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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10–K/A
 
(Mark One)
 
þ       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011
 
o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 
For the transition period from _____ to______
 
Commission File Number  001-32421
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
 
Delaware
 
58-2342021
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
420 Lexington Avenue, Suite 1718, New York, New York  10170
(Address of principal executive offices)  (Zip Code)
 
(212) 201-2400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
NONE
 
NONE
 
Securities registered pursuant to Section 12(g) of the Act:
 
Title of each class
Common Stock, par value $0.01 per share
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o  No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o  No  þ
 
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ  No  o
 
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  þ  No  o
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filler
o
Accelerated filer
o
Non-accelerated filler
o
Smaller reporting company
þ
(do not check if a smaller reporting company)      
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant based upon the closing price of the common stock reported by the OTC Bulletin Board TM (the “OTCBB”) on June 30, 2011 of $0.10 per share, was $9,728,582.
 
Indicate the number of shares outstanding of the registrant’s common stock as of the latest practicable date:  163,121,154 shares of common stock are issued and outstanding as of March 23, 2012.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None
 


 
 

 
 
Table of Contents
 
      PAGE  
           
PART I     3  
           
Item 1. 
Business.
    3  
           
Item 1A. 
Risk Factors.
    14  
           
Item 1B. 
Unresolved Staff Comments.
    22  
           
Item 2.
Properties.
    22  
           
Item 3. 
Legal Proceedings.
    23  
           
Item 4. 
Mine Saftey Disclosures.
    23  
           
PART II     24  
           
Item 5. 
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
    24  
           
Item 6. 
Selected Financial Data.
    25  
           
Item 7. 
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
    25  
           
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
    33  
           
Item 8.
Financial Statements
    34  
           
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    34  
           
Item 9A.
Controls and Procedures
    34  
           
Item 9B.
Other Information
 
35
 
           
PART III     36  
           
Item 10.
Directors, Executive Officers and Corporate Governance
    36  
           
Item 11.
Executive Compensation.
    41  
           
Item 12.
Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters
    45  
           
Item 13.
Certain Relationships and Related Transactions, and Director Independence
    47  
           
Item 14.
Principal Accounting Fees and Services
    48  
           
PART IV     50  
           
Item 15.
Exhibits, Financial Statement Schedules.
    50  
           
SIGNATURES     53  
           
INDEX TO EXHIBITS     54  
 
 
2

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


EXPLANATORY PARAGRAPH

Fusion Telecommunications International, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2011, which was originally filed with the United States Securities and Exchange Commission on March 30, 2012 (the “Original Filing”), for the purpose of: (i) providing the name and the conformed signature of Rothstein Kass to their Report of Independent Registered Public Accounting Firm in compliance with Rule 2-02(a) of Regulation S-X; and (ii) to clarify certain disclosure in Note 16 to the consolidated financial statements regarding claims and legal actions arising in the ordinary course of business.  Except as set forth in the preceding sentence, this Amendment No. 1 contains no changes to the Original Filing.
 
PART I
 
ITEM 1.     BUSINESS.
  
Overview
 
Fusion Telecommunications International, Inc. (“we”, “Fusion” or “the Company”) is a provider of Internet Protocol ("IP") based digital voice and data communications services to corporations and carriers worldwide.  Our strategy is to continue to grow our existing carrier business segment while accelerating the growth of our corporate services business segment, to ensure that an increasing portion of our total revenues are derived from the higher margin and more stable corporate services business segment.

Our services include local, long distance, and international Voice over Internet Protocol ("VoIP") services; broadband Internet access; private line circuits; audio and web conference calling; fax services; and a variety of other enhanced communications services and features.  The majority of our services utilize state-of-the-art VoIP technology, as opposed to traditional circuit-switched technology.  This choice of technology allows us to efficiently deliver voice, data and Internet access services over a single facility, while providing service quality and reliability comparable to that of the historical circuit-switched service providers.

Our carrier services are sold to other communications service providers throughout the world, including U.S.-based carriers wishing to terminate transmission of telephone services to international destinations and foreign carriers wishing to terminate to the U.S. and throughout the world.  We also purchase domestic and international termination services from many of our carrier customers.  We currently have over 270 carrier customers and vendors.
 
In addition to our strong position in the carrier market, we believe that Fusion is well positioned to capitalize on the continuing rapid growth of the corporate VoIP market.  Our corporate services are sold to small, medium, and large businesses located within the United States.  These predominantly IP-based services are designed to meet the communications needs of growing businesses, while maximizing the price-performance ratio.  We currently serve corporate users in 30 states.

We believe that the global networking infrastructure available through our carrier operations, coupled with our ability to leverage our domestic and international carrier relationships, provides us with a significant competitive advantage in the corporate market segment.  We also believe that the extensive experience of our sales, operations, and management personnel provides the skills necessary to execute our strategy and grow this important segment of the Company's business.
 
Recent Developments
 
On January 30, 2012, we entered into purchase agreements to acquire the business currently operated by Network Billing Systems, LLC and Interconnect Systems Group II LLC (collectively, “NBS”).  NBS currently provides voice (including VoIP) and data telecommunications services, as well as a wide variety of managed and cloud-based telecommunications services, to small and medium sized companies.  For the year ended December 31, 2011, NBS had unaudited revenues of approximately $26.8 million and unaudited net income of approximately $3.0 million.  NBS has approximately 5,000 customers, and we expect to realize considerable synergies after the transaction is consummated.

The aggregate purchase price for the NBS acquisition transaction is $20 million, consisting of $17.75 million in cash, $1.0 million to be evidenced by a 24-month promissory note payable to the sellers and $1.25 million in shares of restricted common stock of the Company.  Consummation of the transactions contemplated by the purchase agreements is subject to the satisfaction of certain conditions precedent, including, but not limited to, satisfactory completion of our due diligence on the business being acquired, completion of an audit of the financial books and records of NBS, receipt of certain regulatory approvals, our receipt of sufficient funding to pay the cash portion of the purchase price and provide for reasonable post-acquisition working capital requirements, negotiation and execution of mutually acceptable executive employment and non-compete agreements with Jon Kaufman, the principal operating officer of NBS, and other customary conditions of closing.  While the purchase agreements contemplate that closing of the acquisition of NBS would take place during the second quarter of 2012, the conditions precedent to closing are such that there can be no assurance that the acquisition will be completed in that time or at all.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


On January 24, 2012, we announced our entering into an exclusive group purchasing agreement for cloud services and communications solutions with the group purchasing organizations (“GPOs”) Essensa and Innovatix, LLC., subsidiaries of GNYHA Ventures, Inc.
   
In connection with this agreement, Fusion and the GPOs will offer the GPO members in healthcare and other vertical markets a full range of cloud services, including cloud computing, disaster recovery, storage and security.  Under this agreement, we may also provide GPO members with hosted voice and data solutions that include a full complement of advanced service features, unified communications and presence, Internet and other broadband data services, as well as a comprehensive portfolio of leading edge equipment and software solutions designed to meet the specific needs of the healthcare industry. 
 
Services
 
Historically, we have derived the majority of our revenues from the carrier business segment.  These revenues have come primarily from U.S.-based carriers requiring voice connectivity to emerging markets.  As we continue to execute our strategy for this segment, we anticipate serving a larger number of non-U.S.-based carrier customers, who will require voice connectivity to the U.S. and to other foreign locations.

We are aggressively seeking to expand our higher margin corporate services business by continuing to market to small, medium, and large business customers.  Our corporate services are marketed through both direct sales and partner sales distribution channels.  The direct sales organization generally targets medium to larger enterprise customers, while the partner sales organization generally targets smaller to medium size businesses.

Corporate Services
 
Fusion offers a full suite of advanced corporate communications solutions, designed to provide significant benefits to small, medium and large businesses with single or multiple locations worldwide.  Our solutions provide all required hardware as well as the services themselves, thus providing the customer with everything needed to implement a complete communications service solution.

Our corporate services are designed to minimize upfront capital costs, increase the scalability and flexibility of the customer’s communications network, provide compelling features when compared to traditional analog telephone service, offer high digital quality and reduce the overall cost of communications.  On average, we believe that our corporate services save the customer approximately 20% when compared to similar services offered by that customer’s previous service provider.  Fusion’s IP-based corporate solutions also prioritize voice traffic over data traffic to ensure that a customer always has adequate Internet bandwidth to experience premium voice quality.

Our growing suite of corporate services includes:
 
Hosted IP-PBX Our Hosted IP-PBX service allows a customer to completely replace the legacy office telephone system it owns or leases with a state-of-the-art digital telephone system that is provided by us on a "hosted" basis.  Our feature-rich, hosted solution eliminates the need to own and operate a costly, complex telephone system, often reducing upfront capital costs by 50% or more, and eliminates the cost of calls between customer locations.  This service is ideal for companies with multiple offices or a highly mobile workforce, and for companies that are opening a new office or need to expand or replace existing telephone systems.  Full integration with Microsoft Outlook® provides a simple method to place calls by clicking on an Outlook® contact, while voice mails are delivered as e-mails with an attached voice message that can be played on virtually any computer or handheld wireless device.  All corporate service options can be configured by the user in real time using a personal user portal, virtually eliminating the costs associated with the labor-intensive reconfiguration of legacy telephone systems.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


IP Connect Our IP Connect service allows a customer to retain and use its existing legacy telephone system, while relying on Fusion’s IP-based network to provide its local network access and domestic and international long distance service.  IP Connect customers save on their local, long distance, and international call charges, and gain the many advantages of Internet telephony.  They also eliminate the cost of interoffice calling, and combine their voice and data traffic onto a single broadband access facility for further cost savings – all without having to abandon their existing technology investment.
 
IP Termination IP Termination service allows a customer to retain and use its existing legacy telephone systems, as well as its existing local network access facilities, while leveraging Fusion’s global network to obtain high quality, low cost domestic and international long distance service.  This is a service that would typically be used by major corporations with significant domestic and/or international calling.
 
Internet Access – Fusion offers reliable, secure and cost-effective broadband Internet access to all users.  Fiber optics, broadband over copper and other technologies allow us to provide Internet access at bandwidth levels ranging from T-1 (1.5 Mbps) to DS-3 (45 Mbps) and higher.  Utilizing our ability to route both voice and data over the same facility while using Quality of Service routers designed to always provide adequate bandwidth for the highest quality voice traffic, we seek to maximize the efficiency of the Internet access service purchased.  Our strong relationships with carriers throughout the world also allow us to provide Internet access on a global basis.
 
Conferencing Service – Fusion’s conferencing service offers business customers a versatile online meeting experience.  The simple-to-use, reservation-less service combines traditional audio conferencing with web access to let corporations communicate at any time with customers, suppliers, and partners anywhere.  The service integrates with Microsoft Outlook®, offers audio recording capability, and even allows the user to publish recorded content as a podcast for further distribution.
 
Fusion Fax – Fusion’s desktop fax solution allows customers to electronically send, receive, store, and print faxes using their existing email and Internet infrastructure.  This advanced fax solution requires no application-specific hardware or software, and employs the latest in security capabilities.  Additionally, each user account can be personally controlled through a secure web interface that controls user preferences, cover sheet design and delivery reporting options.
 
Private Line Networks – Leveraging our own network, as well as our relationships with carriers throughout the world, we offer corporate users a full range of private line services between both domestic and international locations.  Services can be engineered to both U.S. (T-1) and international (E-1) standards, are available at all bandwidth levels and can be provisioned using traditional fiber optic or satellite facilities as well as packet-based technologies.  Services include traditional point-to-point networks, as well as Multi-Protocol Label Switching (MPLS) networks and Virtual Private Networks.
 
Co-Location Services – Fusion offers its corporate customers the opportunity to locate their communications or data processing equipment in its secure, co-location facility.  Our facility offers full environmental controls, battery and generator back-up power (AC and DC), 24x7 key-card access, round-the-clock security and alarm monitoring and a wide range of technical support services that can be provided by our on-site technical support personnel.

We combine services as necessary to create the precise communications package required by each customer.  For example, we may use IP Connect service at a customer’s headquarters location that already has a significant investment in telecommunications hardware, yet utilize a Hosted IP-PBX solution at a new branch office location being established.  We believe that our ability to uniquely tailor services to each customer’s specific requirements is a major part of what differentiates us from the competition.

Our corporate services generally offer several different calling packages, designed to meet the needs of different users.  Base level plans offer a nominal monthly recurring charge (“MRC”) for the basic service package.  Additional services, such as local, long distance or international calling, are charged at per minute rates.  Other packages with a higher MRC may include a specific number of minutes of local or long distance calling or even unlimited local or long distance calling.  Optional, value-added features for our basic services are available for an incremental MRC appropriate for the service.  Internet access services and/or private line services are charged on the basis of a fixed MRC for the service provided, and are generally based on the bandwidth utilized and the endpoints of the circuit.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


We have contracts with all of our corporate customers. The Company’s contracts range from one to three years, and all contracts have early cancellation penalties. The majority of our contracts are for a three-year term, and the current average term of all contracts combined is approximately 2.6 years.
 
Carrier Services
 
Our carrier services include voice termination through both VoIP and traditional Time Division Multiplexing (“TDM”) or “circuit-switched” technology.  This wholesale termination traffic consists of minutes of domestic and international long distance usage that must be terminated to telephone numbers in the intended destination countries. The majority of this traffic is international traffic, and we terminate carrier voice traffic to all countries worldwide using three distinct methods of termination:
 
Direct Termination Traffic routed via direct termination will travel directly from Fusion’s international gateway switch to the facilities of an interconnecting carrier in the destination country. We enter into “interconnection agreements” with such carriers, typically the dominant or secondary carrier in the applicable market.  The Company’s interconnection with the distant carrier is usually via VoIP, but may in some cases utilize leased fiber optic or satellite transmission facilities.  Our direct termination agreements allow us to terminate voice traffic into that country and, in most cases, receive return traffic from that country.  The interconnection agreement provides for a “direct” relationship between Fusion and the interconnecting carrier and provides the maximum level of control over route quality, capacity, and cost.
 
Indirect Termination – Traffic routed via indirect termination will also travel from Fusion’s international gateway switch to the facilities of a carrier in the destination country. However, when utilizing indirect termination, we are sharing the interconnection arrangement and facilities with another carrier. The Company has dedicated capacity on the route and significant control over quality and capacity, but does not bear the sole cost burden of the route or the sole responsibility of maximizing utilization of the route.
 
Transit Termination – Traffic routed via transit termination will travel from Fusion’s international gateway switch via another carrier’s switch and their international routes to the destination country.  We often use multiple transit termination routes in order to obtain the best possible levels of quality and capacity for the termination of our carrier customers’ voice traffic.

All voice termination services utilize our proprietary least cost routing (“LCR”) technology and systems, to insure termination to the final destination at the lowest possible cost, thus maximizing our profit on that traffic.  Using LCR technology, we will often “blend” routes to provide our customers with the optimal mix of price and quality, or to meet unique customer requirements for the termination of voice traffic to specific countries.

We also utilize the termination capacity obtained through our interconnection agreements and other methods of termination to carry our corporate customers’ international traffic.  As we continue to execute our strategy for the growth of our corporate business segment, we expect to use an increasing percentage of our termination capacity to carry our higher margin corporate traffic.

We procure required Internet access and private line circuits from our global network of carriers.  We also leverage our relationship with these carriers in order to provide the high quality, low cost Internet access and private line services necessary to meet the international communications requirements of our corporate customers.
 
In addition to our carrier voice termination services, we provide co-location services to other communications service providers, enabling them to co-locate their equipment within our switching facility or lease a portion of our equipment located at that site. We also provide a variety of equipment maintenance services and other technical services to our carrier co-location customers.  In addition, we frequently provide voice termination services to the carriers that co-locate with us.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


All carrier voice termination services are priced on a per minute basis, based upon the destination called, the time of day, and the customer’s overall traffic volume.  We have reciprocal agreements with many of our customers, and the pricing in those agreements may also reflect the pricing provided to us for our terminating traffic.  Prices for Internet access or private line service provided to carriers, as well as pricing for co-location services, are based on a fixed MRC for the services provided.

We have contracts with all of our carrier customers.  Our contracts with carriers typically have a one-year renewable term, with no minimum traffic volume per month, and allow the customer to terminate without penalty.

For the year ended December 31, 2011, our five largest customers represented the following percentages of our consolidated revenue: Qwest Communications 18.1%; MCI Communications d/b/a Verizon 8.3%; Vonage Networks, LLC 6.8%; T-Systems 6.7%; and ILC Canada, Inc. 6.6%.

For the year ended December 31, 2010, our five largest customers represented the following percentages of our consolidated revenue: Qwest Communications 18.8%; MCI Communications d/b/a Verizon 13.8%; AT&T 9.2%; T-Systems 6.8%; and VCG Telecom 5.2%.
 
Strategy
 
Our strategy is to continue to grow our existing carrier business segment while accelerating the growth of our corporate services business segment, to ensure that an increasing portion of our total revenues are derived from the higher margin and more stable corporate business segment.

Corporate Services Segment Strategy
 
In our corporate services segment, we are focusing on generating the rapid growth necessary to make the revenues and margin from this segment a more significant portion of our total revenues and margin.  Specifically, we are focusing on the following strategies:
 
 
Expand the Direct Sales Effort – We intend to continue to expand the direct sales effort that we launched in 2009 by adding new sales personnel in the primary markets we serve.  We currently have direct sales personnel based in our New York headquarters and our Fort Lauderdale, Florida office.
 
