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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10–K
☑
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31,
2016
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ________ to________
Commission File Number 001-32421
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact
name of registrant as specified in charter)
Delaware
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58-2342021
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(IRS
Employer Identification No.)
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420 Lexington Avenue, Suite 1718, New York, New York
10170
(Address
of principal executive offices) (Zip Code)
(212)
201-2400
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name of each exchange on which registered
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Common
Stock, par value $0.01 per share
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The
Nasdaq Capital Market
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Securities
registered pursuant to Section 12(g) of the Act: Not
Applicable
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
Indicate
by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ☐ No ☑
Indicate
by check mark whether the Registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☑
No ☐
Indicate
by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer”, “non-accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filler
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☐
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Accelerated
filer
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☐
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Non-accelerated
filler
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☐
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Smaller
reporting company
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☑
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(do not
check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
☐ No ☑
The
aggregate market value of the voting common stock held by
non-affiliates of the registrant based upon the closing price of
the common stock reported by The Nasdaq Capital Market on June 30,
2016 of $1.84 per share, was $14,445,507.
Indicate
the number of shares outstanding of the registrant’s common
stock as of the latest practicable date: 20,757,028 shares of
common stock are issued and outstanding as of March 15,
2017.
DOCUMENTS INCORPORATED BY REFERENCE
The
information required by Part III of this Report (Items 10, 11, 12,
13 and 14) is incorporated by reference to the registrant’s
definitive proxy statement which involves the election of
directors, to the extent permitted by Instruction G(3) to Form
10-K.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Table
of Contents
PART
I
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3
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Item
1.
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Business.
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3
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Item
1A.
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Risk
Factors.
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13
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Item
1B.
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Unresolved Staff
Comments.
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21
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Item
2.
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Properties.
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21
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Item
3.
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Legal
Proceedings.
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22
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Item
4.
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Mine Safety
Disclosures.
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22
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PART
II
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22
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Item
5.
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Market for
Registrant’s Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities.
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22
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Item
6.
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Selected Financial
Data.
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23
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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23
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Item
7A.
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Quantitative and
Qualitative Disclosures about Market Risk.
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31
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Item
8.
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Financial
Statements.
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32
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Item
9.
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Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure.
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32
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Item
9A.
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Controls and
Procedures.
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32
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Item
9B.
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Other
Information.
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32
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PART
III
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33
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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33
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Item
11.
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Executive
Compensation.
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33
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Item
12.
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Security Ownership
Of Certain Beneficial Owners and Management and Related Stockholder
Matters.
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33
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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33
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Item
14.
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Principal
Accounting Fees and Services.
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33
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PART
IV
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34
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Item
15.
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Exhibits, Financial
Statement Schedules.
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34
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SIGNATURES
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39
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INDEX TO
EXHIBITS
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41
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
PART I
This Form 10-K contains forward-looking statements. These
statements relate to our expectations for future events and future
financial performance. Generally, the words
“anticipates,” “expects,”
“intends,” “may,” “should,”
“plans,” “believes,”
“predicts,” “potential” and similar
expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and
circumstances could differ significantly from those anticipated in
the forward-looking statements. These statements are only
predictions. Actual events or results may differ materially.
Factors which could affect our financial results are described in
Item 1A below and in Item 7 of Part II of this Form
10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as
of the date hereof. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Moreover, neither we nor any other person assume
responsibility for the accuracy and completeness of the
forward-looking statements. We undertake no duty to update any of
the forward-looking statements after the date of this report to
conform such statements to actual results or to changes in our
expectations.
Overview
Fusion
Telecommunications International, Inc. (“Fusion”),
either directly or through its various subsidiaries (collectively,
“we,” “us,” “our” or the
“Company”), offers a comprehensive suite of cloud
communications, cloud connectivity, cloud infrastructure, cloud
computing, and managed cloud-based applications solutions to small,
medium and large businesses, and offers domestic and international
voice services to telecommunications carriers
worldwide. Our advanced, proprietary cloud services
platforms, as well as our state-of-the art switching systems,
enable the integration of leading edge solutions in the cloud,
increasing customer collaboration and productivity by seamlessly
connecting employees, partners, customers and
vendors. We currently operate our business in two
distinct business segments: Business Services and Carrier
Services.
In the
Business Services segment, Fusion is focused on becoming our
business customers’ single source for leveraging the
increasing power of the cloud, providing a robust package of what
we believe to be the essential services that form the foundation
for their successful migration to, and efficient use of, the cloud.
Our core Business Services products and services include cloud
voice and unified communications as a service
(“UCaaS”), improving communications and collaboration
on virtually any device, virtually anywhere, and cloud connectivity
services, securely and reliably connecting customers to the cloud
with managed network solutions that are designed to increase
quality and optimize network efficiency. Our cloud computing
and infrastructure as a service (“IaaS”) solutions are
designed to provide our business customers with a platform on which
additional cloud services can be layered. Complemented by our
software as a service (“SaaS”) solutions such as
security and business continuity, our advanced cloud offerings,
including private and hybrid cloud, storage, backup and recovery,
and secure file sharing that allow our customers to experience the
increased efficiencies and agility delivered by the cloud.
Fusion’s cloud-based services are flexible, scalable and can
be rapidly deployed, reducing our customers’ cost of
ownership while increasing their productivity.
Through
our Carrier Services segment, we have agreements with
approximately 370 carrier customers and vendors and sell our voice
services to other communications service providers throughout the
world. Customers include U.S.-based carriers sending voice traffic
to international destinations, and foreign carriers sending voice
traffic to the U.S. and internationally. We also purchase domestic
and international voice services from many of our Carrier Services
customers. Our carrier-grade network, advanced switching platform
and interconnections with global carriers on six continents also
reduce the cost of global voice traffic, thereby increasing
profitability and expanding the service delivery capabilities for
our Business Services segment.
As a
result of the acquisition of a number of cloud services businesses
over the past five years, Fusion has expanded its business customer
base to over 13,000 customer accounts, increased its distribution
network to over 500 active distribution partners and added a
significant number of network facilities and points of presence,
thus expanding its geographic reach. Through these acquisitions, we
acquired advanced systems and infrastructure and augmented our
management team and employee base with talented, experienced,
well-trained professionals, and further developed a strong platform
for further acquisitions.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Fusion
is seeking to capitalize on the rapid growth of the worldwide cloud
services market, which is expected to grow 18% in 2017 to total
$246.8 billion, up from $209.2 billion in in 2016, according to
Gartner, Inc. The highest growth will come from cloud system
infrastructure as a service, which is projected to grow 36.8% in
2017 to reach $34.6 billion. Cloud application services (SaaS) is
expected to grow 20.1% to reach $46.3 billion. We are pursuing a
three-tiered growth strategy: developing specialized solutions for
key vertical markets (such as legal and healthcare), targeting and
acquiring additional cloud services companies and implementing
measures to accelerate organic growth. Our continuing effort to
deliver advanced cloud solutions to larger companies with more
complex requirements is supported by our proprietary cloud
solutions platform that allows us to rapidly respond to large
enterprise needs for customized or enhanced solutions. We intend to
continue to develop vertically oriented solutions to expand our
revenue opportunities and further differentiate our service suite,
with current efforts directed primarily on the healthcare, legal,
hospitality and real estate verticals. We intend to acquire
additional cloud services companies that can further expand our
customer base, allow us to provide additional cloud products and
services to our portfolio and gain scale. Our growth strategy for
the Business Services segment includes securing large strategic
distribution partners, increasing our direct as well as indirect
channel sales efforts and upselling solutions to our existing
customer base.
Fusion’s
management team has extensive experience in the technology,
services and communications industry, with demonstrated leadership
in middle market, entrepreneurial, small company, distressed and
M&A environments. We believe that our executive team
has the experience and expertise to drive high value opportunities
to the Company and execute on our acquisition and organic growth
strategies.
Fusion
was incorporated in Delaware and commenced operations in September
1997. We currently have offices in: New York, NY; Wayne, NJ;
Fort Lauderdale, FL; Atlanta, GA; Herndon, VA; and Beachwood,
OH.
Acquisitions
The
cloud services marketplace continues to be fragmented, with most
providers challenged by a limited product portfolio, a lack of
financial and operational resources, and a regional focus. Fusion
believes this market segment offers strong opportunities for
consolidation. We believe that the cross-marketing opportunities
and economies of scale made possible through consolidation make
such acquisitions an attractive vehicle to enhance our growth
profile.
Fusion
integrates the businesses it acquires and organizes the employees
under one management team. Products and services and processes and
procedures are rapidly integrated as well, while sales and support
staff and distribution partners are trained to cross and up-sell
our solutions to our existing and acquired customer bases. We
believe that our integration strategy, in combination with our
increasing expertise and our scalable, robust systems and
infrastructure, will enable us to continue to efficiently integrate
additional acquisitions in the future.
Since
2012, we have made the following acquisitions:
NBS
In
October 2012, we acquired Network Billing Systems, LLC,
headquartered in Wayne, NJ, and certain assets and liabilities of
its affiliate, Interconnect Services Group II LLC (collectively,
“NBS”), a cloud services provider delivering cloud
voice and UCaaS, cloud connectivity and managed network services to
small, medium and large businesses nationwide.
Broadvox Cloud Services Business
In
December 2013, we acquired certain assets of Broadvox LLC’s
cloud services business, which delivered cloud-based voice, UCaaS
and cloud connectivity services to small, medium and large
businesses.
PingTone
In
October 2014, we acquired PingTone Communications, Inc.
(“PingTone”), a provider of integrated cloud-based
communications services headquartered in Herndon, VA. This
acquisition added to our customer base, augmented the
Company’s management team and added a direct sales
force.
RootAxcess
In
September 2015, we acquired the customer base, technology platform,
infrastructure and other assets of Chicago-based RootAxcess.
RootAxcess delivered a broad range of cloud solutions, including
IaaS, cloud computing, cloud storage, cloud hosting, virtual data
center, backup and recovery and virtual servers, using both private
and hybrid cloud infrastructure.
4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Fidelity
In a
two-step transaction completed in December 2015 and February 2016,
we acquired Fidelity Access Networks, Inc. and its various
subsidiaries (collectively, "Fidelity"). Fidelity provided cloud
voice, cloud connectivity, security, data center and cloud storage
services to small, medium, and large businesses, primarily in the
Midwest.
TFB
In
April 2016, we acquired the intellectual property and assets of
Technology for Business Corporation (“TFB”), a provider
of industry leading contact center solutions with a fully
integrated advanced cloud voice platform.
Apptix
On
November 14, 2016, we acquired Herndon, Virginia-based Apptix, Inc.
(“Apptix”), a wholly-owned subsidiary of Apptix
ASA (OSE: APP). Apptix provided cloud-based communications,
collaboration, virtual desktop, compliance, security and cloud
computing solutions to approximately 1,500 business customers
across the U.S.
