Attached files
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EX-31.1 - CERTIFICATION - Fusion Connect, Inc. | fsnn_ex311.htm |
EX-31.2 - CERTIFICATION - Fusion Connect, Inc. | fsnn_ex312.htm |
EX-32.1 - CERTIFICATION - Fusion Connect, Inc. | fsnn_ex321.htm |
EX-32.2 - CERTIFICATION - Fusion Connect, Inc. | fsnn_ex322.htm |
EX-10.63 - SECOND AMENDMENT - Fusion Connect, Inc. | fsnn_ex1063.htm |
EX-10.64 - WAIVER - Fusion Connect, Inc. | fsnn_ex1064.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 001-32421
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
|
58-2342021
|
|
(State or other jurisdiction of incorporation or organization)
|
(IRS Employer Identification No.)
|
420 Lexington Avenue, Suite 1718, New York, New York 10170
(Address of principal executive offices) (Zip Code)
(212) 201-2400
(Registrants telephone number, including area code)
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
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).
Yesþ No o
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”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company þ |
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
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 12, 2015.
Title of Each Class
|
Number of Shares Outstanding
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Common Stock, $0.01 par value
|
8,231,567
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Part 1 Financial Information.
|
3
|
Item 1. Financial Statements.
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3
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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21
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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29
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Item 4. Controls and Procedures.
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29
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Part II Other Information.
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29
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Item 1. Legal Proceedings.
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29
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Item 1A. Risk Factors.
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29
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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29
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Item 3. Defaults Upon Senior Securities.
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30
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Item 4. Mine Safety Disclosures.
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30
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Item 5. Other Information.
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30
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Item 6. Exhibits.
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30
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Signatures.
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31
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Index to Exhibits
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32
|
2
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
PART 1 – FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$ | 4,417,858 | $ | 6,444,683 | ||||
Accounts receivable, net of allowance for doubtful accounts of approximately $452,098 and $245,000, respectively
|
7,167,733 | 7,087,599 | ||||||
Prepaid expenses and other current assets
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1,384,088 | 927,772 | ||||||
Total current assets
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12,969,679 | 14,460,054 | ||||||
Property and equipment, net
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14,048,966 | 13,478,912 | ||||||
Other assets:
|
||||||||
Security deposits
|
648,998 | 648,998 | ||||||
Restricted cash
|
1,164,810 | 1,164,381 | ||||||
Goodwill
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10,397,460 | 10,397,460 | ||||||
Intangible assets, net
|
28,728,209 | 32,432,416 | ||||||
Other assets
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1,013,675 | 1,165,273 | ||||||
Total other assets
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41,953,152 | 45,808,528 | ||||||
TOTAL ASSETS
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$ | 68,971,797 | $ | 73,747,494 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||||||||
Current liabilities:
|
||||||||
Notes payable - non-related parties
|
$ | 1,225,432 | $ | 1,225,000 | ||||
Equipment financing obligations
|
904,161 | 662,131 | ||||||
Accounts payable and accrued expenses
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11,322,088 | 10,471,514 | ||||||
Total current liabilities
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13,451,681 | 12,358,645 | ||||||
Long-term liabilities:
|
||||||||
Notes payable - non-related parties, net of discount
|
41,035,730 | 41,263,934 | ||||||
Notes payable - related parties
|
1,320,227 | 1,292,878 | ||||||
Equipment financing obligations
|
1,862,724 | 1,702,704 | ||||||
Derivative liabilities
|
2,533,421 | 3,839,569 | ||||||
Total liabilities
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60,203,783 | 60,457,730 | ||||||
Commitments and contingencies
|
||||||||
Stockholders' equity (deficit):
|
||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
|
||||||||
24,210 and 26,793 shares issued and outstanding
|
242 | 268 | ||||||
Common stock, $0.01 par value, 50,000,000 shares authorized,
|
||||||||
8,224,482 and 7,345,028 shares issued and outstanding
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82,244 | 73,449 | ||||||
Capital in excess of par value
|
175,965,069 | 175,519,459 | ||||||
Accumulated deficit
|
(167,279,541 | ) | (162,303,412 | ) | ||||
Total stockholders' equity
|
8,768,014 | 13,289,764 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 68,971,797 | $ | 73,747,494 | ||||
See accompanying notes to the Condensed Consolidated Financial Statements.
3
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
Revenues
|
$ | 25,063,695 | $ | 23,140,973 | $ | 50,326,733 | $ | 46,045,802 | ||||||||
Cost of revenues (exclusive of depreciation and amortization, shown separately below)
|
13,813,616 | 12,747,441 | 27,826,308 | 24,976,473 | ||||||||||||
Gross profit
|
11,250,080 | 10,393,532 | 22,500,426 | 21,069,329 | ||||||||||||
Depreciation and amortization
|
3,039,758 | 2,597,978 | 6,043,205 | 5,165,469 | ||||||||||||
Selling, general and administrative expenses (including stock-based compensation of approximately $116,000 and $73,000 for the three months ended June 30, 2015 and 2014, respectively, and approximately $239,000 and $142,000 for the six months ended June 30, 2015 and 2014, respectively)
|
9,857,721 | 7,825,494 | 19,594,015 | 15,644,891 | ||||||||||||
Total operating expenses
|
12,897,478 | 10,423,472 | 25,637,219 | 20,810,360 | ||||||||||||
Operating (loss) income
|
(1,647,399 | ) | (29,940 | ) | (3,136,794 | ) | 258,969 | |||||||||
Other (expenses) income:
|
||||||||||||||||
Interest expense
|
(1,608,709 | ) | (1,597,215 | ) | (3,215,552 | ) | (2,991,761 | ) | ||||||||
Gain (loss) on change in fair value of derivative liability
|
2,510,950 | (690,878 | ) | 1,306,148 | 1,919,069 | |||||||||||
Other income (expense), net
|
32,750 | 719 | 70,069 | (40,355 | ) | |||||||||||
Total other income (expenses)
|
934,991 | (2,287,374 | ) | (1,839,335 | ) | (1,113,047 | ) | |||||||||
Loss before income taxes
|
(712,408 | ) | (2,317,314 | ) | (4,976,129 | ) | (854,078 | ) | ||||||||
Provision for income taxes
|
- | 151,583 | - | 173,078 | ||||||||||||
Net loss
|
(712,408 | ) | (2,468,897 | ) | (4,976,129 | ) | (1,027,156 | ) | ||||||||
Preferred stock dividends in arrears
|
(388,098 | ) | (443,194 | ) | (807,086 | ) | (885,282 | ) | ||||||||
Net loss attributable to common stockholders
|
$ | (1,100,506 | ) | $ | (2,912,091 | ) | $ | (5,783,215 | ) | $ | (1,912,438 | ) | ||||
Basic and diluted loss per common share
|
$ | (0.30 | ) | $ | (0.39 | ) | $ | (0.79 | ) | $ | (0.38 | ) | ||||
Weighted average common shares outstanding:
|
||||||||||||||||
Basic and diluted
|
8,461,794 | 6,876,617 | 8,311,499 | 6,842,532 |
See accompanying notes to the Condensed Consolidated Financial Statements.
4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
Preferred Stock
|
Common Stock
|
Capital in Excess of Par
|
Accumulated Deficit
|
Stockholders' Equity (Deficit)
|
||||||||||||||||||||||||
Shares
|
$ |
Shares
|
$ | |||||||||||||||||||||||||
Balance at December 31, 2014
|
26,793 | $ | 268 | 7,345,028 | $ | 73,449 | $ | 175,519,459 | $ | (162,303,412 | ) | $ | 13,289,764 | |||||||||||||||
Net loss
|
(4,976,129 | ) | (4,976,129 | ) | ||||||||||||||||||||||||
Conversion of preferred stock into common stock
|
(2,583 | ) | (26 | ) | 605,350 | 6,054 | (6,028 | ) | - | |||||||||||||||||||
Dividends on preferred stock
|
215,937 | 2159 | (2,159 | ) | - | |||||||||||||||||||||||
Issuance of common stock for services rendered
|
58,167 | 582 | 215,029 | 215,611 | ||||||||||||||||||||||||
Stock-based compensation
associated with stock incentive plans
|
238,768 | 238,768 | ||||||||||||||||||||||||||
Balance at June 30, 2015
|
24,210 | $ | 242 | 8,224,482 | $ | 82,244 | $ | 175,965,069 | $ | (167,279,541 | ) | $ | 8,768,014 |
See accompanying notes to the Condensed Consolidated Financial Statements.