 
Focus on Direct Sales to Large Enterprises – In the current economy, large enterprises are particularly focused on reducing costs wherever possible. This provides us with an excellent entry to some very large potential customers that previously may have been difficult to approach.  We are leveraging this unique opportunity, as well the extensive contacts of our officers and directors, to meet with such large enterprise customers and drive the sale of our high-volume international call termination services, Internet access services and private line networking services.
 
 
Increase the Number of Partners – We continue to seek new sales “partners” to assist in the indirect sale of our services to small and medium businesses, and to target customers in markets where we do not currently have a direct sales presence.  In particular, we are looking to attract partners that have an existing base of voice and/or data customers, partners with a significant direct sales effort and/or a network of sub-agents that can sell our products and services and partners looking to add VoIP services to their existing product portfolio.
 
 
Increase Partner Productivity – We are working to increase the average productivity of our sales partners with additional training on our products and services, targeted promotions and closer management and support.  We are also seeking to add new partners that have more direct control over the sale of our services, including hospitality management companies, franchise companies, and other similar entities.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


 
Increase Average Revenue per Account – We are seeking to increase the average revenue per account for both new and existing customers.  We are focusing on the sale of add-on or enhanced services, including auto-attendant service, call center features, audio and web conferencing and fax services.  We are also working to increase the percentage of customers that order their broadband Internet access connections from us.
 
 
Introduce New Products and Services – We intend to continue to attract new customers and drive increased revenue through the introduction of new products and services, such as cloud computing, as well as innovative and competitive new service packages.
 
Carrier Segment Strategy
 
In growing our carrier segment, we intend to focus on both the revenue growth and the margin growth of this segment.  In particular, we will focus on the following:
 
 
Expand Direct Termination Agreements – We will seek to expand the number of international carriers with whom we interconnect on a direct basis.  As we continue to grow our base of carrier business, such direct interconnections are intended to provide the best possible levels of quality and capacity, with a view towards maximizing the revenue and margins attributable to the international traffic we terminate.
 
 
Increase Business with Existing Carrier Customers – We will seek to strengthen our relationships with existing major customers, and to maximize the traffic received from and sent to them.  We believe that expanding existing relationships is the best way to quickly increase revenue, and that expanding volume generally leads to more attractive pricing and margins.
 
 
Increase Sales to Non-Traditional Carriers – We will seek to expand our sales to non-traditional carriers, including cable television providers, Internet search engine companies, and large IP telephone companies. We believe the revenue streams from such entities will be more predictable and will offer better margins than the revenues from traditional domestic and international carriers.
 
 
Focus on Back-Office Automation – We will continue to seek to automate functions that will allow us to reduce headcount and related costs, thereby improving margins and responding more quickly to the needs of our carrier customers.  In this area, we anticipate continued improvements in areas such as routing, code management, traffic monitoring and alarms, capacity management, provisioning, circuit testing and billing.
 
Sales and Marketing
 
We market our IP-based services, as well as our broad range of other communications services, to carriers and corporations.  Our day-to-day sales and marketing efforts employ direct sales and partner sales channels, as well as referrals and strategic relationships.

Direct Sales
 
Our carrier services are generally sold through direct sales channels.  Our U.S.-based carrier sales and international business development personnel are responsible for selling to and buying from our carrier partners.

Our corporate services are also sold through direct sales channels.  We currently have corporate sales personnel based at our New York headquarters and at our Ft. Lauderdale office.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Our direct sales personnel are experienced professionals who generally come to us with 10+ years of sales and communications experience.  Ongoing training on our products and services, telecommunications technology and sales techniques are a part of each direct sales person’s weekly routine.

Our direct sales personnel are compensated on a combination of base salary and incentive compensation, with the latter being based directly on revenue and margin generated.  Each sales person has established monthly objectives, and is held directly accountable for the achievement of those objectives.

Partner Sales
 
Our corporate services are also sold through independent, third-party sales agents or “partners,” who leverage their existing business relationships to sell our services.  Our partners are compensated solely on a commission-based structure.  We typically control the product, pricing, branding, technical support, billing and collections.  Our partners include interconnect companies, data service companies, value added resellers, network and IT consultant, and LAN/WAN integrators, as well as companies dedicated to the sale of IP-based communications services.  Many of these partners have multiple sales personnel working for them.  In addition to local distribution and support, our partners occasionally assist in the installation of our services.  As of December 31, 2011, we were represented by 105 partners located in 20 states.

Strategic Relationships
 
We enter into agreements with strategic partners that wish to market and distribute our products and services.  In some cases, an agreement may also provide us the ability to market the strategic partner’s products and services.  The terms of these agreements differ by partner, but in general such agreements provide for the selling party to receive a commission based on sales volume or to participate in a revenue or profit sharing arrangement.

Marketing
 
We generally focus our marketing efforts on support of our direct and partner sales efforts.  In particular, we focus on sales collateral, trade shows, and events for prospective customers.  Our use of advertising is minimal.
 
Operations
 
We believe the manner in which we service customers after they have placed an order differentiates us from our competitors.  We rely on our people and automated systems to ensure that provisioning, installation, training, billing and customer service provide the best possible experience for our customers.

The provisioning process turns a customer order into the necessary equipment and systems programming to properly deliver the specific services that were ordered.  In the case of the Company’s corporate services, this process consists of verifying all order information; conducting a site survey of the customer’s location(s) and current equipment; building the proper customer profiles within our service platforms; ordering and shipping required telephones, routers, and other equipment; and setting up the necessary customer records in our billing system.  For Internet access or private line circuits, provisioning may include engineering the circuit design and ordering required transmission facilities from the local telephone company or an interexchange carrier.  In each case, we coordinate the efforts of our centralized provisioning organization and our provisioning systems to ensure that the process occurs in the minimum possible time, and that all components are tested and ready to meet the customer’s scheduled installation date.

On the scheduled installation date, a Fusion installation technician (internal or contracted) is dispatched to the customer premises to complete the installation.  Depending upon the actual service ordered, the technician may configure and install IP telephones, install a router or Internet access device, complete required cabling, install and test Internet service or install and test private lines.  It is our objective to complete the installation on the scheduled date, and leave the customer satisfied that everything has been properly installed and is performing as expected.
 
We believe that training the customer to take full advantage of the features and functionality of our corporate VoIP services is a critical component of the service delivery process.  Immediately after installation we complete an in-depth training session with the customer, either in person or via web conferencing, during which we train the customer’s employees on the use of their new services and features and train the customer’s service administrator on the technical details required for the ongoing administration of the service.  We also provide the customer with manuals covering the set-up and operation of the phones, voice mail and user portals.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Customer invoices for our corporate services are delivered electronically via email on a monthly basis.  We do not send paper invoices.  Invoices include full call detail, as well as a breakdown of charges, taxes and other fees. Monthly service charges are billed in advance, and usage-based charges are billed in arrears.  Our use of package plans, including local and/or long distance calling, increases the percentage of total charges billed in advance as an MRC, thus simplifying billing for us and the customer and minimizing subsequent customer service issues.  Invoices for our carrier customers may be rendered on a weekly, semi-monthly, or monthly basis, and are also delivered electronically.  Upon request, we will also provide carriers with an electronic file of their call detail records (“CDR”s) for analysis or invoice audit purposes.

Customer service representatives are available to our customers on a 24 x 7 basis.  Corporate customers will initially contact our retail customer service center, where billing questions and most general service questions are quickly answered.  Where technical questions or service related issues require further assistance, the customer will be transferred to the Company’s network operations center (“NOC”) for the necessary technical support.  The NOC continuously tracks real-time performance of the Company’s network, and has full access to the necessary data, systems, tools, and technical personnel required to solve any customer or network issues.
 
The Network
 
Our products and services are delivered over an advanced, IP-based communications network that leverages the latest technology and allows for the rapid introduction of new features and applications.  The Company’s service platforms are built on a distributed architecture that enables us to extend our products and services globally, delivering our voice and data services to customers worldwide.  The Company’s NOC is manned 24 hours per day 7 days per week and employs state-of-the-art monitoring and alert systems that ensure quality of service and a proactive response to any potential customer service issues.  Automated back-office and support systems accelerate service provisioning and allow customers to add or change services efficiently.
 
Our carrier-class network employs a digitized, packet-switched service platform capable of interfacing with all Internet protocols, as well as with TDM or circuit-switched systems, and provides the flexibility necessary to seamlessly transport our customers’ voice and data traffic throughout the world.  Multi-peered Internet access is delivered through dedicated and redundant high-speed interconnections to all major Internet backbones.  Advanced route optimization technology delivers enhanced reliability and performance by routing around network hotspots and avoiding downtime, packet loss and latency.

Key network elements include the Company’s Veraz ControlSwitch and associated media gateways; BroadSoft retail services platform; Cisco media gateways, routers, and switches; and Nextone session border controllers.  These redundant network elements are interconnected via a dedicated, fiber-based gigabit Ethernet backbone.  Most network elements are based on software applications that execute entirely on off-the-shelf servers.  Built for easy and rapid scalability, as well as security and reliability, Fusion’s service platforms minimize the capital expenditures associated with legacy switching infrastructures, allow for shorter installation intervals and faster customer provisioning and expedite the deployment of new and innovative products and services.

Our centralized network elements are housed in our own carrier-grade switching facility, located in a secure carrier building that houses many other carriers and is interconnected to all major carrier buildings.  This location allows for cost-effective and rapid interconnection and capacity expansion to carrier customers and vendors, as well as major enterprise customers.  We believe our choices of location and equipment offer an extensible platform to support our envisioned growth and allow us to quickly embrace emerging technologies as they become available.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Our network architecture is highly distributable and allows us to deliver our carrier and corporate services to every part of the world quickly and reliably.  We are able to locate remote network gateways in decentralized locations throughout the world, yet control the services they deliver from our centralized facility.  As a result, we believe we can capitalize on market opportunities that would previously have been uneconomical due to the expense of deployment and the associated marketplace risks.  The Company’s direct interconnections with over 270 global carriers are managed through sophisticated routing systems that allow us to fully monitor performance and dynamically route customer traffic based on unique parameters that ensure the highest quality at the lowest cost. Unlike many retail service providers that rely on only a few carriers to deliver their customers’ traffic, Fusion can leverage the strength and depth of its carrier business to provide the greatest possible range of network and traffic termination options for its corporate customers.
 
Competition
 
The communications industry is highly competitive and significantly affected by regulatory changes, technology evolution, marketing strategies and pricing decisions of the larger industry participants.  In addition, companies offering Internet, voice and data communications services are, in some circumstances, consolidating.  Service providers generally compete on the basis of price, customer service, product quality, brand recognition and breadth of services offered.  Additionally, carriers may compete on the basis of technology.  Recently, the ability to provide VoIP services has been a key differentiator.  As technology evolves and legacy systems become an encumbrance, we expect carriers to compete on the basis of technological agility and their ability to rapidly deliver new services.

Within our carrier services segment, we compete with many of the largest domestic communications carriers, including AT&T, Verizon, Qwest/Century Link and Global Crossing/Level 3.  Internationally, we compete with major entities such as British Telecom, Telstra, Tata Communications, Cable & Wireless, Telecom Italia and KDDI.  We also compete with smaller, internationally focused carriers, including Primus, iBasis, Phonetime, Compass Global and BTS.

Within our corporate services segment, we compete with companies such as Vonage, CBeyond, 8x8, and Skype. However, as Vonage and Skype focus primarily on consumers and smaller business customers, we do not currently see them as major competitors.  As we grow our presence in the corporate marketplace, we see our primary competitors as the business-focused VoIP service providers, such as CBeyond and 8x8; service providers employing traditional technologies to sell into the enterprise marketplace, including Windstream and XO Communications; cable television companies offering VoIP services, like Cox Communications, Comcast and Cablevision; and the incumbent local telephone companies like AT&T, Verizon, and Qwest/Century Link.  We also believe that in the future, given relatively low barriers to entry, other companies may elect to compete in the VoIP services arena.  While we believe the Company’s technology, back office systems, distribution relationships and marketing skills provide us with a competitive advantage, many of our existing competitors have significantly greater resources and more widely recognized brand names.
 
Government Regulation
 
In the United States, our services are generally subject to varying degrees of federal, state and local regulation, including regulation by the Federal Communications Commission (the “FCC”) and various state public utility commissions or public service commissions.  We may also be subject to similar regulation by foreign governments and their telecommunications/regulatory agencies.  While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing.  However, they do require the filing of various reports, compliance with public safety and consumer protection standards and the payment of certain regulatory fees and assessments.

We cannot provide assurance that the U.S. and foreign regulatory agencies exercising jurisdiction over us will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate or will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority.  Similarly, if our pricing and/or terms or conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs.  We have been delinquent in certain filing and reporting obligations in the past including, but not limited to, filings with the FCC and Universal Service Fund (“USF”) reports and payments.  We are currently working with various federal and state regulatory agencies to complete any outstanding filings.

As an international carrier, we are subject to FCC regulation under the Communications Act.  We have applied for and received the necessary authority under Section 214 of the Communications Act to operate as an international carrier.  Generally, the Company’s international traffic is subject to minimal regulation by state and local jurisdictions.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


The regulatory requirements associated with operating as a VoIP service provider are evolving, and have historically been less clear.  For example, the VoIP Regulatory Freedom Act of 2004 exempted VoIP service from state taxes and regulations and defined VoIP services as “lightly regulated information services.”  However, the bill reserved the ability for states to require VoIP service providers to provide 911 services, to require them to contribute to state universal service programs, and to require them to pay intrastate access charges to other telecom providers.

In April 2004 the FCC rendered a decision on an AT&T Petition for Declaratory Ruling.  It determined that where 1+ calls were made from regular telephones, converted into an IP format, transported over the AT&T Internet backbone and then converted back from their IP format and delivered to the called party through the local telephone network, the service was a “telecommunications service” for which terminating access charges were due to the local exchange carrier.  The FCC limited its decision to the specific facts of the AT&T case where the type of service involved ordinary Customer Premise Equipment (“CPE”) with no enhanced functionality, and the calls originated and terminated on the public switched telephone network (“PSTN”).

Although the FCC determined the specific services provided by AT&T to be telecommunications services subject to interstate access charges rather than information services not subject to such charges, it made no determination regarding the regulatory status of phone-to-phone VoIP or its exposure to key public policy issues like USF, 911 Emergency Service, and the Communications Assistance for Law Enforcement Act (“CALEA”).  The FCC further qualified the decision by stating that in no way is the FCC precluded from adopting a different approach when resolving the pending IP-Enabled Services rulemaking proceeding or the Inter-Carrier Compensation rulemaking proceeding.

In June 2005, the FCC imposed 911 emergency service obligations on providers of “interconnected VoIP services.” The FCC also required interconnected VoIP service providers to register with the FCC, comply with CALEA, and to make USF contributions.  The FCC defined interconnected VoIP service as service where the customer was connected to the local PSTN for both origination and termination of telephone calls. Under this definition, Fusion is a provider of interconnected VoIP service.  We believe that our services are currently compliant with all applicable requirements of the FCC’s order, and we have made and are making the required contributions to USF.  However, should we at some time fail to meet certain requirements or fail to make required contributions, we could be subject to revocation of the Company’s authority to operate or to fines or penalties.

Some states have tried to directly regulate VoIP services on an intrastate basis, but these attempts have, so far, not held up to court challenges.  Many states are holding hearings to research and discuss the issues surrounding the regulation of VoIP services.  Others are encouraging or even requesting VoIP service providers to subject themselves to public service commission jurisdiction and obtain certification as telephone companies.  However, most have adopted a “wait and see” attitude.  We are monitoring the actions of the various state regulatory agencies, and are endeavoring to ensure that we are in compliance with the applicable regulations, including any new regulations that may be passed.  However, there can be no assurance that we are fully aware of all applicable requirements or that we will always be fully compliant.  Should we fail at any time to be compliant with applicable state regulations, or to file required reports to state regulatory agencies, we could be subject to fines or other penalties.

While we believe VoIP services may be subject to additional federal, state, local, or international regulation in the future, it is uncertain when or how the effects of such regulation could affect us.  If additional regulation does occur, it is possible that such regulatory agencies may impose surcharges, taxes or regulatory fees on VoIP service providers.  The imposition of any such surcharges, taxes, or regulatory fees could increase the Company’s costs and thus reduce or eliminate any competitive advantage that we might enjoy today.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Intellectual Property and Trademarks
 
We have several trademarks and service marks, all of which are of material importance to us.
 
The following trademark is registered with the United States Patent Trademark Office; however, it is not registered at the international level:
 
 
Fusion Telecom
 
Applications covering the following trademarks and service marks have been filed with the United States Patent Trademark Office and are currently in the registration process:

 
Fusion
 
Fusion Tel
 
Fusion Telecommunications International
 
Fusion Softphone
 
Fusion (Logo)

The telecommunications and VoIP markets have recently been characterized by substantial litigation regarding patent and other intellectual property rights.  Litigation, which could result in substantial cost to and diversion of our efforts, may be necessary to enforce trademarks and/or service marks issued to us or to determine the enforceability, scope and validity of the proprietary rights of others.  Adverse determinations in any litigation or interference proceeding could subject us to costs related to changing names, a loss of established brand recognition, or the need to change the technologies utilized in our services.
 