Business Services
Our
cloud-based services are designed to meet the communications,
network and computing requirements of growing businesses, while
maximizing the price-performance ratio. We believe that
giving our customers access to the cloud provides a more
cost-effective, reliable and secure communications and IT
experience, and relieves them of the capital and support burdens
associated with more traditional premise-based
services. Additionally, customers can reduce costs while
adding features and functionality and improving productivity across
their company. Fusion is increasingly focused on
providing specialized, market-based solutions to targeted verticals
and larger enterprises, matching our advanced solutions to key
industry-specific customer requirements.
We
currently have over 13,000 business customer accounts. We offer a
suite of advanced cloud-based services, including cloud
communications, which encompasses cloud voice and UCaaS, and cloud
connectivity that provides diverse and redundant access to the
cloud. The Company’s managed network services converge voice
and data applications, which include Internet access, Ethernet over
Copper transmission facilities and Multi-Protocol Level Switching
(“MPLS”) services at speeds ranging from 1.5 Mbps to
100 Gbps. Our cloud computing solutions include private and hybrid
cloud, storage, backup and recovery and secure file sharing.
Security and business continuity are offered as part of every
solution.
Fusion’s
services are designed to provide significant benefits to businesses
of all sizes, with single or multiple locations. The integration of
cloud solutions on our advanced services platforms allow customers
to seamlessly connect people with the information they need to
collaborate effectively, regardless of the device they
use.
Our
cloud solutions are also designed to minimize upfront capital
costs, increase the scalability and flexibility of the
customer’s communications network and service environment,
provide robust features and functionality to increase productivity,
and reduce the overall cost of communications.
Our
proprietary cloud communications service platform allows us to
rapidly respond to market requirements for new or enhanced products
and services, as well as customize customer solutions as required
for maximum flexibility, avoiding costly licensing fees and
increasing our control over the service
environment. Fusion’s growing suite of business
services includes:
Cloud Voice
Fusion’s
cloud voice service allows a customer to replace its owned or
leased premise-based office telephone system with a
state-of-the-art digital telephone system provided by Fusion in the
cloud. This feature-rich solution eliminates the need to own and
operate a costly, complex telephone system, reduces upfront capital
costs, and eliminates the cost of calls between customer locations.
The service provides efficiencies for companies with multiple
offices or a highly mobile workforce, and for companies that are
opening a new office or need to expand or replace existing legacy
telephone systems. All business service options can be configured
by the user in real time, using a powerful administrative portal,
virtually eliminating the costs associated with the labor-intensive
reconfiguration of on-site telephone systems. Our contact center
solutions provide advanced call center features and functionality
that can be seamlessly integrated with our cloud voice solutions,
reducing operational costs and increasing cost savings and
efficiency. CRM integration, call recording and real-time
monitoring are built into the contact center solution, increasing
productivity without increasing costs.
5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Unified Communications
Our
UCaaS offering complements our cloud voice solutions with
integrated service features that seamlessly combine audio, video,
messaging and web services, immediately connecting people with the
information they need to communicate effectively. Our integrated
cloud-based UCaaS collaboration suite is device and location
agnostic, allowing businesses of all sizes to increase productivity
by simplifying communication over the most preferred or available
device. By connecting employees with other employees and customers
via conference call or online meeting, and sharing documents
real-time with a simple click, our UCaaS solution drives
efficiencies while at the same time reducing costs.
Contact Center
Fusion’s
cloud-based, enterprise contact center offering is fully integrated
with our UCaaS solution on our proprietary cloud services platform.
Converging voice, data, web and mobile technologies, it enables
customers to extend the features and functionality of the contact
center throughout the enterprise while providing device and
media-agnostic UCaaS services to the contact center. Comprising a
full range of cost-effective applications once reserved for the
largest enterprises through costly premise-based solutions, our
cloud-based contact center offering delivers comprehensive,
real-time and historical reporting, database integration (CRM, ERP,
etc.), enhanced criteria-based routing and customer-controlled
administration. Fusion’s contact center solution protects
technology investments by providing a seamless migration path to
the cloud, delivering everything a customer needs to monitor,
maintain and manage a successful cloud-based contact center
environment.
SIP Trunking
Fusion’s
SIP trunking solution allows a customer to retain and use its
existing telephone system, while connecting to the Fusion network
for access to the cloud, as well as its local services and
inbound/outbound domestic and international long distance services.
Our SIP trunks efficiently and economically provide businesses with
voice channels in any configuration (analog, T-1, PRI, or SIP).
Customers save on their local, long distance, and international
call charges, eliminate traditional line charges, and gain many of
the advantages of cloud voice features and functionality, such as
advanced call handling and out-of-area number portability.
Burstable voice lines accommodate seasonal traffic fluctuations,
marketing campaigns and business continuity requirements. SIP
trunks also eliminate the cost of interoffice calling, and allow
customers to combine their voice and data traffic onto a single
broadband access facility for further cost savings, without having
to abandon their existing technology investment. Fusion’s SIP
trunking solution can be shared across customer locations and is
enhanced by a proprietary administrative portal, which allows
customers to alter call routing in real time and provides increased
efficiency and control.
Cloud Connectivity
Fusion’s
reliable and secure connections to the cloud ensure high levels of
service quality and control. Leveraging our own
expanding on-net network, as well as our relationships with
U.S.-based and international carriers, we offer business customers
a full complement of redundant, flexible and scalable network
solutions, offering true diversity for built-in business
continuity. Services range from dedicated circuits to high-speed
broadband that are available in a variety of bandwidth
levels. Fusion offers reliable, secure and
cost-effective Internet access, as well as Ethernet and MPLS
services. Fusion’s quality of service routers seek to provide
the highest quality voice traffic while reducing customer access
costs. We believe that in addition to providing secure
migration and connection to the cloud, providing a full complement
of network services allows us to address a broader set of customer
needs, delivering increased value and securing customer loyalty in
the process.
Cloud Computing
Fusion’s
cloud computing service centralizes information management,
hardware, network and infrastructure in an off-premise location
that is hosted and managed by Fusion. Offered as private or hybrid
solutions, Fusion’s secure offerings drive efficiencies in
both costs and resources allowing for rapid scalability and
deployment of applications. These offerings provide a predictable,
utility-based OpEx model, which eliminates significant capital
expenditures, removes obsolescence concerns and future-proofs
customer investments.
Managed Applications in the Cloud
Fusion
offers several advanced, industry-specific SaaS solutions to meet
the needs of large enterprises in key vertical markets, especially
those facing the rigorous demands of regulatory requirements and/or
the need to store, secure and move large amounts of customer or
patient data. We believe that these applications
represent significant future revenue potential, as we continue to
introduce them to our existing enterprise customers and
prospects.
6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Cloud Security: Unified Threat Management (UTM)
Fusion’s
scalable, comprehensive and fully integrated UTM solution secures
enterprise data as well as the network on which it is stored, moved
or retrieved. The Fusion firewall is application, policy and
permission- defined, enabling customers to exercise control over
their own security environments. Continuous monitoring and alerts
help detect, deter and defeat cyberattacks to mitigate against
business disruptions, and malware threats are eliminated with
antivirus and antispyware applications designed to maintain the
highest level of security against external intrusions. Centrally
managed and without requiring a dedicated Internet gateway or
firewall on site, the cloud-based solution drives efficiencies in
network management and staffing, detecting and blocking unwanted
traffic before it impacts the network.
Cloud-Based Storage
Fusion
offers a solution that addresses the explosive growth of data
across all industries with a cost-effective and secure storage
solution hosted in the cloud. This scalable, fully redundant
solution is hosted off-premise, reduces customer data center
footprints and resource requirements, and facilitates additional
SaaS solutions that can be accommodated on the same cloud platform.
Fusion delivers a storage and data back-up assessment service as
part of its storage offering, measuring growth and duplication
benchmarked against best practices. The solution consolidates
requirements across the enterprise, increases efficiency and
achieves economies of scale designed to reduce overall customer
costs.
Backup and Recovery
Fusion
“Backup and Recovery” is an enterprise-grade backup
software solution that provides a single, integrated approach to
data protection. Its comprehensive suite of tools and capabilities
allow businesses to securely protect more data while using less
network capacity and fewer storage resources without having to
deploy multiple point solutions.
Secure File Sharing
Fusion
offers a file sharing solution that allows businesses to share,
sync and transfer important data across multiple platforms, while
keeping security a main priority with military grade encryption.
The solution delivers file access from any location, on any device
to enable flexible and scalable file sharing, restoration and
collaboration.
Service Plans
Fusion
offers several different service packages designed to meet specific
customer requirements. Base level plans offer a basic service
package for a low monthly recurring charge (“MRC”).
Additional charges, such as local, long distance, or international
calling, are charged at per minute rates. Other packages may
include a specific number of local or long distance minutes or
even unlimited local or long distance calling. Optional value-added
features for basic services are available for an incremental
monthly charge appropriate for the service.
Cloud
connectivity services such as Internet access services and/or
private line services are charged on a fixed monthly basis, and are
generally based on the bandwidth utilized and the endpoints
involved. Cloud computing services are generally composed of an
upfront charge and an MRC. Fusion’s contracts with its
Business Services customers range from one to five years in
length.
Carrier Services
Fusion’s
Carrier Services segment provides voice traffic termination
employing primarily VoIP technology. This traffic typically
consists of minutes of domestic and international long distance
usage that are terminated to telephone numbers in the intended
destination countries. The majority of this traffic is
international in nature, and terminates to virtually all countries.
We
employ least cost routing technology and systems in connection
with all of our voice termination services to ensure high quality
termination at the lowest possible cost, thus maximizing profit on
that traffic. Using least cost routing technology, Fusion often
“blends” routes to provide our customers with the
optimal mix of price and quality, or to meet unique customer
requirements for the termination of voice traffic to specific
countries.
We also
leverage the termination capacity of the Carrier Business segment
obtained through interconnection agreements and other methods of
termination to carry international traffic generated by our
Business Services segment. As we further grow our Business
Services segment, we anticipate using an increasingly larger
percentage of our termination capacity in support of the higher
margin traffic generated from the Business Services segment. Where
needed to meet a specific business customer’s requirements,
we also procure Internet access and private line circuits from our
network of domestic and international carriers.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
All
carrier voice services are priced on a per minute basis, based upon
the destination called, the time of day, and the customer’s
overall traffic volume. We have reciprocal service agreements with
the majority of our carrier customers, and the pricing in those
agreements may also reflect the pricing provided to us for
terminating our traffic. Prices for Internet access or private line
service provided to carriers, as well as pricing for co-location
services, are based on a fixed MRC for the services
provided.
We have
contracts with most of our carrier customers, which typically have
a one-year renewable term, no minimum commitments, and allow either
party to terminate the arrangement without penalty.