5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30,
|
||||||||
2015
|
2014
|
|||||||
Cash flows from operating activities:
|
||||||||
Net loss
|
$ | (4,976,129 | ) | $ | (1,027,156 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities:
|
||||||||
Depreciation and amortization
|
6,043,205 | 5,165,469 | ||||||
Loss on disposal of property
|
- | 84,373 | ||||||
Bad debt expense
|
225,000 | 222,856 | ||||||
Stock-based compensation
|
238,768 | 142,140 | ||||||
Stock and warrants issued for services rendered or in settlement of liabilities
|
215,611 | 37,542 | ||||||
Amortization of debt discount and deferred financing fees
|
507,690 | 579,541 | ||||||
Gain in the change in fair value of derivative liability
|
(1,306,148 | ) | (1,919,069 | ) | ||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
(305,135 | ) | (910,798 | ) | ||||
Prepaid expenses and other current assets
|
(456,315 | ) | (862,851 | ) | ||||
Other assets
|
155,190 | (46,870 | ) | |||||
Deferred tax liability
|
- | 147,341 | ||||||
Accounts payable and accrued expenses
|
156,308 | (1,521,179 | ) | |||||
Net cash provided by operating activities
|
498,045 | 91,339 | ||||||
Cash flows from investing activities:
|
||||||||
Purchase of property and equipment
|
(1,859,265 | ) | (1,817,707 | ) | ||||
Proceeds from the sale of property and equipment
|
- | 46,116 | ||||||
Payment of obligations related to purchase price of acquisitions
|
- | (226,148 | ) | |||||
Returns of security deposits
|
- | 2,000,000 | ||||||
Payment of security deposits
|
- | (10,990 | ) | |||||
Change in restricted cash
|
- | (136 | ) | |||||
Net cash used in investing activities
|
(1,859,265 | ) | (8,865 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from the sale of preferred stock and warrants, net
|
- | 3,984,426 | ||||||
Proceeds from the accounts receivable factoring arrangement
|
1,078,576 | 1,102,724 | ||||||
Repayments of borrowings related to the accounts receivable factoring arrangement
|
(769,517 | ) | (887,824 | ) | ||||
Payments on equipment financing obligations
|
(361,948 | ) | (173,832 | ) | ||||
Repayments of notes payable - related parties
|
- | (185,714 | ) | |||||
Repayments of notes payable - non-related parties
|
(612,716 | ) | (312,500 | ) | ||||
Net cash (used in) provided by financing activities
|
(665,605 | ) | 3,527,280 | |||||
Net change in cash and cash equivalents
|
(2,026,825 | ) | 3,609,754 | |||||
Cash and cash equivalents, beginning of period
|
6,444,683 | 6,176,575 | ||||||
Cash and cash equivalents, end of period
|
$ | 4,417,858 | $ | 9,786,329 |
See accompanying notes to the Condensed Consolidated Financial Statements.
6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Business
Fusion Telecommunications International, Inc. (“Fusion” and together with its subsidiaries, the “Company”) is a Delaware corporation. The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud storage and security to businesses of all sizes, and IP-based domestic and international voice services. The Company currently operates in two business segments, ‘Business Services’ and ‘Carrier Services’.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the year ended December 31, 2014.
Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.
Significant Accounting Policies
For a detailed discussion of significant accounting policies, please refer to our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes in our accounting policies during the quarter ended June 30, 2015.
Principles of Consolidation
The condensed consolidated interim financial statements include the accounts of Fusion and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material.
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.
7
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less at the date of purchase. As of June 30, 2015 and December 31, 2014, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.
Restricted Cash
Restricted cash consists primarily of cash held in reserve as required by the terms of the second amended and restated securities purchase agreement (the "SPA") and certificates of deposit that serve to collateralize outstanding letters of credit for one of our non-cancellable operating leases. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted cash at June 30, 2015 and December 31, 2014 includes $1,000,000 of cash held in reserve as required by the terms of the SPA, and certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $164,000. The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.
Fair value of Financial Instruments
At June 30, 2015 and December 31, 2014, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.
Long-Lived Asset Impairment
The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the six months ended June 30, 2015 or 2014, as there were no indicators of impairment.
8
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill
Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.
In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (See Note 15). The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, then the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Goodwill at June 30, 2015 and December 31, 2014 was approximately $10.4 million. All of the Company’s goodwill is attributable to its ‘Business Services’ segment. There was no change in goodwill as a result of adjustments to purchase price allocations of previous acquisitions during the quarter ended June 30, 2015. There was no impairment charge recorded for goodwill during the six months ended June 30, 2015 or 2014, as there were no indicators of impairment.
Advertising and Marketing Costs
Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. The Company’s advertising and marketing expense was approximately $122,000 and $33,000 for the three months ended June 30, 2015 and 2014, respectively, and approximately $234,000 and $77,000 for the six months ended June 30, 2015 and 2014, respectively.
Income Taxes
The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of June 30, 2015 and December 31, 2014. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2010 and its tax returns may be subject to review and
9
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
adjustment at a later date based on factors including, but not limited to, on-going analyses of, and changes to, tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of June 30, 2015 and December 31, 2014. During the three and six months ended June 30, 2015 and 2014, the Company recognized no adjustments for uncertain tax positions.
Stock-Based Compensation
The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. In addition, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is a more reliable measurement.
New and Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standard Board the (“FASB”) issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In May 2014, the FASB issued authoritative guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, the FASB deferred the effective date of this guidance by one year. As such, this guidance will be effective on January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.
10
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Earnings per share
Basic and diluted loss per share is computed by dividing (i) loss available to common stockholders, adjusted by approximately $1.5 million gain and $0.2 million loss on the fair value of the Company’s derivative liability for the three months ended June 30, 2015 and 2014, and $0.7 million gain for the six months ended June 30, 2015 and 2014, respectively, that is attributable to 728,333 outstanding warrants with a nominal exercise price and dividends on preferred stock, by (ii) the weighted-average number of common shares outstanding during the period, increased by the number of common shares underlying such warrants with a nominal exercise price as if such exercise had occurred at the beginning of the year.
