held for one year to secure the indemnification
obligations in favor of the Company under the MegaPath Merger
Agreement.
The cash consideration, as well as certain expenses associated with
the acquisition of MegaPath, were funded from approximately
$62.0 million of borrowings under the First Lien Credit
Agreement (as defined in note 13). See note 13 for additional
information regarding the First Lien Credit Agreement.
The preliminary purchase price allocation is as follows (in
thousands):
|
|
Useful life (in
years)
|
Purchase
consideration for invested capital
|
$68,251
|
|
Working
capital
|
3,779
|
|
Debt
|
(12,181)
|
|
Total
purchase consideration for equity
|
$59,849
|
|
|
|
|
Cash
|
$4,660
|
|
Accounts
receivable
|
2,539
|
|
Other current
assets
|
1,347
|
|
Property and
equipment
|
6,319
|
|
Other noncurrent
assets
|
1,602
|
|
Intangible
assets:
|
|
|
Developed
technology
|
10,610
|
3
|
Trademark
|
7,100
|
10
|
Customer
relationships
|
17,800
|
15
|
Goodwill
|
28,755
|
|
Deferred
revenue
|
(1,400)
|
|
Other
liabilities, including debt
|
(19,483)
|
|
|
$59,849
|
|
The following summarized unaudited consolidated pro forma
information presents the results of operations of the Company had
each of the Birch Merger and the MegaPath Merger occurred on
January 1, 2017 (in thousands except per share
information):
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Revenues
|
$145,996
|
$173,200
|
$296,048
|
$342,827
|
Net
loss
|
(27,714)
|
(14,214)
|
(46,483)
|
(29,997)
|
Basic
and diluted net loss per share
|
(0.48)
|
(0.56)
|
(1.11)
|
(1.19)
|
The summarized unaudited consolidated pro forma results set forth
in this note are not necessarily indicative of results that would
have occurred if the Birch Merger and the MegaPath Merger had been
in effect for the periods presented. Further, these pro forma
results are not intended to be a projection of future
results.
During
the three and six months ended June 30, 2018, total acquisition
costs related to the Birch merger and the MegaPath Merger were $9.9
million and $10.6 million, respectively. These costs are included
in selling, general and administrative (“SG&A”)
expenses on the accompanying unaudited condensed consolidated
statement of operations.
11
Note 5. Loss per share
Basic
and diluted loss per share is computed by dividing the loss
attributable to common stockholders by the weighted-average number
of common shares outstanding during the period. The following table
sets forth the computation of basic and diluted net loss per share
(in thousands, except per share amounts):
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
||
|
2018
|
2017
|
2018
|
2017
|
Numerator
|
|
|
|
|
Net
loss from continuing operations
|
$(33,701)
|
$(4,701)
|
$(37,718)
|
$(11,751)
|
Net
income (loss) from discontinued operations
|
15,179
|
(4,743)
|
6,218
|
(8,133)
|
Total
net loss
|
(18,522)
|
(9,444)
|
(31,500)
|
(19,884)
|
Undeclared
dividends on Preferred Series D
|
(287)
|
-
|
(287)
|
-
|
Dividends paid on
Preferred Series D
|
(500)
|
-
|
(500)
|
-
|
Total net loss less
Preferred Series D dividends
|
$(19,309)
|
$(9,444)
|
$(32,287)
|
$(19,884)
|
|
|
|
|
|
Denominator
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
58,248
|
25,161
|
41,796
|
25,161
|
|
|
|
|
|
(Loss) income per share basic and diluted
|
|
|
|
|
From
continuing operations
|
$(0.59)
|
$(0.19)
|
$(0.92)
|
$(0.47)
|
From
discontinued operations
|
$0.26
|
$(0.19)
|
$0.15
|
$(0.32)
|
From
the Birch Closing Date through June 30, 2018, dilutive securities
excluded from the calculation of diluted earnings per common share
because of their anti-dilutive effects were as
follows:
Warrants
|
1,105,278
|
Stock
Options
|
1,955,295
|
Note 6. Prepaid Expenses
Prepaid
expenses are as follows (in thousands):
|
June 30,
2018
|
December 31,
2017
|
Insurance
and benefits
|
$1,175
|
$252
|
Rent
|
642
|
907
|
Software
subscriptions
|
3,137
|
1,448
|
Hardware
maintenance
|
1,255
|
1,517
|
Commissions
|
2,292
|
-
|
Line
costs
|
667
|
706
|
Taxes
|
613
|
883
|
Other
|
662
|
577
|
|
$10,443
|
$6,290
|
12
Note 7. Property and Equipment
Property
and equipment consist of the following (in thousands):
|
June 30,
2018
|
December 31,
2017
|
Telecommunications
equipment
|
$100,722
|
$85,472
|
Leasehold
improvements
|
11,110
|
10,591
|
Office
equipment
|
1,838
|
1,731
|
Buildings and
building improvements
|
1,540
|
1,540
|
Furniture
and fixtures
|
5,597
|
5,160
|
Computer
Software
|
36,632
|
32,663
|
Land
|
470
|
470
|
Automobiles
|
53
|
56
|
Onboarding
|
23,893
|
15,727
|
Network
transition
|
50,199
|
45,863
|
Construction-in-progress
|
4,468
|
3,680
|
Total
owned assets
|
236,522
|
202,953
|
Less:
accumulated depreciation
|
(139,949)
|
(120,761)
|
Net
owned assets
|
96,573
|
82,192
|
|
|
|
Capital
lease assets
|
40,084
|
38,123
|
Less:
accumulated depreciation
|
(15,363)
|
(13,758)
|
Net
capital lease assets
|
24,721
|
24,365
|
|
|
|
Property
and equipment, net
|
$121,294
|
$106,557
|
13
For the
three months ended June 30, 2018 and 2017, depreciation expense was
$10.8 million and $11.8 million, respectively. For the six months
ended June 30, 2018 and 2017, depreciation expense was $20.6
million and $22.0 million, respectively.
Note 8. Goodwill
During
the six months ended June 30, 2018, goodwill activity is as follows
(in thousands):
Balance,
January 1, 2018
|
$89,806
|
Acquisitions (note
4):
|
|
Birch
reverse Merger
|
99,253
|
MegaPath
|
28,755
|
Balance,
June 30, 2018
|
$217,814
|
Note 9. Intangible Assets
Intangible
assets are as follows (in thousands):
|
June 30, 2018
|
December 31, 2017
|
||||
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Subscriber
acquisition costs
|
$134,849
|
$(24,521)
|
$110,328
|
$77,189
|
$(20,918)
|
$56,271
|
Tradenames
and trademarks
|
66,846
|
(8,333)
|
58,513
|
13,146
|
(6,174)
|
6,972
|
Proprietary
technology
|
15,320
|
(335)
|
14,985
|
-
|
-
|
-
|
Noncompete
agreement
|
-
|
-
|
-
|
3,000
|
(3,000)
|
-
|
Commissions
|
-
|
-
|
-
|
7,683
|
(2,092)
|
5,590
|
Total
acquired intangibles
|
$217,015
|
$(33,189)
|
$183,826
|
$101,018
|
$(32,184)
|
$68,834
|
During
the three months ended June 30, 2018 and 2017, the Company recorded
no impairment charges. During the six months ended June 30, 2018
and 2017, the Company recorded impairment charges on certain
intangible assets of $2.3 million and $0,
respectively.
For the
three months ended June 30, 2018 and 2017, amortization expense was
$5.9 million and $5.8 million, respectively. For the six months
ended June 30, 2018 and 2017, amortization expense was $10.8
million and $11.6 million, respectively. Estimated future aggregate
amortization expense is expected to be as follows (in
thousands):
remainder
of 2018
|
$14,743
|
2019
|
23,678
|
2020
|
23,678
|
2021
|
20,728
|
2022
|
18,571
|
Thereafter
|
82,428
|
|
$183,826
|
14
Note 10. Other Accrued Liabilities
Other
accrued expenses are as follows (in thousands):
|
June 30,
2018
|
December 31,
2017
|
Compensation
and benefits
|
$5,813
|
$2,462
|
Bonus
|
3,585
|
729
|
Taxes
|
4,775
|
169
|
Interest
|
10,552
|
8,219
|
Facility
restructuring (note 11)
|
1,885
|
3,131
|
Legal
settlements
|
10,940
|
13,360
|
Professional
fees
|
6,920
|
1,389
|
Deferred
tax
|
481
|
2,934
|
Sales
commissions
|
929
|
965
|
Customer
deposits
|
1,056
|
429
|
Other
|
2,552
|
3,008
|
|
49,488
|
36,795
|
Less noncurrent
portion:
|
|
|
Legal
settlements
|
(6,100)
|
(8,520)
|
Deferred
tax
|
(481)
|
(2,934)
|
Other
|
(1,076)
|
(1,393)
|
Total
other non-current liabilities
|
(7,657)
|
(12,847)
|
Current
portion of other accrued liabilities
|
$41,831
|
$23,948
|
Note 11. Restructuring Event
During
2018 and 2017, the Company implemented strategic re-alignments that
included reductions in headcount, facility costs and other
operating costs.
The
following table summarizes changes to the accrued liability
associated with the restructuring for the six months ended June 30,
2018 and 2017 (in thousands):
|
Employee
Costs
(1)
|
Facility
Exit Costs
(2)
|
Other
Costs
|
Total
|
Balance, January 1,
2018
|
$107
|
$3,131
|
$24
|
$3,262
|
Expenses
|
3,045
|
534
|
42
|
3,621
|
Payments
|
(2,877)
|
(1,780)
|
(66)
|
(4,723)
|
Balance, June 30,
2018
|
275
|
1,885
|
-
|
2,160
|
|
|
|
|
|
Balance, January 1,
2017
|
$-
|
$-
|
$-
|
$-
|
Expenses
|
810
|
2,416
|
-
|
3,226
|
Payments
|
(56)
|
(31)
|
-
|
(87)
|
Balance, June 30,
2017
|
$754
|
$2,385
|
$-
|
$3,139
|
__________
(1)
As of June 30,
2018, the remaining employee-related liability will be paid within
four 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.