Employees
 
As of December 31, 2011, the Company had 53 full time employees.  None of our employees are represented by a labor union or collective bargaining agreement.  We consider our employee relations to be good, and, to date, we have not experienced a work stoppage.

All the Company’s employees have signed confidentiality agreements, and it is our standard practice to require newly hired employees and, when appropriate, independent consultants, to execute confidentiality agreements. These agreements provide that the employee or consultant may not use or disclose confidential information except in the performance of his or her duties for the Company, or in other limited circumstances.  The steps taken by us may not, however, be adequate to prevent the misappropriation of our proprietary rights or technology.
 
Revenues and Assets by Geographic Area
 
During the years ended December 31, 2011, and December 31, 2010, 81.5% and 86.7%, respectively, of the Company’s revenue was derived from customers in the United States and 18.5% and 13.3%, respectively, was derived from international customers.  As of December 31, 2011 and 2010 the Company did not have any long-lived assets that were located outside of the United States.
 
Available Information

We are subject to the informational requirements of the Securities Exchange Commission (“SEC”) and, in accordance with those requirements, file reports, proxy statements and other information with the SEC. You may read and copy the reports, proxy statements and other information that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, DC 20549. Please call 1-800-SEC-0339 for information about the SEC’s Public Reference Room. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC. The address of the SEC’s web site is http://www.sec.gov. The Company’s web site is http://www.fusiontel.com. The information on the Company’s website is neither a part of nor incorporated by reference into this report.
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 1A.  RISK FACTORS.
 
An investment in our securities involves a high degree of risk.  You should carefully consider the risks described below before you decide to invest in our securities.  If any of the following events actually occur, our business could be seriously harmed.  In such case, the value of your investment may decline and you may lose all or part of your investment.  You should not invest in our securities unless you can afford the loss of your entire investment.
 
Risks Related to Our Business
 
We have a history of operating losses, working capital deficit, and stockholders’ deficit.  There can be no assurance that we will ever achieve profitability or have sufficient funds to execute our business strategy.
 
At December 31, 2011, we had nominal cash on hand, a working capital deficit of approximately $12.0 million and a stockholders’ deficit of approximately $10.6 million.  Although we have reduced our losses, we continue to sustain losses from operations and for the years ended December 31, 2011 and 2010, we incurred net losses applicable to common stockholders of approximately $4.9 million and $6.4 million, respectively.  In addition, we did not generate positive cash flow from operations for the years ended December 31, 2011 and 2010.  We may not be able to generate profits in the future and may not be able to support our operations or otherwise establish a return on invested capital.  In addition, we may not have sufficient funds to execute our business strategy, requiring us to raise funds from the capital markets or other sources, resulting in dilution of our common stock.

These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ deficit.  In light of our recurring losses, accumulated deficit and cash flow difficulties, the report of our independent registered public accounting firm on our financial statements for the fiscal year ended December 31, 2011 contained an explanatory paragraph raising substantial doubt about our ability to continue as a going concern.  Our financial statements do not include any adjustments that may be necessary in the event we are unable to continue as a going concern.

Our carrier services revenue performance is subject to both internal and external influences, which have negatively impacted our revenues and may continue to do so in the future.
 
During 2011 and 2010, the Company's carrier services revenue was negatively impacted not only by seasonal and economic market fluctuations, but also by a general decline in the overall market for international communications as a result of current economic conditions.  We were also adversely affected by limits on our ability to provide extended payment terms to larger customers.  We anticipate that these revenue growth constraints will be eased as the general economic conditions and the Company’s financial condition improve, but there is no assurance that we will be successful in our efforts to increase revenues and margin contribution in this business segment.

Our business is capital intensive, and we do not currently generate sufficient revenues to offset our operating expenses.  If we are unable to obtain additional funding as and when required, we may have to significantly curtail or possibly terminate our operations.
 
We will require substantial future capital in order to continue to fund our operating expenses and to otherwise execute our business plan.  If we are unable to obtain additional financing or generate sales revenue sufficient to sustain our operations, we could be forced to significantly curtail or suspend our operations, including laying-off employees, selling assets and other measures.  Additional capital may not be available to us when needed on terms that are acceptable to us, or at all.

We have historically funded our working capital requirements through the sale of our equity securities.  The sale of equity securities to fund operations is dilutive to the equity ownership of our existing stockholders.  Unless we are able to substantially increase our revenues to fund our operating expenses, we will in all likelihood be required to continue to fund operations through additional sales of our equity securities.  In addition, limited cash resources may restrict our ability to sell those carrier services that require us to purchase termination capacity on shorter payment terms than the terms under which we are able sell to our customers. This could limit our ability to grow our revenues and/or margins, or limit our ability to achieve our revenue and/or margin targets.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


We have historically relied on our officers and directors to loan us funds to sustain our operations. If such loans are not available if and when we require them in the future, we may have insufficient capital to operate. We may also be required to repay loans, including those from our affiliates, from our accounts receivable.
 
We have historically relied upon loans from non-related and related parties, including Marvin Rosen, the chairman of our board of directors, to fund our operations.  From January 1, 2011 through December 31, 2011, we received approximately $2.9 million in new loans from Mr. Rosen.  We expect to continue to rely on additional sales of our securities and additional borrowings to support our operations and meet the Company’s financial obligations for the remainder of 2012.  There are no current commitments for such funds and there can be no assurances that such funds will be available to the Company as needed.  In addition, a substantial portion of our outstanding indebtedness is payable upon ten days notice from the lender.  Although we have yet to receive any demand notices for this indebtedness, there are no assurances that we will not receive any such notices in the future, and we currently do not have the financial resources to repay these loans should we receive a demand for payment.

We have historically funded our cash flow requirements, in part, from the proceeds of loans evidenced by secured promissory notes.  To the extent that term notes were not repaid on their stated maturity date, they were typically converted into demand notes, which may be called in the discretion of the note holders.
 
As of December 31, 2011, approximately $4.9 million of indebtedness was evidenced by such demand notes, all of which are held by Mr. Rosen.  In connection with these notes, Mr. Rosen has been granted a subordinated security interest in our accounts receivable.  If Mr. Rosen were to suddenly demand payment of all outstanding demand notes, or a substantial portion thereof, we likely would not have sufficient funds to repay those notes.  In such event, he could assert rights against us in legal proceedings, and could seek to collect on the notes by enforcing his security interest in our accounts receivable.  This could adversely affect the availability of the funds required to continue operation of our business.

If we are unable to manage our growth or implement our expansion strategy, we may increase our costs without increasing our revenues.
 
We may not be able to expand our product offerings, client base and markets, or implement the other features of our business strategy at the rate or to the extent presently planned. Our projected growth will place a significant strain on our administrative, operational, and financial resources and may increase our costs.  If we are unable to successfully manage our future growth, continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, we may not be able to maximize revenues or achieve profitability.

The success of our growth is dependent upon market developments and traffic patterns, which may lead us to make expenditures that do not result in increased revenues.
 
Our purchase of network equipment and software will be based in part on our expectations concerning future revenue growth and market developments. As we expand our network, we will be required to make significant capital expenditures, including the purchase of additional network equipment and software, and to add additional employees.  Our fixed costs will also increase from the ownership and maintenance of a greater amount of network equipment including our switching systems, gateways, routers, and other related systems.  If our traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of our network, our costs as a percentage of revenues would increase significantly.

We may be unable to adapt to rapid technology trends and evolving industry standards, which could lead to our products becoming obsolete.
 
The communications industry is subject to rapid and significant changes due to technology innovation, evolving industry standards and frequent new service and product introductions. New services and products based on new technologies or new industry standards expose us to risks of technical or product obsolescence. We will need to use technologies effectively, continue to develop our technical expertise and enhance our existing products and services in a timely manner to compete successfully in this industry.  We may not be successful in using new technologies effectively, developing new products or enhancing existing products and services in a timely manner, and we cannot assure you that any new technologies or enhancements used by us or offered to our customers will achieve market acceptance.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Some of our services are dependent upon multiple service platforms, network elements, and back-office systems that are reliant on third party providers.
 
We have deployed back-office systems and services platforms that enable us to offer our customers a wide-array of services and features.  Sophisticated back office information and processing systems are vital to our growth and our ability to monitor costs, invoice customers, provision client orders, and achieve operating efficiencies.  Some of these systems are dependent upon license agreements with third party vendors. These third party vendors may cancel or refuse to renew some of these agreements, and the cancellation or non-renewal of these agreements may harm our ability to invoice customers and provide services efficiently.

We may be impacted by litigation regarding patent infringement to which we were not a party.
 
On March 8, 2007, a jury in the U.S. District Court for the Eastern District of Virginia ruled that Vonage Holdings had infringed on six patents held by Verizon Communications, and ordered Vonage to pay Verizon $58 million plus a future royalty payment equal to 5.5% of Vonage’s customer sales.  The patents related in part to technologies used to connect Internet telephone use to the traditional telephone network.  Vonage appealed the decision, but terminated its appeals options in November 2007, when it agreed to pay Verizon approximately $120 million in settlement.  The future impact, if any, of this litigation, or of similar litigation that might be initiated by other companies against VoIP service providers, including us, is unclear.  If we were restricted from using certain VoIP technologies, it could increase our cost of service or preclude us from offering certain current or future services.

Breaches in our network security systems may hurt our ability to deliver services and our reputation and result in liability.
 
We could lose clients or expose ourselves to liability if there are any breaches to our network security systems that jeopardize or result in the loss of confidential information stored in our computer systems.  Since our inception, we have experienced only two known breaches of network security, which resulted in a temporary failure of certain network operations, but neither breach resulted in any loss of confidential customer information or in any material financial loss.  However, a future network security breach could harm our ability to deliver certain services, damage our reputation or subject us to liability.

Our revenue growth is dependent upon our ability to build new distribution relationships and to bring on new customers, for which there can be no assurance.
 
Our ability to grow through efficient and cost effective deployment of our VoIP services is in part dependent upon our ability to identify and contract with local entities that will assist in the distribution of our services.  This will include local sales partners that sell our corporate services.  If we are unable to identify or contract for such distribution relationships, or if the efforts of third party sales agents are not successful, we may not generate the customers or revenues currently envisioned and our results of operations will be adversely impacted.

We are dependent upon our ability to obtain the necessary regulatory approvals and licenses to enter new domestic and international markets in which such approvals are required. Such approvals may or may not occur as planned and may or may not be delayed.
 
Our entry into new domestic and international markets may in certain cases rely upon our ability to obtain licenses or other approvals to operate in those markets, our ability to establish good working relationships with the relevant telecommunications regulatory authorities in that jurisdiction or our ability to interconnect to the local telephone networks in that market.  If we are not able to obtain necessary licenses or approvals, our ability to enter into new markets may be delayed or prevented.

The communications services industry is highly competitive and we may be unable to compete effectively.
 
The communications industry, including the provisioning of voice services, Internet services and data services, is highly competitive, rapidly evolving and subject to constant technological change and intense marketing by providers with similar products and services.  We expect that new carrier competitors, as well as “gray market” operators (operators who arrange call termination in a manner that bypasses the authorized local telephone company, resulting in high margins for them and substantially lower revenues for the legitimate providers), may have an impact on the market.  In addition, many of our current carrier and corporate competitors are significantly larger and have substantially greater market presence; greater financial, technical, operational and marketing resources; and more experience. In the event that such a competitor expends significant sales and marketing resources in one or several markets where we compete with them, we may not be able to compete successfully in those markets.  We also believe that competition will continue to increase, placing downward pressure on prices.  Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions of our competitors.  In addition, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us.  If our competitors were to provide better and more cost effective services than ours, we may not be able to increase our revenues or capture any significant market share.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Industry consolidation could make it more difficult for us to compete.
 
Companies offering voice, Internet, data and communications services are, in some circumstances, consolidating. We may not be able to compete successfully with businesses that have combined, or will combine, to produce companies with substantially greater financial, technical, sales and marketing resources, or with larger client bases, more extended networks or more established relationships with vendors, distributors and partners.  With these heightened competitive pressures, there is a risk that our revenues may not grow as expected and the value of our common stock could decline.

Our ability to provide services is often dependent on our suppliers and other service providers who may not prove to be effective.
 
A majority of the voice calls made by our clients are connected through other communication carriers, which provide us with transmission capacity through a variety of arrangements.  Our ability to terminate voice traffic in our targeted markets is an essential component of our ongoing operations.  If we do not secure or maintain operating and termination arrangements our ability to increase services to our existing markets, and gain entry into new markets, will be limited.  Therefore, our ability to maintain and expand our business is dependent, in part, upon our ability to maintain satisfactory relationships with other domestic carriers, Internet service providers, international carriers, satellite providers, fiber optic cable providers and other service providers, many of which are our competitors, and upon our ability to obtain their services on a cost effective basis.  In addition, if a carrier with whom we interconnect does not carry the traffic routed to it, or does not provide the required capacity, we may be forced to route our traffic to, or buy capacity from, a different carrier on less advantageous terms, which could reduce our profit margins or degrade our network service quality.  In the event network service is degraded, it may result in a loss of customers. To the extent that any of these carriers with whom we interconnect raise their rates, change their pricing structure or reduce the amount of capacity they will make available to us, our revenues and profitability may be adversely affected.

We rely on third party equipment suppliers who may not be able to provide us the equipment necessary to deliver the services that we seek to provide.
 
We are dependent on third party equipment suppliers for equipment, software and hardware components, including Cisco, Nextone, BroadSoft and Veraz.  If these suppliers fail to continue product development and research and development or fail to deliver quality products or support services on a timely basis, or we are unable to develop alternative sources of supply if and as required, it could result in an inability to deliver the services that we currently provide or intend to provide, and our financial condition and results of operations may be adversely affected.

We rely on the cooperation of other international carriers and/or postal telephone and telegraph companies (“PTTs”), who may not always cooperate with us in our attempts to serve a specific country or market.
 
In some cases, the growth of our carrier services business requires the cooperation of other international carriers and/or the incumbent PTT in order to provide services to or from specific countries or markets. In the event the PTT, or another in-country international carrier, does not cooperate with us or support us in our efforts to serve that country, our ability to provide service to or from that country may be delayed, or the costs to provide service might increase due to our being forced to use another more expensive carrier.  If we are unable to develop and maintain successful relationships with other international carriers and PTTs, our ability to service an important market could be prevented or adversely affected.

Service interruptions due to disputes or other conditions over which we have no or little control could result in a loss of revenues and harm our reputation.
 
Portions of our terminating network may be shut down from time to time, as a result of circumstances including disputes with vendors, acts of war, terrorism, acts of God or other issues, many of which are beyond our control. Any future network shut downs can have a significant negative impact on revenue and cash flows, as well as hurting our reputation.  In addition, there is no assurance that we will be able to quickly resolve disputes or disruptions, which could result in a permanent loss of revenues.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Because we do business on an international level, we are subject to an increased risk of tariffs, sanctions and other uncertainties that may hurt our revenues.
 
There are certain risks inherent in doing business internationally, especially in emerging markets, such as unexpected changes in regulatory requirements, the imposition of tariffs or sanctions, licenses, customs, duties, other trade barriers, political risks, currency devaluations, high inflation, corporate law requirements and civil unrest. Many of the economies of these emerging markets we seek to enter are weak and volatile.  We may not be able to mitigate the effect of inflation on our operations in these countries by price increases, even over the long-term. Further, expropriation of private businesses in such jurisdictions remains a possibility, whether by outright seizure by a foreign government or by confiscatory tax or other policies.  Also, deregulation of the communications markets in developing countries may or may not continue.  Incumbent service providers, trade unions and others may resist legislation directed toward deregulation and may resist allowing us to interconnect to their networks.  The legal systems in emerging markets also frequently have insufficient experience with commercial transactions between private parties, therefore we may not be able to protect or enforce our rights in some emerging market countries. Governments and regulations may change, thus impacting the availability of new licenses or the cancellation or suspension of existing operating licenses. The instability of the laws and regulations applicable to our businesses, as well as their interpretation and enforcement, could materially impact our business in those countries and adversely affect our financial condition or results of operations.

The regulatory treatment of VoIP outside the United States varies from country to country.  Some countries are considering subjecting VoIP services to the regulations applied to traditional telephone companies and they may assert that we are required to register as a telecommunications carrier in that country or impose other more onerous regulations.  In such cases, our failure to register could subject us to fines, penalties or forfeiture of our right to do business in that country.  Regulatory developments such as these could have a material adverse effect on our international operations.

Additional taxation and government regulation of the 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.  We may also be subject to similar regulation by foreign governments and their telecommunications and/or regulatory agencies.  While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing.  However, they do require the filing of various reports, compliance with public safety and consumer protection standards, and the payment of certain regulatory fees and assessments.

We cannot assure you that the applicable U.S. and foreign regulatory agencies will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate or will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority.  Similarly, if our pricing and/or terms and conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs.  We have been delinquent in certain filing and reporting obligations in the past, including, but not limited to, filings with the FCC and Universal Service Fund (USF) reports and payments.  We are currently working with various federal and state regulatory agencies to complete any outstanding filings and resolve outstanding payment issues.