The following table sets forth the computation for basic and diluted net income per share for the three and six months ended June 30, 2015 and 2014:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
2015
|
2014
|
2015
|
2014
|
|||||||||||||
Numerator
|
||||||||||||||||
Loss available to common stockholders
|
$ | (712,408 | ) | $ | (2,468,897 | ) | $ | (4,976,129 | ) | $ | (1,027,156 | ) | ||||
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock
|
(100,623 | ) | (100,624 | ) | (200,141 | ) | (200,141 | ) | ||||||||
Dividends declared on Series B-2 Convertible Preferred Stock
|
(287,475 | ) | (342,570 | ) | (606,945 | ) | (685,141 | ) | ||||||||
(Gain) loss on nominal warrants
|
(1,456,666 | ) | 218,515 | (742,900 | ) | (688,256 | ) | |||||||||
Loss attributable to common stockholders
|
$ | (2,557,172 | ) | $ | (2,693,576 | ) | $ | (6,526,115 | ) | $ | (2,600,694 | ) | ||||
Denominator
|
||||||||||||||||
Basic and diluted weighted average common shares outstanding
|
8,461,794 | 6,876,617 | 8,311,499 | 6,842,532 | ||||||||||||
Loss per share
|
||||||||||||||||
Basic and diluted
|
$ | (0.30 | ) | $ | (0.39 | ) | $ | (0.79 | ) | $ | (0.38 | ) |
For the six months ended June 30, 2015 and 2014, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:
Six Months Ended
|
||||||||
June 30,
|
||||||||
2015
|
2014
|
|||||||
Warrants
|
3,132,707 | 3,565,583 | ||||||
Convertible preferred stock
|
3,999,398 | 4,726,572 | ||||||
Stock options
|
682,234 | 386,333 | ||||||
7,814,339 | 8,678,488 |
The net loss per common share calculation includes a provision for preferred stock dividends on the Company’s outstanding Series A-1, A-2 and A-4 Preferred Stock (the “Series A Preferred Stock”) of approximately $100,000 for the three months ended June 30, 2015 and 2014, and approximately $200,000 for the six months ended June 30, 2015 and 2014. As of June 30, 2015, Fusion’s Board of Directors had not declared any dividends on the Series A Preferred Stock, and the Company had accumulated approximately $4,133,458 of preferred stock dividends. Fusion’s Board of Directors has declared a dividend of $287,475 and $606,945 for the three and six months ended June 30, 2015, related to the Company’s Series B-2 Preferred Stock, which, in accordance with the terms of the Series B-2 Preferred Stock, was paid in the form of 143,732 and 215,937 shares of common stock.
11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Intangible Assets
Intangible assets as of June 30, 2015 and December 31, 2014 are as follows:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Trademarks and tradename
|
$ | 1,093,400 | $ | 1,093,400 | ||||
Proprietary technology
|
5,781,000 | 5,781,000 | ||||||
Non-compete agreements
|
9,852,100 | 9,852,100 | ||||||
Customer relationships
|
24,897,800 | 24,897,800 | ||||||
Favorable lease intangible
|
218,000 | 218,000 | ||||||
41,842,300 | 41,842,300 | |||||||
Less: accumulated amortization
|
(13,114,091 | ) | (9,409,884 | ) | ||||
Intangible assets, net
|
$ | 28,728,209 | $ | 32,432,416 |
Amortization expense was $1.9 million and $1.7 million for the three months ended June 30, 2015 and 2014, respectively, and for the six months ended June 30, 2015 and 2014 was $3.7 million and $3.3 million, respectively. Estimated future aggregate amortization expense is expected to be as follows:
Year
|
Estimated Annual Amortization Expense
|
|||
2015
|
$ | 3,523,262 | ||
2016
|
$ | 3,587,246 | ||
2017
|
$ | 3,454,097 | ||
2018
|
$ | 2,729,701 | ||
2019
|
$ | 1,895,455 |
Note 5. Stock–based compensation
The Company's stock-based compensation plan provides for the issuance of stock options to the Company’s employees, officers, and directors. The Compensation Committee of Fusion’s Board of Directors (the "Compensation Committee") approves all awards that are granted under the Company's stock-based compensation plan.
The following weighted average assumptions were used to determine the fair value of the stock options granted under the Company’s stock-based compensation plan using the Black-Scholes option-pricing model:
Six months ended June 30,
|
||||||||
2015
|
2014
|
|||||||
Dividend yield (%)
|
0.0 | 0.0 | ||||||
Expected volatility (%)
|
112.6 | 137.2 | ||||||
Average Risk-free interest rate (%)
|
1.69 | 2.34 | ||||||
Expected life of stock option term (years)
|
7.82 | 8.08 |
The Company recognized compensation expense of approximately $116,000 and $239,000 for the three and six months ended June 30, 2015, respectively, and $73,000 and $142,000 for the three and six months ended June 30, 2014, respectively. These amounts are included in selling, general, and administrative expenses in the condensed consolidated interim statements of operations.
12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the stock option activity for the six months ended June 30, 2015:
Number of Options
|
Weighted Average Exercise Price
|
|||||
Oustanding at December 31, 2014
|
607,877
|
$
|
8.00
|
|||
Granted
|
108,730
|
$
|
3.71
|
|||
Exercised
|
-
|
$
|
-
|
|||
Forfeited
|
(26,318)
|
$
|
4.59
|
|||
Expired
|
$ |
(8,055)
|
$
|
31.41
|
||
Outstanding at June 30, 2015
|
682,234
|
$
|
7.09
|
|||
Exercisable at June 30, 2015
|
204,561
|
$
|
14.58
|
As of June 30, 2015, the Company had approximately $1.0 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plan, which is expected to be recognized over a weighted-average period of 2.1 years.
Note 6. Supplemental Disclosure of Cash Flow Information
The following table summarizes the Company’s supplemental cash flows information:
Six Months Ended June 30,
|
||||||||
Supplemental Cash Flow Information
|
2015
|
2014
|
||||||
Cash paid for interest
|
$ | 2,680,029 | $ | 2,749,360 | ||||
Cash paid for income taxes
|
$ | - | $ | 21,495 | ||||
Supplemental Non-Cash Investing and Financing Activities
|
||||||||
Property and equipment acquired under capital leases
|
$ | 764,991 | $ | 49,090 | ||||
Dividend on Series B-2 preferred stock paid with the issuance of common stock
|
$ | 215,937 | $ | 123,833 | ||||
Conversion of preferred stock into common stock
|
$ | 2,583,000 | $ | - |
13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 7. Prepaid Expenses and Other Current Assets
The following table sets forth the items in prepaid expenses and other current assets:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Insurance
|
$ | 88,001 | $ | 61,004 | ||||
Rent
|
109,902 | 54,209 | ||||||
Marketing
|
57,598 | 34,482 | ||||||
Sofware subscriptions
|
588,705 | 502,696 | ||||||
Real estate taxes and other taxes
|
98,036 | - | ||||||
Due from factoring party
|
99,417 | - | ||||||
Commissions
|
22,000 | 23,015 | ||||||
Other
|
320,429 | 252,366 | ||||||
$ | 1,384,088 | $ | 927,772 |
Note 8. Accounts Payable and Accrued Expenses
The following table sets forth the items in accounts payable and accrued expenses:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Trade accounts payable
|
$ | 2,788,089 | $ | 3,028,902 | ||||
Accrued bonus
|
603,750 | 575,000 | ||||||
Professional and consulting fees
|
96,690 | 132,521 | ||||||
Property and other taxes
|
409,075 | 238,368 | ||||||
Accrued network costs
|
1,224,880 | 1,384,159 | ||||||
Rent
|
129,903 | 131,627 | ||||||
Accrued Universal Service Fund fees
|
1,063,712 | 538,302 | ||||||
Customer deposits
|
392,314 | - | ||||||
Due to factoring party
|
408,475 | - | ||||||
Accrued payroll and vacation
|
453,027 | 250,574 | ||||||
Accrued sales and federal excise taxes
|
1,842,489 | 1,722,554 | ||||||
Accrued sales commissions
|
763,421 | 864,928 | ||||||
Interest payable
|
33,518 | 33,341 | ||||||
Deferred revenue
|
655,396 | 729,618 | ||||||
Other
|
457,349 | 841,620 | ||||||
$ | 11,322,088 | $ | 10,471,514 |
14
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Equipment Financing Obligations
From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 4% and 11%. The Company’s equipment financing obligations are as follows:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Equipment financing obligations
|
$ | 2,766,885 | $ | 2,364,835 | ||||
Less: current portion
|
(904,161 | ) | (662,131 | ) | ||||
Long-term portion
|
$ | 1,862,724 | $ | 1,702,704 |
Notes payable – non-related at June 30, 2015 and December 31, 2014 is as follows:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Senior Notes
|
$ | 45,553,951 | $ | 46,166,667 | ||||
Discount on Senior Notes
|
(3,292,789 | ) | (3,677,733 | ) | ||||
Total notes payable - non-related parties
|
42,261,162 | 42,488,934 | ||||||
Less: current portion
|
(1,225,432 | ) | (1,225,000 | ) | ||||
Long-term portion
|
$ | 41,035,730 | $ | 41,263,934 |
Note 11. Derivative Liability
As part of various debt and equity financing transactions and other agreements, the Company has issued warrants to purchase shares of Fusion’s common stock. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”). For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations. The fair values of the warrants have been estimated using Black-Scholes and other valuation models, and the quoted market price of Fusion’s common stock.