15
Note 12. Equipment and Network Infrastructure Financing
Obligations
From time to time, the Company enters into capital lease
arrangements to finance the purchase of network hardware and
software utilized in its operations. These arrangements require
monthly payments over a period of 2 to 20 years with interest rates
ranging between 2.0% and 8.3% per annum. The Company’s
equipment and network infrastructure
financing obligations are as follows (in
thousands):
|
June 30,
|
December 31,
|
|
2018
|
2017
|
Equipment
financing obligations
|
$2,345
|
$1,292
|
IRU (1)
|
4,822
|
6,415
|
Amount
representing interest
|
(824)
|
(881)
|
Present
value of minimum lease payments
|
6,343
|
6,826
|
Less
current portion
|
(3,027)
|
(3,003)
|
Non-current
portion
|
$3,316
|
$3,823
|
__________
(1)
Purchase of an indefeasible right to use (“IRU”) fiber
network infrastructure owned by others.
The payment obligations under capital leases are as follows (in
thousands):
remainder
of 2018
|
$1,999
|
2019
|
2,211
|
2020
|
818
|
2021
|
442
|
2022
|
245
|
Thereafter
|
1,452
|
|
$7,167
|
Note 13. Long-Term Debt
Debt
consists of the following (in thousands):
|
June 30,
|
|
2018
|
First
Lien Credit Agreement:
|
|
Tranche
A Term Loan
|
$45,000
|
Tranche
B Term Loan
|
510,000
|
Revolving
Facility
|
-
|
Second
Lien Credit Agreement – Term Loan
|
85,000
|
Subordinated
Note
|
10,000
|
Bircan
Notes Payable
|
3,348
|
|
653,348
|
Less:
|
|
Discounts
|
(48,828)
|
Current
portion
|
(24,500)
|
Non-current
portion
|
$580,020
|
16
On the Birch Closing Date, the Company entered into a First Lien
Credit and Guaranty Agreement (the “First Lien Credit
Agreement”) with Wilmington Trust, National Association, as
Administrative Agent and Collateral Agent (in such capacities, the
“First Lien Agent”), the lenders party thereto (the
“First Lien Lenders”), and all of the U.S.-based
subsidiaries of the Company, as guarantors thereunder (the
“Guarantors”), pursuant to which the First Lien Lenders
extended (a) term loans to the Company in an aggregate principal
amount of $555.0 million, consisting of the “Tranche A Term
Loan” and “Tranche B Term Loan,” in an aggregate
principal amount of $45.0 million and $510.0 million, respectively
(collectively, the “First Lien Term Loan”), and (b) a
revolving facility in an aggregate principal amount of $40.0
million (the “Revolving Facility”, and together with
the First Lien Term Loan, the “First Lien Facility”).
Borrowings under the First Lien Credit Agreement are computed based
upon either the then current “base rate” of interest or
“LIBOR” rate of interest, as selected by the Company at
the time of its borrowings. Interest on borrowings that the Company
designates as “base rate” loans bear interest per annum
at the greatest of (a) the prime rate published by the Wall Street
Journal, (b) the federal funds effective rate as published by the
Federal Reserve Bank of New York plus 0.5%, (c) the Adjusted LIBOR
Rate (as defined below) with an interest period of one month plus
1%, or (d)(i) 1% (for the Revolving Facility) or (ii) 2% (for the
First Lien Term Loan) (collectively, the “Base
Rate”); plus (x)
4.00%, with respect to the Tranche A Term Loan, (y) 6.50%, with
respect to the Tranche B Term Loan, or (z) 4.00%, with respect to
the Revolving Facility (which shall be subject to adjustment based
upon the net leverage ratio of the Company and its subsidiaries
after the delivery of the Company’s financial statements for
fiscal quarter ended June 30, 2018 and related compliance
certificate (the “Financial Statement Delivery Date”)).
Interest on borrowings that the Company designates as
“LIBOR” loans bear interest per annum at (a) the
“LIBOR” rate divided by (b) one minus the
“applicable reserve requirement” of the Federal Reserve
for Eurocurrency liabilities (subject to a floor of 1% for the
First Lien Term Loan) (the “Adjusted LIBOR
Rate”); plus (x)
5.00%, with respect to the Tranche A Term Loan, (y) 7.50%, with
respect to the Tranche B Term Loan, or (z) 5.00%, with respect to
the Revolving Facility (which shall be subject to adjustment based
upon the net leverage ratio of the Company and its subsidiaries
after the Financial Statement Delivery Date). The Tranche A Term
Loan has an original issue discount of 0.5%. The Tranche B Term
Loan has an original issue discount of 4%, except for the $170
million portion of the Tranche B Term Loan made by one lender and
certain of its affiliates, which has an original issue discount of
9%, for a blended original issue discount of approximately 5.67%.
The Tranche A Term Loan and the Revolving Facility mature on the
fourth anniversary of the Closing Date and the Tranche B Term Loan
matures on the fifth anniversary of the Closing Date. The
Guarantors guaranty the obligations of the Company under the First
Lien Credit Agreement.
In addition, the Company simultaneously entered into a Second Lien
Credit and Guaranty Agreement (the “Second Lien Credit
Agreement”, and with the First Lien Credit Agreement, the
“Credit Agreements”), by and among the Company, the
Guarantors, Wilmington Trust, National Association, as
Administrative Agent and Collateral Agent (in such capacities, the
“Second Lien Agent”, and together with the First Lien
Agent, collectively the “Agents”), and the lenders
party thereto (the “Second Lien Lenders”, and together
with the First Lien Lenders, the “Lenders”), pursuant
to which the Second Lien Lenders extended a term loan in the
aggregate principal amount of $85.0 million (the “Second Lien
Term Loan”, and collectively with the First Lien Term Loan,
the “Term Loans”, and collectively with the First Lien
Facility, the “Credit Facilities”). Borrowings under
the Second Lien Credit Agreement are computed based upon either the
then current “base” rate of interest or
“LIBOR” rate of interest, as selected by the Company at
the time of its borrowings. The interest on borrowings, under the
Second Lien Term Loan that the Company designates as “base
rate” loans, bear interest per annum at Base
Rate plus 9.50%.
The interest on borrowings, under the Second Lien Term Loan that
the Company designates as “LIBOR” loans, bear interest
per annum at (a) the “LIBOR” rate divided by (b) one
minus the “applicable reserve requirement” of the
Federal Reserve for Eurocurrency liabilities (subject to a floor of
1% for the Second Lien Term Loan), plus 10.50%. The
Second Lien Term Loan has an original issue discount of 4.00% and
it matures 5.5 years from the Closing Date. The Guarantors guaranty
the obligations of the Company under the Second Lien Credit
Agreement. The Credit Facilities may be prepaid, in whole or in
part, subject to specified prepayment premiums.
As of June 30, 2018, the Credit Facilities (including the Revolving
Facility) bear interest at a weighted-average rate of approximately
LIBOR plus 7.6%. Excluding the Revolving Facility, the Credit
Facilities bear interest at a weighted-average rate of
approximately LIBOR plus 7.7%.
In connection with the Credit Facilities, the Company entered into
(i) a First Lien Pledge and Security Agreement with the First Lien
Agent and (ii) a Second Lien Pledge and Security Agreement with the
Second Lien Agent, pursuant to which the Company and the Guarantors
pledged substantially all of their owned and after acquired
property as security for the obligations under the Credit
Agreements, including the capital stock of the Guarantors and other
direct and indirect subsidiaries of the Company (subject to certain
limitations and restrictions set forth in these
agreements).
17
Under the Credit Agreements, 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 Lenders, incurring additional indebtedness, making capital
expenditures, dividend payments and cash distributions by
subsidiaries. Furthermore, the Company is required to comply with
various financial covenants, including net leverage ratio, fixed
charge coverage ratio and maximum levels of consolidated capital
expenditures; 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. As of
June 30, 2018, the Company was in compliance with these financial
covenants.
The proceeds of the Term Loans were used, in part, to refinance all
of the existing indebtedness of Fusion and its subsidiaries
(including Birch), under (i) the Credit Agreement, dated as of
November 14, 2016, as amended, among Fusion NBS Acquisition Corp.,
a subsidiary of Fusion (“FNBS”), East West Bank
(“EWB”), as Administrative Agent, Swingline Lender, an
Issuing Bank and a Lender, and the other lenders party thereto;
(ii) the Fifth Amended and Restated Securities Purchase Agreement
and Security Agreement, dated as of November 14, 2016, as amended,
among FNBS, Fusion, the subsidiaries of Fusion guarantors thereto,
Praesidian Capital Opportunity Fund III, LP, as Agent, and the
lenders party thereto; and (iii) the Credit Agreement, dated as of
July 18, 2014, among Birch, Birch Communications, Inc., Cbeyond,
Inc., the other guarantors party thereto, the lenders party thereto
and PNC Bank, National Association, as Administrative Agent. In
addition, the Term Loans were used to repay, in full, approximately
$0.9 million of indebtedness under that certain Second Amended and
Restated Unsecured Promissory Note, dated November 14, 2016,
payable by Fusion to Marvin Rosen. The proceeds were also used to
pay the fees and expenses associated with the Birch merger and
related transactions, including fees and expenses in connection
with the Credit Facilities. The pay-off of the previous credit
facilities, including the expensing of the related remaining
unamortized debt costs, resulted in a debt extinguishment for
accounting purposes. For the three and six months ended June 30,
2018, the Company recorded a loss on debt extinguishment of $14.4
million. For additional information on the previous credit
facilities, see Birch's audited financial statements and notes
thereto included in the Form 8-K filed by Fusion with the SEC on
May 10, 2018.