Network
Fusion
operates a robust and reliable carrier-grade network and
infrastructure that delivers high quality, diverse and secure
connections to our cloud services. Our Managed Network Services,
Internet access, Ethernet, MPLS and cloud communications solutions
can be provided either on-net leveraging our own extensive network,
or off-net using the networks of our carrier partners, for
truly diverse and redundant connections.
Both of
our Carrier Services and Business Services network operations
centers are manned 24 hours per day, 7 days per week and employ
state-of-the-art monitoring and alert systems that are designed to
ensure quality of service and a proactive response to potential
customer service issues.
Our
carrier-class network employs digitized, packet-switched service
platforms capable of interfacing with most Internet protocols, as
well as with TDM (time division multiplexing) or circuit-switched
systems, and provides the flexibility necessary to seamlessly
transport our customers’ voice and data traffic throughout
the United States and the world. Internet access is
delivered through dedicated and redundant high-speed
interconnections to all major Internet backbones.
The
Fusion network is characterized by its low cost of deployment and
low recurring costs. It has been constructed to meet actual, rather
than anticipated, customer demand with on-net and off-net
connections to provide ubiquitous access, delivering maximum cost
efficiency without sacrificing quality. This robust network allows
us to provide diverse and redundant network connections with
seamless automatic failover. Our major points of presence include:
New York City; Newark, NJ; Philadelphia, PA; Boston, MA; Atlanta,
GA; Miami, FL; Cleveland, OH; Chicago, IL; Dallas, TX; Los Angeles,
CA; Washington, D.C.; San Jose, CAS; Charlotte, NC; Jacksonville,
FL; Columbus, OH; and Little Ferry, NJ.
Key
elements of our network include a proprietary cloud communications
platform, a BroadSoft cloud communications services platform; Cisco
routers and switches, and Acme Packet and Sonus communications
services platforms. These redundant network elements are
interconnected via a dedicated fiber-based gigabit Ethernet
backbone. Most network elements are based on software applications
that execute entirely on off-the-shelf servers and are built for
easy and rapid deployment and scalability, as well as security and
reliability. Fusion has deployed a Global Convergence Solutions
routing and rating management solution that has improved routing,
rating and invoicing capabilities, facilitated cost savings through
overhead reduction and driven efficiencies in route
management.
Fusion’s
centralized network elements are housed in carrier-grade switching
facilities located in secure carrier buildings that house many
other carriers and are interconnected to other major carrier
buildings. These locations allow for cost-effective and rapid
interconnection and capacity expansion to carrier customers, as
well as major enterprise customers. Fusion believes its facility
locations and equipment choices provide the platform required to
support its envisioned growth and will allow it to quickly embrace
emerging technologies as they become commercially available and
viable.
Proprietary Cloud Services Platform
Our
proprietary cloud services platform was designed and developed over
many years by our own team of experienced programmers using
advanced, yet proven technology. This proprietary platform is
scalable, flexible and secure, delivering an integrated portfolio
of cloud-based communications services that enable businesses of
every size to increase productivity and efficiency while
controlling costs. Information management, hardware, network and
infrastructure are centralized off-premise, hosted and managed by
Fusion, allowing customers to rapidly adjust to fluctuating and
unpredictable service demands, drive efficiencies in staff and
space, and eliminate the need for costly technology upgrades. The
architecture of our proprietary platform has been designed to allow
for the seamless integration of additional cloud-based
applications, whether or not developed by Fusion. Not subject to
third party end user licensing fees or technology release
constraints, our proprietary platform allows faster, easier and
more cost-effective introduction of new, business-critical
applications, delivering a unique feature set engineered to quickly
respond to customer demands and market requirements. We
differentiate ourselves from our competitors by combining our
robust carrier-grade network services to enable secure connections
to the cloud, delivering true diversity and a fully integrated
solution for maximum efficiency and cost savings.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Our
proprietary platform has been designed using advanced technologies
and best of breed equipment and provides for geographical diversity
and redundancy. The platform has been designed for scalability as
well as resiliency, and can be easily expanded to accommodate any
required number of connections and customers. Platform solutions
are location and device neutral, serving multiple as well as single
locations nationwide, connecting users to customers and other
employees on desktops, laptops, handsets, tablets and mobile
phones, wherever they may be located. The platform is currently
deployed in two diverse Tier 1 carrier data centers, and such
platform has a fully functional, redundant system whose
databases are constantly in sync. Thus, should one of the data
centers be hit with a catastrophic event, customers should
experience no interruption of service. The result is to ensure
a proven, reliable and consistent uptime, which is crucial for
delivering mission critical solutions.
Developed
with experienced in-house programmers, the platform requires no
ongoing licensing fees for individual seats or SIP sessions, which
we believe gives Fusion a competitive advantage against many other
service providers. Written in current programming languages and
utilizing proven technologies, the system enjoys efficiencies and
capabilities not found in older legacy type platforms.
Sales and Marketing
We
market and sell our business services to small, medium and large
customers through distribution partners, direct sales
personnel and inside sales representatives. Our independent
distribution partners are typically paid commissions based on
their sales and, thereafter, the continued use of our services by
the respective customers. Our sales employees, including direct
sales and inside sales, are typically compensated through a
combination of base salary and commissions based on their actual
sales performance.
Our
distribution partners generally target small-to medium-size
businesses, while our direct sales force focuses on the larger
enterprise customers in our targeted verticals. We
believe that our cloud platform, infrastructure, systems and
connectivity provide a strong competitive advantage in serving
these larger enterprise customers, creating real value with
specialized solutions that meet their more complex and rigorous
requirements. Referrals, strategic relationships and the
strength of our corporate relationships are also a key part of our
overall sales and marketing plan. Our carrier services
are sold entirely through our direct sales force.
Strategy
Our
recent acquisitions are important milestones in our strategic
roadmap as we work to become one of the industry’s leading
and most successful cloud services providers. Our plans for growth
are supported by an experienced and tested management team and
dedicated staff, as well as our advanced cloud strategy to
organically grow our revenue from the Business Services segment and
to continue to develop vertically oriented solutions and acquire
additional cloud services companies.
Fusion
intends to grow organically through direct as well as indirect
channel sales efforts; by securing large strategic distribution
partners to extend our geographic and vertical market reach; and
through the up-sale and cross-sale of services to our existing
customer base.
We
continue to focus our sales and marketing efforts on developing
vertically oriented solutions for targeted markets that require the
kind of specialized solutions made possible by our state-of-the-art
networks and advanced services platforms. Our vertically oriented
solutions, which are currently focused on healthcare, legal
services, hospitality and real estate, offer a substantial
opportunity to gain market share. 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. For the year ended December 31, 2016, the
Business Services segment accounted for 70.9% of our revenues, as
compared to 65.1% for the year ended December 31,
2015.
Fusion
intends to build on the success of its past acquisitions through
additional acquisitions of other cloud services companies. We
believe that the experience gained in integrating people, products,
systems, platforms and customers positions us well to advance our
growth. We continue to look to acquire companies that can expand
our customer base and distribution capability, add additional
cloud-based products and services and help us increase the scale of
our operations.
We
intend to manage our Carrier Services business segment through
leveraging technology and systems improvements, enhancing product
stability through stronger bi-lateral vendor relationships, and
increasing sales to non-traditional carriers such as cable
television providers, Internet search engine companies, and large
IP telephone companies. We believe the revenue streams from such
entities will be more predictable and will offer better margins
than the revenues from traditional domestic and international
carriers.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Intellectual Property and Trademarks
We have
several trademarks and service marks, which are supported by a
combination of common law and statutory protection. We also own
numerous domain names, which have been registered with the
Corporation for Assigned Names and Numbers. The
following trademarks are registered with the United States Patent
and Trademark Office; however, except as otherwise noted, they are
not registered at the international level:
●
Fusion®
●
Fusion
(Logo®
●
Clear Connections
in the Cloud®
●
Apptix® (also
registered with the European Community)
●
Cloud Alliance
Network & Design®
●
Mailstreet®
The
telecommunications and VoIP markets have been characterized by
substantial litigation regarding patent and other intellectual
property rights. Litigation, which could result in substantial cost
and diversion of our efforts, may be necessary to enforce
trademarks and/or service marks issued to us or to determine the
enforceability, scope and validity of the proprietary rights of
others. Legal proceedings to enforce our intellectual property or
defend ourselves against third-party claims of infringement can be
time consuming and costly. Adverse determinations in any litigation
or interference proceeding could subject us to costs related to
changing names, a loss of established brand recognition, or the
need to change the technologies utilized in our
services.
Competition
Each of
Fusion’s business segments are highly competitive, rapidly
evolving, and subject to constant technological change. In each of
our business segments, we compete with companies that are
significantly larger and have substantially greater market
presence, financial, technical, operational and marketing resources
than we do. In the event that such a competitor expends significant
sales and marketing resources in one or several markets where we
compete with them, we may not be able to compete successfully in
those markets. Specialized cloud services providers, who focus on
one or more cloud service or application, could adopt aggressive
pricing and promotion practices that could impact our ability to
compete. We also believe that competition will continue to
increase, placing downward pressure on prices. Such pressure could
adversely affect our gross margins if we are not able to reduce our
costs commensurate with the price reductions of our competitors.
Further, the pace of technological change makes it impossible for
us to predict whether we will face new competitors using different
technologies to provide the same or similar services offered or
proposed to be offered by us. If our competitors were to provide
better and more cost effective services than ours, we may not be
able to increase our revenues or capture any significant market
share.
Government Regulation
In the
United States, our services are generally subject to varying
degrees of federal, state and local regulation, including
regulation by the Federal Communications Commission (the
“FCC”) and various state public utility commissions or
public service commissions. We may also be subject to similar
regulation by foreign governments and their
telecommunications/regulatory agencies. While these regulatory
agencies grant us the authority to operate our business, they
typically exercise minimal control over our services and pricing.
However, they do require the filing of various reports, compliance
with public safety and consumer protection standards and the
payment of certain regulatory fees and assessments.
We
cannot provide assurance that the U.S. and foreign regulatory
agencies exercising jurisdiction over us will grant us the required
authority to operate, will allow us to maintain existing authority
so we can continue to operate, or will refrain from taking action
against us if we are found to have provided services without
obtaining the necessary authority. Similarly, if our pricing and/or
terms or conditions of service are not properly filed or updated
with the applicable agencies, or if we are otherwise not fully
compliant with the rules of the various regulatory agencies,
regulators or other third parties could challenge our actions and
we could be subject to forfeiture of our authority to provide
service, or to penalties, fines, fees or other costs. From time to
time in the past, we have been delinquent in certain filing,
reporting and payment obligations, including to the FCC and the
Universal Service Administrative Company
(“USAC”). However, we are currently
up-to-date with our filings, reports and payments to these and
other telecommunications agencies having regulatory oversight over
us.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
As a
carrier, we are subject to FCC regulation under the Communications
Act of 1934, as amended. We have applied for and received the
necessary authority under Section 214 of the Communications Act to
operate as a domestic and international carrier. Generally, our
international carrier traffic is subject to minimal regulation by
state and local jurisdictions. We also hold various state licenses
authorizing us to provide intrastate services to our carrier and
end-user customers, and we comply with state reporting, fee
payment, tariffing, and other obligations with respect to these
services. There may be some states where we provide
minimal amounts of intrastate services where we have not fully
complied with the licensing requirements. Should we fail at any
time to hold the licenses required to provide our intrastate
services, we could be subject to fines and/or other
penalties.