The following assumptions were used to determine the fair value of the warrants for the six months ended June 30, 2015 and 2014:
Six months ended June 30,
|
||||||||
2015
|
2014
|
|||||||
Stock price ($)
|
2.13 | 5.30 | ||||||
Exercise price ($)
|
0 - 6.25 | 0 - 6.25 | ||||||
Risk-free interest rate (%)
|
2.07 - 2.35 | 2.53 | ||||||
Expected volatility (%)
|
112.6 | 135.1 | ||||||
Time to maturity (years)
|
7.3 - 8.5 | 8.3 - 9.5 |
15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At June 30, 2015 and December 31, 2014, the fair value of the derivative was $2.5 million and $3.8 million, respectively. For the three months ended June 30, 2015 and 2014, the Company recognized a gain on the change in the fair value of this derivative of approximately $2.5 million and a loss of approximately $0.7 million, respectively, and a gain of approximately $1.3 million and $1.9 million for the six months ended June 30, 2015 and 2014, respectively.
Note 12. Notes Payable-Related Parties
Notes payable – related parties at June 30, 2015 and December 31, 2014 is as follows:
June 30,
|
December 31,
|
|||||||
2015
|
2014
|
|||||||
Notes payable to Marvin Rosen
|
$ | 1,478,081 | $ | 1,478,081 | ||||
Discount on note
|
(157,854 | ) | (185,203 | ) | ||||
Total notes payable - non-related parties
|
$ | 1,320,227 | $ | 1,292,878 |
The note payable to Marvin Rosen, the Company’s Chairman of the Board of Directors, is subordinated to the Company’s senior note obligations and the Company’s other obligations to its senior lenders under the SPA. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 60 days after the Company’s senior notes obligations are paid in full.
For the six months ended June 30, 2015, the Company recognized interest expense on the note of approximately $53,000, and amortization on the discount of approximately $27,000.
Note 13. Equity Transactions
Common Stock
Fusion is authorized to issue 50,000,000 shares of its common stock. As of June 30, 2015 and December 31, 2014, 8,224,482 and 7,345,028 shares of its common stock were issued and outstanding, respectively.
During the six months ended June 30, 2015, Fusion issued an aggregate of 58,167 shares of common stock to third party consultants for services rendered valued at $215,611. In addition, the Fusion Board of Directors declared aggregate dividends of $606,945 related to Fusion’s Series B-2 preferred stock, which, as permitted by the terms of the Series B-2 preferred stock, was paid in the form of 215,937 shares of Fusion’s common stock. Also, certain holders of Series B-2 preferred stock elected to convert 2,583 shares of their Series B-2 preferred stock into an aggregate of 605,350 shares of Fusion’s common stock.
Preferred Stock
Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of June 30, 2015 and December 31, 2014, there were 5,045 shares of Fusion’s Series A-1, A-2 and A-4 cumulative convertible preferred stock issued and outstanding. In addition, as of June 30, 2015 and December 31, 2014 there were 19,165 and 21,748 shares of Series B-2 preferred stock issued and outstanding, respectively.
The holders of the Series A preferred stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and if declared by Fusion’s Board of Directors, on January 1 of each year. As of June 30, 2015, no dividend had been declared by the Fusion Board of Directors with respect to the Series A preferred stock, and the Company had accumulated approximately $4,133,458 of preferred stock dividends. In addition, shares of Series B-2 preferred stock bear a cumulative 6% annual dividend payable quarterly in arrears, in cash or shares of common stock, at the option of the Company.
16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Commencing on January 1, 2016, Fusion has the right to force the conversion of the Series B-2 preferred stock into common stock at the specified preferred conversion price; provided that the volume weighted average price for its common stock is at least $12.50 for ten consecutive trading days.
Note 14. Commitments and Contingencies
Legal matters
From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. Defending such proceedings can be costly and can impose a significant burden on the Company’s management and its other employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of June 30, 2015, the Company did not have any significant ongoing legal matters.
Note 15. Segment Information
Operating segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance.
The Company has two reportable segments – “Carrier Services” and “Business Services”. These segments are organized by the products and services that are sold and the customers that are served. The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company’s measurement of segment gross profit exclude the Company’s executive, administrative and support costs. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014. The Company’s segments and their principal activities consist of the following:
Carrier Services
Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily Voice over Internet Protocol (“VoIP”) technology. VoIP permits a less costly and more rapid interconnection between the Company and international telecommunications carriers, and generally provides better profit margins for the Company than other technologies. The Company currently interconnects with over 270 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.
Business Services
Through this operating segment, the Company provides cloud communications, cloud connectivity, storage and security solutions to small, medium and large businesses. These services are sold through both the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party distributors to sell the Company’s products and services. The Business Services segment includes the Company’s acquisition of PingTone Communications effective as of November 1, 2014.
17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating segment information for the three and six months ended June 30, 2015 and 2014 is summarized in the following table:
Three months ended June 30, 2015
|
||||||||||||||||
Carrier Services
|
Business Services
|
Corporate and Unallocated*
|
Consolidated
|
|||||||||||||
Revenues
|
$ | 9,020,449 | $ | 16,043,246 | $ | - | $ | 25,063,696 | ||||||||
Cost of revenues (exclusive of depreciation and amortization)
|
7,971,898 | 5,841,717 | - | 13,813,616 | ||||||||||||
Gross profit
|
1,048,551 | 10,201,529 | - | 11,250,080 | ||||||||||||
Selling, general and administrative expenses
|
1,336,207 | 7,731,305 | 790,209 | 9,857,721 | ||||||||||||
Interest expense
|
(91,191 | ) | (1,081,792 | ) | (435,726 | ) | (1,608,709 | ) | ||||||||
Gain on change in fair value of derivative liability
|
- | - | 2,510,950 | 2,510,950 | ||||||||||||
Other income (expenses)
|
408,937 | (153,710 | ) | (222,477 | ) | 32,750 | ||||||||||
Net (loss) income
|
$ | (15,835 | ) | $ | (1,742,787 | ) | $ | 1,046,214 | $ | (712,408 | ) | |||||
Total assets
|
$ | 1,719,940 | $ | 62,469,874 | $ | 4,781,983 | $ | 68,971,797 |
Six months ended June 30, 2015
|
||||||||||||||||
Carrier Services
|
Business Services
|
Corporate and Unallocated*
|
Consolidated
|
|||||||||||||
Revenues
|
$ | 17,497,571 | 32,829,163 | $ | - | $ | 50,326,733 | |||||||||
Cost of revenues (exclusive of depreciation and amortization)
|
15,898,565 | 11,927,743 | - | 27,826,308 | ||||||||||||
Gross profit
|
1,599,006 | 20,901,420 | - | 22,500,426 | ||||||||||||
Depreciation and amortization
|
90,922 | 5,911,602 | 40,680 | 6,043,204 | ||||||||||||
Interest expense
|
(91,191 | ) | (2,644,019 | ) | (480,342 | ) | (3,215,552 | ) | ||||||||
Gain on change in fair value of derivative liability
|
- | - | 1,306,148 | 1,306,148 | ||||||||||||
Other income (expenses)
|
408,937 | (338,868 | ) | 70,069 | ||||||||||||
Net loss
|
$ | (245,857 | ) | $ | (3,732,823 | ) | $ | (997,449 | ) | $ | (4,976,129 | ) | ||||
Capital expenditures
|
$ | 31,344 | $ | 1,827,921 | $ | - | $ | 1,859,265 |
18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended June 30, 2014
|
||||||||||||||||
Carrier Services
|
Business Services
|
Corporate and Unallocated*
|
Consolidated
|
|||||||||||||
Revenues
|