The Term Loans were also used to make a prepayment of an aggregate
of approximately $3.0 million of indebtedness of Birch under
related party subordinated notes each dated October 28, 2016, in
favor of Holcombe T. Green, Jr., R. Kirby Godsey and the Holcombe
T. Green, Jr. 2013 Five-Year Annuity Trust. The remaining balance
of $3.3 million was brought forward and is now evidenced by three
Amended and Restated Subordinated Notes, each dated as of the Birch
Closing Date (the “Bircan Notes”). The Bircan Notes
accrue interest at the rate of 12% per annum, with interest due in
quarterly installments. The Bircan Notes are being amortized in
three equal installments and will be paid off in March 2019. The
Bircan Notes are unsecured and the Company’s obligations
thereunder are subordinated to amounts borrowed under the Credit
Facilities.
In addition, $62.0 million of the Tranche B Term Loan was used by
the Company to pay the cash portion of the purchase price for
MegaPath and certain expenses incurred in connection with that
transaction. See note 4 for additional information on the MegaPath
Merger.
Green Subordinated Note
On the Birch Closing Date, Holcombe T. Green, Jr. loaned the
Company an additional $10 million, which is evidenced by a
subordinated promissory note (the “Green Note”). The
Green Note accrues interest at a rate of 13% per annum, was issued
with an original issue discount of 4% and matures on the date which
is 91 days after the maturity date of the Second Lien Term Loan.
Prior to maturity, only interest is payable on the Green Note. The
Green Note is unsecured, and obligations thereunder are
subordinated to amounts borrowed under the Credit
Facilities.
Vector Facility
In connection with its participation in the Tranche B Term Loan
under the First Lien Credit Agreement, Vector Fusion Holdings
(Cayman), Ltd. (“Vector”) entered into a separate
credit agreement (the “Vector Credit Agreement”) with
Goldman Sachs Lending Partners LLC, as administrative agent and
lender (“Goldman Sachs”), and U.S. Bank National
Association, as collateral agent and collateral custodian, pursuant
to which Vector borrowed funds from Goldman Sachs, the proceeds of
which were used to purchase Tranche B Term Loans under the First
Lien Credit Agreement. In connection therewith, Vector issued to
the Company, and the Company purchased from Vector, a $25 million
unsecured subordinated note (the “Vector Note”). The
Vector Note bears interest at the rate earned by the bank account
in which the proceeds of the Vector Note have been deposited and
matures on May 3, 2024. The Vector Note is subordinate in right of
payment to Vector’s loan from Goldman Sachs. Except in
limited circumstances, the Company is not entitled to any
distribution on account of the principal, premium or interest or
any other amount in respect of the Vector Note until all amounts
owed by Vector under the Vector Credit Agreement are paid in full.
Similarly, while the Company has the right to declare obligations
under the Vector Note to be immediately due and payable upon the
occurrence of an event of default (including, without limitation,
in the event of any insolvency, bankruptcy or liquidation of
Vector), the Company is not entitled to receive any payment on
account of the Vector Note until Vector’s obligations under
the Vector Credit Agreement are paid in full. The Vector Note is
pledged as security for the Company’s obligations under the
Credit Facilities.
18
In addition, in connection with its participation in
the Tranche B Term Loan, Vector and certain of its affiliates
entered into a side letter with the Company pursuant to which
Vector is entitled to certain non-voting board observation rights,
including the receipt of materials provided to the Company’s
board and attendance at regularly scheduled quarterly Company board
meetings. Such board observation rights are not transferrable to
any assignee of the Tranche B Term Loans.
Estimated
future aggregate payments for long-term debt are expected are
expected to be as follows (in thousands):
remainder
of 2018
|
$23,068
|
2019
|
28,842
|
2020
|
38,156
|
2021
|
41,625
|
2022
|
72,844
|
Thereafter
|
448,813
|
|
$653,348
|
Note 14. Obligations Under Asset Purchase Agreements
In
connection with certain historical acquisitions completed by
Fusion, 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 agreements. Such
obligations to sellers or other parties associated with these
transactions are as follows (in thousands):
|
June 30,
|
December 31,
|
|
2018
|
2017
|
Customer
base acquisitions
|
$38
|
$-
|
IQMax
|
447
|
-
|
|
485
|
|
Less
current portion(1)
|
(485)
|
-
|
Long-term
portion
|
$-
|
$-
|
(1) Included in "other accrued liabilities" on the
accompanying condensed consolidated balance sheets as of June 30,
2018.
Note 15. Revenues from Contracts with Customers
The
Company adopted ASC 606 using the modified retrospective method by
recognizing the cumulative effect of initially applying ASC 606 as
an adjustment to the opening balance of stockholders’ equity
at January 1, 2018. Under the new guidance, these service revenues
continue to be recognized when the services are provided. However,
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. The following table presents the
cumulative effect of the changes made to the consolidated balance
sheet at January 1, 2018 (in thousands):
|
Balance as of
|
ASC 606
|
Balance as of
|
|
December 31,
2017
|
Transition
Adjustment
|
January 1,
2018
|
Assets
|
|
|
|
Prepaid
expenses
|
$6,290
|
$2,203
|
$8,493
|
Intangible
assets, net
|
68,834
|
(3,304)
|
65,530
|
Other
non-current assets
|
877
|
4,826
|
5,703
|
|
$76,001
|
$3,725
|
$79,726
|
Stockholders'
Equity
|
|
|
|
Accumulated
deficit
|
$(236,477)
|
$3,725
|
$(232,752)
|
19
The
following table summarizes the current impacts associated with the
adoption of ASC 606 on the accompanying condensed consolidated
balance sheet and statement of operations and comprehensive loss
(in thousands):
|
June 30, 2018
|
||
|
|
|
Impact
of
|
|
As
reported
|
Previous
guidance
|
Adoption
of ASC 606
|
Assets
|
|
|
|
Prepaid
expenses
|
$10,443
|
$8,226
|
$2,217
|
Intangible
assets, net
|
183,826
|
189,020
|
(5,194)
|
Other
non-current assets
|
33,462
|
30,485
|
2,977
|
|
|
|
|
Liabilities
|
|
|
|
Deferred
customer revenue
|
(16,030)
|
(15,864)
|
(166)
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
Accumulated
deficit
|
(264,752)
|
(264,586)
|
(166)
|
Amortization
of deferred commissions was $0.5 million and $0.9 million for the
three and six months ended June 30, 2018,
respectively.
|
For the
three months ended June 30, 2018
|
||
|
|
|
Impact
of
|
|
As
reported
|
Previous
guidance
|
Adoption
of ASC 606
|
|
|
|
|
Revenues
|
$120,803
|
$120,968
|
$(165)
|
Selling,
general and administrative
|
43,001
|
43,668
|
(667)
|
Net
Impact
|
$77,802
|
$77,300
|
$502
|
|
For the
six months ended June 30, 2018
|
||
|
|
|
Impact
of
|
|
As
reported
|
Previous
guidance
|
Adoption
of ASC 606
|
|
|
|
|
Revenues
|
$223,714
|
$223,879
|
$(165)
|
Selling,
general and administrative
|
66,767
|
67,852
|
(1,085)
|
Net
Impact
|
$156,947
|
$156,027
|
$920
|
The
impact associated with the adoption of ASC 606 on net income, basic
and diluted net loss per share, consolidated statement of
operations and the consolidated statement of cash flows were not
material for the three and six months ended June 30,
2018.
The
following table includes estimated revenue expected to be
recognized in the future related to performance obligations that
are unsatisfied (or partially unsatisfied) at the end of the
reporting period (in thousands):
|
Deferred installation
|
Deferred installation
|
|
|
revenue
|
costs
|
Net
|
|
|
|
|
remaining
2018
|
$21
|
$(887)
|
$(866)
|
2019
|
33
|
(1,490)
|
(1,457)
|
2020
|
28
|
(949)
|
(921)
|
2021
|
28
|
(179)
|
(151)
|
2022
and thereafter
|
11
|
(18)
|
(7)
|
|
$121
|
$(3,523)
|
$(3,402)
|
20
Summary
of disaggregated revenue is as follows (in thousands):
|
For the three months ended June 30,
|
|
|
2018
|
2017
|
Monthly
recurring
|
$104,651
|
$100,388
|
Usage
and other
|
15,892
|
15,915
|
Installation
|
260
|
374
|
Total
revenue
|
$120,803
|
$116,677
|
|
For the six months ended June 30,
|
|
|
2018
|
2017
|
Monthly
recurring
|
$190,562
|
$200,599
|
Usage
and other
|
32,555
|
30,344
|
Installation
|
597
|
800
|
Total
revenue
|
$223,714
|
$231,743
|
Summary
of revenue by country is as follows (in thousands):
|
For the three months ended June 30,
|
|
|
2018
|
2017
|
United
States
|
$97,302
|
$89,900
|
Canada
|
23,501
|
26,777
|
Total
revenue
|
$120,803
|
$116,677
|
|
For the six months ended June 30,
|
|
|
2018
|
2017
|
United
States
|
$176,390
|
$204,966
|
Canada
|
47,324
|
26,777
|
Total
revenue
|
$223,714
|
$231,743
|
Note 16. Equity Transactions
Private Placements of Common Stock
Immediately prior to the closing of the Birch Merger, Fusion
entered into three separate common stock purchase agreements and
simultaneously consummated the sale of shares of Fusion common
stock thereunder. Specifically, Fusion issued and sold (i) 952,382
shares of its common stock, for an aggregate purchase price of
approximately $5.0 million, to North Haven Credit Partners II L.P.,
one of the Second Lien Lenders, which is managed by Morgan Stanley
Credit Partners; (ii) 380,953
shares of its common stock, for an aggregate purchase price of
approximately $2.0 million, to Aetna Life Insurance Company; and
(iii) 190,477 shares of its common stock, for an aggregate purchase
price of approximately $1.0 million to Backcast Credit
Opportunities Fund I, L.P. In connection with these private
placements, Fusion paid an aggregate of $492,000 of
fees.