Our
VoIP services are lightly regulated, although certain traditional
telecommunications regulations have been applied to VoIP services.
The FCC requires interconnected VoIP services to comply with: 911
emergency service requirements; registration requirements;
Communications Assistance for Law Enforcement requirements;
obligations to support Universal Service including the Universal
Service Fund (“USF”) and Telecommunications Relay
Services, the North American Numbering Plan Administration, and
Local Number Portability Administration; Customer Proprietary
Network Information requirements; disability access obligations;
Local Number Portability requirements; service discontinuance
notification obligations; outage reporting requirements; and rural
call completion reporting and rules related to ring signal
integrity. The FCC defines interconnected VoIP service as service
that (1) enables real-time, two-way voice communications, (2)
requires a broadband connection from the user’s location, (3)
requires Internet protocol compatible customer premises equipment,
and (4) permits users generally to receive calls that originate on
the public switched telephone network (“PSTN”) and to
terminate calls to the PSTN. Under this definition, Fusion is a
provider of interconnected VoIP service. We believe that our
services are currently compliant with all applicable FCC
requirements, and we have made and are making the required
contributions to USF and other funds. Should we fail to meet any of
the FCC requirements discussed above or fail to make required
contributions in the future, we could be subject to revocation of
our authority to operate or to fines and/or penalties.
As a
result of the FCC’s preemption of states’ ability to
regulate certain aspects of VoIP service, and a trend in state
legislatures to affirmatively deregulate VoIP services for most
purposes, our VoIP services are subject to relatively few state
regulatory requirements aside from collection of state and local
E911 fees and state Universal Service support obligations. We
believe that our services are currently compliant with all
applicable state requirements, and we have made and are making the
required contributions to E911, state USF, and other funds. The
state regulatory framework for our VoIP services continues to
evolve, so we, in conjunction with our professional advisors,
monitor the actions of the various state regulatory agencies and
endeavor to ensure that we are in compliance with applicable state
law, including any new statutes or regulations that may be passed.
However, there can be no assurance that we will become aware of all
applicable requirements on a timely basis, or that we will always
be fully compliant with applicable rules and regulations. Should we
fail to be compliant with applicable state regulations, or to file
required reports with state regulatory agencies, we could be
subject to fines and/or penalties.
While
we believe VoIP services may be subject to additional federal,
state, local, or international regulation in the future, it is
uncertain when or how the effects of such regulation could affect
us and our business. If additional regulation does occur, it is
possible that such regulatory agencies may impose surcharges, taxes
or regulatory fees on VoIP service providers. The imposition of any
such surcharges, taxes, or regulatory fees could increase the
Company’s costs and thus reduce or eliminate any competitive
advantage that we might enjoy today.
Employees
As of
December 31, 2016, we had 306 employees, all of which were full
time employees. None of our employees are represented by a
labor union or collective bargaining agreement. We believe
that the relationship between the Company and its employees are
good, and, to date, we have not experienced a work
stoppage.
Customer Concentrations and Revenues and Assets by Geographic
Area
For the
years ended December 31, 2016 and 2015, no single customer
accounted for more than 10% of the Company’s consolidated
revenues or accounts receivable.
During
the years ended December 31, 2016 and 2015, 89.5% and 87.1%,
respectively, of the Company’s revenue was derived from
customers in the United States and 10.5 % and 12.9%, respectively,
was derived from international customers. As of December 31, 2016
and 2015, the Company had no assets located outside of the United
States.
11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Available Information
Our
principal executive offices are located at 420 Lexington Avenue,
Suite 1718, New York, New York 10170. The telephone
number at our executive offices is 212-201-2400 and our main
corporate website is www.fusionconnect.com. The
information on the Company’s website is neither a part of,
nor incorporated by reference into, this report.
We make
available our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, proxy statements and
amendments to those reports and statements filed or furnished
pursuant to Section 13(a), Section 15(d) or Section 14(a) of the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”), free of charge on our website, www.fusionconnect.com, as soon
as reasonably practicable after they are electronically filed with,
or furnished to, the Securities and Exchange Commission (the
“SEC”). Additionally, copies of materials
filed by us with the SEC may be accessed at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, DC 20549,
between the hours of 10:00 am to 3:00 pm, or at the
SEC’s website www.sec.gov.
For information about the SEC’s Public Reference Room, please
call 1-800-SEC-0339.
12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the risk factors described below in
evaluating our future prospects. In particular, keep
these risk factors in mind when you read
“forward-looking” statements elsewhere in this report.
Forward-looking statements relate to our expectations for future
events and time periods. Generally, the words
“anticipates,” “expects,”
“intends,” “may,” “should,”
“plans,” “believes,”
“predicts,” “potential” and similar
expressions identify forward-looking statements. Forward-looking
statements involve risks and uncertainties, and future events and
circumstances could differ significantly from those anticipated in
the forward-looking statements. Any of the following risks could
harm our business, operating results or financial condition and
could result in a complete loss of your investment. Additional
risks and uncertainties that are not yet identified or that we
currently think are immaterial may also harm our business and
financial condition in the future.
Risks Relating to Our Business
Failure to comply with the financial and other covenants contained
in our senior debt facilities is an event of default under these
agreements.
Our
acquisitions have been financed primarily through the issuance of
secured debt with an aggregate principal amount outstanding of
approximately $101.6 million at December 31, 2016. Currently, all
assets of Fusion and its subsidiaries are pledged as collateral
under its senior debt facilities. These facilities contain a number
of affirmative and negative covenants, including but not limited
to, restrictions on the payment of subordinate indebtedness,
incurring additional indebtedness, making capital expenditures,
paying dividends and cash distributions by subsidiaries.
Under these senior facilities, we are also required to comply with
various financial covenants, including leverage ratio, fixed charge
coverage ratio and minimum levels of earnings before interest,
taxes, depreciation and amortization, or EBITDA. Failure
to comply with any of the restrictive or financial covenants
contained in these facilities could result in an event of default
and accelerated demand for repayment of our outstanding debt. We do
not have the financial resources to repay our senior debt if
it is accelerated.
At
various times during the first six months of 2015, we were not in
compliance with some of the financial covenants contained in our
senior credit facility, particularly with respect to the minimum
EBITDA and Fixed Charge Coverage Ratio covenants, and we failed to
raise additional equity within the time frame committed in the
facility. These events of default were waived by the note holders.
In addition, as of September 30, 2016, we were not in compliance
with the leverage ratio covenants contained in our senior credit
facilities, and we received waivers and amendments from the lenders
under these facilities as of September 30, 2016.
After
giving effect to the foregoing waivers, we were in compliance with
all of the financial covenants contained in our debt agreements for
the years ended December 31, 2016 and 2015. There can be no
assurances however, that we will continue to be able to obtain such
waivers in the future if we do not comply with the financial
covenants contained in our credit facilities.
We have a history of operating losses and net losses. There can be
no assurance that we will ever achieve profitability or have
sufficient funds to execute our business strategy.
At
December 31, 2016, we had a working capital deficit of $6.6 million
and at December 31, 2015, we had working capital of $1.7 million.
At December 31, 2016 and 2015, we had stockholders’ equity of
$9.2 million and $14.5 million, respectively. In
addition, at December 31, 2016 and 2015, we incurred net losses
applicable to common stockholders of $15.1 million and $9.8
million, respectively. Our cash flows from operations
for the year ended December 31, 2016 were not sufficient to support
our capital expenditure requirements and other obligations in
2016. We may not be able to generate profits in the
future and may not be able to support our operations or otherwise
establish a return on invested capital. In addition, we
may not have sufficient funds to execute our business strategy,
requiring us to raise additional funds from the equity markets or
other sources, resulting in further dilution to our equity
holders. These losses, among other things, have had, and
may continue to have, an adverse effect on our working capital,
total assets and stockholders’ equity.
Our recent acquisitions do not provide assurance that the acquired
operations will be accretive to our earnings or otherwise improve
our results of operations.
Acquisitions,
such as our recent acquisition of Apptix in November 2016, as well
as our previously completed acquisitions, involve the integration
of previously separate businesses into a common enterprise in which
it is envisioned that synergistic operations and economies of scale
will result in improved financial performance. However,
realization of these desired results are subject to numerous risks
and uncertainties, including but not limited to the
following:
13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
●
diversion of
management time and attention from daily operations;
●
difficulties
integrating the acquired business, technologies and personnel into
the existing business;
●
potential loss of
key employees, key contractual relationships or key customers of
the acquired businesses; and
●
in the case of a
stock acquisition, exposure to unforeseen liabilities.
Notwithstanding
consummation of our recent acquisitions, there is no assurance that
these acquisitions will be or will continue to be accretive to our
earnings or otherwise improve our results of
operations.
If we are unable to successfully manage the integration of our
acquisitions, we may not benefit from our acquisition
strategy.
A
significant part of our growth strategy is to supplement internal
growth with targeted acquisitions. We may not be
successful in integrating newly acquired businesses into our
day-to-day operations for a number of reasons, including if we are
unable to (a) retain skilled managerial, technical, and sales
personnel; (b) retain customers acquired; (c) integrate the
services offered by acquired businesses with our existing services
to achieve a single package of service offerings; (d) establish and
maintain uniform standards, controls, policies and procedures
throughout the Company; or (e) devote the management time required
to successfully integrate the acquired businesses.
The cloud services industry is highly competitive and we may be
unable to compete effectively.
The
cloud services industry is highly competitive, rapidly evolving and
subject to constant technological change. In
addition, many of our current cloud services competitors are
significantly larger and have substantially greater market
presence; greater financial, technical, operational and marketing
resources; and more experience. In the event that any
competitor expends significant sales and marketing resources in one
or several markets where we compete with them, we may not be able
to compete successfully in those markets. We also
believe that competition will continue to increase, placing
downward pressure on prices. Such pressure could
adversely affect our gross margins if we are not able to reduce our
costs commensurate with the price reductions of our
competitors. In addition, the pace of technological
change makes it impossible for us to predict whether we will face
new competitors using different technologies to provide the same or
similar services offered or proposed to be offered by
us. If our competitors were to provide better and more
cost effective services, we may not be able to increase our
revenues or capture any significant market share.