$ | 7,510,875 | $ | 15,630,098 | $ | - | $ | 23,140,973 | ||||||||
Cost of revenues (exclusive of depreciation and amortization)
|
6,714,319 | 6,033,122 | - | 12,747,441 | ||||||||||||
Gross profit
|
796,556 | 9,596,976 | - | 10,393,532 | ||||||||||||
Depreciation and amortization
|
53,503 | 2,522,472 | 22,003 | 2,597,978 | ||||||||||||
Selling, general and administrative expenses
|
725,383 | 5,878,297 | 1,221,814 | 7,825,494 | ||||||||||||
Interest expense
|
- | (1,400,275 | ) | (196,940 | ) | (1,597,215 | ) | |||||||||
Loss on change in fair value of derivative liability
|
- | - | (690,878 | ) | (690,878 | ) | ||||||||||
Other (expenses) income
|
(52,997 | ) | (25,556 | ) | 79,272 | 719 | ||||||||||
Provision for income taxes
|
- | - | 151,583 | 151,583 | ||||||||||||
Net loss
|
$ | (35,327 | ) | $ | (229,624 | ) | $ | (2,203,946 | ) | $ | (2,468,897 | ) | ||||
Total assets
|
$ | 5,040,316 | $ | 58,293,657 | $ | 6,720,174 | $ | 70,054,147 |
Six months ended June 30, 2014
|
||||||||||||||||
Carrier Services
|
Business Services
|
Corporate and Unallocated*
|
Consolidated
|
|||||||||||||
Revenues
|
$ | 14,673,371 | $ | 31,372,431 | $ | - | $ | 46,045,802 | ||||||||
Cost of revenues (exclusive of depreciation and amortization)
|
13,033,057 | 11,943,416 | - | 24,976,473 | ||||||||||||
Gross profit
|
1,640,314 | 19,429,015 | - | 21,069,329 | ||||||||||||
Depreciation and amortization
|
116,198 | 5,005,102 | 44,169 | 5,165,469 | ||||||||||||
Selling, general and administrative expenses
|
1,441,232 | 11,840,301 | 2,363,358 | 15,644,891 | ||||||||||||
Interest expense
|
- | (2,754,067 | ) | (237,694 | ) | (2,991,761 | ) | |||||||||
Gain on change in fair value of derivative liability
|
1,919,069 | 1,919,069 | ||||||||||||||
Other (expenses) income
|
(94,037 | ) | (26,656 | ) | 80,338 | (40,355 | ) | |||||||||
Provision for income taxes
|
- | - | 173,078 | 173,078 | ||||||||||||
Net loss
|
$ | (11,153 | ) | $ | (197,111 | ) | $ | (818,892 | ) | $ | (1,027,156 | ) | ||||
Capital expenditures
|
$ | 56,995 | $ | 1,760,712 | $ | - | $ | 1,817,707 |
*The Company employs executive, administrative, human resources, and finance resources that service both the Carrier Services and Business Services segments. The amounts reflected as Corporate and Unallocated represent those operating expenses, assets and capital expenditures that were not allocated to a business segment or product line.
Note 16. Related Party Transactions
Since March 6, 2014, the Company has engaged a third party to prepare its tax returns and to provide related tax advisory services. Larry Blum, a member of Fusion’s Board of Directors, is a Senior Advisor and a former partner of the third party that the Company is using to provide tax advisory services.
19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 17. Fair Value Disclosures
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—No observable pricing inputs in the market
The following table represents the fair value of the liability measured at fair value on a recurring basis:
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
As of June 30, 2015
|
||||||||||||||||
Non-current liabilities:
|
||||||||||||||||
Derivative liability (see note 11)
|
$ | - | $ | - | $ | 2,533,421 | $ | 2,533,421 | ||||||||
As of December 31, 2014
|
||||||||||||||||
Non-current liabilities:
|
||||||||||||||||
Derivative liability (see note 11)
|
$ | - | $ | - | $ | 3,839,569 | $ | 3,839,569 |
Changes in the derivative warrant liability for the six months ended June 30, 2015 are as follows:
Balance at December 31, 2014
|
$ | 3,839,569 | ||
Gain for the period:
|
||||
Included in net loss
|
(1,306,148 | ) | ||
Balance at June 30, 2015
|
$ | 2,533,421 |
Note 18. Subsequent Events
On June 16, 2015, the Company and the senior lenders entered into a Second Amendment to the SPA whereby the senior lenders agreed, among other things, to (i) increase the amount of our capital lease indebtedness to $7.0 million, (ii) extend to July 31, 2015, the date by which we are required to satisfy the minimum cash commitment, (iii) extend to September 30, 2015, the date by which EBITDA at Fusion must equal or exceed EBITDA at Fusion’s subsidiaries. In the Second Amendment, we also agreed to sell at least $3.0 million of Fusion equity securities by July 31, 2015 on terms reasonably satisfactory to the senior lenders. As of July 31, 2015, we failed to sell the required equity securities and we also failed to meet the minimum cash commitment. In addition, we were not in compliance with our minimum EBITDA and Fixed Charge Coverage Ratio covenants for the three months ended June 30, 2015. On August 13, 2015, the holders of our senior notes waived our events of default with respect to the minimum EBITDA and Fixed Charge Coverage Ratio obligations and extended to September 30, 2015 the date by which we must raise $3.0 million of additional capital from the sale of Fusion equity and our obligation to satisfy the minimum cash commitment. As a result of this waiver and amendment, we were in compliance with our obligations under the SPA as of June 30, 2015. We are in active discussion with potential equity investors regarding the $3.0 million investment in Fusion, with our senior lenders concerning permanent adjustments to our existing covenants, and with other financing sources concerning a new senior debt facility. We are unable to provide any assurance, however, that any of these discussions will result in final agreement(s) or that the terms and conditions of any such agreements will be acceptable to us.
20
The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
Overview
Our Business
We offer a comprehensive suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium and large businesses, and offer domestic and international VoIP services to communications carriers worldwide. Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors. We currently operate our business in two distinct business segments: Business Services and Carrier Services.
In the Business Services segment, we are focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud. Our core Business Services products and services include cloud voice and unified communications, improving communication and collaboration on virtually any device, virtually anywhere, and cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency. Our cloud computing and IaaS solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered. Complemented by storage solutions, as well as SaaS solutions such security and business continuity, our advanced cloud offerings allow our larger enterprise customers to experience the increased efficiencies and agility delivered by the cloud. Fusion’s cloud-based services are flexible, scalable and rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.
Through our Carrier Services segment, we have agreements with over 270 carrier customers and vendors, and sells its domestic and international voice services to other communications service providers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic and expand service delivery capabilities for our Business Services segment.
We manage our business segments based on gross profit and gross margin, which represents net revenue less the cost of revenue, and on net profitability after excluding certain non-cash and non-recurring items. The majority of our operations, engineering, information systems and support personnel are assigned to either the Business Services or Carrier Services business segment for segment reporting purposes.
We intend to increasingly focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art network and advanced services platforms. Our vertically oriented solutions, with an initial focus on healthcare, legal services, hospitality and real estate, offer a substantial opportunity to gain market share. We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment. In addition to lowering the underlying costs of termination, we believe that our Carrier Services business supports the growth of the Business Services segment by providing enhanced service offerings for business customers and by strengthening its relationships with major service providers throughout the world.