In addition to new regulations being adopted, existing laws may be applied to the Internet, which could hinder our growth.
 
New and existing laws may cover issues that include: sales and other taxes; user privacy; pricing controls; characteristics and quality of products and services; consumer protection; cross-border commerce; copyright, trademark and patent infringement; and other claims based on the nature and content of Internet materials.  Changes to existing regulations or the adoption of new regulations could delay growth in demand for our products and services and limit the growth of our revenue.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


A large percentage of our current revenues are related to a small group of customers and loss of any of those customers could negatively impact our revenues.
 
A large percentage of our carrier services revenues are provided by a limited number of customers.  Specifically, our five largest customers accounted for approximately 47% and 53% of our revenues for the years ended December 31, 2011 and December 31, 2010, respectively.  The terms of our customer agreements do not bind the customer contractually to continue using our services and if our business with these customers were to significantly decrease or cease altogether, it could have a negative impact on our revenues and cash flow.

Risks Related to our Common Stock
 
Although our shares are widely dispersed, two voting blocs may influence the outcome of matters submitted to a vote of our stockholders; and the interests of these voting blocs may differ from other stockholders.
 
West End Special Opportunity Fund II, LP (“West End”) currently beneficially owns approximately 19.9 million shares, or 12.2%, of our outstanding common stock, and is the second largest single voting bloc in the Company. Additionally, our directors and executive officers as a group currently beneficially own approximately 49.6 million shares, or 27.9% of our common stock.  As a result, while neither West End nor our directors and officers as a group have sufficient voting power to control the outcome of matters submitted to a vote of our stockholders, the extent of their ownership enables both groups to influence the outcome of these matters, including the election of directors and extraordinary corporation transactions including business combinations. The interests of the holders of these voting blocs may differ from those of other stockholders.

We are unlikely to pay cash dividends on our common stock in the foreseeable future.
 
We have never declared or paid any cash dividends on our common stock.  We intend to retain any future earnings to finance our operations and expand our business and therefore do not expect to pay any cash dividends in the foreseeable future.  Holders of our outstanding preferred stock are entitled to receive dividends prior to the payment of any dividends on our common stock.  The payment of dividends is also subject to provisions of Delaware law prohibiting the payment of dividends except out of surplus and certain other limitations.

Our common stock is subject to price volatility unrelated to our operations.
 
The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in the same industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us.  In addition, the stock market is subject to extreme price and volume fluctuations.  This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

In addition, the market price of our common stock may fluctuate significantly in response to a number of other factors, many of which are beyond our control, including but not limited to the following:
 
 
Ability to obtain securities analyst coverage
 
Changes in securities analysts’ recommendations or estimates of our financial performance
 
Changes in the market valuations of companies similar to us
 
Announcements by us or our competitors of significant contracts, new offerings, acquisitions, commercial relationships, joint ventures, or capital commitments
 
Failure to meet analysts’ expectations regarding financial performance

Furthermore, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation.  A securities class action lawsuit against us, regardless of its merit, could result in substantial costs and divert the attention of our management from other business concerns, which in turn could harm our business.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Our common stock may become subject to the “penny stock” rules of the SEC, which will make transactions in our shares cumbersome and may reduce the value of an investment in our shares.
 
For so long as the trading price of our common stock is less than $5.00 per share, our common stock may be considered a "penny stock," and in such event trading in our common stock would be subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934.  Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements.  The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks.  These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities.  In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.

To date, we have not been considered a “penny stock” due to an exemption from Rule 15g-9 for companies with average annual audited revenues for the prior three years of in excess of $6,000,000 per year.  However, should the exclusions from the definition of a “penny stock” change, or should our annual revenues fall dramatically, we may become subject to rules applicable to “penny stocks” and the market for our shares may be adversely affected.

The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights in favor of our directors, officers and employees may result in substantial expenditures by our Company and may discourage lawsuits against our directors, officers and employees.
 
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to our Company and stockholders to the maximum extent permitted under Delaware corporate law.  Our by-laws also require us to indemnify our directors to the maximum extent permitted by Delaware corporate law.  We may also have contractual indemnification obligations under our agreements with our directors, officers and employees.  The foregoing indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup.  These provisions and resultant costs may also discourage our Company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our Company and stockholders.
 
Our use of equity to fund operations is dilutive to stockholders and, depending upon the market price for our shares at the time of issuance, we may be required to issue shares at depressed prices.
 
Historically, we have funded our working capital requirements through the sale of our equity.  The use of our equity to fund operations is dilutive to the equity ownership of our securities by our existing stockholders.  Unless we are able to generate substantial revenues to fund our operating expenses, we will, in all likelihood, be required to continue to fund operations through the sale of our equity.  Moreover, the dilutive effect on our stockholders of the issuance of new equity shares is directly impacted by the market price for our shares at the time of issuance.  If we are required to issue shares at a time when the market price for our shares is depressed, we will issue more shares than if the market price was higher, and the dilutive effect on our stockholders will be greater.

The issuance of our common stock upon the exercise of options or warrants or the conversion of outstanding convertible securities may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock.
 
As of the date of this report, there were 163,121,154 shares of our common stock outstanding.  The issuance of our shares upon the exercise or conversion of securities we have outstanding will increase the number of our publicly traded shares, which could depress the market price of our common stock.  As of December 31, 2011, unexercised options to purchase 6,634,261 shares of our common stock, unexercised warrants to purchase 47,615,186 shares of our common stock and outstanding preferred stock, including accumulated dividends, convertible into 7,021,512 shares of common stock were outstanding.
 
The perceived risk of dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock.  Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


We could use preferred stock to fund operations or resist takeovers, and the issuance of preferred stock may cause additional dilution.
 
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock, of which 5,045 shares of Series A-1, A-2 and A-4 Preferred Stock are currently issued and outstanding.  Our certificate of incorporation gives our Board of Directors the authority to issue preferred stock without the approval of our common stockholders.  We may issue additional shares of preferred stock to raise money to finance our operations.  We may authorize the issuance of the preferred stock in one or more series. In addition, we may set the terms of preferred stock, including:
 
 
Dividend and liquidation preferences
 
Voting rights
 
Conversion privileges
 
Redemption terms
 
Other privileges and rights of the shares of each authorized series

The issuance of large blocks of preferred stock could possibly have a dilutive effect to our existing stockholders.  It can also negatively impact our existing stockholders’ liquidation preferences.  In addition, while we include preferred stock in our capitalization to improve our financial flexibility, we could possibly issue our preferred stock to friendly third parties to preserve control by present management.  This could occur if we become subject to a hostile takeover that could ultimately benefit our stockholders and us.

RISKS RELATED TO OUR PROPOSED ACQUISITION OF NBS
 
Consummation of our proposed acquisition of NBS is subject to the satisfaction of numerous conditions precedent and may not be consummated.
 
Consummation of our proposed acquisition of NBS is subject to the satisfaction of numerous conditions precedent, including but not limited to, satisfactory completion of our due diligence and completion of an audit of the financial books and records of the business to be acquired, receipt of certain regulatory approvals, our receipt of sufficient funding to pay the cash portion of the purchase price and provide for reasonable post-acquisition working capital requirements, negotiation and execution of mutually acceptable executive employment and non-compete agreements with Jon Kaufman, the principal operating officer of NBS, and other customary conditions of closing.  There is no assurance that the conditions precedent to closing will be satisfied or waived, or that the proposed acquisition of NBS will be consummated.
 
We may be unable to secure the funding necessary to consummate our proposed acquisition of NBS.
 
Among the conditions precedent to consummation of our acquisition of NBS is our ability to secure the necessary funding.  While we are engaged in discussion with several potential sources of a combination of debt and equity financing, there is no assurance that we can obtain the necessary financing on acceptable terms, or at all.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Consummation of our acquisition of NBS does not provide assurance that the operations of NBS will be accretive to our earnings or otherwise improve our results of operations.
 
Acquisitions, such as our proposed acquisition of NBS, involve the integration of previously separate businesses into a common enterprise in which it is envisioned that synergistic operations and economies of scale will create accretive earnings and improved results of operations.  However, realization of these envisioned results are subject to numerous risks and uncertainties including but not limited to:
 
  
Diversion of management time and attention from daily operations;
  
Difficulties integrating the acquired business, technologies and personnel into our business;
  
Potential loss of key employees, key contractual relationships or key customers of the acquired business; and
  
Assumption of the liabilities and exposure to unforeseen liabilities of the acquired business

Even if our proposed acquisition of NBS is consummated, there is no assurance that the acquisition will be accretive to our earnings or otherwise improve our results of operations.
 
ITEM 1B.  UNRESOLVED STAFF COMMENTS.

Not applicable to a smaller reporting company.

ITEM 2.     PROPERTIES.

We are headquartered in New York, New York and lease offices and space in a number of locations. Below is a list of the Company’s leased offices and space as of December 31, 2011.
 
Location
 
Lease Expiration
 
Annual Rent
 
Purpose
 
Approx. Sq. Ft.
420 Lexington Avenue, Suite 1718, New York,
New York 10170
 
October 2015
 
 $ 475,000
 
Lease of principal executive offices
 
9,000
75 Broad Street, New York, New York 10007
 
November 2015
 
 $ 446,000
 
Lease of network facilities
 
9,274
1475 W. Cypress Creek Road, Suite 204, Fort Lauderdale, Florida 33309
 
August 2014
 
 $ 150,000
 
Lease of network facilities and office space
 
9,716
 
We believe that the Company’s leased facilities are adequate to meet our current and future needs.
 
 
22

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 3.     LEGAL PROCEEDINGS.

On February 16, 2012, a landlord over premises leased by the Company commenced a proceeding in the New York City Civil Court, County of New York (Index No. 56186/12), in which the landlord sought to recover against the Company certain unpaid rent and related charges due under a lease agreement between the landlord and the Company, and to evict the Company from the premises.  The Company intends to contest and dispute the claims set forth in the foregoing Petition.  However, due to the uncertainties of litigation and other unknown factors, there can be no assurances that the Company will be able to reach a favorable resolution to this proceeding. 
 
The Company is from time to time involved in claims and legal actions arising in the ordinary course of business. Management does not expect that the outcome of any such claims or actions will have a material effect on the Company’s operations or financial condition.  In addition, due to the regulatory nature of the telecommunications industry, the Company periodically receives and responds to various inquiries from state and federal regulatory agencies.  Management does not expect the outcome of any such regulatory inquiries to have a material impact on the Company’s operations or financial condition.

ITEM 4.     MINE SAFETY DISCLOSURES

Not applicable.
 
 
23

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


PART II
 
ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our common stock is currently listed on the OTC Bulletin Board under the symbol “FSNN.”  The following tables list the high and low sales prices for the Company’s common stock for each fiscal quarter during the two preceding fiscal years.

Year Ended December 31, 2011
 
High
   
Low
 
First Quarter
  $ 0.10     $ 0.06  
Second Quarter
  $ 0.12     $ 0.07  
Third Quarter
  $ 0.11     $ 0.07  
Fourth Quarter
  $ 0.10     $ 0.06  
                 
Year Ended December 31, 2010
 
High
   
Low
 
First Quarter
  $ 0.16     $ 0.10  
Second Quarter
  $ 0.24     $ 0.10  
Third Quarter
  $ 0.19     $ 0.10  
Fourth Quarter
  $ 0.13     $ 0.07  
                 
 
The market price for the Company’s common stock is highly volatile and fluctuates in response to a wide variety of factors.
 
Holders of Record
 
As of December 31, 2011, there were approximately 437 shareholders of record of the Company’s common stock.

Dividend Policy
 
We have never declared or paid any cash dividends on our common stock.  We do not anticipate paying any cash dividends on our common stock in the foreseeable future.  We currently intend to retain future earnings, if any, to finance our operations, and to expand our business.  Subject to the rights of holders of preferred stock, any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements, limitations under Delaware law and other factors that our board of directors considers appropriate.

The holders of the Company’s Series A-1, A-2, and A-4 Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, as declared by the Company’s board of directors, on January 1 of each year, commencing on January 1, 2008. The board of directors has not declared any dividends on the Series A-1, A-2, or A-4 Preferred Stock.

Recent Sales of Unregistered Securities
 
During the three months ended December 31, 2011, we sold and issued to 13 accredited investors 7,207,678 shares of common stock and warrants to issue 2,612,309 shares of the Company’s common stock at exercise prices ranging from $0.07 to $0.11 per share, or 112% to 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.  The net proceeds of $510,500 were used for general working capital purposes.  The securities were sold by the Company’s officers and directors and no commissions or other remuneration were paid in connection with these transactions.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Between January 1, 2012 and March 15, 2012, we sold and issued to 23 accredited investors 9,409,804 shares of common stock and warrants to issue 2,822,950 shares of the Company’s common stock at exercise prices ranging from $0.09 to $0.23 per share, or 112% to 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.  The net proceeds of $975,200 were used for general working capital purposes.

The foregoing transactions were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

ITEM 6. SELECTED FINANCIAL DATA.
 
Not applicable to smaller reporting companies

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of the Company’s financial condition and results of operations should be read together with the Company’s consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.  This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1996.  Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may”, “expect”, “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 there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements (see Item 1A, “Risk Factors”).
 
OVERVIEW

Our Business
 
We are an international telecommunications carrier delivering value-added communications solutions to corporations and carriers in the United States and throughout the world.  We offer services that include voice and data communications using Voice over Internet Protocol (“VoIP”), private network services, broadband Internet access, and other advanced services.  The Company's Corporate Services business segment focuses on small, medium, and large corporations headquartered in the United States, but with the ability to serve their global communications needs and to provide service virtually anywhere in the world. The Company's Carrier Services business segment focuses on carriers across the globe, with a particular focus on providing services to and from emerging markets in Asia, the Middle East, Africa, Latin America, and the Caribbean.  Historically, we have generated the majority of our revenues from voice traffic sold to other carriers, with a strong focus in recent years on VoIP termination to emerging markets.  We have focused on growing our existing customer base, which was primarily U.S.-based, through the addition of new international customers.  We have also focused on expanding the Company’s vendor base through the addition of direct VoIP terminating arrangements to new countries and emerging markets.

Although we believe that the Carrier Services business segment continues to be of significant value to our long term strategy, ongoing competitive and pricing pressures have caused us to increase our focus on the higher margin Corporate Services business segment and to expand our efforts to market to small and mid-sized corporations, as well as larger enterprises, using both our direct and partner distribution channels.  While our Corporate Services business segment is still a relatively small portion of our revenue base, we continue to increase our emphasis on this segment in order to increase the percentage of the Company’s total revenues contributed by the Corporate Services business segment. We believe that this will complement the Company’s carrier business segment by providing higher margins and a more stable customer base.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


On January 30, 2012, we entered into purchase agreements to acquire the business currently operated by Network Billing Systems, LLC and Interconnect Systems Group II LLC (collectively, “NBS”).  NBS currently provides voice (including VoIP) and data telecommunications services, as well as a wide variety of managed and cloud-based telecommunications services, to small and medium sized companies.  For the year ended December 31, 2011, NBS had unaudited revenues of approximately $26.8 million and unaudited net income of approximately $3.0 million.  NBS has approximately 5,000 customers.

The aggregate purchase price for the NBS acquisition transaction is $20 million, consisting of $17.75 million in cash, $1.0 million to be evidenced by a 24-month promissory note payable to the sellers and $1.25 million in shares of restricted common stock of the Company.  Consummation of the transaction contemplated by the purchase agreements is subject to the satisfaction of certain conditions precedent, including, but not limited to, satisfactory completion of our due diligence on the business being acquired, completion of an audit of the financial books and records of NBS, receipt of certain regulatory approvals, our receipt of sufficient funding to pay the cash portion of the purchase price and provide for reasonable post-acquisition working capital requirements, negotiation and execution of mutually acceptable executive employment and non-compete agreements with Jon Kaufman, the principal operating officer of NBS, and other customary conditions of closing.  While the purchase agreements contemplate that closing of the acquisition of NBS would take place during the second quarter of 2012, the conditions precedent to closing are such that there can be no assurance that the acquisition will be completed in that time or at all.

We manage our revenues by business segment and customer. We manage our costs by service provider/vendor.  We track revenues by business segment, as the Company’s segments have different customer billing and payment terms and utilize different billing systems. We track total revenue at the customer level because our sales force manages revenue generation at the customer level, and because invoice charges are billed and collected at the customer level.

We manage our business segments based on gross profit and margin, which represents net revenue less the cost of revenue, and on net profitability.  Although our infrastructure is largely built to support all business segments and products, many of the infrastructure costs, selling, general and administrative expenses (“SG&A”) and capital expenditures can be specifically associated with one of our two business segments.  The majority of our operations, engineering, information systems and support personnel are assigned to either the corporate services or carrier services business segment for segment reporting purposes, while a relatively small number of personnel are allocated to the segments as appropriate.

Cost of revenues mainly includes the purchase of voice termination, as well as the cost of Internet access, private line, and other services from telecommunications carriers and Internet service providers.  We continue to work to lower the variable component of cost of revenues through the use of least cost routing, and through on-going negotiation of usage-based costs with our many domestic and international service providers.