Our business is capital intensive, and we do not currently generate
sufficient revenue to offset our operating expenses. If
we are unable to obtain additional funding when required, we may
have to significantly curtail or possibly terminate some of our
operations.
We may
require future capital in order to continue to fund our operating
expenses and to continue to otherwise execute our business plan and
growth strategy. If we are unable to obtain the required
funding or generate revenue sufficient to sustain our operations,
we could be forced to significantly curtail or suspend our
operations, including laying-off employees and selling assets.
Additional capital may not be available to us when needed or on
terms that are acceptable to us, or at all.
We have
historically funded our working capital requirements through the
sale of common stock or preferred stock of Fusion. The
sale of equity securities to fund operations is dilutive to our
existing stockholders. The terms of our debt facilities
may limit our ability to utilize cash flows generated from our
Business Services segment to fund the Company’s other
operations, including corporate overhead expenses. In
the event we are unable to substantially increase our revenue to
fund our operating expenses, we may be required to continue to fund
operations through additional sales of Fusion’s equity
securities. In the past, limited cash resources
restricted our Carrier Services segment’s ability to purchase
termination capacity with longer payment terms than the terms under
which it is able to sell services to its
customers. Should this trend continue, it could limit
our ability to grow our revenues and/or margins, or limit our
ability to achieve our revenue and/or margin targets in
this segment.
If we are unable to manage our growth or implement our expansion
strategy, we may increase our costs without increasing our
revenue.
We may
not be able to expand our product offerings, customer base and
markets, or implement the other features of our business strategy
at the rate, or to the extent, presently planned. Our
projected growth will place a significant strain on our
administrative, operational, and financial resources and may
increase our costs. If we are unable to successfully
manage our future growth, continue to upgrade our operating and
financial control systems, recruit and hire necessary personnel or
effectively manage unexpected expansion difficulties, we may not be
able to maximize revenue or achieve profitability.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Our ability to grow our business is dependent upon market
developments and traffic patterns, which may lead us to make
expenditures that do not result in increased revenue.
Our
purchase of network equipment and software will be based, in part,
upon our expectations concerning future revenue growth and market
developments. As we expand our network, we will be
required to make significant capital expenditures, including the
purchase of additional network equipment and
software. To a lesser extent, our fixed costs will also
increase from the ownership and maintenance of a greater amount of
network equipment including our switching systems, gateways,
routers and other related systems. If our traffic volume
were to decrease, or fail to increase to the extent expected or
necessary to make efficient use of our network, our costs as a
percentage of revenue would increase significantly.
Changes in technology and service offerings could affect the
ability of our Business Services segment to compete in the
marketplace for cloud communications services.
Our
Business Services segment is subject to rapid and significant
changes in technology, particularly in the emerging areas of cloud
voice, cloud connectivity, cloud storage and cloud
computing. Our industry has evolved significantly in
these areas over the past few years, and is expected to continue to
evolve. Emerging technologies could lead to the
development of newer, more convenient, more cost-effective or
otherwise more attractive services. In addition, the
preferences and requirements of business customers are changing
rapidly. Our ability to retain current customers and
attract new customers may be highly dependent on whether we choose
the technologies that will ultimately have the greatest customer
acceptance, are able to adopt these new technologies and offer
competitive new services when appropriate, or can compete
successfully against other service providers that use these new
technologies, many of whom are larger or possess greater financial
or technical resources than we do. The development,
introduction and marketing of such new services in response to new
technologies or new customer demands may require us to increase our
capital expenditures significantly. In addition, new
technologies may be protected by patents or other intellectual
property laws and therefore may only be available to our
competitors and not to us.
Some of our services are dependent upon multiple service platforms,
network elements, and back-office systems that are reliant on third
party providers.
We have
deployed back-office systems and services platforms that enable us
to offer our customers a wide-array of services and features.
Sophisticated back office information and processing systems are
vital to our growth and our ability to monitor costs, invoice
customers, provision client orders, and achieve operating
efficiencies. Some of these systems are dependent upon
license agreements with third party vendors. These third
party vendors may cancel or refuse to renew some of these
agreements, and the cancellation or non-renewal of these agreements
may harm our ability to invoice customers and provide services
efficiently.
Our business could be materially and adversely affected in the
event of accusations of infringement of third-party intellectual
rights.
There
has been substantial litigation in the areas in which we operate
regarding intellectual property rights. Regardless of the merits,
accusations and lawsuits concerning claims of infringement or
misuse of another party’s proprietary rights may negatively
affect customer relationships, may divert management’s
attention away from other aspects of our operations and, upon
resolution may have a material adverse effect on our business,
results of operations, financial condition and cash
flows.
If we
were found to be infringing on the intellectual property rights of
a third party, we could be subject to liability for such
infringement, which could be material. We could also be
prohibited from selling certain services or required to redesign
certain services, each of which could have a material adverse
effect on our business and results of operations. These
and other outcomes may result in the loss of a substantial number
of existing customers or prevent our acquisition of new customers;
cause us to pay license fees for intellectual property we are found
to have infringed; cause our costs to increase; materially and
adversely affect our brand in the marketplace and cause a
substantial loss of good will; and cause us to cease certain
services or offering certain features.
15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
We rely upon certain proprietary rights in our technology, systems
and business processes. If our protection of these
rights were to be compromised, it could negatively affect our
ability to compete or to achieve our projected business and
financial results.
Our
ability to compete depends, in part, upon our proprietary rights in
our technology, systems and business processes. In
general, our technology is based on the integration and use of
publicly available hardware components, and is therefore afforded
little protection under existing patent law. Some of our
software and systems, while developed by us, are generally not
unique in such a manner as to allow protection under existing
patent law. As a result, we generally rely on a
combination of contractual restrictions and the general protection
afforded by copyright, trademark and trade secret laws to establish
and protect our proprietary rights. Such limited
protection could prove insufficient and thereby subject us to
increased competition or impact the business or financial results
of our operations.
It is
the Company’s policy to require employees, consultants and,
when warranted, certain customers and vendors to execute
confidentiality agreements with us. These agreements
provide that confidential information developed or made known
during the course of the relationship must be kept confidential and
not disclosed to third parties except under certain limited
circumstances. If such arrangements were to prove
ineffective in protecting our confidential information, our
business or financial performance could be negatively
impacted.
The
U.S. Patent and Trademark Office has granted Fusion federal
registration for eight trademarks, and Federal registration of
those trademarks will be effective for as long as we continue to
use them and renew their registrations. We may register
additional trademarks and other intellectual property rights in the
future, although there can be no assurance that our effort to
register these trademarks will be successful. Fusion
generally does not register any of its copyrights with the U.S.
Copyright Office, but relies on the protection afforded to such
copyrights by the U.S. Copyright Act, which provides protection to
authors of original works whether published or unpublished and
whether registered or unregistered.
Breaches in our network security systems may hurt our ability to
deliver services and our reputation and result in
liability.
We
could lose customers or expose ourselves to liability if there are
any breaches to our network security systems that jeopardize or
result in the loss of confidential information stored in our
computer systems. Since our inception, we have
experienced two known breaches of network security, which resulted
in a temporary failure of certain network operations, but did not
result in the loss of any confidential customer information or
material financial losses.
However, a future network security breach could harm our ability to
deliver certain services, damage our reputation or subject us to
liability.
Our revenue growth is dependent upon our ability to build new
distribution relationships and to acquire new
customers.
Our
ability to grow through efficient and cost effective deployment of
our cloud services is, in part, dependent upon our ability to
identify and contract with local, regional and national entities
that will assist in the distribution of our products and
services. If we are unable to identify, contract with or
maintain such distribution relationships, or if the efforts of
these agents are not successful, we may not grow the customer base
or achieve the revenue level currently envisioned and our results
of operations will be adversely impacted.
We are dependent upon our ability to obtain the necessary
regulatory approvals and licenses to enter new domestic and
international markets in which such approvals are
required. Such approvals may or may not occur as planned
and could be delayed.
Our
ability to enter into new domestic and international markets may,
in certain cases, rely upon our ability to obtain licenses or other
approvals to operate in those markets, our ability to establish
good working relationships with the relevant regulatory authorities
in those jurisdictions, or our ability to interconnect to the local
telephone networks in those markets. If we are not able
to obtain the necessary licenses, approvals or interconnections,
our ability to enter these new markets may be delayed or
prevented.
Industry consolidation could make it more difficult for us to
compete.
Companies
offering cloud voice, UCaaS, cloud connectivity, SaaS, IaaS and
other cloud services are, in some circumstances,
consolidating. We may not be able to compete
successfully with businesses that have combined, or will combine,
to produce companies with substantially greater financial,
technical, sales and marketing resources, or with larger client
bases, more extended networks or more established relationships
with vendors and distributors. If we were to experience
such heightened competitive pressures, there is a risk that our
revenues may not grow as expected and the value of our equity
securities could decline.
16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Our ability to provide services is often dependent on our suppliers
and other service providers who may not prove to be
reliable.
A
majority of the voice calls made by our customers are connected
through other communication carriers, which provide us with
transmission capacity through a variety of
arrangements. Our ability to terminate voice traffic in
our targeted markets is an essential component of our ongoing
operations. If we do not secure or maintain operating and
termination arrangements our ability to increase services to our
existing markets, and gain entry into new markets, will be
limited. Therefore, our ability to maintain and expand
our business is dependent, in part, upon our ability to maintain
satisfactory relationships with other domestic carriers, Internet
service providers, international carriers, fiber optic cable
providers and other service providers, many of which are our
competitors, and upon our ability to obtain their services on a
cost effective basis. In addition, if a carrier with
whom we interconnect does not carry the traffic routed to it, or
does not provide the required capacity, we may be forced to route
our traffic to, or buy capacity from, a different carrier on less
advantageous terms, which could reduce our profit margins or
degrade our network service quality. In the event
network service quality is degraded, it may result in a loss of
customers. To the extent that any of these carriers with
whom we interconnect raise their rates, change their pricing
structure or reduce the amount of capacity they will make available
to us, our revenues and profitability may be adversely
affected.
We rely on third party equipment suppliers who may not be able to
provide us the equipment necessary to deliver the services that we
seek to provide.
We are
dependent on third party equipment suppliers for equipment,
software and hardware components, including Cisco, BroadSoft, Acme
Packet and Sonus. If these suppliers fail to continue product
development and research and development or fail to deliver quality
products or support services on a timely basis, or if we are unable
to develop alternative sources of supply if and as required, such a
failure could result in an inability to deliver the services that
we currently provide or intend to provide, and our financial
condition and results of operations may be adversely
affected.
Our Carrier Services business relies on the cooperation of other
international carriers and incumbent service providers, who may not
always cooperate with us in our attempt to serve a specific country
or market.