Private Placement of Series D Preferred Stock
Immediately prior to the closing of the Birch Merger, Fusion
entered into a preferred stock purchase agreement with Holcombe T.
Green, Jr. pursuant to which it issued and sold to Mr. Green 15,000
shares of its Series D Cumulative Preferred Stock, par value $0.01
per share (the “Series D Preferred Stock”), for an
aggregate purchase price of $14.7 million, and Fusion paid a
$200,000 closing fee to Mr. Green. The Series D Preferred
Stock has a stated value of $15.0 million. The Series D Preferred
Stock accrues dividends when, as and
if declared by the Company’s board at an annual rate of 12%
per annum, payable monthly in arrears on a cumulative basis.
From the
Birch Closing Date through June 30, 2018, accrued and undeclared
dividends were $0.2 million.
21
Stock Options
The Company’s 2016 equity incentive plan reserves a
number of shares of Fusion common stock equal to 10% of its common
stock outstanding from time to time on a fully diluted basis,
adjusted upward for the number of shares available for grant under
its 2009 stock option plan plus a number of shares covered by
options granted under the 2009 plan that expire without being
exercised. The Company’s 2016 equity incentive 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 issued under the various plans 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
Company recognized compensation expense of $0.1 million from the
Birch Closing Date through June 30, 2018. This amount is included
in SG&A in the unaudited condensed consolidated statements of
operations.
The
following table summarizes stock option activity for the six months
ended June 30, 2018 (number of options in thousands):
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
Outstanding
at December 31, 2017
|
-
|
$-
|
-
|
Acquired
in reverse acquisition
|
1,996
|
3.48
|
-
|
Granted
|
-
|
-
|
-
|
Exercised
|
(26)
|
2.67
|
-
|
Forfeited
|
(14)
|
1.97
|
-
|
Expired
|
(1)
|
6.35
|
-
|
Outstanding
at June 30, 2018
|
1,955
|
3.50
|
7.79
|
Exercisable
at June 30, 2018
|
1,428
|
4.01
|
7.62
|
As of
June 30, 2018, the Company had approximately $0.7 million of
unrecognized compensation expense related to stock options granted
under its stock-based compensation plans. This amount is expected
to be recognized over a weighted-average period of 1.6
years.
Note 17. Commitments and Contingencies
From time to time, the Company is involved in legal proceedings
arising in the ordinary course of business, including, for
example, civil litigation arising from customer complaints, breach
of contract, billing and collection issues, employee claims, and
intellectual property. In addition, from
time to time the Company is involved in various investigations and
proceedings relating to its compliance with various federal and
state laws, including those relating to its provision of cloud and
business services. Defending such proceedings can be costly and can
impose a significant burden on the Company’s management and
employees. The Company establishes a liability with respect to
contingencies when a loss is probable and it is able to reasonably
estimate such loss. At June 30, 2018, we believe we have adequate
reserves for these liabilities, when taking into account
contractual indemnitees that have been provided to the Company. For
certain matters in which the Company is involved, for which a loss
is reasonably possible, we are not currently able to reasonably
estimate the potential loss. While the ultimate resolution of, and
costs associated with, these litigation and regulatory matters are
uncertain, the Company does not currently believe that any of these
pending matters will have a material adverse effect on the
Company’s results of operations, financial condition or
liquidity.
Note 18. Income Taxes
During
the six months ended June 30, 2018, the Company recorded an income
tax benefit of $4.9 million, resulting in an effective tax rate for
the same period of approximately 11.43%. The difference between the
effective tax rate and the federal statutory rate primarily relates
to changes in the valuation allowance on net deferred tax assets
and certain discrete items. For the six months ended June 30, 2018,
the income tax benefit includes certain refundable credits of which
$4.3 million was recorded as a discrete benefit, partially offset
by foreign and state taxes and amortization of intangibles with
indefinite useful lives.
22
As of
June 30, 2018, the Company had a full valuation allowance recorded
against all of its net deferred tax assets, exclusive of its
deferred tax liabilities with indefinite useful lives. The Company
continually reviews the adequacy of the valuation allowance and
recognizes the benefits of deferred tax assets only as the
reassessment indicates that it is more likely than not that the
deferred tax assets will be realized. As of June 30, 2018, the
Company does not believe it is more likely than not that the
remaining net deferred tax assets will be realized. Should the
Company’s assessment change in a future period it may release
all or a portion of the valuation allowance at such time, which
would result in a deferred tax benefit in the period of
adjustment.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin
No. 118 (“SAB 118”) to address the application of U.S.
GAAP in situations when a registrant does not have the necessary
information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for
certain income tax effects of the 2017 Tax Act. We recognized some
provisional tax impacts related to the revaluation of deferred tax
assets and liabilities in our consolidated financial statements for
the year ended December 31, 2017, as we did not have all the
information regarding the changes of the 2017 Tax Act to determine
any impact. The current period includes $2.3 million of tax benefit
related to tax reform for certain refundable credits and the
release of the valuation against our indefinite lived
intangibles. The ultimate impact may differ from those
provisional amounts due to, among other things, additional
analysis, changes in interpretations and assumptions we have made,
additional regulatory guidance that may be issued, and actions we
may take as a result of the 2017 Tax Act. Any adjustments made to
the provisional amounts under SAB 118 will be recorded as discrete
adjustments in the period identified (not to extend beyond the
one-year measurement provided in SAB118).
23
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
information contained in our unaudited condensed consolidated
financial statements and the notes thereto appearing elsewhere
herein and with Birch’s audited financial statements and
notes thereto included in the Form 8-K filed by the Company with
the SEC on May 10, 2018. As further described in “Note 4
– Acquisitions” in this report, Birch was determined to
be the accounting acquirer in the Birch Merger and, accordingly,
the historical financial information presented in this report,
including for the second quarter of 2017, reflects the standalone
financial statements of Birch and, therefore, period-over-period
comparisons may not be meaningful.
Certain statements and the discussion contained herein regarding
the Company’s business and operations may include
“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,” “plans,”
“expect,” “anticipate,”
“intend,” “estimate” or
“continue” or the negative thereof or other variations
thereof or comparable terminology. The reader is cautioned that all
forward-looking statements are speculative and are subject to risks
and uncertainties, including those set forth under Item 1A,
“Risk Factors” in Fusion’s Annual Report on Form
10-K for the year ended December 31, 2017, and Part II, Item 1A in
this report, that could cause actual events or results to differ
materially from historical results or anticipated results. The
risks of the Company include, among other things, its ability to
attract new capital to execute its comprehensive business strategy,
its ability to integrate acquisitions, its ability to comply with
the terms of the Credit Facilities, competitors with broader
product lines and greater resources, emergence into new markets,
acts of war, terrorism or other events beyond the Company’s
control and the other factors identified by the Company from time
to time in its filings with the SEC. However, the risks included
should not be assumed to be the only risks that could affect future
performance. All forward-looking statements included in this report
are made as of the date hereof, are based on information available
to the Company as of that date, and the Company assumes no
obligation to update any such forward-looking
statements.
OVERVIEW
Recent Developments
Birch
On the Birch Closing Date, Fusion completed the various
transactions contemplated by the Birch Merger Agreement. As
contemplated therein, on the Birch Closing Date, Birch merged with
and into BCHI Merger Sub, with BCHI Merger Sub surviving the merger
as a wholly-owned subsidiary of Fusion. For accounting
purposes, the Birch Merger is treated as a “reverse
acquisition” under U.S. GAAP and Birch is considered the
accounting acquirer. Birch was
determined to be the accounting acquirer based on the terms of the
Birch Merger Agreement and other factors, such as relative stock
ownership of the Company following the Birch Merger.
Accordingly, Birch’s historical results of operations replace
Fusion’s historical results of operations for all periods
prior to the Birch Merger and, for all periods following the Birch
Merger, the results of operations of the combined company will be
included in the Fusion’s financial statements. All share numbers and other information about
equity securities prior to the acquisition of Birch in this report
relate to Fusion and give effect to the Reverse Split. See note 4
in the accompanying unaudited condensed consolidated
financial statements for additional information on the reverse acquisition.
On the Birch Closing Date, all of the outstanding shares of common
stock of Birch (other than treasury shares or shares owned of
record by any Birch subsidiary) were cancelled and converted into
the right to receive the Merger Shares. Pursuant to subscription
agreements executed by each of the former shareholders of Birch,
the Merger Shares were issued in the name of, and are held by, BCHI
Holdings.