Our Performance
Revenues for the three months ended June 30, 2015 were $25.0 million, an increase of $1.9 million, or 8.3%, compared to the three months ended June 30, 2014. Our operating loss for the three months ended June 30, 2015 was $1.7 million, compared to an operating loss of $30,000 in the same period a year ago, as a result of higher salaries and payroll benefits of approximately $1.3 million and depreciation and amortization expense of approximately $0.4 million.
21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
We had a net loss for the three months ended June 30, 2015 of $0.7 million, compared to a net loss of $2.5 million for the three months ended June 30, 2014, the improvement in net loss was primarily a result of the gain in the change in the fair value of our derivative liability of approximately $2.5 million.
Revenues for the six months ended June 30, 2015 were $50.3 million, an increase of $4.3 million, or 9.3%, compared to the six months ended June 30, 2014. Our operating loss for the six months ended June 30, 2015 was $3.1 million, as compared to an operating income of $0.3 million in the same period a year ago, mainly due to higher salaries and payroll benefits of approximately $2.3 million and depreciation and amortization expense of $0.9 million. We had a net loss for the six months ended June 30, 2015 of $4.9 million, as compared to net loss of $1.0 million for the six months ended June 30, 2014, primarily a result of higher interest expense, depreciation and amortization, and selling, general and administrative expenses.
Our Outlook
Our ability to achieve positive cash flows from operations and net profitability is substantially dependent upon our ability to increase revenue in both of our business segments and, to a lesser extent, on our ability to identify further synergistic cost savings and operational efficiencies from our recent acquisitions.
Revenues from our Carrier Services segment have declined over the last few years due, in large part, to decreases in the prevailing rates charged for the termination of international traffic. We believe these declines resulted largely from increased competition, deregulation in many of the markets we serve and the use by competitors of lower cost, Internet-based technologies. While the market demand for international voice termination has seen a corresponding increase over the last few years, we have been unable to increase our revenues accordingly due to capacity limitations on our network switching platform and liquidity constraints. During late 2014, we implemented new systems and equipment which increased our network capacity to levels necessary to compete in the current market environment and allow us to increase our traffic volume and, therefore, gross profit for this business segment.
Results of Operations
The following table summarizes the results of our consolidated operations for the three and six months ended June 30, 2015 and 2014:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||||||||||||||||||
2015
|
% Sales
|
2014
|
% Sales
|
2015
|
% Sales
|
2014
|
% Sales
|
|||||||||||||||||||||||||
Revenues
|
$ | 25,063,695 | 100.0 | % | $ | 23,140,973 | 100.0 | % | $ | 50,326,733 | 100.0 | % | $ | 46,045,802 | 100.0 | % | ||||||||||||||||
Cost of revenues*
|
13,813,616 | 55.1 | % | 12,747,441 | 55.1 | % | 27,826,308 | 55.3 | % | 24,976,473 | 54.2 | % | ||||||||||||||||||||
Gross profit
|
11,250,080 | 44.9 | % | 10,393,532 | 44.9 | % | 22,500,426 | 44.7 | % | 21,069,329 | 45.8 | % | ||||||||||||||||||||
Depreciation and amortization
|
3,039,758 | 12.1 | % | 2,597,978 | 11.2 | % | 6,043,205 | 12.0 | % | 5,165,469 | 11.2 | % | ||||||||||||||||||||
Selling, general and administrative expenses
|
9,857,721 | 39.3 | % | 7,825,494 | 33.8 | % | 19,594,015 | 38.9 | % | 15,644,891 | 34.0 | % | ||||||||||||||||||||
Total operating expenses
|
12,897,478 | 51.5 | % | 10,423,472 | 45.0 | % | 25,637,219 | 50.9 | % | 20,810,360 | 45.2 | % | ||||||||||||||||||||
Operating (loss) income
|
(1,647,399 | ) | -6.6 | % | (29,940 | ) | -0.1 | % | (3,136,794 | ) | -6.2 | % | 258,969 | 0.6 | % | |||||||||||||||||
Other (expenses) income:
|
||||||||||||||||||||||||||||||||
Interest expense
|
(1,608,709 | ) | -6.4 | % | (1,597,215 | ) | -6.9 | % | (3,215,552 | ) | -6.4 | % | (2,991,761 | ) | -6.5 | % | ||||||||||||||||
Gain (loss) on change in fair value of derivative liability
|
2,510,950 | 10.0 | % | (690,878 | ) | -3.0 | % | 1,306,148 | 2.6 | % | 1,919,069 | 4.2 | % | |||||||||||||||||||
Other expenses, net
|
32,750 | 0.1 | % | 719 | 0.0 | % | 70,069 | 0.1 | % | (40,355 | ) | -0.1 | % | |||||||||||||||||||
Total other income (expenses)
|
934,991 | 3.7 | % | (2,287,374 | ) | -9.9 | % | (1,839,335 | ) | -3.7 | % | (1,113,047 | ) | -2.4 | % | |||||||||||||||||
Loss before income taxes
|
(712,408 | ) | -2.8 | % | (2,317,314 | ) | -10.0 | % | (4,976,129 | ) | -9.9 | % | (854,078 | ) | -1.9 | % | ||||||||||||||||
Provision for income taxes
|
- | 0 | % | 151,583 | 0.7 | % | - | 0 | % | 173,078 | 0.4 | % | ||||||||||||||||||||
Net loss
|
$ | (712,408 | ) | -2.8 | % | $ | (2,468,897 | ) | -10.7 | % | $ | (4,976,129 | ) | -9.9 | % | $ | (1,027,156 | ) | -2.2 | % |
*Exclusive of depreciation and amortization, shown separately below.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014
Revenues
Consolidated revenues were $25.0 million during the three months ended June 30, 2015 compared to $23.1 million during the three months ended June 30, 2014, an increase of $1.9 million, or 8.3%.
Revenues for the Business Services segment were $16.0 million for the three months ended June 30, 2015 as compared to $15.6 million for the three months ended June 30, 2014. The increase is primarily due to the inclusion of revenues from our acquisition of PingTone which was completed on October 31, 2014.
Carrier Services revenue of approximately $9.0 million represents an increase of $1.5 million, or 20.1%, from the same period a year ago, mainly due to a 35% increase in overall traffic volume partially offset by a decrease of 11% in the blended per minute rate of traffic terminated.
Cost of Revenues and Gross Margin
Consolidated cost of revenues was $13.8 million for the three months ended June 30, 2015 as compared to $12.7 million for the three months ended June 30, 2014. The increase was primarily due to higher cost of traffic terminated in the Carrier Services segment of approximately $1.3 million slightly offset by a decrease of $0.2 million in the costs incurred by the Business Services segment.
For the three months ended June 30, 2015, consolidated gross margin remained unchanged at 44.9%, as compared to the same three month period a year ago.
Gross margin for the Business Services segment was 63.6% for the three months ending June 30, 2015 as compared to 61.4% for the three months ending June 30, 2014, as a result of the incremental revenue from PingTone and a favorable mix in cost of revenues.
Gross margin for the Carrier Services segment was 11.6% for the three months ended June 30, 2015 as compared to 10.6% in the three months ended June 30, 2014. This increase was due to an approximately 35% increase in minutes of traffic terminated and a decrease of approximately 12% in the cost per minute of traffic terminated over the same period a year ago.
Depreciation and Amortization
Depreciation and amortization expense was $3.0 million for the three months ended June 30, 2015 as compared to $2.6 million during the same period a year ago, primarily due to our acquisition of PingTone.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2015 was $9.9 million as compared to $7.8 million for the three months ended June 30, 2014. This increase is the result of higher salaries and employee related benefits of approximately $1.1 million driven primarily by headcount increase as a result of our PingTone acquisition, professional and consulting fees of $0.09 million, integration costs of approximately $0.3 million associated with our Broadvox and Pingtone acquisitions, and office and general expenses of $0.10 million.