Our operating expenses are categorized as depreciation and amortization, SG&A and advertising and marketing.  Depreciation and amortization includes the depreciation of our communications network equipment, leasehold improvements and office equipment and fixtures, as well as the amortization of our intangible assets.  SG&A includes salaries and benefits, sales commissions, the costs of occupancy related to our leased network facilities and administrative offices, legal and professional fees and other administrative expenses.  Advertising and marketing expense includes costs for promotional materials for the marketing of our corporate products and services.

Our Performance
 
Revenues for the year ended December 31, 2011 were $42.4 million, an increase of $0.6 million, or 1.4%, compared to the year ended December 31, 2010.  Our operating loss for 2011 was $4.3 million, compared to $5.8 million in 2010.  The improvement was mainly due to a $1.2 million reduction in operating expenses in 2011.  Net loss attributable to common stockholders was $4.9 million in 2011, compared to $6.4 million in 2010.

Our Outlook
 
Our ability to grow our business, fully implement our business plan and achieve profitability is dependent upon our ability to raise significant amounts of additional capital.  In addition to the cash portion of the purchase price of the pending NBS transaction, we require additional capital to support our Carrier Services business, specifically for capital expenditures required to expand our voice termination capacity, to implement a new automated system for the administration of routing and rates and for the working capital necessary to optimize the terms under which we buy from our vendors and sell to our customers.  We believe that if we are able to obtain the necessary capital to fund our Carrier Services business and the acquisition of NBS we will be able to compete effectively in both of our business segments.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


RESULTS OF OPERATIONS

The following table summarizes our results of operations for the years ended December 31, 2011 and 2010:
 
   
2011
   
2010
 
Revenues
  $ 42,350,640       100.0 %   $ 41,763,002       100.0 %
Cost of revenues, exclusive of depreciation and amortization
    38,067,888       89.9 %     37,830,121       90.6 %
Gross profit
  $ 4,282,752       10.1 %   $ 3,932,881       9.4 %
Operating expenses:
                               
Depreciation and amortization
    516,892       1.2 %     847,881       2.0 %
Loss on impairment of intangibles
    163,126       0.4 %     19,018       0.0 %
Selling general and administrative
    7,897,339       18.6 %     8,847,474       21.2 %
Advertising and marketing
    14,959       0.0 %     38,973       0.1 %
Total operating expenses
    8,592,316       20.3 %     9,753,346       23.4 %
Operating loss
    (4,309,564 )     -10.2 %     (5,820,465 )     -13.9 %
Interest expense, net of interest income
    (201,183 )     -0.5 %     (180,714 )     -0.4 %
Other (expenses) income
    46,319       0.1 %     213,956       0.5 %
Total other (expenses) income
    (154,864 )     -0.4 %     33,242       0.1 %
Loss from continuing operations
  $ (4,464,428 )     -10.5 %   $ (5,787,223 )     -13.9 %
 
Year Ended December 31, 2011 Compared with Year Ended December 31, 2010

Revenues
 
Consolidated revenues were $42.4 million in the year ended December 31, 2011, compared to $41.8 million during the year ended December 31, 2010, an increase of $0.6 million, or 1.4%.  Carrier Services revenue of $40.1 million increased by $0.1 million, or 0.3%, over the same period of a year ago, as a 26% increase in the number of minutes transmitted over our network was mostly offset by the decrease in the blended rate per minute of traffic terminated.

Revenues for the Corporate Services segment increased $0.5 million, or 27.5%, to $2.2 million in 2011 compared to 2010 due to the continued growth in the customer base for this segment.
 
Cost of Revenues and Gross Margin
 
Consolidated cost of revenues was $38.1 million in the year ended December 31, 2011, compared to $37.8 million in the year ended December 31, 2010.  Consolidated gross margin was 10.1% in 2011, compared to 9.4% in the same period of a year ago.   The increase is mainly due to the higher Carrier Services margin and, to a lesser extent, the increased relative contribution of the higher margin Corporate Services business.  Gross margin for the Carrier Services business was 8.7% in 2011 compared to 8.1% in 2010.  The higher margin was due to a reduction of approximately $0.2 million in fixed costs in 2011, primarily for TDM circuits and internet bandwidth.  We believe there are opportunities to further improve our Carrier Services margin if we can obtain the necessary funding for capital expenditures and working capital.

During 2011, the Corporate Services business segment accounted for 19.0% of our consolidated gross profit, compared to 17.6% of consolidated gross profit in 2010.  Continuing to increase the relative contribution of our Corporate Services business segment is an essential component of our business strategy, and we believe that the NBS acquisition, if it takes place, will result in a substantial increase to our consolidated gross margins and significantly improve our overall operating results.  Gross margin for the Corporate Services business was 36.5% in 2011, compared with 39.7% in 2010.  The decrease in gross margin during the year was mainly due to price discounts granted to certain customers in 2011 in order to secure long-term business and expand our customer base, and to increased competitive pressures as 2011 progressed.  We expect these trends to continue in 2012, and we believe that we need to achieve greater economies of scale and enhance our product offerings in order to compete effectively in this business.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Depreciation and Amortization
 
Depreciation and amortization expense decreased by $0.3 million, from $0.8 million in the year ended December 31, 2010 to $0.5 million in the year ended December 31, 2011, as more existing assets became fully depreciated during 2011 than there were new assets placed into service during the year.  Although our liquidity constraints in 2011 did not significantly impact our ability to incur capital expenditures that were required to support our current network operations, if we are able to obtain funding to enhance our network capacity and capabilities in 2012 and beyond, we expect that this will result in future increases to depreciation expense.

Loss on Impairment
 
During the year ended December 31, 2011, we recorded an impairment charge in the amount of $0.2 million related to the Company’s trademark intangible assets, as compared to an impairment charge of approximately $19,000 in the same period of a year ago.  The impairment charges are based on the difference between the asset’s carrying value at the time of the impairment test and our estimate of fair market value.

SG&A
 
SG&A decreased to $7.9 million for the year ended December 31, 2011 as compared to $8.8 million in the year ended December 31, 2010.  During 2011, we reduced our accruals for certain state franchise taxes and other state and local taxes based on changes in estimates, resulting in a decrease in expense of $0.4 million.  Excluding this adjustment, SG&A decreased by $0.6 million, or 6.6%.  This decrease resulted from reduced employee compensation costs of $0.5 million, a $0.2 million reduction in rent and other occupancy costs, which was mainly due to the restructuring of the lease at our switch facility in late 2010, and $0.1 million of lower insurance expense, partly offset by a $0.2 million increase in bad debt expense and a $0.1 million increase in agent commissions associated with the growth of the Corporate Services business segment.

Advertising and Marketing
 
Advertising and marketing expenses was approximately $15,000 in the year ended December 31, 2011, compared to approximately $39,000 in the year ended December 31, 2010.  Although our use of advertising continues to be minimal, our pursuit of certain large scale opportunities for our Corporate Services business may result in increased marketing expenses in 2012 and beyond.

Operating Loss
 
Our operating loss decreased by $1.5 million, or 26.0%, from $5.8 million for the year ended December 31, 2010 to $4.3 million for the year ended December 31, 2011.  The decrease in operating loss was primarily attributable to a $1.2 million reduction in operating expenses, primarily SG&A, and a $0.3 million increase in gross profit, which was mainly the result of the improved margins in the Carrier Services segment.

Other (Expense) Income
 
For the year ended December 31, 2011, total other (expense) income was a net expense of approximately $155,000, compared to net income of approximately $33,000 for the year ended December 31, 2010.  The change is due to approximately $160,000 of gains on vendor settlements in 2010 compared to $75,000 in 2011, as well as a loss on the sale of our accounts receivable of approximately $52,000 in 2011 with no comparable amount in 2010.  In addition, interest expense increased by approximately $25,000 in 2011 due to the issuance of additional notes payable, and we recorded a loss on the disposal of certain of our property and equipment of approximately $25,000 in 2011, with no comparable amount in 2010.

Discontinued Operations
 
Discontinued Operations pertains to our former consumer segment that we discontinued in 2009.  During the year ended December 31, 2011 we recorded a gain from discontinued operations of approximately $10,000, compared with a loss from discontinued operations of approximately $12,000 in 2010.  The change was largely the result of cash received for certain customer receivables pertaining to this segment that had previously been written off.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Net Loss
 
Net loss decreased $1.3 million, or 23.2% to $4.5 million for the year ended December 31, 2011, from $5.8 million for the year ended December 31, 2010, mainly due to the decrease in operating expenses and increase in gross profit.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Our ability to continue as a going concern is dependent upon our ability to raise additional capital to support our day to day operations and implement our business plan.  Since our inception, we have incurred significant operating and net losses.  In addition, we have yet to generate positive cash flow from operations.  As of December 31, 2011, we had a stockholders’ deficit of $10.6 million, as compared to $8.1 million at December 31, 2010, and a working capital deficit of $12.0 million, as compared to $9.7 million at December 31, 2010.  We currently do not have sufficient cash or other financial resources to fund our operations and meet our obligations for the next twelve months.

We have historically relied upon the sale of our equity securities and loans from non-related and related parties, including Marvin Rosen, the Chairman of the Board of Directors, to fund our operations.  For the year ended December 31, 2011, we raised approximately $1.1 million from the sale of our securities through private placement financings and received $2.9 million in new loans from Mr. Rosen.  From January 1, 2012 through the date of this report, we raised an additional $0.9 million from additional private sales of our securities.  We expect to continue to rely on additional sales of our securities and additional borrowings to support our operations and meet the Company’s financial obligations for the remainder of 2012.  There are no current commitments for such funds and there can be no assurances that such funds will be available to the Company as needed.  In addition, a substantial portion of our outstanding indebtedness is payable upon ten days notice from the lender.  Although we have yet to receive any demand notices for this indebtedness, there are no assurances that we will not receive any such notices in the future, and we currently do not have the financial resources to repay these loans should we receive a demand for payment.
 
On September 12, 2011, we entered into a purchase and sale agreement with Prestige Capital Corporation (“Prestige”), whereby we may sell certain of our accounts receivable to Prestige, at a discount in order to improve our liquidity and cash flow.  Since the fourth quarter of fiscal 2011 through the date of this report, we have been utilizing this agreement to assist us with our short term liquidity needs and we expect to continue to do so until such time as we can complete a significant equity raise.  Under the terms of the purchase and sale agreement, Prestige pays a percentage of the face amount of the receivables at the time of sale, and the remainder, net of the discount, is paid to us within three business days after Prestige receives payment on the receivables, which generally have 30 day terms.
 
Prestige also provided the Company with a one-time advance of $208,000 at the time we entered into this agreement.  This advance is secured by a priority lien on the Company’s accounts receivable. The proceeds from the advance were used to pay down other third party indebtedness and for general corporate purposes.  The advance is payable in 25 equal weekly installments beginning in October of 2011 and an advance fee of approximately $15,000 is payable 180 days after the closing date.  The outstanding balance on this advance was approximately $103,000 at December 31, 2011, and this balance was paid in full as of March 30, 2012.  The Prestige agreement expires in June of 2012, but contains automatic renewals unless either party provides a written notice of cancellation within 60 days prior to expiration.

On January 30, 2012 we entered into agreements to acquire NBS.  The cash portion of the purchase price is $17.75 million.  In conjunction with our efforts to obtain debt financing for a substantial portion of this amount, we are seeking to consummate a significant sale of our equity securities which will (i) finance the remaining amount of the cash portion of the purchase price; (ii) provide for necessary post-acquisition working capital requirements for the acquired business; and (iii) provide the necessary funds for capital expenditures and working capital requirements of our existing business, including the implementation of our long term business plan.  There are currently no commitments for any such financings and no assurances can be given that funds will be available on terms that are acceptable to us, or at all.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


On October 27, 2011, the landlord over premises leased by the Company exercised its right under the lease to draw down the full amount of a letter of credit in the amount of $428,391 that we had posted as security under the terms of the lease.  The letter of credit was issued for our benefit by a third party lending institution and we had partially collateralized the letter of credit in the approximate amount of $240,000 by depositing this amount in a money market account with the lending institution.  As a result of the drawdown of the letter of credit, we were required to pay the issuer of the letter of credit the difference between the full amount of the letter of credit and the amount of the collateral, which difference is approximately $188,000.  While our failure to make this payment constitutes an event of default under the terms of the letter of credit, we did not receive a default notice from the lending institution. The Company and the lender have agreed in principle on the terms of a forbearance and settlement agreement which, among other things, sets forth payment terms for the outstanding amount.  Under the terms of the proposed forbearance and settlement agreement, which provides for interest on the outstanding amount at the rate of 5.25% per annum, we will be required to make principal payments in the amount of $5,000 per month from March 27, 2012 through August 27, 2012, $50,000 on each of September 27, 2012, December 27, 2012 and March 27, 2013 and approximately $8,000 June 27, 2013.  Although there can be no assurances, we expect that the forbearance and settlement agreement will be fully executed in the second quarter of 2012.
 
In the event that we are unable to secure the necessary funding to meet our working capital requirements and payment obligations, either through the sale of our securities or through other financing arrangements, we may be required to downsize, reduce our workforce, sell assets or possibly curtail or even cease operations.
 
A summary of the Company’s cash flows for years ended December 31, 2011 and 2010 is as follows:
 
   
2011
   
2010
 
 Cash from continuing operations:
           
 Cash used in operating activities
  $ (3,461,117 )   $ (4,791,026 )
 Cash used in investing activities
    (146,528 )     (508,617 )
 Cash provided by financing activities
    3,654,862       5,386,503  
 Increase (decrease) in cash and cash equivalents from continuing operations
    47,217       86,860  
 Cash from discontinued operations
    (64,540 )     (165,509 )
 Net increase (decrease) in cash and cash equivalents
    (17,323 )     (78,649 )
 Cash and cash equivalents, beginning of period
    20,370       99,019  
 Cash and cash equivalents, end of period
  $ 3,047     $ 20,370  
 
Cash used in operating activities was $3.5 million for the year ended December 31, 2011, compared to $4.8 million for the year ended December 31, 2010.  The decrease is mainly due to a lower operating loss.  As we continue to implement our business strategy with our Carrier Services and Corporate Services business segments we expect that our net cash flows from operating activities will continue to improve.

Cash used in investing activities was $0.1 million for the year ended December 31, 2011, compared to $0.5 million in the year ended December 31, 2010.  The decrease is due to increases in restricted cash in 2010 in order to collateralize letters of credit required under our leasing arrangements, and lower capital expenditures in 2011.  We expect our cash capital expenditures to be approximately $0.4 million in 2012, mainly to implement improvements to our network for our Carrier Services business segment.

Cash provided by financing activities was $3.7 million for the year ended December 31, 2011, as compared to $5.4 million in the year ended December 31, 2010.  During 2011, we raised $1.1 million from the sale of our common stock, compared to $3.6 million in 2010.  We also raised $2.6 million from new borrowings, net of repayments, in 2011, compared with $1.8 million in 2010.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Sources of Liquidity
 
As of December 31, 2011, we had cash and cash equivalents of approximately $3,000 and accounts receivable of approximately $2.4 million.  Our long-term liquidity is dependent on our ability to develop profitable operations that will generate positive cash flow.  We cannot predict if and when we will be able to achieve profitability.

Uses of Liquidity
 
Our short-term and long-term liquidity needs arise primarily from working capital requirements to support the growth and day-to-day operations of our business, principal and interest payments related to our financing obligations, capital expenditures and any additional funds that may be required for business expansion opportunities.  In some situations, we may be required to guarantee payment or performance under agreements, and in these circumstances we may be required to secure letters of credit or bonds to do so. These instruments may further limit unrestricted cash and cash equivalents, and may place a further strain on our liquidity.

Debt Service Requirements
 
During the year ended December 31, 2011, we repaid $0.5 million of promissory notes and other indebtedness held by unrelated parties.  For 2012, we expect to make debt service payments aggregating to $0.3 million related to the letter of credit drawdown and the Prestige advance.  At December 31, 2011, we had $4.9 million of debt payable to Mr. Rosen, which is payable on demand and is collateralized by a subordinated security interest in our accounts receivable.  As of the date of this report we have not received any demand for payment.

Capital Instruments
 
Over the course of 2011 we entered into subscription agreements with 27 accredited investors, under which we issued an aggregate of 13,291,167 shares of common stock and five-year warrants to purchase 3,482,785 shares of the Company’s common stock for aggregate consideration of $1.1 million.  The warrants are exercisable at 112% to 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.  Two of these investors, accounting for 1,037,038 shares, 272,224 warrants and proceeds of $85,000, were directors of the Company.  Also during 2011, two of our directors and two unrelated note holders converted an aggregate of $0.7 million of promissory notes and accrued interest that were payable on demand into an aggregate of 8,409,685 shares of the Company’s common stock and warrants to purchase 1,961,304 shares of the Company’s common stock.

Between January 1, 2012 and March 15, 2012, we sold and issued to 20 accredited investors 8,594,988 shares of common stock and warrants to issue 2,578,503 shares of the Company’s common stock at exercise prices ranging from $0.09 to $0.23 per share, or 112% to 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.  The net proceeds of $0.9 million were used for general working capital purposes.  In addition, three of our officers and/or directors converted an aggregate of $85,000 of indebtedness from the Company into 814,816 shares of common stock and warrants to issue 244,447 shares of the Company’s common stock at exercise prices ranging from $0.09 to $0.17 per share, or 112% to 125% of the average closing price of the Company’s common stock for the five trading days prior to closing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
We have identified the policies and significant estimation processes discussed below as critical to our business operations and to the understanding of our results of operations.  In many cases, the accounting treatment of a particular transaction is dictated by specific accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application.  In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions.  For a detailed discussion on the application of these and other accounting policies, see note 3 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.  The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods.   We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Revenue Recognition
 
Our revenue is primarily derived from usage fees charged to carriers and corporations that terminate voice traffic over our network, and from the monthly recurring fees charged to customers that purchase our corporate products and services.