MegaPath
On the MegaPath Closing Date (June 15, 2018), the Company completed
the MegaPath Merger. In accordance with the terms of the MegaPath
Merger Agreement, the Company paid approximately $61.5 million of
the $71.5 million purchase price in cash , with approximately $10
million of the purchase price paid in 1,679,144 shares of
Fusion’s common stock, at an agreed upon price of $5.775 per
share. As a result of the fixed price at which the shares were
issued, from an accounting perspective, the total purchase price
was $68.3 million. Of the cash consideration, $2.5 million was
deposited into an escrow account to be held for one year to secure
the indemnification obligations in favor of the Company under the
MegaPath Merger Agreement. The financial statements included in
this report and in future reports filed by the Company include
adjustments to reflect the acquisition of MegaPath as of MegaPath
Closing Date.
24
The cash consideration, as well as certain expenses associated with
the MegaPath Merger, was funded from $62.0 million of
borrowings under the First Lien Credit Agreement. See note 13 in
the accompanying unaudited condensed consolidated financial
statements for additional
information on the terms of the First Lien Credit
Agreement.
See note 4 in the accompanying unaudited condensed
consolidated financial statements for additional information
regarding the Birch Merger and MegaPath Merger.
Our Business
We are a provider of integrated cloud solutions to small, medium
and large businesses. Our innovative cloud solutions lower our
customers' cost of ownership and deliver new levels of security,
flexibility, scalability and speed of deployment.
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 products and services include cloud
voice and Unified Communications-as-a-Service, improving
communication 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 and contact center solutions. Our cloud
computing and Infrastructure-as-a-Service solutions are designed to
provide our larger enterprise customers with a platform on which
additional cloud services can be layered. Complemented
by our Software-as-a-Service 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.
COMPONENTS OF STATEMENTS OF OPERATIONS
Revenue
We
generate revenue primarily from monthly recurring, usage and
installation fees related to the provision of cloud and business
services.
Cost of Revenue
Cost of
revenue primarily consists of circuit and third-party service costs
and taxes and fees.
SG&A
SG&A
consist primarily of costs related to
sales and marketing, compensation and other expense for executive,
finance, product development, human resources and administrative
personnel, professional fees and other general corporate
costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of financial condition and results of
operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with U.S.
GAAP. The preparation of
these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosure of contingent assets
and liabilities. Management makes these estimates on their
historical experience and on various other assumptions that they
believe to be reasonable under the circumstances, and these
estimates form the basis for their judgments concerning the
carrying values of assets and liabilities that are not readily
apparent from other sources. Management periodically
evaluates these estimates and judgments based on available
information and experience. Actual results may differ substantially
from these estimates. If actual results significantly
differ from management estimates, the Company’s 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.
25
Revenue Recognition
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 revenue recognition guidance provided by
ASC 606. 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.
Customer revenue includes revenue received from the sale of
integrated cloud solutions and business services and is comprised
of monthly recurring charges, usage charges and initial
nonrecurring charges. Monthly recurring charges include the fees
paid by customers for services. 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 revenue derived from sales of
communications equipment, such as phones. The Company recognizes
installation revenue when the installation is
complete.
Deferred Commissions
Direct incremental costs of obtaining a contract, consisting of
sales commissions, are deferred and amortized over the estimated
life of the customer, which is currently 36 months. We calculate
the estimated life of the customer on an annual basis. The Company
classifies deferred commissions as prepaid expenses or other
noncurrent assets expenses based on the timing of when it expects
to recognize the expense.
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.
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. During the three months ended June 30,
2018 and 2017, the Company recorded no impairment charges. During
the six months ended June 30, 2018 and 2017, the Company recorded
impairment charges of $2.3 million and $0,
respectively.
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.
26
Recently Issued Accounting Pronouncements
Recently
issued accounting pronouncements are summarized in note 2 in the
accompanying unaudited condensed consolidated financial statements.
RESULTS
OF OPERATIONS
Three Months Ended June 30, 2018 Compared with Three Months Ended
June 30, 2017
The
results of Fusion have been included in the financial results for
the combined company from the Birch Closing Date and MegaPath from
the MegaPath Closing Date.
|
Three Months Ended June 30,
|
|||
|
2018
|
2017
|
||
|
|
%
|
|
%
|
Revenue
|
$120,803
|
100.0
|
$116,677
|
100.0
|
Cost
of revenue *
|
66,189
|
54.8
|
63,039
|
54.0
|
Gross profit
|
54,614
|
45.2
|
53,638
|
46.0
|
SG&A
|
43,001
|
35.6
|
29,009
|
24.9
|
Depreciation
and amortization
|
16,712
|
13.8
|
17,625
|
15.1
|
Foreign
currency loss (gain)
|
241
|
0.2
|
(131)
|
(0.1)
|
Total
operating expenses
|
59,954
|
49.6
|
46,503
|
39.9
|
Operating (loss) income
|
(5,340)
|
(0.04)
|
7,135
|
6.1
|
Other expense:
|
|
|
|
|
Interest
expense, net
|
(17,608)
|
(14.6)
|
(11,852)
|
(10.2)
|
Loss
on debt extinguishment
|
(14,414)
|
(11.9)
|
-
|
-
|
Other
expense
|
(211)
|
(0.2)
|
(28)
|
-
|
Total other
expense
|
(32,233)
|
(26.7)
|
(11,880)
|
(10.2)
|
Loss before income taxes
|
(37,573)
|
(31.1)
|
(4,745)
|
(4.1)
|
Income
tax benefit
|
3,872
|
3.2
|
44
|
-
|
Net loss from continuing operations
|
(33,701)
|
(27.6)
|
(4,701)
|
(4.0)
|
Net income (loss) from discontinued operations
|
15,179
|
12.6
|
(4,743)
|
(4.1)
|
Net loss
|
$(18,522)
|
(15.3)
|
$(9,444)
|
(8.1)
|
__________
*Exclusive
of depreciation and amortization, shown separately.
Revenues
Revenue
increased to $120.8 million for the three months ended June 30,
2018, as compared to $116.7 million for the same period in 2017.
This
increase is primarily due to $17.7 million of revenue attributable
to Fusion and $1.6 million of revenue attributable to MegaPath,
partially offset by $15.2 million impact of churn.
Cost of Revenue and Gross Profit
Cost of
revenue increased to $66.2 million for the three months ended June
30, 2018, as compared to $63.0 million for the same period in 2017.
This increase is primarily due to $8.1 million of costs
attributable to Fusion and $1.1 million of costs attributable to
MegaPath, partially offset by $6.0 million costs associated with a
lower revenue volume.
Gross margin was 45.2% for the three months ended June 30, 2018, as
compared to 46.0% for the same period in 2017. This decrease
is primarily due to the fixed cost network becoming a higher
percent of cost of revenue.
27
SG&A
SG&A
increased to $43.0 million for the three months ended June 30,
2018, as compared to $29.0 million for the same period in 2017.
This
increase is primarily due to $8.9 million of transactions costs,
$0.9 million in restructuring costs, $5.7 million of expenses
attributable to Fusion, $1.6 million of expenses attributable to
MegaPath, partially offset by $2.7 million in headcount reduction
and discretionary items.
Depreciation and Amortization
Depreciation
and amortization expense decreased to $16.7 million for the three
months ended June 30, 2018, as compared to $17.6 million for the
same period in 2017. This decrease is primarily due to the impact
of impairment charges in the fourth quarter of 2017, partially
offset by the additional depreciation and amortization expense on
the Fusion assets.
Interest Expense
Interest
expense increased to $17.6 million for the three months ended June
30, 2018, as compared to $11.9 million for the same period in 2017.
This increase is primarily
due to increased borrowings and interest rate under our Credit
Facilities.
Income Tax Benefit
For the
three months ended June 30, 2018, the income tax benefit of $3.9
million includes discrete benefits of $3.4 million. The discrete
benefit includes certain refundable credits of $1.4 million,
indefinite lived intangibles of $1.5 million and certain state tax
refunds of $1.0 million, partially offset by foreign and state
taxes. For the three months ended June 30, 2017, the income tax
benefit of $0.1 million was related to historical Birch tax
positions.
Loss on Debt Extinguishment
Loss on debt extinguishment was $14.4 million for the three months
ended June 30, 2018. This loss resulted from the pay-off of the
prior credit facilities of Fusion and Birch in May 2018. See note
13 in the accompanying unaudited condensed consolidated
financial statements for information on our debt.
Net Income (Loss) from Discontinued Operations
Net
income from discontinued operations was $15.2 million for the three
months ended June 30, 2018, as compared to a net loss of $4.7
million for the same period in 2017, resulting from the spin-off of
the Birch Consumer Segment immediately prior to the Birch Merger.
See note 3 in the
accompanying unaudited condensed consolidated financial statements
for additional information on discontinued operations.
Six Months Ended June 30, 2018 Compared with Six Months Ended June
30, 2017
The
results of Fusion have been included in the financial results for
the combined company from the Birch Closing Date and MegaPath from
the MegaPath Closing Date.
|
Six Months Ended June 30,
|
|||
|
2018
|
2017
|
||
|
|
%
|
|
%
|
Revenue
|
$223,714
|
100.0
|
$231,743
|
100.0
|
Cost
of revenue *
|
121,316
|
54.2
|
125,899
|
54.3
|
Gross profit
|
102,398
|
45.8
|
105,844
|
45.7
|
SG&A
|
66,767
|
29.8
|
61,334
|
26.5
|
Depreciation
and amortization
|
31,441
|
14.1
|
33,642
|
14.5
|
Impairment
losses on intangible assets
|
2,314
|
1.0
|
-
|
-
|
Foreign
currency loss (gain)
|
511
|
0.2
|
(166)
|
(0.1)
|
Total
operating expenses
|
101,033
|
45.2
|
94,810
|
40.9
|
Operating income
|
1,365
|
0.6
|
11,034
|
4.8
|
Other expense:
|
|
|
|
|
Interest
expense, net
|
(29,370)
|
(13.1)
|
(21,481)
|
(9.3)
|
Loss
on debt extinguishment
|
(14,414)
|
(6.4)
|
-
|
-
|
Other
(expense) income
|
(168)
|
(0.1)
|
50
|
-
|
Total other
expense
|
(43,952)
|
(19.6)
|
(21,431)
|
(9.2)
|
Loss before income taxes
|
(42,587)
|
(19.0)
|
(10,397)
|
(4.5)
|
Income
tax benefit (expense)
|
4,869
|
2.2
|
(1,354)
|
(0.6)
|
Net loss from continuing operations
|
(37,718)
|
(16.9)
|
(11,751)
|
(5.1)
|
Net income (loss) from discontinued operations
|
6,218
|
2.8
|
(8,133)
|
(3.5)
|
Net loss
|
$(31,500)
|
(14.1)
|
$(19,884)
|
(8.6)
|
__________
*Exclusive
of depreciation and amortization, shown separately.