Operating Loss
Our operating loss for the three months ended June 30, 2015 was $1.7 million as compared to an operating loss of $30,000 for the three months ended June 30, 2014. The increase in operating loss was due to increases in SG&A and depreciation and amortization expense.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Interest Expense
Interest expense increased by approximately $11,000 in the three months ended June 30, 2015 as compared to the three months ended June 30, 2014, mainly due to an additional $5.0 million of senior debt incurred in October 2014 to finance the PingTone acquisition.
Change in Fair Value of Derivative Liability
During the three months ended June 30, 2015, we recognized a gain on the change in fair value of our derivative liability in the amount of $2.5 million compared to a loss in the amount of $0.7 million for the same period in 2014. These gains and losses are related to the derivatives associated with the warrants that we issued to our senior lenders in 2012 and 2013 and with the warrants we issued to purchasers of our preferred stock, the terms of which require them to be treated as liabilities and not equity instruments. The changes in their fair value are required to be recorded through the statement of operations at each accounting period. The warrants are valued using the Black-Scholes pricing model and other option pricing models, such that increases to our stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases to our stock price result in a lower valuation and a gain being recorded in our income statement. We expect that we will be subject to additional significant fluctuations in our income statement in 2015 and beyond based on changes in our stock price and the corresponding changes in fair value of our derivative liabilities.
Net Loss
Net loss for the three months ended June 30, 2015 was $0.7 million as compared to a net loss of $2.5 million for the three months ended June 30, 2014, an improvement of approximately $1.8 million. This improvement was primarily a result of the gain on the change in the fair value of our derivative liability of approximately $2.5 million.
Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014
Revenues
Consolidated revenues were $50.3 million for the six months ended June 30, 2015 compared to $46.0 million for the six months ended June 30, 2014, an increase of $4.3 million, or 9.3%.
Revenues for the Business Services segment increased by $1.5 million in 2015 to $32.8 million from $31.3 million in 2014, mainly as the result of the inclusion of revenues from the PingTone acquisition which was completed on October 31, 2014.
Carrier Services revenue of $17.5 million represents an increase of $2.8 million, or 19.2%, from a year ago, as a result of a 29% increase in the volume of traffic terminated over our network offset by a 7% decrease in the blended rate realized per minute of traffic terminated.
Cost of Revenues and Gross Margin
Consolidated cost of revenues was $27.8 million for the six months ended June 30, 2015 compared to $24.9 million for the six months ended June 30, 2014. This increase was primarily due to higher cost of traffic terminated in the Carrier Services segment of $2.9 million.
Consolidated gross margin was 44.7% in the six months ended June 30, 2015 compared to 45.8% in the six months ended June 30, 2014. The increase is due to the higher mix of Business Services revenue resulting from the PingTone acquisition.
Gross Margin for the Business Services segment was 63.7% in the first six months of 2015 compared to 61.9% in the first six months of 2014, as a result of the incremental revenue from PingTone of approximately $1.5 million and a favorable mix in improvement in the cost of revenues of approximately $16,000.
Gross margin for the Carrier Services business segment was 9.1% for the six months ended June 30, 2015 compared to 11.2% in the six months ended June 30, 2014, primarily due to a 5% decrease in the blended rate of per minute traffic terminated.
24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Depreciation and Amortization
Depreciation and amortization increased by approximately $0.9 million to $6.1 million for the six months ended June 30, 2015 from $5.2 million during the same period of a year ago, mainly as a result of the Pingtone acquisition that contributed approximately $85,000 and $400,000 in depreciation and amortization expense.
Selling, General and Administrative Expenses
SG&A expenses increased by $3.9 million for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014. The increase is the result of higher salaries and employee related benefits of approximately $2.1 million driven primarily by headcount increase as a result of the PingTone acquisition, office and general expenses of $0.2 million, and higher integration costs of approximately $1.0 million as a result of the Broadvox and PingTone acquisitions.
Operating Loss
Our operating loss was $3.1 million for the six months ending June 30, 2015 as compared to an operating income of $0.3 million for the same period of a year ago. The operating loss is driven primarily by an increase in SG&A of approximately $3.9 million and depreciation and amortization expense of $0.9 million.
Interest Expense
Interest expense increased by $0.2 million in the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, mainly due to an additional $5.0 million of senior debt incurred in October 2014 to finance the PingTone acquisition.
Change in Fair Value of Derivative Liability
The change in fair value of the derivative was a gain of $1.3 million in the six months ended June 30, 2015 compared to a gain of $1.9 million the six months ended June 30, 2014. This change is due to the decrease in Fusion's stock price during these periods, which decreases the value of our derivative liability.
Net Loss
Our net loss was $4.9 million for the six months ended June 30, 2015 compared to a net loss of $1.0 million in the same period of a year ago, mainly due to the increase in SG&A of approximately $3.9 million and depreciation and amortization expense of $0.9 million, partially offset by the increase in the gain on the change of the fair value of our derivative liability.
Liquidity and Capital Resources
Since our inception, we have incurred significant net losses. In addition, we have only recently begun to generate positive cash flow from operations. At June 30, 2015, we had negative working capital of $482,000 and stockholders’ equity of approximately $8.8 million. At December 31, 2014, we had working capital of $2.1 million and stockholders’ equity of approximately $13.3 million. Our consolidated cash balance at June 30, 2015 was $4.4 million as compared to $6.4 million at December 31, 2014. While we believe that we have sufficient cash to fund our operations and meet our operating and debt obligations for the next twelve months, we may be required to raise additional capital to support our business plan. There are no current commitments for such funds and there can be no assurances that such funds will be available to the Company as and when needed.
During fiscal year 2013 and for most of fiscal year 2014, we relied primarily on the sale of our equity securities and the cash generated from the operations of our Business Services segment to fund our operations.
25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
We have never paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Subject to the rights of holders of our outstanding preferred stock, any future determination to pay dividends is at the discretion of Fusion’s Board of Directors, and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, the terms of our senior debt and other factors that our Board of Directors and senior management of the Company consider appropriate.
The holders of the Series A-1, A-2, and A-4 preferred stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, as and if declared by the Fusion Board of Directors. The holders of the Series B-2 preferred stock are entitled to receive quarterly dividends at an annual rate of 6%. These dividends can be paid, at the Company’s option, either in cash or in shares of our common stock.
As of June 30, 2015, the Fusion Board of Directors had not declared any dividends on Fusion’s Series A preferred stock, and the Company had accumulated approximately $4.1 million of undeclared preferred stock dividends. The Fusion Board of Directors declared a dividend of $287,475 for the three months ended June 30, 2015 related to the Series B-2 preferred stock, which, as permitted by the terms of the Series B-2 preferred stock, was paid in the form of 143,732 shares of Fusion’s common stock.
At June 30, 2015, we have approximately $43 million principal amount of senior notes outstanding under the second amended and restated securities purchase agreement (the “SPA”) as follows:
●
|
Series A and B Notes. On October 29, 2012, the Company sold the Series A Notes in the aggregate principal amount of $6.5 million, bearing interest at the rate of 10.0% annually, and the Series B notes in the aggregate principal amount of $10.0 million bearing interest at the rate of 11.5% annually. The proceeds from the sale of the Series A Notes and Series B Notes were used to finance the acquisition of Network Billing Systems, LLC.
|
●
|
Series C Notes. On December 15, 2013, the Company sold the Series C Notes in the aggregate principal amount of $0.5 million. The proceeds were used to pay a deposit on the purchase price to the sellers in connection with our acquisition of certain assets of Broadvox.
|
●
|
Series D Notes. On December 31, 2013, the Company sold the Series D Notes in the aggregate principal amount of $25.0 million. The proceeds from the sale of the Series D Notes were used to finance the acquisition of certain assets of Broadvox.
|
●
|
Series E Notes. On October 31, 2014, contemporaneously with the completion of the acquisition of PingTone, the Company sold the Series E Notes in an aggregate principal amount of $5.0 million.
|
In accordance with the terms of the SPA, the senior notes bear interest at an annual rate of 11.15%, with monthly principal payments of approximately $102,119 from January 2015 through October 2019 with the outstanding principal balance on all the senior notes payable at maturity on October 31, 2019.