Variable revenue is earned based on the length (number of minutes duration) of a call.  It is recognized upon completion of the call, and is adjusted to reflect customer billing adjustments.  Revenue for each customer is calculated from information received through our network switches.  Customized software has been designed to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates.  This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period.  We believe that the nature of this process is such that recorded revenues are unlikely to be revised in the future.

Revenue earned from monthly services provided to our corporate services customers are fixed and recurring in nature, and are contracted for over a specified period of time.  Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer.  The recurring customer charges continue until the expiration of the contract, or until cancellation of the service by the customer.  To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.

Accounts Receivable
 
Accounts receivable is recorded net of an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and adjust the allowance for doubtful accounts based on our history of past write-offs and collections and current credit conditions.  Specific customer accounts are written off as uncollectible if the probability of a future loss has been established, collection efforts have been exhausted and payment is not expected to be received.

Cost of Revenues and Cost of Revenues Accrual
 
Cost of revenues is comprised primarily of costs incurred from other domestic and international communications carriers to originate, transport, and terminate voice calls for the Company’s carrier and corporate customers.  The majority of the Company’s cost of revenues is thus variable, based upon the number of minutes actually used by the Company’s customers and the destinations they are calling.  Cost of revenues also includes the monthly recurring cost of certain platform services purchased from other service providers, as well as the monthly recurring costs of broadband Internet access and/or private line services purchased from other carriers to meet the needs of the Company’s customers.  Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through the Company’s network switches.  During each period, the call activity is analyzed and an accrual is recorded for the revenues associated with minutes not yet invoiced. This cost accrual is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates.

Fixed expenses reflect the costs associated with connectivity between the Company’s network infrastructure, including its New York switching facility, and certain large carrier customers and vendors. They also include the cost of fiber optic transmission facilities used to connect the Company's switching facility to certain international destinations.  In addition, fixed expenses include the monthly recurring charges associated with certain platform services purchased from other service providers, the monthly recurring costs associated with private line services for certain corporate customers and the cost of broadband Internet access used to provide service to both carrier and corporate customers.

Impairment of Long-Lived Assets
 
We periodically review long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.  If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset.  If the carrying value of the asset exceeds the projected undiscounted cash flows, we are required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value.  We recorded impairment charges related to our Efonica trademarks of approximately $163,000 and $19,000 in the years ended December 31, 2011 and 2010, respectively.  In addition, we wrote off certain of our property and equipment that we determined was no longer in use, and recorded a loss on disposal of approximately $25,000 for the net book value of these assets during the year ended December 31, 2011.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


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 like than not that we will fail to generate sufficient taxable income to be able to utilize the deferred tax assets.

Recently Issued Accounting Pronouncements
 
During the years ended December 31, 2011 and 2010, there were no new accounting pronouncements adopted by the Company that had a material impact on the Company’s consolidated financial statements.  Our management does not believe that there are any recently issued, but not yet effective, accounting pronouncements, if currently adopted, which would have a material effect on our consolidated financial statements.
 
OTHER MATTERS

Inflation
 
We do not believe inflation has a significant effect on the Company’s operations at this time.

Off Balance Sheet Arrangements
 
Under SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors.  Off-balance sheet arrangements consist of transactions, agreements or contractual arrangements to which any entity that is not consolidated with us is a party, under which we have:
 
 
Any obligation under certain guarantee contracts.
 
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.
 
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.
 
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

As of December 31, 2011, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for smaller reporting companies.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 8.     FINANCIAL STATEMENTS.
 
The Company’s consolidated financial statements required by this Item are included after Item 15 of this report.

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.  CONTROLS AND PROCEDURES.
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (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 the Company’s management, including as appropriate our Chief Executive Officer and our President, who also serves as our Principal Financial Officer, to allow timely decisions regarding required disclosure.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and President, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of December 31, 2011.  Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and President concluded that the Company’s disclosure controls and procedures were effective to accomplish their objectives.  Our Chief Executive Officer and President 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 the Company’s stated goals under all potential future conditions.

There have been no changes in our internal control over financial reporting that occurred during our fiscal year ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of Fusion’s internal control over financial reporting as of December 31, 2011.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.  Based on the assessment using those criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2011.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Changes in Internal Control over Financial Reporting
 
There was no change in the internal control over financial reporting that occurred during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION
 
Not applicable.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
The members of the Company’s Board of Directors and the Company’s executive officers, together with their respective ages and certain biographical information are set forth below, along with, in the case of directors, a description of the qualifications that led the Board to conclude that the individual should serve as a director:
 
Name
 
Age
 
Position
Marvin S. Rosen
 
71
 
Chairman of the Board
Philip D. Turits
 
78
 
Secretary, Treasurer and Director
Matthew D. Rosen
 
39
 
Chief Executive Officer and Director
E. Alan Brumberger
 
71
 
Director
Julius Erving
 
61
 
Director
William Rubin
 
58
 
Director
Paul C. O'Brien
 
71
 
Director
Michael J. Del Giudice
 
68
 
Director
Larry Blum
 
68
 
Director
Gordon Hutchins, Jr.
 
62
 
President, Chief Operating Officer, and Acting Chief Financial Officer
Jan Sarro
 
57
 
Executive Vice President - Corporate Services

Board of Directors and Executive Officers

Marvin S. Rosen, Chairman of the Board
 
Mr. Rosen co-founded the Company in 1997. He has served as the Chairman of our Board of Directors since November 2004, Chairman of our Executive Committee since September 1999, Vice Chairman of the Board of Directors from December 1998 to November 2004 and has been a member of our Board since March 1998. He served as our Chief Executive Officer from April 2000 until March 2006. In 1983 he joined the international law firm of Greenberg Traurig as a Partner specializing as a Corporate Securities Lawyer active in many Public Offerings and Private Placements.  He remained an active practicing lawyer until 2000. At that point he became inactive and remained of Counsel until early 2009.  Mr. Rosen was Finance Chairman for the Democratic National Committee from September 1995 until January 1997. Currently, he serves on the Board of Directors of the Robert F. Kennedy Memorial and previously was Budget and Finance Chairman for the Summit of the Americas, Chairman of the Florida Housing Finance Agency.  Mr. Rosen served on the Board of Directors Terremark Worldwide, Inc from 2000 until 2011.  Mr. Rosen is also a Principal with Emerald Point Capital Partners, LLC Mr. Rosen’s son, Matthew, is our current Chief Executive Officer, and serves on our Board of Directors.  The Board believes that Mr. Rosen’s background as the co-founder and former CEO of the Company, a Principal with a financial services firm, a securities lawyer and a director of a public company provides him with the industry, financial, legal, and leadership experience to advise the Board on valuable strategic and tactical matters.

Philip D. Turits, Secretary, Treasurer, and Director
 
Mr. Turits co-founded the Company in 1997 and has served as a Director since September 1997, Secretary since October 1997, Treasurer since March 1998, and Vice Chairman from March 1998 to December 1998. From September 1991 to February 1996, Mr. Turits served as Treasurer and Chief Operating Officer for Larry Stuart, Ltd., a consumer products company and prior to 1991 he served as President and Chief Executive Officer of Continental Chemical Company.  The Board believes that Mr. Turits background as the co-founder and Secretary/Treasurer of the Company and an experienced corporate executive provides him with the operational, financial, and leadership qualifications to provide valuable guidance to management and the other directors, particularly in the financial aspects of the telecommunications business.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Matthew D. Rosen, Chief Executive Officer and Director
 
Mr. Rosen has served as a Director since May 2005 and has been our Chief Executive Officer since March of 2006. He served as President from March 2006 until March 2008, as Chief Operating Officer from August 2003 to March 2006, as Executive Vice President and Chief Operating Officer between February 2002 and August 2003, as Executive Vice President and President of Global Operations between November 2000 and January 2002 and as President of US Operations between March 2000 and November 2000.  From 1998 to 2000, he held various management positions, including President of the Northwest and New England Operations for Expanets, a $1.3 billion integrated network communications service provider. From 1996 to 1998 he was Corporate Director of Operations for Oxford Health Plans, a $4 billion health care company, where he worked on developing and executing turnaround strategies. Prior to his role as Corporate Director of Operations, Mr. Rosen held an executive position in a start-up healthcare technology subsidiary of Oxford where he played an integral part in developing strategy and building its sales, finance and operations departments. Prior to Oxford, Mr. Rosen was an investment banker in Merrill Lynch’s corporate finance department.  The Board believes that Mr. Rosen’s background as the current Chief Executive Officer and former Chief Operating Officer of the Company, a senior executive in the telecommunications industry, an experienced operations executive and an investment banker provides him with the industry, operational, financial, and leadership experience to advise on all aspects of the Company’s business.  Mr. Rosen is the son of our Chairman of the Board, Marvin Rosen.
 
E. Alan Brumberger, Director
 
Mr. Brumberger has served as a Director since March 1998.  Currently, Mr. Brumberger is the Chief Executive Officer of Emerald Point Capital Partners, LLC He formerly was a partner in Andersen & Co. and its predecessor firms, from 1997 to 2004.  From 1995 through 1997, he was a Managing Director of the Taylor Companies and from 1994 through 1995 he was a Managing Director of Brenner Securities, Inc.  From 1983 through 1990, Mr. Brumberger was a Managing Director of Drexel Burnham Lambert and a member of the Underwriting and Commitment Committees.  Prior to that, he was a Managing Director of Shearson American Express and a partner at Loeb, Rhoades & Co., a predecessor of Shearson American Express.  Mr. Brumberger served for three years as President and Chief Executive Officer of Shearson American Express International Limited, the firm’s international investment banking business in London.  The Board believes that Mr. Brumberger’s background as the current Chief Executive Officer of a financial services firm, an experienced leader in the finance and securities industry, a partner in a public accounting firm and an investment banker provides him with the financial and leadership experience to provide important input and direction to management and the Board, particularly on financial matters.

Julius Erving, Director
 
Mr. Erving has served as a director since June 2003.  He is the President of the Erving Group, and has served in that role since 1979.  Mr. Erving was also employed by the National Broadcasting Company between December 1994 and June 1997, and by the National Basketball Association between 1987 and September 1997.  He is a former director of Saks, Incorporated, Darden Restaurants, and The Sports Authority.  Mr. Erving is also a Trustee of the Basketball Hall of Fame. The Board believes that Mr. Erving’s unique background as a leader in broadcasting, sports management, and professional sports, as well as his prior service as a corporate director provides him with the qualifications to provide valuable direction and guidance to executive management and the Board.

William Rubin, Director
 
Mr. Rubin has been President of the Rubin Group, a consulting firm representing clients before governmental entities, since 1992.  From 1983 through 1984, he was Assistant Insurance Commissioner and Treasurer of the State of Florida, where he was directly responsible for all activities related to the Florida State Board of Administration, the agency that manages the investments for Florida’s pension funds.  Mr. Rubin also serves as an advisor to many large companies, primarily advising health care companies doing business in Florida.  The Board believes that Mr. Rubin’s background as a senior governmental official and a lobbyist provides him with the financial and leadership experience to be a valuable advisor to executive management and the Board.

Paul C. O’Brien, Director
 
Mr. O’Brien has served as a director since August 1998.  Since January 1995, Mr. O’Brien has served as the President of the O’Brien Group, Inc., a consulting and investment firm.  From February 1988 until December 1994, he was the President and Chairman of New England Telephone, (a subsidiary of NYNEX), a telecommunications company.  Mr. O'Brien serves as Chairman of the Board of Astrobotic Technology, Inc. and he is also on the advisory board of Sovereign Bank. The Board believes that Mr. O’Brien’s background as President of a consulting and investment firm, as Chairman of a major telecommunications enterprise, and as an experienced corporate director provides him with the industry, operational and financial leadership experience to effectively guide the Board on all aspects of the Company’s business.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Michael J. Del Giudice, Director
 
Mr. Del Giudice has served as a Director since November 2004. He is a Senior Managing Director of Millennium Credit Markets LLC and Senior Managing Director of MCM Securities LLC, both of which he co-founded in 1996. Mr. Del Giudice also serves as Chairman of Rockland Capital Energy Investments LLC, founded in April 2003. Mr. Del Giudice has been a Member of the Board of Directors of Consolidated Edison Company of New York, Inc. since 1999, and is currently a member of its Audit Committee and Chairman of its Corporate Governance and Nominating Committee. Mr. Del Giudice has served as a director of Reis, Inc. since 2007 and was a director of Barnes and Noble, Inc. through September 2010.  He is also Vice Chairman of the New York Racing Association and serves as Chairman of the Governor’s Committee on Scholastic Achievement. Mr. Del Giudice was a General Partner and Managing Director at Lazard Freres & Co. LLC from 1985 to 1995. From 1983 to 1985, Mr. Del Giudice was Chief of Staff to New York Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as Chief of Staff to the Speaker of the Assembly.  The Board believes that Mr. Del Giudice’s background as a Senior Managing Director in securities and investment firms, an investment banker, Chief of Staff to the Governor and an active corporate director provides Mr. Del Guidice with the financial and leadership experience to be a valuable advisor to executive management and the Board.

Larry Blum, Director
 
Mr. Blum was the Senior Partner of the Florida Region of Marcum LLP (formerly known as Marcum Rachlin) from 2009 until December 31, 2011.  For more than 18 years, Mr. Blum served as the Managing Partner of Rachlin LLP, directing the firm’s growth to its position as Florida’s largest independent accounting and business advisory firm up until its merger with Marcum LLP in 2009.  Mr. Blum has also served as a litigation advisor and is a member of the Florida Bar.  The Board believes that Mr. Blum’s background as a managing partner of a public accounting firm and his expertise in the areas of strategic planning, mergers and acquisitions and domestic and international taxation provides him with the financial and leadership experience to be a valuable advisor to executive management and the Board.

Gordon Hutchins, Jr., President, Chief Operating Officer, and Acting Chief Financial Officer
 
Mr. Hutchins has served as our President and Chief Operating Officer since March 2008 and as Acting Chief Financial Officer since January 15, 2010.   Mr. Hutchins served as our Executive Vice President from December 2005 to March 2008. Prior to his employment with Fusion, Mr. Hutchins served as President and Chief Executive Officer of SwissFone, Inc., a $100 million telecommunications carrier. Prior to SwissFone, Mr. Hutchins was President and Chief Executive Officer of STAR Telecommunications, Inc., an $800 million international telecommunications carrier, where he was hired to lead the company’s restructuring following the filing of its bankruptcy petition. Mr. Hutchins has also served since 1989 as President and CEO of GH Associates, Inc., a management-consulting firm that he founded. In this capacity, he has consulted to over 100 small and large telecommunications companies throughout the world, and has held ten interim CEO/COO roles with client companies.  As an entrepreneur, Mr. Hutchins also founded Telecom One, Inc., a nationwide long distance carrier that he sold to Broadwing Communications Inc., and TCO Network Services, Inc., a local wireless services carrier purchased by Winstar Communications, Inc.  During his early career, Mr. Hutchins served as President and CEO of LDX NET, Inc., a fiber optic network company, and held positions with MCI, McDonnell Douglas Corporation, and AT&T.

Jan Sarro, Executive Vice President - Corporate Services
 
Ms. Sarro has served as our Executive Vice President – Corporate Services since March 2008. Ms. Sarro served as our Executive Vice President of Carrier Services from April 2005 to March 2008, and as Vice President of Sales and Marketing since March 2002. Prior to joining us, Ms. Sarro was the President of the Americas for Viatel, Inc., a global, facilities-based communications carrier, and has over 20 years of experience in developing telecommunications solutions for international businesses and carriers worldwide. At Viatel, Ms. Sarro grew annual carrier revenues from $20 million to $160 million in under two years, and built a $140 million sales organization to market Internet access, corporate networks, and international voice services to multinational corporations in the United States and Latin America. Ms. Sarro has also held senior executive marketing and sales management positions at Argo Communications, the international record carriers, FTC Communications, TRT Communications and WorldCom. 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Board of Directors

The Board of Directors oversees our business affairs and monitors the performance of management.  In accordance with our corporate governance principles, the Board of Directors does not involve itself in day-to-day operations.  The directors keep themselves informed through discussions with the Chief Executive Officer and our other executive officers and by reading the reports and other materials that we send them and by participating in Board of Directors and committee meetings.  If any director resigns, dies or is otherwise unable to serve out his or her term, or if the Board increases the number of directors, the Board may fill any vacancy by a vote of a majority of the directors then in office.  A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the stockholders.

The Company’s bylaws provide that the number of members of the Company’s Board shall be not be less than seven nor more than seventeen and that a director’s term extends from the date of his or her election at each Annual Meeting of Stockholders until the Company’s next Annual Meeting of Stockholders.  There are currently nine directors on the Board.  Evelyn Langlieb Greer chose not to stand for re-election to the Board of Directors and two new directors, Larry Blum and William Rubin, were elected to the Board at the Company’s 2011 Annual Meeting of Stockholders.