28
Revenues
Revenues
decreased to $223.7 million for the six months ended June 30, 2018,
as compared to $231.7 million for the same period in 2017.
This
decrease is primarily due to $27.3 million of net revenue loss
driven by 2017 churn, partially offset by $17.7 million of revenue
attributable to Fusion and $1.6 million of revenue attributable to
MegaPath.
Cost of Revenue and Gross Profit
Cost of
revenue decreased to $121.3 million for the six months ended June
30, 2018, as compared to $125.9 million for the same period in
2017. This decrease is primarily due to $13.8 million of lower
revenue volume, partially offset by
$8.1 million of costs attributable to Fusion and $1.1 million of
costs attributable to MegaPath.
Gross margin remained fairly constant at 45.8% for the six months
ended June 30, 2018, as compared to 45.7% for the same period in
2017.
SG&A
SG&A
increased to $66.8 million for the six months ended June 30, 2018,
as compared to $61.3 million for the same period in 2017.
This
increase is primarily due to $9.9 million of transaction costs,
$0.4 million in restructuring costs, $5.6 million of expenses
attributable to Fusion and $1.6 million of expenses attributable to
MegaPath, partially offset by $6.5 million in headcount reduction,
$1.9 million in lower rent and facilities costs and $3.6 million in
lower discretionary items.
Depreciation and Amortization
Depreciation
and amortization expense decreased to $31.4 million for the six
months ended June 30, 2018, as compared to $33.6 million for the
same period in 2017. This decrease is primarily due to the impact
of impairment charges in the fourth quarter of 2017, partially
offset by the additional depreciation and amortization expense on
the Fusion assets.
Impairment Losses on Intangible Assets
During
the six months ended June 30, 2018, the Company recorded an
impairment charge of $2.3 million on certain intangible assets.
There was no comparable charge during the same period in
2017.
Interest Expense
Interest
expense increased to $29.3 million for the six months ended June
30, 2018, as compared to $21.5 million for the same period in 2017.
This increase is primarily
due to increased borrowings and interest rate under our Credit
Facilities.
Income Tax (Benefit) Expense
For the
six months ended June 30, 2018, the income tax benefit of $4.9
million includes discrete benefits of $4.4 million. The discrete
benefit includes certain refundable credits of $1.4 million,
indefinite lived intangibles of $2.6 million and certain state tax
refunds of $1.0 million, partially offset by foreign and state
taxes. For the six months ended June 30, 2017, the income tax
expense of $1.4 million was related to historical Birch tax
positions.
Loss on Debt Extinguishment
Loss on debt extinguishment was $14.4 million for the six months
ended June 30, 2018. This loss resulted from the pay-off of the
prior credit facilities of Fusion and Birch in May 2018. See note
13 in the accompanying unaudited condensed consolidated
financial statements for information on our debt.
Net Income (Loss) from Discontinued Operations
Net
income from discontinued operations was $6.2 million for the six
months ended June 30, 2018, as compared to a net loss of $8.1
million for the same period in 2017, resulting from the spin-off of
the Birch Consumer Segment in May 2018. See note 3 in the
accompanying unaudited condensed consolidated financial statements
for additional information on discontinued operations.
29
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Since our inception, we have incurred significant net losses.
During the three and six months ended June 30, 2018, we had a net
loss of $18.5 million and $31.5 million, respectively. At June 30,
2018, we had a working capital deficit of $84.3 million and
stockholders’ deficit of $118.9 million. Our cash balance at
June 30, 2018 was $13.5 million. While our management projects that
we have sufficient cash to fund our operations and meet our
operating and debt obligations for the next twelve months, we may
decide to either raise additional capital, limit our discretionary
capital expenditures or borrow amounts available under the
Revolving Facility to support our business plan. There is currently
no commitment for additional funding and there can be no assurances
that other funds will be available on terms that are 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 further expansion of our business. Subject to the
rights of holders of our Series D Preferred Stock, any future
determination to pay dividends is at the discretion of the
Company’s board, and will be dependent upon our financial
condition, operating results, capital requirements, general
business conditions, the terms of our then existing credit
facilities, limitations under Delaware law and other factors that
the Company’s board and senior management consider
appropriate.
The holder of our Series D Preferred Stock is entitled to receive
monthly dividends at an annual rate of 12%. These dividends can be
paid, at the Company’s option, either in cash or, under
certain circumstances, in shares of our common stock. From the
Birch Closing Date through June 30, 2018, undeclared dividends on
the Series D Preferred Stock were $0.2 million.
Capital Resources
On the
Birch Closing Date, the Company entered into the First Lien Credit Agreement, which provides
for a $45.0 million Tranche A Term Loan, a $510.0 million Tranche B
Term Loan and the $40.0 million Revolving Facility. In addition,
the Company simultaneously entered into the Second Lien Credit
Agreement, which provides for an $85.0 million term loan. The
proceeds of the Term Loans were used to refinance all of the then
existing indebtedness of Fusion and its subsidiaries (including
Birch), except for the Bircan Notes, and to finance the cash
portion of the consideration for the MegaPath Merger. See note 13
for further information.
As of June 30, 2018, our debt consisted of the following (in
thousands):
First
Lien Credit Agreement:
|
|
Tranche
A Term Loan, matures May 2022
|
$45,000
|
Tranche
B Term Loan, matures May 2023
|
510,000
|
Revolving
Facility, matures May 2022
|
-
|
Second
Lien Credit Agreement – Term Loan, matures November
2022
|
85,000
|
Subordinated
Note, matures February 2023
|
10,000
|
Bircan
Notes Payable, matures March 2019
|
3,348
|
|
653,348
|
Less:
|
|
Discounts
|
(48,828)
|
Current
portion
|
(24,500)
|
|
$580,020
|
As
of June 30, 2018, the Credit Facilities (including the Revolving
Facility) bear interest at a weighted-average rate of approximately
LIBOR plus 7.6%. Excluding the Revolving Facility, the Credit
Facilities bear interest at a weighted-average rate of
approximately LIBOR plus 7.7%.
Under the Credit Agreements, 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 Lenders, incurring additional indebtedness, making capital
expenditures, dividend payments and cash distributions by
subsidiaries. Furthermore, the Company is required to comply with
various financial covenants, including net leverage ratio, fixed
charge coverage ratio and maximum levels of consolidated capital
expenditures; 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. As of
June 30, 2018, the Company was in compliance with these financial
covenants.
30
The following table sets forth a summary of our cash flows for the
periods indicated (in thousands):
|
Six Months Ended June 30,
|
|
|
2018
|
2017
|
Net
cash provided by operating activities
|
$1,915
|
$26,055
|
Net
cash used in investing activities
|
(37,410)
|
(22,614)
|
Net
cash provided by (used in) financing activities
|
43,364
|
(2,910)
|
Net
increase in cash and cash equivalents
|
7,869
|
531
|
Cash
and cash equivalents, beginning of period
|
5,757
|
8,208
|
Foreign
currency translation effect on cash
|
(91)
|
27
|
Cash
and cash equivalents, end of period
|
$13,535
|
$8,766
|
The following table illustrates the primary components of our cash
flows provided by operations (in thousands):
|
Six Months Ended June 30,
|
|
|
2018
|
2017
|
Net
loss from continuing operations
|
$(37,718)
|
$(11,751)
|
Net
loss from discontinued operations
|
6,218
|
(8,133)
|
Net
loss
|
(31,500)
|
(19,884)
|
Non-cash
expenses, gains and losses
|
49,850
|
36,378
|
Changes
in accounts receivable
|
(16,062)
|
3,403
|
Changes
in accounts payable
|
25,935
|
10,129
|
Other
|
(11,476)
|
(10,902)
|
Cash
provided by operating activities - continuing
operations
|
10,529
|
27,257
|
Cash provided by operating activities - discontinued
operations
|
(8,614)
|
(1,202)
|
Net cash provided by
operating activities
|
$1,915
|
$26,055
|
For the six months ended June 30, 2018, cash used in investing
activities consists primarily of acquisitions in the amount of
$20.6 million and capital expenditures of $15.4 million. For the
same period in 2017, cash used in investing activities consists
primarily of capital expenditures in the amount of $17.9
million.
For the six months ended June 30, 2018, cash provided by financing activities consists
primarily of proceeds from term loans of $650.0 million, partially
offset by principal payments on previous term loans, revolving
credit facility and other debt of $551.5 million, as well as
issuance costs of $50.4 million. Additionally, cash from financing
activities includes $14.5 million from the issuance of the Series D
Preferred Stock and proceeds from the sale of common stock of $7.5
million. For the same period in 2017, cash provided by financing
activities consists primarily of proceeds from term loans of $15.0
million, $4.3 million of issuance costs and $11.4 million of
repayments of debt obligations.