In some
cases, the growth of our Carrier Services business requires the
cooperation of other international carriers and/or the incumbent
service provider in order to provide services to or from specific
countries or markets. In the event the incumbent, or
another in-country international carrier, does not cooperate with
us or support us in our efforts to serve that country, our ability
to provide service to or from that country may be delayed, or the
costs to provide service might increase should we be forced to use
another more expensive carrier. If we are unable to develop
and maintain successful relationships with other international
carriers and incumbent operators, our ability to cost-effectively
service an important market could be adversely
affected.
Because we do business on an international level, we are subject to
an increased risk of tariffs, sanctions and other uncertainties
that may hurt our revenue.
There
are certain risks inherent in doing business internationally,
especially in emerging markets, such as unexpected changes in
regulatory requirements, the imposition of tariffs or sanctions,
licenses, customs, duties, other trade barriers, political risks,
currency devaluations, high inflation, corporate law requirements
and civil unrest. Many of the economies of these
emerging markets are weak and volatile. We may not be
able to mitigate the effect of inflation on our operations in these
countries by price increases, even over the
long-term. Also, deregulation of the communications
markets in developing countries may or may not
continue. Incumbent service providers, trade unions and
others may resist legislation directed toward deregulation and may
resist allowing us to interconnect to their
networks. The legal systems in emerging markets also
frequently have insufficient experience with commercial
transactions between private parties, therefore we may not be able
to protect or enforce our rights in some emerging market
countries. Governments and regulations may change, thus
impacting the availability of new licenses or the cancellation or
suspension of existing operating licenses. The
instability of the laws and regulations applicable to our Carrier
Services business, as well as their interpretation and enforcement,
could materially impact our business in those countries and
adversely affect our financial condition or results of
operations.
The
regulatory treatment of VoIP outside the United States varies from
country to country. Some countries are considering
subjecting VoIP services to the regulations applied to traditional
telephone services and they may assert that we are required to
register as a telecommunications carrier in that country or impose
other more onerous regulations. In such cases, our
failure to register could subject us to fines, penalties or
forfeiture of our right to do business in that
country. Regulatory developments such as these could
have a material adverse effect on our ability to grow our
international operations.
17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Additional taxation and government regulation of the cloud
communications industry may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing
business.
As a
result of changes in regulatory policy, we could be forced to pay
additional taxes on the products and services we provide. We
structure our operations and our pricing based on assumptions about
various domestic and international tax laws, tax treaties and other
relevant laws. Taxation authorities or other regulatory
authorities might not reach the same conclusions about taxation
that we have reached in formulating our assumptions. We
could suffer adverse tax and other financial consequences if our
assumptions about these matters are incorrect or the relevant laws
are changed or modified. In the U.S., our products and services are
subject to varying degrees of federal, state and local regulation,
including regulation by the FCC and various state public utility
commissions. We may also be subject to similar regulation by
foreign governments and their telecommunications and/or regulatory
agencies. While these regulatory agencies grant us the
authority to operate our business, they typically exercise minimal
control over our services and pricing. However, they do
require the filing of various reports, compliance with public
safety and consumer protection standards, and the payment of
certain regulatory fees and assessments.
We
cannot assure you that applicable U.S. and foreign regulatory
agencies will grant us the required authority to operate, will
allow us to maintain existing authority so we can continue to
operate or that such agencies will refrain from taking action
against us if we are found to have provided services without
obtaining the necessary authority. Similarly, if our
pricing and/or terms and conditions of service are not properly
filed or updated with the applicable agencies, or if we are
otherwise not fully compliant with the rules of the various
regulatory agencies, regulators or other third parties could
challenge our actions and we could be subject to forfeiture of our
authority to provide service, or to penalties, fines, fees or other
costs.
We also
hold various state licenses authorizing us to provide intrastate
services to our carrier and end-user customers, and we comply with
state reporting, fee payment, tariffing, and other obligations with
respect to these services. However, in several states
where we provide de minimus intrastate services we may not have
fully complied with applicable licensing requirements. Should we
fail at any time to hold the licenses required to provide our
intrastate services, we could be subject to fines or other
penalties.
In addition to new regulations being adopted, existing laws may be
applied to the Internet, which could hinder our
growth.
New and
existing laws may cover issues that include: sales and other taxes;
user privacy; pricing controls; characteristics and quality of
products and services; consumer protection; cross-border commerce;
copyright, trademark and patent infringement; and other claims
based on the nature and content of Internet
materials. Changes to existing regulations or the
adoption of new regulations could delay growth in demand for our
products and services and limit the growth of our
revenue.
The effects of natural disasters such as hurricanes or other events
over which we have no control could significantly disrupt our
operations and could have a material adverse impact on our
business.
Our
Carrier Services operations were impacted by Hurricane Sandy in the
Northeast region of the United States in late October of
2012. The severe weather conditions directly affected
the ability of many of our carrier customers and vendors to connect
to us. As a result, we did not generate the same levels
of revenues and gross profit that we believe we would have
generated absent these abnormal conditions. Any future
disruptions to the operation of our network, including acts of war,
terrorism or other force majeure events, could have a material
adverse impact on our liquidity, financial condition and results of
operations. Although we do carry business interruption
insurance, we cannot assure you that our losses in the event of a
natural disaster or other force majeure event would be completely
covered by insurance.
If we do not retain our executive officers and senior management,
or if we do not continue to attract and retain qualified personnel
and independent sales agents, our ability to execute our business
plan could be adversely affected.
Our
existing executive officers and senior management have extensive
experience in the communications industry, as well as many years of
working together as an integrated management team directing our
day-to-day operations. As a result, we are dependent on
those individuals and the loss of the services of one or more of
these individuals could impair our ability to execute our strategy
or achieve our business and financial objectives.
We do
not have written employment agreements with any of our executive
officers or members of senior management team other than Matthew
Rosen, our Chief Executive Officer.
We face
competition for qualified personnel, including management,
technical, financial and sales personnel. We also rely
on independent sales agents to market and sell our
services. If we are unable to attract and retain
experienced and motivated personnel, including independent sales
agents, the growth of our business or the effectiveness of our
day-to-day operations may be negatively impacted and we may not be
able to grow our customer base or to achieve our business or
financial objectives.
18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Risks Related to Ownership of our Common Stock
We are unlikely to pay cash dividends on our common stock in the
foreseeable future.
We have
never declared or paid any cash dividends on our common
stock. We intend to retain any future earnings to
finance our operations and expand our business and therefore do not
expect to pay any cash dividends in the foreseeable
future. Holders of our outstanding preferred stock are
entitled to receive dividends prior to the payment of any dividends
on our common stock. The payment of dividends is also subject to
provisions of Delaware law prohibiting the payment of dividends
except out of surplus and certain other limitations, as well as the
provisions contained in our debt facilities.
Our common stock is subject to price volatility unrelated to our
operations.
The
market price of our common stock has fluctuated substantially and
will likely continue to fluctuate due to a variety of factors,
including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in our
industry, trading volume in our common stock, changes in general
conditions in the economy and the financial markets or other
developments affecting our competitors or us. In
addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant
effect on the market price of our common stock and securities
issued by many other companies for reasons unrelated to operating
performance.
In
addition, the market price of our common stock may continue to
fluctuate significantly in response to a number of other factors,
many of which are beyond our control including, but not limited to,
the following:
●
ability to obtain
and retain securities analyst coverage;
●
changes in
securities analysts’ recommendations or estimates of our
financial performance;
●
changes in the
market valuations of companies similar to us;
●
announcements by
us or our competitors of significant contracts, new offerings,
acquisitions, commercial relationships, joint ventures, or capital
commitments; and
●
failure to meet
analysts’ expectations regarding financial
performance.
Furthermore,
companies that have experienced volatility in the market price of
their stock have been subject to securities class action
litigation. A securities class action lawsuit against
us, regardless of its merit, could result in substantial costs and
divert the attention of our management from other business
concerns, which in turn could harm our business.
Our common stock may become subject to the “penny
stock” rules of the SEC, which will make transactions in our
shares cumbersome and may reduce the value of an investment in our
shares.
For so
long as the trading price of our common stock is less than $5.00
per share, our common stock may be considered a "penny stock," and
in such event trading in our common stock would be subject to the
requirements of Rule 15g-9 under the Exchange Act. Under this rule,
broker/dealers who recommend low-priced securities to persons other
than established customers and accredited investors must satisfy
special sales practice requirements. The broker/dealer
must make an individualized written suitability determination for
the purchaser and receive the purchaser's written consent prior to
the transaction.
SEC
regulations also require additional disclosure in connection with
any trades involving a "penny stock," including the delivery, prior
to any penny stock transaction, of a disclosure schedule explaining
the penny stock market and its associated risks. These
requirements severely limit the liquidity of securities in the
secondary market because few brokers or dealers are likely to
undertake these compliance activities. In addition to
the applicability of the penny stock rules, other risks associated
with trading in penny stocks could also be price fluctuations and
the lack of a liquid market.
To
date, we have not been considered a “penny stock” due
to an exemption from Rule 15g-9 for companies with average annual
audited revenues for the prior three years of in excess of
$6,000,000 per year. However, should the exclusions from
the definition of a “penny stock” change, or should our
annual revenues fall dramatically, we may become subject to rules
applicable to “penny stocks” and the market for our
shares may be adversely affected.
19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
The elimination of monetary liability against our directors,
officers and employees under our certificate of incorporation and
the existence of indemnification rights in favor of our directors,
officers and employees may result in substantial expenditures by us
and may discourage lawsuits against our directors, officers and
employees.
Our
certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to the Company
and its stockholders to the maximum extent permitted under Delaware
corporate law. Our by-laws also require us to indemnify
our directors to the maximum extent permitted by Delaware corporate
law. We may also have contractual indemnification
obligations under our agreements with our directors, officers and
employees. These indemnification obligations could
result in us incurring substantial expenditures to cover the cost
of settlement or damage awards against directors, officers and
employees, which we may be unable to recoup. These
provisions and resultant costs may also discourage the Company from
bringing a lawsuit against directors, officers and employees for
breaches of their fiduciary duties, and may similarly discourage
the filing of derivative litigation by our stockholders against our
directors, officers and employees even though such actions, if
successful, might otherwise benefit the Company and its
stockholders.
We will incur certain payment obligations and we will be subject to
limitations on our use of Securities Act registration statements
until we correct a deficiency in our Exchange Act
reports.