The Board held 6 meetings in 2011.  With the exception of Julius Erving, all incumbent directors attended at least 75% of the meetings that were held.

Committees of the Board

The board has established a Compensation and Nominating Committee, a Strategic and Investment Banking Committee, and an Audit Committee (collectively the “Committees”) to devote attention to specific subjects and to assist the board in the discharge of its responsibilities. The functions of the Committees and their current members are set forth below:
 
Compensation and Nominating Committee
 
Our Compensation and Nominating Committee’s (the “Compensation Committee”) main functions are (i) to review and recommend to our Board of Directors compensation and equity plans, policies and programs and approve Executive Officer compensation, and (ii) to review and recommend to our Board of Directors the nominees for election as Directors of the Company and to review related Board of Directors development issues including succession planning and evaluation. The members of our Compensation Committee are Michael J. Del Giudice– Chairman, Paul C. O'Brien and Julius Erving, each of whom is a non-employee member of our Board. Our Board has determined that each of the Directors serving on our Compensation Committee is independent within the existing standards of the NYSE Amex LLC Company Guide.  The charter of our Compensation Committee is posted on our website (www.fusiontel.com), and a copy of the charter can be obtained by contacting our Corporate Secretary at the address previously provided for Communications with Directors.   The information on our website is neither incorporated by reference nor a part of this report.

The Compensation Committee has not established any procedures for the recommendation or selection of director nominees by our stockholders.  The Company intends during the coming year to consider a procedure for stockholders to propose director nominees for the Company’s Board.  The Compensation Committee held two meetings during 2011.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Strategic and Investment Banking Committee
 
The members of our Strategic and Investment Banking Committee (the “Strategic Committee”) are Marvin S. Rosen – Chairman, E. Alan Brumberger, Michael Del Giudice, and Philip D. Turits.  Our Strategic Committee evaluates and recommends investment strategies with investment banks and brokerage houses and assists in the evaluation of potential mergers and acquisitions.  There is no written charter for the Strategic Committee. The Strategic Committee acts at the direction of the Board of Directors.  The Strategic Committee did not meet in 2011.

Audit Committee
 
Our Audit Committee’s primary function is to oversee our accounting and financial reporting processes, internal control systems, independent accountant relationships, the audits of our financial statements and our compliance with the Sarbanes-Oxley Act of 2002. This Committee’s responsibilities include, among other things:
 
  
Reviewing our quarterly financial statements and annual audited financial statements with our management and our independent accountants and determining the adequacy of our internal accounting controls.
  
Reviewing analyses prepared by our management and independent accountants concerning significant financial reporting issues and judgments made in connection with the preparation of our financial statements.
  
Reviewing the independence of the independent accountants.
  
Reviewing our accounting principles and practices with the independent accountants and reviewing major changes to our accounting principles and practices as suggested by the independent accountants or our management.
  
Selecting and recommending the appointment of the independent accountants to the Board of Directors, which firm is ultimately accountable to the Audit Committee and the Board of Directors; and
  
Approving professional services provided by the independent accountants, including the range of audit and non-audit fees.
  
Ensuring that management has established a system to monitor and enforce our Code of Ethics and reviewing and monitoring the Company’s corporate governance practices.

The members of our Audit Committee in 2011 were Paul C. O'Brien – Chairman, Michael Del Giudice and Julius Erving, each of whom is a non-employee member of our Board.  Michael Del Giudice is our Audit Committee Financial Expert as currently defined under SEC Rules.  Our Board has also determined that each of the directors serving on our Audit Committee is independent within the meaning of the Rules of the SEC and within the existing standards of the NYSE Amex LLC Company Guide.  The charter of our Audit Committee is posted on our website (www.fusiontel.com), and a copy of the charter can also be obtained by contacting our Corporate Secretary. The information on our website is neither incorporated by reference nor a part of this report.  The Audit Committee held four meetings in 2011.

With respect to the year ended December 31, 2011, in addition to its other work, the Audit Committee:
 
  
Reviewed and discussed with management and Rothstein Kass, our independent registered public accounting firm, our audited consolidated financial statements as of December 31, 2011 and the year then ended.
  
Discussed with Rothstein Kass the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as amended, with respect to its review of the findings of the independent registered public accounting firm during its examination of our financial statements; and
  
Received from Rothstein Kass written affirmation of its independence as required by the Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees.”  In addition, the Audit Committee discussed with Rothstein Kass its independence and determined that the provision of non-audit services was compatible with maintaining auditor independence.

Based on the review and discussion summarized above, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the 2011 Annual Report on Form 10-K for filing with the SEC.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Shareholder Communications with Directors
 
The Board recommends that communications with the Board be initiated, in writing, addressed to:
 
Fusion Telecommunications International, Inc.
Attention: Corporate Secretary- Shareholder Communications
420 Lexington Avenue, Suite 1718
New York, New York 10170
 
This centralized process will assist the Board in reviewing and responding to Stockholder communications in an appropriate manner. The name of any specific intended Board recipient should be noted in the communication. The Board has instructed our Secretary to forward such correspondence only to the intended recipients; however, the Board has also instructed our Secretary, prior to forwarding any correspondence, to review such correspondence and, in his or her discretion, not to forward certain items if they are deemed of a commercial or frivolous nature or otherwise inappropriate for the Board's consideration. In such cases, some of that correspondence may be forwarded elsewhere within the Company for review and possible response.
 
Code of Ethics
 
On November 1, 2004, we adopted a Code of Ethics applicable to all members of our board, executive officers, and senior financial officers.  A copy of our Code of Ethics is posted on our website (www.fusiontel.com) and a copy of the Code of Ethics can be obtained by contacting our Corporate Secretary at the address previously provided for Communications with Directors. Disclosure of amendments to or waivers from the provisions of the Code of Ethics will be publicly disclosed in accordance with applicable rules and regulations, and will be posted on the Company's website.  The information on our website is neither incorporated by reference nor a part of this report.

Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16 (a) of the Exchange Act requires disclosure from every person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security (other than an exempted security) which is registered pursuant to Section 12, or is a director or an officer of the issuer of such security, by filing the statements required by Section 16 of the Exchange Act.

Based solely upon the Company’s review of Forms 3 and 4 and amendments thereto furnished to us during or with respect to our most recent fiscal year, and Forms 5 and amendments thereto furnished to us with respect to our most recent fiscal year and any written representation from a reporting person (as defined in Item 405 of Regulation S-K) that no Form 5 is required, no reporting person failed to timely file reports required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior fiscal years.
 
ITEM 11.   EXECUTIVE COMPENSATION.
 
Executive Officers Summary Compensation Table
 
The following table summarizes all compensation recorded by us in each of the last two completed fiscal years for (i) our Principal Executive Officer, (ii) our two most highly compensated executive officers (other than our Principal Executive Officer), who were serving as such on December 31, 2011, and whose annual compensation exceeded $100,000 and (iii) up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2011. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718.
 
 
41

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Name and Principal Position
 
Year
 
Salary (1)
($)
   
Bonus (1)
($)
   
Option Awards (2)
($)
   
All Other Compensation (3)
($)
   
Total
($)
 
Matthew D. Rosen
 
2011
  $ 350,000     $ -     $ 26,336     $ 1,805     $ 378,141  
CEO
 
2010
  $ 350,000     $ -     $ 43,832     $ 3,121     $ 396,953  
Gordon Hutchins, Jr.
 
2011
  $ 220,000     $ -     $ 15,337     $ 405     $ 235,742  
President, COO, and Acting CFO
 
2010
  $ 220,000     $ -     $ 24,185     $ 351     $ 244,536  
Jan Sarro
 
2011
  $ 155,000     $ -     $ 8,487     $ 405     $ 163,892  
Executive VP - Corporate Solutions
 
2010
  $ 155,000     $ -     $ 11,738     $ 351     $ 167,089  
_________
(1) Included in these columns are amounts earned, though not necessarily received, during the corresponding fiscal year.
 
(2) This column reflects the dollar amount recognized for financial statement reporting purposes for the fiscal years ended December 31, 2011 and 2010, for option awards pursuant to the Company's 1998 and 2009 Stock Option Plans, and may include amounts from awards granted both in and prior to 2011. The value attributable to option awards is computed in accordance with FASB ASC Topic 718, and the assumptions made in the valuations of the option awards are included in Note 3 (Summary of Significant Accounting Policies – Stock Based Compensation) of the notes to our financial statements for the year ended December 31, 2011, appearing elsewhere in this Annual Report on Form 10-K. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
 
(3) Represents life insurance premiums paid by the Company.
 
Employment Agreements, Termination of Employment and Change-In-Control Arrangement

We currently have a written employment agreement with Mr. Matthew Rosen, our Chief Executive Officer.  The term of Mr. Rosen's employment agreement commenced on November 11, 2004 and, following the expiration of the initial term of the agreement on January 31, 2007, has been periodically renewed thereafter by mutual agreement of the parties, with the current term due to expire on September 30, 2013.  The agreement provides for an annual salary of not less than $350,000, with a minimum annual bonus equal to 25% of his annual salary.  Mr. Rosen has voluntarily waived his bonus opportunity since December of 2006, pending improvement in the Company's financial position.  In the event that we achieve a positive EBITDA for two successive quarters, he will be paid a one-time bonus equal to 50% of his annual salary then in effect. In the event that Mr. Rosen’s employment is terminated without cause, including as a result of a change of control, the agreement provides that Mr. Rosen will receive unpaid base salary accrued through the effective date of the termination plus any pro-rata bonus earned and a lump sum payment equal to 200% of his base salary plus 200% of his highest annual bonus for the three years preceding his termination.  Had such an event had occurred on December 31, 2011, the amount due to Mr. Rosen would have been $700,000.  The agreement also includes a one-year non-compete provision.  In the event of a sale of the Company for an amount in excess of $100 million, Mr. Rosen would receive a bonus equal to 2% of proceeds of sale between $100 million and $200 million, 3% of proceeds of sale between $200 million and $300 million, 4% of proceeds of sale between $300 million and $400 million, and 5% of proceeds of sale over $400 million.

Mr. Gordon Hutchins Jr. serves as President, Chief Operating Officer, and Acting Chief Financial Officer of the Company.  Mr. Hutchins does not have a written employment agreement with the Company.  His promotion to President and Chief Operating Officer on March 26, 2008 included an increase in his annual salary from $220,000 to $250,000, and he retains a targeted bonus opportunity equal to 25% of annual salary, based on achievement of corporate performance metrics.  Mr. Hutchins voluntarily waived the increase in his annual salary from March 2008 through December 31, 2011, and effective January 1, 2012, his annual salary was increased to $250,000.  No bonuses have been awarded as the corporate performance metrics have not been achieved.

Ms. Jan Sarro serves as Executive Vice President – Corporate Solutions.  Ms. Sarro does not have a written employment agreement with the Company.  Effective February 15, 2012, Ms. Sarro’s annual salary was increased to $175,000.  Ms. Sarro is entitled to a targeted bonus opportunity equal to 25% of annual salary, based on achievement of corporate performance metrics.  No bonuses have been awarded as the corporate performance metrics have not been achieved.

The Compensation of each executive officer is determined by negotiations between the Compensation Committee and those executive officers, which are then subject to approval by the Compensation Committee and the Board of Directors.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


2011 Director Compensation
 
 
Our directors do not receive cash compensation for their services on the Company’s board or board committees. However, we reimburse our directors for out-of-pocket expenses associated with their attendance at board meetings and we grant directors options under our stock option plans as compensation for their services.
 
The following table provides information relating to compensation paid to the Company’s directors for the 2011 fiscal year.
 
Name
 
Fees Earned Or Paid In Cash
(S)
   
Stock Awards
($)
   
Option Awards (1)
($)
   
Non-Equity Incentive Plan Compensation
   
Change in Pension Value and Nonqualified Deferred Compensation Earnings
   
All Other Compensation (2)
($)
   
Total
($)
 
Marvin S. Rosen
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
E. Alan Brumberger
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
Michael J. Del Giudice
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
Julius Erving
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
Paul C. O'Brien
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
Philip D. Turits
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
Evelyn Langlieb Greer (3)
  $ -     $ -     $ 774     $ -     $ -     $ -     $ 774  
William Rubin (4)
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Larry Blum (4)
  $ -     $ -     $ -     $ -     $ -     $ -     $ -  
______
(1) This column reflects the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2011, for option awards pursuant to the Company's 1998 and 2009 Stock Option Plans and may include amounts from awards granted both in and prior to 2011.  The value attributable to option awards is computed in accordance with FASB ASC Topic 718, and the assumptions made in the valuations of the option awards are included in Note 3 (Summary of Significant Accounting Policies – Stock Based Compensation) of the notes to our financial statements for the year ended December 31, 2011, appearing elsewhere in this Annual Report on Form 10-K.
 
(2) The table does not include reimbursement for out of pocket expenses associated with attendance at board meetings.
 
(3) Ms. Greer chose not to stand for re-election to the Board of Directors for the 2011 Annual Meeting of Stockholders.
 
(4) Elected to the Board of Directors at the 2011 Annual Meeting of Stockholders on February 27, 2012.
 
Stock Option Plans

On December 17, 2009, the stockholders approved and adopted the Company’s 2009 Stock Option Plan (the “2009 Plan”), which had been approved by the board of directors on March 26, 2009.  This plan replaced the 1998 Stock Option Plan, which had expired.  The 2009 Plan provides a long-term, equity-based incentive designed to assist in the retention of key personnel, align the interests of directors, executive officers and employees with those of the stockholders and focus all of these individuals on the achievement of those long-term business objectives that will increase share value.

Under the 2009 Plan, the Company has reserved 7,000,000 common shares for the award from time to time of stock options.  Stock options awarded under the 2009 Plan may either be options that qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”), or, alternatively, as options that do not so qualify (“Non Qualified Options”).  Any Incentive Stock Options granted under the 2009 Plan must provide for an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant.

The 2009 Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee, subject to the approval of the full Board of Directors, will determine, from time to-time, those of our officers, directors and employees to whom stock options will be granted, as well as the actual number of options granted to each individual, the vesting schedule and the other terms and conditions of the stock options.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


As of December 31, 2011, there were outstanding options to purchase 3,841,000 shares of common stock under the 2009 Plan and options to purchase 3,159,500 shares were available for future award.  In addition, options to purchase 2,793,261 shares of common stock remain outstanding under the now expired 1998 Stock Option Plan, with such options expiring at various dates through 2019.

Outstanding Equity Awards at Year End

The following table provides information concerning unexercised options and stock awards that have not vested for each named executive officer as of December 31, 2011.
 
      OPTION AWARDS     STOCK AWARDS  
Name
 
Number of securities underlying unexercised options, (#) exercisable
   
Number of securities underlying unexercised options, (#) unexercisable
   
Equity incentive plan awards; Number of securities underlying unexercised unearned options (#)
   
Option exercise prices ($)
 
Option expiration dates
 
Number of shares or units of stock that have not vested (#)
   
Market value of shares or units of stock that have not vested ($)
   
Equity incentive plan awards; Number of unearned shares, units or other rights that have not vested (#)
   
Equity incentive plan awards; Number of unearned shares, units or other rights that have not vested (#)
 
Matthew D. Rosen
    62,143       0       0     $ 3.15  
7/13/2014
    0       0       0       0  
      62,143       0       0     $ 4.38  
7/13/2014
    0       0       0       0  
      218,572       0       0     $ 4.38  
7/13/2014
    0       0       0       0  
      107,142       0       0     $ 2.80  
3/6/2016
    0       0       0       0  
      132,858       0       0     $ 2.46  
3/6/2016
    0       0       0       0  
      160,000       0       0     $ 2.28  
6/15/2016
    0       0       0       0  
      350,000       0       0     $ 0.69  
3/28/2017
    0       0       0       0  
      350,000       0       0     $ 0.31  
3/25/2018
    0       0       0       0  
      233,334       116,666       0     $ 0.11  
3/25/2019
    0       0       0       0  
      145,834       291,666       0     $ 0.12  
4/14/2020
    0       0       0       0  
              437,500       0     $ 0.09  
10/19/2021
    0       0       0       0  
Total                                                                  
Matthew D. Rosen
    1,822,026       845,832                                                    
                                                                   
Gordon Hutchins, Jr.
    107,142       0       0     $ 2.80  
3/6/2016
    0       0       0       0  
      17,858       0       0     $ 2.65  
3/6/2016
    0       0       0       0  
      175,000       0       0     $ 0.69  
3/28/2017
    0       0       0       0  
      200,000       0       0     $ 0.31  
3/25/2018
    0       0       0       0  
      133,334       66,666       0     $ 0.11  
3/25/2019
    0       0       0       0  
      83,334       166,666       0     $ 0.12  
4/14/2020
    0       0       0       0  
      0       325,000       0     $ 0.09  
10/19/2021
    0       0       0       0  
Total                                                                  
Gordon Hutchins, Jr.
    716,668       558,332                                                    
                                                                   
Jan Sarro
    4,993       0       0     $ 4.38  
7/14/2014
    0       0       0       0  
      12,865       0       0     $ 4.38  
7/14/2014
    0       0       0       0  
      28,572       0       0     $ 4.38  
7/14/2014
    0       0       0       0  
      17,858       0       0     $ 3.15  
7/14/2014
    0       0       0       0  
      20,000       0       0     $ 6.45  
2/9/2015
    0       0       0       0  
      20,000       0       0     $ 2.46  
12/22/2015
    0       0       0       0  
      60,000       0       0     $ 0.69  
3/29/2017
    0       0       0       0  
      100,000       0       0     $ 0.31  
3/26/2018
    0       0       0       0  
      66,667       33,333       0     $ 0.11  
3/26/2019
    0       0       0       0  
      50,000       100,000       0     $ 0.12  
4/14/2020
    0       0       0       0  
      0       175,000       0     $ 0.09  
10/19/2021
    0       0       0       0  
Total                                                                  
Jan Sarro
    380,955       308,333                                                    
 
 
44

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The following table presents information regarding the beneficial ownership of our common stock as of February 29, 2012 by: 
 
  
Each person who beneficially owns more than 5% of our common stock
  
Each of our Directors and Named Executive Officers (within the meaning of Item 402(a)(3) of Regulation S-K) individually; and
  
All Executive Officers and Directors as a group.