Other Matters
Inflation
At this
time, we do not believe that inflation has a significant effect on
our operations at this time.
Off-Balance Sheet Arrangements
At June 30, 2018, we have no off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future
material effect on our financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Disclosure
under this section is not required for a smaller reporting
company.
31
Item 4. Controls and Procedures.
Fusion maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (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 Chief Executive
Officer and Chief Financial Officer, as appropriate, 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 Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of Fusion’s
disclosure controls and procedures as of June 30, 2018. Based upon
that evaluation and subject to the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that Fusion’s
disclosure controls and procedures were effective to accomplish
their objectives. However, such evaluation relates only to Fusion.
Management is still in the process of evaluating the internal
controls employed by each of Birch and MegaPath to determine
whether they will be adopted by the Company. Accordingly, our
controls and procedures for the Company are currently evolving and
will continue to evolve during the integration period which we
anticipate will extend through at least the end of 2018, after
which time we expect to be able to fully evaluate the effectiveness
of the controls and procedures of the Company.
Our Chief Executive Officer and Chief Financial Officer do not
expect that our disclosure controls or our internal controls will
prevent all error and all fraud. The design of a control system
must reflect the fact that there are resource constraints and the
benefit of controls must be
considered relative to their cost. Because of the inherent
limitations in all control systems, no evaluation of
controls can provide absolute
assurance that we have detected all of our control issues and all
instances of fraud, if any. The design of any system of controls also is based partly on certain
assumptions about the likelihood of future events and there can be
no assurance that any design will succeed in achieving our stated
goals under all potential future conditions.
Other than with respect to the integration of Birch and MegaPath,
including the potential adoption of certain controls and procedures
thereof, which the Company is still in the process of evaluating,
there have been no other changes in Fusion’s 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 three months ended June 30, 2018 that have materially
affected, or are reasonably likely to materially affect,
Fusion’s internal control over financial
reporting.
32
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
From
time to time, the Company is engaged in legal proceedings arising
in the ordinary course. The Company believes that it has adequate
reserves for and/or is indemnified against these liabilities and
that, as of June 30, 2018, there is no litigation or regulatory
proceeding pending that could have a material adverse effect on our
results of operations and financial condition.
Item 1A. Risk Factors.
Risk
factors describing the major risks to our business can be found in
Item 1A, “Risk Factors,” in Fusion’s Form 10-K
for the year ended December 31, 2017. There have been no material
changes to our risk factors from those previously disclosed in that
Form 10-K, except as discussed below:
We earn revenue, incur costs and maintain cash balances in multiple
currencies, and currency fluctuations could adversely affect our
financial results.
We have
operations in Canada, where we earn revenue and incur costs in
Canadian Dollars. Doing business in Canada exposes us to foreign
currency risks in numerous areas, including revenue, purchases and
payroll. Certain of these currency exposures are naturally offset
because revenue and costs are both denominated in the same foreign
currency, and certain cash balances are held in U.S. Dollar
denominated accounts. However, due to the increasing size and
importance of our Canadian operations, fluctuations in foreign
currency exchange rates could materially impact our results. Our
cash position includes amounts denominated in both U.S Dollars and
Canadian Dollars. We manage our overall cash requirements
considering available funds from our subsidiaries and the cost
effectiveness with which these funds can be accessed. The
repatriation of cash balances from our subsidiaries outside the
U.S. could have adverse tax consequences and be limited by foreign
currency exchange controls. However, those balances are generally
available in the local jurisdiction without legal restrictions to
fund ordinary business operations. Any fluctuations in foreign
currency exchange rates could materially impact the availability
and amount of these funds available for transfer.
A significant amount of our revenue is derived from a limited
number of customers, and any reduction in revenue from any of these
customers could have a material adverse effect on our
business.
After
giving effect to the Birch Merger and the MegaPath Merger, our ten
largest customers by revenue accounted for approximately 4% of our
proforma consolidated revenue in 2017. For the years ended December
31, 2017 and after giving effect to the Birch Merger and the
MegaPath Merger, no single customer accounted for more than 10% of
our proforma consolidated revenue or accounts receivable. If any of
our key customers decides not to renew its contracts with us, or to
renew on less favorable terms, our business, revenue, reputation,
and our ability to obtain new customers could be adversely
affected.
Our rights to the use of fiber that is part of our network may be
affected by the ability to continue long term contracts and the
financial stability of our IRU fiber providers.
A
portion of our services are provided on network fiber facilities
licensed or leased from other network service providers through
indefeasible rights of use (“IRUs”) or similar
arrangements. The facilities under these agreements have remaining
terms generally ranging from less than 1 year to 24 years. In these
agreements, the network owner is responsible for network
maintenance for which we pay such network owners. If our network
provider under IRU agreements has financial troubles, it could
adversely affect our costs, especially maintenance costs and
ability to deliver service. Also, if our network providers under
IRU agreements are unable to obtain and maintain necessary
rights-of-way and access to pole attachments for their fiber
networks or if they fail to renew or extend our IRUs, our
operations may be interrupted and/or we could incur material
expenses if we were required to relocate to alternative network
assets.
33
Our ability to provide certain of our services and systems at
competitive prices is dependent on our ability to negotiate and
enforce favorable interconnection and other agreements with
ILECs.
Our
ability to continue to obtain favorable interconnection,
unbundling, service provisioning and pricing terms is dependent, in
part, on maintenance of interconnection agreements with the
incumbent local exchange carrier (“ILEC”). We are party
to one or more interconnection agreements in each state and service
territory in which we require such agreements. The initial terms of
many of our interconnection agreements have expired, however, our
interconnection agreements generally contain an
“evergreen” provision that allows the agreement to
continue in effect until terminated. ILECs also are making
available some facilities and services to competitors under
unregulated “commercial agreements” that are not
subject to the same requirements as interconnection agreements. The
largest ILECs are also attempting to eliminate mandatory
interconnection through FCC rulemaking, and replace regulated
interconnection arrangements with commercial negotiations. If we
were to receive a termination notice from an ILEC, we could
negotiate a new agreement or initiate an arbitration proceeding at
the relevant state commission before the agreement expired. In
addition, the Federal Communications Act of 1934, as amended (the
“Communications Act”) gives us the right to opt into
interconnection agreements which have been entered into by other
carriers, provided the agreement is still in effect and provided
that we adopt the entire agreement. We cannot assure you that we
will be able to successfully renegotiate these agreements or any
other interconnection agreement on terms favorable to us or at all.
Local telephone service competition depends on cost based and
nondiscriminatory interconnection with, and use of, ILEC networks
and facilities. Failure to achieve and maintain such arrangements
could have a material adverse effect on our ability to provide
competitive local telephone services. If we are unable to
renegotiate or enter into new agreements on acceptable terms, our
cost of doing business could increase and our ability to compete
could be impeded.
Due to their control of “last-mile” access to many of
our customers, if we experience difficulties in working with ILECs,
our ability to offer services on a timely and cost-effective basis
could be materially and adversely affected.
Our
business depends on our ability to interconnect with ILEC networks
and to lease from the ILECs certain essential network elements. We
obtain access to these network elements and services under terms
established in interconnection agreements, contract tariffs and
commercial arrangements that we have entered into with ILECs. Like
many competitive communications services providers, from time to
time, we may experience difficulties in working with ILECs with
respect to obtaining information about network facilities, ordering
and maintaining network elements and services, interconnecting with
ILEC networks and settling financial disputes. These difficulties
can impair our ability to provide service to customers on a timely
and competitive basis. If an ILEC refuses to cooperate or otherwise
fails to support our business needs for any other reason, including
labor shortages, work stoppages, cost-cutting initiatives or
disruption caused by mergers, other organizational changes or
terrorist attacks, our ability to offer services on a timely and
cost-effective basis can be materially and adversely
affected.
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 Federal Communications Commission
(“FCC”) and various state public utility commissions.
In Canada, our products and services are subject to varying degrees
of federal, provincial and local regulation, including regulation
by The Canadian Radio-television and Telecommunications Commission.
We may also be subject to similar regulation by other 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
the cloud services that we offer. 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.
34
We also
hold various U.S. federal and state licenses authorizing us to
provide regulated interstate and intrastate telecommunications
services to our carrier and end-user customers, and we comply with
federal and state reporting, fee payment, tariffing and other
obligations with respect to these services. In contrast to the
typically lighter regulation of cloud services, described above,
telecommunications services in the U.S. are often subject to a more
formalized and aggressive regulatory regime. Even in jurisdictions
where we are primarily providing cloud or lightly regulated VoIP
services, we are regulated more pro-actively based upon the holding
of a license to provide telecommunications services. It is possible
that at some point we may be found not to have fully complied with
applicable federal and/or state licensing or compliance
requirements and, as a result, we may be subject to fines,
penalties or other enforcement consequences. In addition, following
the Birch Merger, our operations are subject to the requirements of
a Consent Decree established in 2016 between Birch Communications,
Inc. (“BCI”) and the FCC to settle allegations of
noncompliance by BCI and its operating subsidiaries. We may face
heightened regulatory scrutiny going forward as a result of the
Consent Decree and in the event that we are found to have violated
any of the specific laws and regulations implicated in the BCI
Consent Decree, it is possible that we will face escalated
penalties. Over time, it is possible that U.S. federal and/or state
regulation of telecommunications services may change and become
more burdensome, resulting in increased labor costs for compliance
management and/or increases in direct costs of operations,
including, for example, increased federal/state Universal Service
Fund contributions or increased FCC and state public utility
commission regulatory assessments. In the event that federal and/or
state telecommunications regulation becomes more robust in the
future, it could provide the basis for an increase in complaints
filed against companies such as Fusion pursuant to the
Communications Act, and/or state laws and regulations.