For the three months ended June 30, 2015 and 2014, we paid interest expense on the senior notes of approximately $1.3 million and $1.2 million, respectively, and $2.6 million and $2.3 million for the six months ended June 30, 2015 and 2014, respectively.
We have a note payable outstanding of approximately $1.3 million from Marvin Rosen, the Company’s Chairman of the Board of Directors. This note is subordinated to the senior notes and the Company’s other obligations to the senior lenders. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 60 days after the Senior Notes are paid in full. For the three months ended June 30, 2015 and 2014 and six months ended June 30, 2015 and 2014, we paid interest expense on this note of approximately $27,000 and $53,000, respectively.
As set forth in the SPA, our obligations to the senior lenders are secured by a first priority security interest on all of the assets of Fusion’s subsidiaries (including their capital stock) and by a second lien on the accounts receivable and other assets of our Carrier Services segment which continues to be operated through Fusion. Further, subject to certain limitations, the borrower subsidiaries and Fusion have guaranteed the obligations of the borrower under the SPA, including its obligations to repay the senior notes.
26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
In addition, the SPA contains a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to the senior notes, incurring additional indebtedness (as defined), making capital expenditures, dividend payments and cash distributions by subsidiaries. As set forth in the SPA, , we are required to maintain a minimum cash bank balance of no less than $1.0 million in excess of any amounts outstanding under a permitted working capital line of credit and in excess of any and all cash balances held by Fusion’s subsidiaries through which it provides Business Services (the “minimum cash commitment”). The SPA also requires on-going compliance with various financial covenants, including leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization. Failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of the senior notes. We do not have the financial resources to repay the senior notes if we are required to pay them off prior to their maturity date.
For the year ended December 31, 2014, we exceeded the limit on capital expenditures set forth in the SPA, which constituted to an event of default under terms of the senior notes and the SPA. On March 27, 2015, the holders of our senior notes waived the event of default for 2014 and amended the terms of the SPA by adjusting the threshold for 2015. As a result of the amendment, we were in compliance with the capital expenditure limit for the year ended December 31, 2014.
On June 16, 2015, the Company and the senior lenders entered into a Second Amendment to the SPA whereby the senior lenders agreed, among other things, to (i) increase the amount of our capital lease indebtedness to $7.0 million, (ii) extend to July 31, 2015, the date by which we are required to satisfy the minimum cash commitment, (iii) extend to September 30, 2015, the date by which EBITDA at Fusion must equal or exceed EBITDA at Fusion’s subsidiaries. In the Second Amendment, we also agreed to sell at least $3.0 million of Fusion equity securities by July 31, 2015 on terms reasonably satisfactory to the senior lenders. As of July 31, 2015, we failed to sell the required equity securities and we also failed to meet the minimum cash commitment. In addition, we were not in compliance with our minimum EBITDA and Fixed Charge Coverage Ratio covenants. On August 13, 2015, the holders of our senior notes waived our events of default with respect to the minimum EBITDA and Fixed Charge Coverage Ratio obligations and extended to September 30, 2015 the date by which we must raise $3.0 million of additional capital from the sale of Fusion equity and our obligation to satisfy the minimum cash commitment. As a result of this waiver and amendment, we were in compliance with our obligations under the SPA as of June 30, 2015. We are in active discussion with potential equity investors regarding the $3.0 million investment in Fusion, with our senior lenders concerning permanent adjustments to our existing covenants, and with other financing sources concerning a new senior debt facility. We are unable to provide any assurance, however, that any of these discussions will result in final agreement(s) or that the terms and conditions of any such agreements will be acceptable to us.
The following table sets forth a summary of our cash flows for the periods indicated:
Six Months Ended June 30,
|
||||||||
2015
|
2014
|
|||||||
Net cash provided by operating activities
|
$ | 498,045 | $ | 91,339 | ||||
Net cash used in investing activities
|
(1,859,265 | ) | (8,865 | ) | ||||
Net cash (used in) provided by financing activities
|
(665,605 | ) | 3,527,280 | |||||
Net (decrease) increase in cash and cash equivalents
|
(2,026,825 | ) | 3,609,754 | |||||
Cash and cash equivalents, beginning of period
|
6,444,683 | 6,176,575 | ||||||
Cash and cash equivalents, end of period
|
$ | 4,417,858 | $ | 9,786,329 |
Cash provided by operating activities increased to $0.5 million for the six months ended June 30, 2015 compared to $0.09 million for the six months ended June 30, 2014, primarily due to changes in non-cash items. The following table illustrates the primary components of our cash flows from operations:
Six Months Ended June 30,
|
|||||||
2015 |
2014
|
||||||
Net loss
|
$ | (4,976,129 | ) | $ | (1,027,156 | ) | |
Non-cash expenses, gains and losses
|
5,924,126 | 4,312,852 | |||||
Accounts receivable
|
(305,135 | ) | (910,798 | ) | |||
Accounts payable and accrued expenses
|
156,308 | (1,521,179 | ) | ||||
Other
|
(301,125 | ) | (762,380 | ) | |||
Cash provided by operating activities
|
$ | 498,045 | $ | 91,339 |
27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Cash used in investing activities, comprised mainly of capital expenditures, was approximately $1.9 million for the six months ended June 30, 2015, compared to $1.8 million for the six months ended June 30, 2014. Capital expenditures for the remainder of 2015 are expected to be approximately $0.8 million to fund the purchase of network and related equipment and operational support systems as we continue to grow our Business Services segment. A portion of our capital expenditure requirements may be financed through capital leases or other equipment financing arrangements. Many of these projects are subject to review and cancellation at the discretion of our Chief Executive Officer and Board of Directors.
Cash used in financing activities for the six months ended June 30, 2015 of approximately $0.7 million was primarily attributable to payments of $0.6 million to our senior lenders, $0.4 million in capital lease payments, and approximately $0.8 million repayment of borrowings under a factoring arrangement with a third party, offset by approximately $1.1 million in proceeds received from the transfer of receivables from such related party.
Other Matters
Inflation
We do not believe inflation has a significant effect on our operations at this time.
Off Balance Sheet Arrangements
At June 30, 2015, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Forward Looking Statements
Certain statements and the discussion contained herein regarding our business and operations may include “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. Our primary risk is our ability to attract new capital to execute on our comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, our ability to comply with our senior debt agreements, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, natural disasters, acts of war, terrorism or other events beyond our control and the other factors identified by us from time to time in our filings with the SEC. However, the risks included should not be assumed to be the only things that could affect our future performance.
All forward-looking statements included are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Disclosure under this section is not required for a smaller reporting company.
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 our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.
Our Chief Executive Officer and Acting Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.
There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes to our risk factors from those previously disclosed in such Annual Report.
During the quarter covered by this report, we issued an aggregate of 46,500 shares of common stock valued at approximately $169,000 to third party consultants for services rendered. These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
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Item 3. Defaults Upon Senior Securities.
Not applicable
EXHIBIT NO.
|
DESCRIPTION
|
|
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
Second Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated June 16, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company.
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||
10.64 |
Waiver and Third Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated August 12, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company.
|
|
101.INS*
|
XBRL Instance Document
|
|
101.SCH*
|
XBRL Taxonomy Extension Schema Document
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|
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
|
* 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, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.
30
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
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.
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|||
August 13, 2015
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By:
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/s/ Gordon Hutchins, Jr.
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Gordon Hutchins, Jr.
|
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President, Chief Operating Officer and Acting Chief Financial Officer
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31
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
EXHIBIT NO.
|
DESCRIPTION
|
|
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
||
Second Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated June 16, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company.
|
||
Waiver and Third Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated August 12, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company.
|
||
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
|
* 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, 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.
32