Unless otherwise indicated, the address of each beneficial owner in the table set forth below is c/o Fusion Telecommunications International, Inc. 420 Lexington Avenue, Suite 1718, New York, NY 10170.  We believe that all persons, unless otherwise noted, named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them.  Under securities laws, a person is considered to be the beneficial owner of securities owned by him (or certain persons whose ownership is attributed to him) and that can be acquired by him within 60 days from that date, including upon the exercise of options, warrants or convertible securities.  We determine a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of the that date, have been exercised or converted.
 
Name and Address of Beneficial Owners
       
Number of Shares Beneficially Owned
   
Percentage of
Common Stock
 
Larry Blum
    (1 )     847,013       * %
E. Alan Brumberger
    (2 )     2,321,207       1.4 %
Julius Erving
    (3 )     134,911       * %
Michael J. Del Giudice
    (4 )     2,124,171       1.3 %
Gordon Hutchins, Jr.
    (5 )     1,681,294       1.0 %
Paul C. O'Brien
    (6 )     253,537       * %
Marvin S. Rosen
    (7 )     25,447,157       15.1 %
Matthew D. Rosen
    (8 )     3,002,547       1.8 %
William Rubin
    (9 )     2,837,438       1.7 %
Jan Sarro
    (10 )     707,362       * %
Philip D. Turits
    (11 )     10,221,242       6.2 %
All Directors and Executive Officers as a Group (11 persons)
            49,577,879       27.9 %
West End Special Opportunity Fund II, LP
    (12 )     19,887,286       12.2 %
_________
* Less than 1% of outstanding shares.

(1) Includes (i) 636,907 shares of common stock held by trusts for which his wife serves as trustee, and (ii) 179,963 shares of Common Stock issuable upon exercise of Common Stock Purchase Warrants held by trusts for which his wife serves as trustee.
 
(2) Includes (i) 10,715 shares of common stock held by trusts for which his wife serves as trustee, (ii) 18,037 shares of common stock issuable upon the exercise of Convertible Preferred Stock Series A-1 and A-2, (iii) 90,000 shares of common stock issuable upon the exercise of options, and (iv) 461,211 shares of common stock issuable upon exercise of Common Stock Purchase Warrants.
 
(3) Includes (i) 90,000 shares of common stock issuable upon the exercise of options, (ii) 29,940 shares of common stock issuable upon the conversion of Convertible Preferred Stock Series A-1, and (iii) 14,971 Common Stock Purchase Warrants.
 
(4) Includes (i) 90,000 shares of common stock issuable upon the exercise of options, (ii) 492,802 Common Stock Purchase Warrants, of which 59,881 are held in the name of Catskill Investor Group, LLC, and (iii) 119,760 shares of common stock issuable upon the conversion of Convertible Preferred Stock Series A-1 held in the name of Catskill Investor Group, LLC.
 
(5) Includes (i) 1,275,000 shares of common stock issuable upon the exercise of options, (ii) 30,121 shares of Common Stock issuable upon the conversion of Preferred Stock Series A-2, and (iii) 98,395 Common Stock Purchase Warrants.
 
 
45

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


(6) Includes (i) 90,000 shares of Common Stock issuable upon the exercise of options, (ii) 59,880 shares of common stock issuable upon conversion of Preferred Stock Series A-1, and (iii) 31,275 Common Stock Purchase Warrants.
 
(7) Includes (i) 5,974,958 Common Stock Purchase Warrants, (ii) 90,000 shares of common stock issuable upon the exercise of options, and (iii) 60,061 shares of common stock issuable upon conversion of Convertible Stock Series A-1 and A-2, and (iv) 80,500 shares of common stock held by a Delaware Trust Custodian IRA of Mr. Rosen.
 
(8) Includes (i) 2,667,858 shares of common stock issuable upon the exercise of options, (ii) 35,965 shares of common stock issuable upon conversion of Convertible Preferred Stock Series A-1 and A-2, and (iii) 67,985 Common Stock Purchase Warrants.
 
(9) Includes 630,756 Common Stock Purchase Warrants.
 
(10) Includes (i) 689,288 shares of Common Stock issuable upon the exercise of options, (ii) 12,049 shares of common stock issuable upon conversion of Convertible Preferred Stock A-2, held by her husband, and (iii) 6,025 Common Stock Purchase Warrants, held by her husband.
 
(11) Includes (i) 4,286 shares of common stock held by his wife, (ii) 1,995,600 Common Stock Purchase Warrants; and (iii) 90,000 shares of Common Stock issuable upon the exercise of options; and (iv) 51,117 shares of common stock issuable upon conversion of Convertible Preferred Stock A-1 and A-2.
 
(12) Includes (i) 18,689,966 shares of common stock and (ii) 1,197,320 Common Stock Purchase Warrants. The address provided by the named Stockholder is 77 East 55th Street, New York, NY 10022.
 
Equity Compensation Plans
 
The following table sets forth securities authorized for issuance under our equity compensation plans as of December 31, 2011.
 
Plan Category
 
Number Of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights
   
Weighted Average Exercise Price Of Outstanding Options, Warrants and Rights
   
Number of Securities Remaining Available For Future Issuance
 
1998 Stock Option Plan, equity compensation plans approved by security holders
    2,793,261     $ 1.63       -  
                         
2009 Stock Option Plan, equity compensation plans approved by security holders
    3,841,000     $ 0.11       3,159,000  
Total
    6,634,261     $ 0.75       3,159,000  
 
 
46

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
Officer and Director Loans to Company
 
During 2011, the Company borrowed approximately $3,200,000 from its Chairman of the Board, Marvin Rosen, $347,000 of which was repaid during the year.  These loans were evidenced by a series of short-term promissory notes, each of which is payable in full upon ten days notice from the lender and bear interest at the rate of 3.25% per annum.  Each note also grants Mr. Rosen a collateralized security interest, pari passu with other lenders, if any, in the Company’s accounts receivable.  During 2011, Mr. Rosen converted $351,000 of previously issued promissory notes into 4,981,151 shares of the Company’s common stock and warrants to purchase 1,275,996 shares of common stock.  The warrants are exercisable for a period of five years from the respective dates of debt conversion at exercise prices ranging from 112.5% to 125% of the average closing price of the Company’s common stock for the five trading days prior to the date of the conversion.  As of December 31, 2011, the Company had an aggregate principal amount of outstanding demand notes payable to Mr. Rosen and his affiliates in the amount of $4,922,000 and, to date, the Company has not received a demand for payment.   In connection with an accounts receivable financing arrangement entered into by the Company during 2011, Mr. Rosen has agreed to subordinate his security interest in the Company’s accounts receivable.
 
During 2010, the Company borrowed an aggregate of $1,750,000 from Marvin Rosen. These loans were evidenced by a series of promissory notes, each bearing interest at the rate of 3.25% per annum with maturities extending through January 2011, at which point the notes automatically converted to demand notes, and the principal sum and all accrued interest under each note is now payable in full upon ten days notice from Mr. Rosen. Each note also grants the Mr. Rosen a collateralized security interest, pari passu with other lenders, if any, in the Company’s accounts receivable.  At various times during 2010, Mr. Rosen converted a total of $725,000 of indebtedness evidenced by such promissory notes into an aggregate of 5,320,002 shares of the Company’s common stock and warrants to purchase a total of 2,360,004 shares of the Company’s common stock.  The warrants are generally exercisable for a period of five years from the respective dates of debt conversion at exercise prices ranging from 120% to 150% of the closing price of the Company’s common stock on the date of the conversion.
 
Director Independence
 
The Company applies the standards of NYSE Amex LLC (the “Exchange”), for determining the independence of the members of its Board of Directors and board committees. Based upon its application of those standards, the Board of Directors has determined that the following members of the Company’s Board of Directors (and committee members, as applicable) are independent:
 
Larry Blum
E. Alan Brumberger
Julius Erving
William Rubin
Paul C. O'Brien
Michael J. Del Giudice
 
 
47

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
 
The aggregate fees billed to the Company for the years ended December 31, 2011 and 2010 by the Company’s principal accounting firm, Rothstein Kass (“RK”), are as follows:

Audit and Audit-Related Fees
 
The fees billed for professional services rendered by RK for the years ended December 31, 2011, and 2010 were approximately $142,500 and $147,000, respectively.  These professional services included fees associated with the audit of the Company’s annual financial statements and reviews of the Company’s quarterly financial statements.

Tax Related Fees
 
There were no fees incurred for tax-related services for the years ended December 31, 2011 and 2010, respectively.

All Other Fees
 
There were no fees for other services that were not included in the categories above during the years ended December 31, 2011 and 2010.

Audit Committee Pre-Approval Of Audit and Permissible Non-Audit Services Of Independent Accountants
 
Consistent with SEC policies regarding auditor independence, the Audit Committee has the responsibility for appointing, setting compensation, and overseeing the work of the independent accountants.  In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent accountant.

 
48

 
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


Prior to engagement of the independent accounting firm for the audit of the Company’s 2012 consolidated financial statements, management will submit to the Audit Committee for approval an aggregate of services expected to be rendered during that year for each of the three categories of services.

Audit services include audit work performed in the preparation of financial statements, as well as work that generally only the independent accountants can reasonably be expected to provide, including comfort letters, statutory audits and attest services and consultation regarding financial accounting and/or reporting standards.

Audit-Related services are for assurance and related services that are traditionally performed by the independent accountants, including due diligence related to mergers and acquisitions, employee benefit plan audits, and special procedures required to meet certain regulatory requirements.  Other Fees are those fees associated with services not captured in the other categories. The Company generally does not request such services from the independent accountants.

Prior to engagement, the Audit Committee pre-approves these services by category of service. During the year, circumstances may arise when it may become necessary to engage the independent accounting firm for additional services not contemplated in the original pre-approval.  In those instances, the Audit Committee requires specific pre-approval before engaging the independent accountant.

The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.

 
49

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


PART IV
 
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS.
 
(a)     (1) Financial Statements.
 
The consolidated financial statements filed as part of this Annual Report on Form 10-K, are identified in the Index to Consolidated Financial Statements. 
 
(a)     (2) Exhibits.
 
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.
 
Exhibit No.
 
Description
     
3.1
 
Certificate of Incorporation, as amended (*)
3.1(a)
 
Certificate of Designation of Series C Convertible Redeemable Preferred Stock (*)
3.1(b)
 
Certificate of Designation of the Rights and Preferences of the Series A-2 Preferred Stock (6)
3.1(c)
 
Certificate of Designation of the Rights and Preferences of the Series A-4 Preferred Stock (9)
3.1(d)
 
Form of Subscription Agreement (7)
3.1(e)
 
Certificate of Designation of the Rights and Preferences of the Series A-1 Preferred Stock (5)
3.2
 
Bylaws (*)
10.1
 
1998 Stock Option Plan (*)
10.2
 
Employment Agreement between registrant and Matthew Rosen (*)
10.2.1
 
Amended and Restated Employment Agreement between registrant and Matthew Rosen (3)
10.3
 
Master Service Agreement between registrant and Terremark Worldwide, Inc., dated May 29, 2003 (*)
10.5
 
Joint Venture Agreement between registrant and Karamco, Inc., dated December 12, 2002 (*)
10.7
 
Form of Warrant to Purchase Common Stock (*)
10.8
 
Lease Agreement between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (*)
10.8.1
 
Lease Modification Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (8)
10.8.2
 
Lease Modification Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (8)
10.8.3
 
Lease Agreement dated November 1, 2005, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (8)
10.9
 
Lease Agreement between registrant and 67 Broad Street LLC for the 75 Broad Street, New York, NY office (*)
10.10
 
Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (*)
10.10.1
 
Amendment dated February 10, 2006, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office, as amended (8)
10.11
 
Lease Agreement between Efonica FZ- LLC and Dubai Internet City for Dubai offices (8)
10.13
 
Shareholders Joint Venture Agreement between registrant and Communications Ventures Index Pvt. Ltd., dated March 11, 2000 (*)
10.19
 
Warrant to Purchase Common Stock issued by registrant to Marvin Rosen, dated July 31, 2002 (*)
10.20
 
Form of Promissory Note and Security Agreement (2)
10.21
 
Agreement with MCI Communications Services, Inc., dated September 20, 2006 (2)
10.22
 
Agreement with VCG dated June 10, 2004 (2)
10.23
 
Agreement with Qwest Communications Corporation dated April 22, 2002 (2)
10.24
 
Agreement with AT&T dated April 13, 2006 (2)
10.25
 
Agreement with T-Systems, Inc., dated October 24, 2002 (2)
10.28
 
Non-Competition Agreement between registrant and Marvin Rosen (*)
 
 
50

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


10.29
 
Stock Purchase Agreement between registrant, Convergent Technologies, Ltd. and the stockholders listed on Schedule 1 Attached thereto, dated December 16, 2004, as amended and restated, dated January 11, 2005 (*)
10.31.1
 
Stock Purchase Agreement between registrant, Efonica FZ-LLC and Karamco, Inc., dated January 11, 2005 and the amendment thereto (*)
10.31.2
 
Amendment to Stock Purchase Agreement between registrant, Efonica FZ-LLC and Karamco, Inc., dated March 24, 2006 (8)
10.32
 
Carrier Service Agreement for International Terminating Traffic between the registrant and Qwest Communications Corporation, dated May 17, 2000 (*)
10.33
 
Carrier Service Agreement between registrant and Telco Group, Inc. dated April 3, 2001, as amended (*)
10.34
 
Colocation License Agreement between the registrant and Telco Group, dated January 28, 2002 (*)
10.35
 
International VoIP Agreement, dated April 25, 2002, as amended (*)
10.37
 
Lease Agreement dated April 28, 2005, between Convergent Technologies Limited and Oceanic Digital Jamaica Limited (**)
10.38
 
Promissory Note issued by iFreedom Communications International Holdings, Limited; iFreedom Communications Corporation; iFreedom Communications (Malaysia) Sdn. Bhd.; iFreedom Communications, Inc.; iFreedom Communications Hong Kong Limited and iFreedom UK, Ltd., jointly and severally, to Registrant. (8)
10.39
 
Form of Subscription Agreement (5)
10.40
 
Form of Warrant (5)
10.41   Purchase and Sale Agreement dated September 12, 2011 between registrant and Prestige Capital Corporation (10)
10.42
 
Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (1)
10.43
 
Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (1)
14
 
Code of Ethics of Registrant (8)
21.1
 
List of Subsidiaries (8)
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
 
Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
 
Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
 
Section 1350 Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS***
 
XBRL Instance Document
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
_____________
*
Originally filed with the Company’s Registration Statement no. 33-120412 and incorporated herein by reference.    
**
Originally filed with the Company’s Registration Statement no. 33-120206 and incorporated herein by reference.
***
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
     (1)    Filed herewith.
 
     (2)    Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed April 13, 2011, and incorporated herein by reference.
 
     (3)    Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on March 17, 2006, and incorporated herein by reference.
 
 
51

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


     (4)    Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed March 25, 2010, and incorporated herein by reference.
 
     (5)    Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 15, 2006, and incorporated herein by reference.
 
     (6)    Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on May 9, 2007, and incorporated herein by reference.
 
     (7)    Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 23, 2007 and 8K/A on November 27, 2007, and incorporated herein by reference.
 
     (8)    Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed on March 31, 2006, and incorporated herein by reference.
 
     (9)    Identical to Certificate of Rights and Preferences of Series A-2 Preferred Stock filed as an exhibit to Form 8-K on May 9, 2007.
 
     (10)  Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2011 filed on November 15, 2011 and incorporated herein by reference.
 
 
52

 
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2011 ANNUAL REPORT ON FORM 10-K


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 TELECOMMUNICATIONS INTERNATIONAL, INC.  
       
       
Date: March 30, 2012
By:
/s/ MATTHEW D. ROSEN  
    Matthew D. Rosen  
    Chief Executive Officer and Principal Executive Officer  
       
       
Date: March 30, 2012
By:
/s/ GORDON HUTCHINS, JR.  
    Gordon Hutchins, Jr.  
   
President, Chief Operating Officer, Principal Accounting Officer
and Acting Chief Financial Officer
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has also been signed below by a majority of our board of directors on the dates indicated.
 
 
Signature
 
Title
 
Date