Birch previously has been the subject of litigation and could be
the subject of additional legal actions and possible liabilities in
the future.
In the
course of normal business activities, Birch and its subsidiaries
have been the subject of civil litigation concerning various types
of matters including, for example, customer complaints, breach of
contract, billing and collection, employee claims, and intellectual
property. It is possible that we could be the subject of additional
litigation involving similar or different matters in the future.
For example, an individual or business could initiate litigation
involving similar actions or behavior for which Birch previously
was found liable, in the hopes of achieving a similarly favorable
outcome. Due to the inherently uncertain nature of litigation, it
is not possible to predict the likelihood, scope, or outcome of any
future litigation. If litigation is initiated and the outcome is
unfavorable to the Company we could be found liable for financial
or other penalties. Any such liabilities are not predictable and,
individually, or in the aggregate, could have a material adverse
impact on the Company’s financial results.
Lingo may fail to perform under the Transition Services Agreement
that was entered into as part of the Birch Merger which could
affect our profitability and business.
In
connection with the Birch Merger, Birch spun off the Birch Consumer
Segment through a dividend of its membership interests in Lingo
Management, LLC (“Lingo”) and Lingo and the Company
entered into a transition services agreement, dated as of May 4,
2018 (the “Transition Services Agreement”), pursuant to
which each of the Company and Lingo agreed perform certain services
for the benefit of the other for a period of time after the closing
of the Birch Merger. If Lingo is unable or unwilling to satisfy its
payment or performance obligations under the Transition Services
Agreement, we could incur losses which could have an adverse effect
on our profitability and business. In addition, if we do not have
our own systems and services in place, or if we do not have
agreements in place with other service providers of these services,
or the cost of providing services to Lingo increase substantially,
the cost to comply with our obligation to provide services under
the Transition Services Agreement may be greater than what is
provided therein.
The indemnification provided by BCHI Holdings to the Company
regarding various litigation matters and pending regulatory
proceedings may not be sufficient to cover the full amount
owed.
As a
result of the Birch Merger, Birch and certain of its subsidiaries
that are involved in various litigation matters and pending
regulatory proceedings became subsidiaries of Fusion and, as a
result, the Company is responsible for any liabilities arising from
those various matters. BCHI Holdings entered into a letter
agreement with the Company under which it agreed, for a period of
18 months following the closing of the Birch Merger, to indemnify
and hold harmless Fusion for and against any and all losses in
excess of $500,000 that are related to, or arise from, certain
specified litigation and regulatory matters, subject to a maximum
aggregate liability of $25 million. Amounts owed by BCHI Holdings
under this indemnity may, with limited exception, be paid in cash
or shares of Fusion common stock at the option of BCHI Holdings,
with such shares valued for this purpose at the greater of (A)
$4.50 or (B) the weighted average daily closing bid price during a
certain period prior to transfer. The BCHI Holdings indemnification
does not provide us protection if (i) Birch and our other new
subsidiaries have liabilities for litigation or regulatory matters
that are not specifically enumerated in the indemnification letter,
(ii) the liabilities relating to the covered matters do not arise
until after the 18 month indemnity period, or (iii) to the extent
the aggregate liability relating to such matters exceeds $25
million. Furthermore, if an indemnifiable claim exists and BCHI
Holdings elects to pay us with shares of Fusion common stock, we
may not have sufficient cash on-hand to cover the required
payments. In addition, if the price of Fusion common stock is lower
than $4.50 per share, then the indemnification payment in shares
will be less than the losses that we incur.
35
The indemnification provided by BCHI Holdings to the Company
regarding state tax matters may not be sufficient to cover the full
amount owed and BCHI Holdings may not have the cash required to
fund some or all of its indemnification obligations to the Company
arising under a separation agreement between Birch and its former
chief executive officer.
Various
Birch subsidiaries that became subsidiaries of Fusion as a result
of the Birch Merger are involved in various tax audits and may have
failed to file certain historical state tax filings. As a result of
the Birch Merger, the Company is responsible for any liabilities
arising from these audits and late and/or missed filings. BCHI
Holdings has entered into a letter agreement with the Company under
which it agreed, for a period of 24 months following the closing of
the Birch Merger, to indemnify and hold harmless the Company for
and against any and all asserted and/or actual liabilities for
unpaid state income tax and franchise fees and associated late
fees, penalties and interest for 2017 and prior years; provided
however, that the Company shall bear the initial $1.0 million of
any actual taxes (but not any late fees, penalties or interest on
any such amounts). Amounts owed by BCHI Holdings under this tax
indemnity may be paid in cash or shares of Fusion common stock at
the option of BCHI Holdings, with such shares valued for this
purpose at the greater of (A) $4.50 or (B) the weighted average
daily closing bid price during a certain period prior to transfer.
This BCHI Holdings indemnification does not provide us protection
if (i) Birch and our other new subsidiaries have liabilities for
other types of state taxes or any federal tax liabilities, or (ii)
the liabilities relating to the covered tax matters do not arise
until after the 24 month indemnity period. Furthermore, if an
indemnifiable tax claim exists and BCHI Holdings elects to pay us
with shares of Fusion common stock, we may not have sufficient cash
on-hand to cover the required tax payments. In addition, if the
price of Fusion common stock is lower than $4.50 per share, then
the indemnification payment in shares will be less than the losses
that we incur.
In
addition to the foregoing tax indemnity side letter, BCHI Holdings
entered into another letter agreement under the terms of which it
has agreed to indemnify Birch for amounts owed by Birch under a
separation agreement, as amended, between Birch and its former
chief executive officer. Under the terms of this letter agreement,
BCHI Holdings has agreed to remit funds sufficient to satisfy each
payment to the former chief executive officer on or prior to the
dates such payments are required to be made to the former chief
executive officer by Birch. Under this indemnity arrangement, BCHI
Holdings may settle amounts owed in shares of Fusion common stock
only if, after diligent efforts, it has been unable to secure the
required cash. The value of the shares returned to Fusion in any
such case would be determined on the same basis as described above
in the case of the tax indemnity letter. If BCHI does not make the
required payments when due or it settles these amounts in shares of
Fusion common stock, we may not have sufficient cash on-hand to
cover the required payments.
Birch and MegaPath may have liabilities that are not known,
probable or estimable at this time. As a result of the Birch Merger
and the MegaPath Merger, Birch and MegaPath became subsidiaries of
Fusion and remain subject to all of their liabilities.
There
could be unasserted claims or assessments, including failure to
comply with applicable communications laws, regulations, orders and
consent decrees that we failed or were unable to discover or
identify in the course of performing our due diligence
investigation of Birch and MegaPath. 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 or MegaPath that adversely
affects us, such as unknown, unasserted or contingent liabilities
and issues relating to compliance with applicable
laws.
We may not realize the revenue growth opportunities and cost
synergies that are anticipated from the Birch Merger or the
MegaPath Merger as we may experience difficulties in integrating
the three businesses.
The
benefits that are expected to result from the Birch Merger and the
MegaPath Merger will depend, in part, on our ability to realize the
anticipated revenue growth opportunities and cost synergies
projected to result from each of these transactions. Our success in
realizing these revenue growth opportunities and cost synergies,
and the timing of this realization, depends on the successful
integration of the three businesses. There is a significant degree
of difficulty and management distraction inherent in the process of
integrating an acquisition. The difficulty and risks could be
heightened when integrating multiple acquisitions within a short
period of time. The process of integrating operations could cause
an interruption of, or loss of momentum in, our core business, the
acquired businesses and the business of MegaPath. 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 the combined company, service existing
customers of each company, attract new customers, and develop new
products or strategies. If senior management is unable 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 the three
businesses. The failure to do so could have a material adverse
effect on our business, financial condition or results of
operations.
36
Even if
we are able to integrate the three businesses successfully, this
integration may not result in the realization of the full benefits
of the growth opportunities and cost synergies that we currently
project from these transactions, 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 the three companies and the integration may take
longer that we anticipate. 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 transactions may be
offset by costs incurred to, or delays in, integrating the
businesses.
Fusion Common Stock is concentrated in the hands of a few
stockholders, and their interests may not coincide with those of
our other Stockholders.
As of
August 10, 2018, BCHI Holdings beneficially own approximately 63.5%
of Fusion outstanding common stock. Accordingly, BCHI Holdings and
its affiliates currently have the ability to exercise significant
influence over matters
generally requiring stockholder approval. These matters include the
election of directors and the approval of significant corporate
transactions, including potential mergers, consolidations or sales
of all or substantially all of our assets. The interests of BCHI
Holdings and its affiliates may differ from those of other Fusion
stockholders.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not
applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
EXHIBIT NO.
|
|
DESCRIPTION
|
|
Amendment
No. 2 to the Fusion Telecommunications International, Inc. 2016
Equity Incentive Plan.
|
|
|
Form of
Director Indemnification Agreement.
|
|
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
37
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
FUSION CONNECT, INC.
|
|
|
|
|
|
|
August
14, 2018
|
By:
|
/s/
Kevin M. Dotts
|
|
|
|
Kevin
M. Dotts
|
|
|
|
Executive
Vice President, Chief Financial Officer and Principal Accounting
Officer
|
|
38
Index to Exhibits
EXHIBIT NO.
|
|
DESCRIPTION
|
|
Amendment
No. 2 to the Fusion Telecommunications International, Inc. 2016
Equity Incentive Plan.
|
|
|
Form of
Director Indemnification Agreement.
|
|
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
|
XBRL
Instance Document
|
101.SCH
|
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
39