We have been advised by the Corporate Finance Staff (the
“Staff”) of the SEC that, in the Staff’s opinion,
the financial statements of Apptix included as an exhibit to our
Current Report on Form 8-K originally filed on November 18, 2016
(the “Apptix Form 8-K”), did not comply with applicable
SEC auditing standards (the “Deficiency”). Until the
Deficiency is corrected (a) we are not considered current in our
reporting obligations under the Exchange Act, (b) we are not
eligible to use Form S-3 under the Securities Act of 1933, as
amended (the “Securities Act”) for registration of our
securities prior to December 1, 2017, and (c) we will likely be
unable to have a Securities Act registration statement declared
effective by the Staff. We are currently working to correct the
Deficiency and, once the required financial statements are
completed, we intend to file a further amendment to the Apptix Form
8-K, and to make applicable filings with the SEC to permit resales
of our common stock by stockholders holding contractual
registration rights. Holders of such contractual rights may be
entitled to certain damage payments prior to our regaining
compliance with affected registration rights.
Our use of equity to fund operations is dilutive to existing
stockholders and, depending upon the market price for our shares at
the time of issuance, we may be required to issue shares at
depressed prices.
Historically,
we have funded a vast majority of our working capital requirements
through the sale of Fusion equity securities. The use of
Fusion equity to fund operations is dilutive to our existing
stockholders. Unless we are able to generate substantial
revenues to fund our operating expenses, we may be required to
continue to fund operations through the sale of additional equity.
Moreover, the dilutive effect on our stockholders caused by the
issuance of new equity is directly impacted by the market price for
our shares at the time of issuance. If we are required
to issue shares at a time when the market price for our equity
securities is depressed, we will need to issue more shares than if
the market price was higher, and the dilutive effect on our
stockholders will be greater.
The issuance of our common stock upon the exercise of options or
warrants or the conversion of outstanding convertible securities
may cause significant dilution to our stockholders and may have an
adverse impact on the market price of our common
stock.
As of
December 31, 2016, we had 20,642,028 common shares outstanding and
approximately 2,628,389 shares reserved for issuance upon
conversion of outstanding preferred stock, 2,902,862 shares
reserved for the exercise of outstanding warrants, and 2,183,723
shares reserved for the exercise of outstanding stock
options. The issuance of our common shares upon the
exercise of stock options or warrants, or conversion of preferred
stock, will increase the number of our publicly traded shares,
which could depress the market price of our common
stock.
The
perceived risk of dilution may cause our common stockholders to
sell their shares, which would contribute to a downward movement in
the stock price of our common stock. Moreover, the
perceived risk of dilution and the resulting downward pressure on
our common stock price could encourage investors to engage in short
sales of our common stock. By increasing the number of
shares offered for sale, material amounts of short selling could
further contribute to progressive price declines in our common
stock.
20
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
We could use preferred stock to fund operations or resist
takeovers, and the issuance of preferred stock may cause additional
dilution.
Our
certificate of incorporation authorizes Fusion to issue up to
10,000,000 shares of preferred stock, of which 5,045 shares of
Series A-1, A-2 and A-4 Preferred Stock (the “Series A
Preferred”) are currently issued and outstanding, and 12,254
shares of our Series B-2 Preferred Stock (the “Series B-2
Preferred”) are currently issued and
outstanding. Our certificate of incorporation gives the
Fusion board of directors the authority to issue preferred stock
without any further approval of our stockholders. We may
issue additional shares of preferred stock to raise money to
finance our operations. We may authorize the issuance of
the preferred stock in one or more series. In addition, we may set
the terms of preferred stock, including:
●
dividend and
liquidation preferences;
●
voting
rights;
●
conversion
privileges;
●
redemption terms;
and
●
other
privileges and rights of the shares of each authorized
series.
The
issuance of large blocks of Fusion’s preferred stock could
have a dilutive effect on our existing stockholders. It
can also negatively impact our existing stockholders’
liquidation preferences. In addition, while we include
preferred stock in our capitalization to improve our financial
flexibility, we could also issue preferred stock to friendly third
parties to preserve control by present management. This
could occur if we become subject to a hostile takeover that could
ultimately benefit our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not
applicable to smaller reporting companies.
ITEM 2. PROPERTIES.
We are
headquartered in New York, New York and lease offices and
facilities in a number of other locations. Below is a list of our
primary leased offices and other facilities as of December 31,
2016.
Location
|
|
Lease Expiration
Date
|
|
Annual
Rent
|
|
Business
Use
|
|
Approx. Sq.
Ft.
|
420
Lexington Avenue, Suite 1718, New York, NY 10170
|
|
October
2020
|
|
$666,000
|
|
Lease
of principal executive offices
|
|
9,956
|
|
|
|
|
|
|
|
|
|
3565
Piedmont Road, N.E., Suite 300, Atlanta, GA 30005
|
|
August
2022
|
|
$261,000
|
|
Lease
of network facilities and office space
|
|
10,509
|
|
|
|
|
|
|
|
|
|
155
Willowbrook Boulevard, Wayne, NJ 07470
|
|
October
2017
|
|
$140,000
|
|
Lease
of network facilities and office space
|
|
10,757
|
|
|
|
|
|
|
|
|
|
13921
Park Center Road Herndon, VA 20171
|
|
November
2017
|
|
$345,000
|
|
Lease
of network facilities and office space
|
|
13,364
|
|
|
|
|
|
|
|
|
|
1475 W.
Cypress Creek Rd., Suite 204 Fort Lauderdale, FL 33309
|
|
August
2017
|
|
$82,000
|
|
Lease
of network facilities and office space
|
|
5,183
|
|
|
|
|
|
|
|
|
|
23250
Chagrin Blvd. Suite 250 Beachwood, OH 44122
|
|
May
2019
|
|
$93,000
|
|
Lease
of sales and administrative office space
|
|
5,638
|
|
|
|
|
|
|
|
|
|
1621
Euclid Avenue, Suite 730 Cleveland, OH 44122
|
|
April
2019
|
|
$93,000
|
|
Lease
of network facilities and office space
|
|
10,000
|
We
believe that our leased facilities are adequate to meet our current
and future needs.
21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
ITEM 3. LEGAL PROCEEDINGS.
From
time to time, we may be involved in a variety of claims, lawsuits,
investigations and proceedings relating to contractual disputes,
employment matters, regulatory and compliance matters, intellectual
property rights and other litigation arising in the ordinary course
of business. Defending such proceedings can be costly
and can impose a significant burden on management and employees. We
do not expect that the outcome of any such claims or actions will
have a material effect on our liquidity, results of operations or
financial condition. As of December 31, 2016 and 2015, we did not
have any significant ongoing legal matters.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES.
Market Information
Our
common stock is listed on The Nasdaq Capital Market under the
symbol “FSNN.” The following tables list the high and
low sales prices for our common stock for each fiscal quarter
during the two preceding fiscal years.
Year Ended
December 31, 2016
|
High
|
Low
|
First
Quarter
|
$3.80
|
$1.69
|
Second
Quarter
|
$2.09
|
$1.20
|
Third
Quarter
|
$2.46
|
$1.30
|
Fourth
Quarter
|
$1.71
|
$0.96
|
Year Ended
December 31, 2015
|
|
|
First
Quarter
|
$4.64
|
$3.52
|
Second
Quarter
|
$4.75
|
$2.07
|
Third
Quarter
|
$3.16
|
$1.88
|
Fourth
Quarter
|
$3.44
|
$1.99
|
The
market price for our common stock is highly volatile and fluctuates
in response to a wide variety of factors.
Holders of Record
As of
December 31, 2016, there were approximately 561 stockholders of
record of our common stock.
Dividend Policy
We have
never declared or paid any cash dividends on our common stock
nor do we anticipate paying any cash dividends on our
common stock in the foreseeable future. Subject to the
rights of holders of our outstanding Series A Preferred and Series
B-2 Preferred, any future determination to pay dividends will be at
the discretion of our board of directors, subject to applicable
law, and will be dependent upon our financial condition, operating
results, capital requirements, general business conditions, the
terms of our outstanding debt and other factors that our Board
considers appropriate.
The
holders of our Series A Preferred are entitled to receive
cumulative dividends of 8% per annum payable in arrears, as and
when declared by the Fusion board from January 1,
2008. To date, the Fusion board has not declared any
dividends on any series of Series A Preferred. The holders of
our Series B-2 Preferred have been entitled to receive quarterly
dividends at an annual rate of 6%. These dividends can
be paid, at our option, either in cash or in shares of our common
stock.
Recent Sales of Unregistered Securities
None.
22
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
ITEM 6. SELECTED FINANCIAL DATA.
Not
applicable to smaller reporting companies.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of
operations should be read together with our consolidated financial
statements and the notes related thereto included elsewhere in this
report. This discussion contains certain forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 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,” "should," "believes,"
"plans'" "potential," "predicts" “anticipate,”
“intend” or “estimate” or the negative
thereof or other variations thereof or comparable terminology. The
reader is cautioned that all forward-looking statements are
speculative, and there are certain risks and uncertainties that
could cause actual events or results to differ from those referred
to in such forward-looking statements (see Item 1A, “Risk
Factors”).
OVERVIEW
Our Business
We
offer a comprehensive suite of cloud communications, cloud
connectivity, cloud computing, and managed cloud-based applications
solutions to small, medium and large businesses, and offer domestic
and international VoIP services to carriers
worldwide. Our advanced, proprietary cloud services
platforms, as well as our state-of-the art switching systems,
enable the integration of leading edge solutions in the cloud,
increasing customer collaboration and productivity by seamlessly
connecting employees, partners, customers and
vendors. We currently operate our business in two
distinct business segments: Business Services and Carrier
Services.
In the
Business Services segment, we are focused on becoming our business
customers’ single source for leveraging the increasing power
of the cloud, providing a robust package of what we believe to be
the essential services that form the foundation for their
successful migration to, and efficient use of, the
cloud. Our core Business Services products and services
include cloud voice and UCaaS, improving communication and
collaboration on virtually any device, virtually anywhere, cloud
connectivity services, securely and reliably connecting customers
to the cloud with managed network solutions that are designed to
increase quality and optimize network efficiency, and contact
center solutions. Our cloud computing and IaaS solutions
are designed to provide our larger enterprise customers with a
platform on which additional cloud services can be
layered. Complemented by our SaaS solutions such as
security and business continuity, our advanced cloud offerings
include private and hybrid cloud, storage, backup and recovery, and
secure file sharing that allow our customers to experience the
increased efficiencies and agility delivered by the cloud. The
Company’s cloud-based services are flexible, scalable and
rapidly deployed, reducing our customers’ cost of ownership
while increasing their productivity.
Through
our Carrier Services segment, we have agreements with approximately
370 carrier customers and vendors, through which we sell domestic
and international voice services to other carriers throughout the
world. Customers include U.S.-based carriers sending
voice traffic to international destinations, and foreign carriers
sending traffic to the U.S. and internationally. We also
purchase domestic and international voice services from many of our
Carrier Services customers. Our carrier-grade network,
advanced switching platform and interconnections with global
carriers on six continents also reduce the cost of global voice
traffic and expand service delivery capabilities for our Business
Services segment.
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
continue to focus our sales and marketing efforts on developing
vertically oriented solutions for targeted markets that require the
kind of specialized solutions made possible by our state-of-the-art
network and advanced services platforms. Our vertically
oriented solutions, which are currently focused on healthcare,
legal, hospitality and real estate, offer a substantial opportunity
to gain additional market share. 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 segment 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.
23
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Recent Acquisitions
In a
two-step transaction completed in December 2015 and February 2016,
we acquired Fidelity. Fidelity provided cloud voice, cloud
connectivity, security, data center and cloud storage services to
small, medium, and large business customers, primarily in the
Midwest.
In
April 2016, we acquired the intellectual property and assets of
TFB, a provider of contact center solutions with an integrated
cloud voice platform. The acquisition provides Fusion with
entry into the contact center market, and provides cross-selling
and up-selling opportunities as TFB's Fortune 500 enterprise
customers, government entities and healthcare organizations are
migrated to Fusion's cloud solutions platform.
On
November 14, 2016, we acquired Apptix. Apptix provided cloud-based
communications, collaboration, virtual desktop, compliance,
security and cloud computing solutions to approximately 1,500
business customers throughout the U.S.
Our Performance
Revenues
for the year ended December 31, 2016 were $122.0 million, an
increase of $20.4 million, or 20%, compared to the year ended
December 31, 2015. The increase is due to acquisitions in the
Business Services segment. Our operating loss for 2016 decreased
from $9.0 million in 2015 to $7.6 million in 2016. Our net loss in
2016 was $12.7 million, as compared to $8.2 million in
2015.
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/or on our ability to achieve further cost savings and
operational efficiencies in our operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our
discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”). The preparation of these financial
statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure of contingent liabilities. We
base these estimates on our historical experience and on various
other assumptions that we believe to be reasonable under the
circumstances, and these estimates form the basis for our judgments
concerning the carrying values of assets and liabilities that are
not readily apparent from other sources. We periodically
evaluate these estimates and judgments based on available
information and experience. Actual results could differ from our
estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our
financial condition and results of operations could be materially
impacted.
We have
identified the policies and significant estimation processes
discussed below as critical to our operations and to an
understanding of our results of operations. For a
detailed discussion on the application of these and other
accounting policies, see Note 2 to the Consolidated Financial
Statements included elsewhere in this report.
Revenue Recognition
We
recognize revenue when persuasive evidence of a sale arrangement
exists, delivery has occurred or services have been rendered, the
sales price is fixed and determinable and collectability is
reasonably assured. We record provisions against revenue
for billing adjustments, which are based upon estimates derived
from factors that include, but are not limited to, historical
results, analysis of credits issued and current economic
trends. The provisions for revenue adjustments are
recorded as a reduction of revenue at the time revenue is
recognized.
Our
Business Services revenue includes monthly recurring charges
(“MRC”) to customers for whom services are contracted
over a specified period of time, and variable usage fees charged to
customers that purchase our business products and
services. Revenue recognition commences after the
provisioning, testing and acceptance of the service by the
customer. MRC continues until the expiration of the
contract, or until cancellation of the service by the
customer. To the extent that payments received from a
customer are related to a future period, the payment is recorded as
deferred revenue until the service is provided or the usage
occurs.
24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Our
Carrier Services revenue is primarily derived from usage fees
charged to other carriers that terminate voice traffic over our
network. Variable revenue is earned based on the
length of a call, as measured by the number of minutes of
duration. It is recognized upon completion of the call,
and is adjusted to reflect the allowance for billing
adjustments. Revenue for each customer is calculated
from information received through our network
switches. Our customized software tracks the information
from the switches and analyzes the call detail records against
stored detailed information about revenue rates. This
software provides us with the ability to complete a timely and
accurate analysis of revenue earned in a period. We
believe that the nature of this process is such that recorded
revenues are unlikely to be revised in future periods.
Cost of Revenues
For our
Business Services segment, cost of revenues include the MRC
associated with certain platform services purchased from other
service providers, the MRC associated with private line services
and the cost of broadband Internet access used to provide service
to business customers.
Cost of
revenues for our Carrier Services segment is comprised primarily of
costs incurred from other carriers to originate, transport, and
terminate voice calls for our carrier customers. Thus,
the majority of our cost of revenues for this segment is variable,
based upon the number of minutes actually used by our customers and
the destinations they are calling. Call activity is
tracked and analyzed with customized software that analyzes the
traffic flowing through our network switch. During each
period, the call activity is analyzed and an accrual is recorded
for the costs associated with minutes not yet
invoiced. This cost accrual is calculated using minutes
from the system and the variable cost of revenue based upon
predetermined contractual rates. Fixed expenses reflect
the costs associated with connectivity between our network
infrastructure, including our New Jersey switching facility, and
certain large carrier customers and vendors.
Fair Value of Financial Instruments
The
carrying value of certain financial instruments such as accounts
receivable, accounts payable and accrued
expenses, approximates their fair values due to their short
term nature. Some of the warrants issued in conjunction
with the issuance of our debt and equity securities are accounted
for in accordance with the guidance contained in Accounting
Standards Codification (“ASC”) Topic 815, Derivatives
and Hedging (“ASC 815”). For these warrant
instruments that are not deemed to be indexed to Fusion’s
stock, we classify the warrant instrument as a liability at its
fair value and adjust the instrument to fair value at each
reporting period. This liability is subject to re-measurement at
each balance sheet date until the underlying warrants are
exercised, and any change in fair value is recognized in our
statement of operations. The fair values of these
warrants have been estimated using option pricing and other
valuation models, and the quoted market price of Fusion’s
common stock (see notes 17 and 18 to the accompanying consolidated
financial statements).
Accounts Receivable
Accounts
receivable is recorded net of an allowance for doubtful
accounts. On a periodic basis, we evaluate our accounts
receivable and adjust the allowance for doubtful accounts based on
our history of past write-offs and collections and current credit
conditions. Specific customer accounts are written off
as uncollectible if the probability of a future loss has been
established, collection efforts have been exhausted and payment is
not expected to be received.
Impairment of Long-Lived Assets
We
periodically review long-lived assets, including intangible assets,
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully
recoverable. If an impairment indicator is present, we
evaluate recoverability by a comparison of the carrying amount of
the asset to future undiscounted net cash flows expected to be
generated by the asset. If the carrying value of the
asset exceeds the projected undiscounted cash flows, we are
required to estimate the fair value of the asset and recognize an
impairment charge to the extent that the carrying value of the
asset exceeds its estimated fair value. We did not
record any impairment charges for the years ended December 31, 2016
and 2015.
Impairment
testing for goodwill is performed annually in our fourth fiscal
quarter. The impairment test for goodwill uses a
two-step approach, which is performed at the reporting unit
level. We have determined that our reporting units are
our operating segments since that is the lowest level at which
discrete, reliable financial and cash flow information is
available. The authoritative guidance provides entities
with an option to perform a qualitative assessment to determine
whether a quantitative analysis is necessary. We
performed qualitative impairment evaluations on our goodwill as of
December 31, 2016 and 2015 and determined that there were no
indications that goodwill was impaired.
25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Income Taxes
We
account for income taxes in accordance with U.S. GAAP, which
requires the recognition of deferred tax liabilities and assets for
the expected future income tax consequences of events that have
been recognized in our financial statements. Deferred
income tax assets and liabilities are computed for temporary
differences between the financial statement and tax bases of assets
and liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established to reduce
deferred income tax assets when we determine that it is more likely
than not that we will fail to generate sufficient taxable income to
be able to utilize the deferred tax assets.
Recently Issued Accounting Pronouncements
In
November 2016, the Financial Accounting Standard Board
(“FASB”) issued ASU 2016-18, Restricted Cash, which clarifies
guidance and presentation related to restricted cash in the
statement of cash flows, including stating that restricted cash
should be included within cash and cash equivalents in the
statement of cash flows. The standard is effective for fiscal years
beginning after December 15, 2017, with early adoption permitted,
and is to be applied retrospectively. The Company is currently
evaluating the effect that the new guidance will have on its
financial statements and related disclosures.
In
February 2016, the FASB issued Accounting Standards Update
(“ASU”) No. 2016-2, Leases, which is effective for
fiscal years, and interim periods within those years, beginning
after December 15, 2018 with early adoption permitted. Under ASU
2016-02, lessees will be required to recognize for all leases at
the commencement date a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease measured on
a discounted basis, and a right–to-use asset, which is an
asset that represents the lessee’s right to use or control
the use of a specified asset for the lease term. The Company is
currently evaluating the effect that the new guidance will have on
its financial statements and related disclosures.
In
November 2015, FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes (ASU 2015-17), which
simplifies the presentation of deferred income taxes by requiring
deferred tax assets and liabilities be classified as noncurrent on
the balance sheet. The updated standard is effective beginning on
January 1, 2017 with early application permitted as of the
beginning of any interim or annual reporting period. The Company
does not expect this guidance to have a material impact on its
consolidated financial statements.
In
September 2015, FASB issued guidance that eliminates the
requirement for an acquirer in a business combination to account
for measurement-period adjustments retrospectively. Instead,
acquirers must recognize measurement-period adjustments during the
period in which they determine the amounts, including the effect on
earnings of any amounts they would have recorded in previous
periods if the accounting had been completed at the acquisition
date. This guidance is effective for interim and annual reporting
periods beginning after December 15, 2015. Adoption of this
guidance did not have a material impact on the Company’s
consolidated financial statements.
In
April 2015, 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 adopted this guidance
retrospectively for all periods presented and reclassified all of
its debt issuance costs in its consolidated financial
statements.
In May
2014, FASB issued 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, FASB deferred
the effective date of this guidance until January 1, 2018 and
the Company is currently assessing the impact of this guidance on
its consolidated financial statements.
26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
RESULTS OF OPERATIONS
The
following table summarizes our results of operations for the years
ended December 31, 2016 and 2015:
|
2016
|
2015
|
||
|
$
|
%
|
$
|
%
|
Revenues
|
$122,045,320
|
100.0
|
$101,694,516
|
100.0
|
Cost
of revenues *
|
68,058,432
|
55.8
|
56,724,121
|
55.8
|
Gross profit
|
53,986,888
|
44.2
|
44,970,395
|
44.2
|
Depreciation
and amortization
|
13,096,587
|
10.7
|
12,975,981
|
12.8
|
Selling,
general and administrative expenses
|
48,524,923
|
39.8
|
41,009,107
|
40.3
|
Total
operating expenses
|
61,621,510
|
50.5
|
53,985,088
|
53.1
|
Operating loss
|
( 7,634,622)
|
(6.3)
|
( 9,014,693)
|
(8.9)
|
Other (expenses) income:
|
|
|
|
|
Interest
expense
|
( 6,742,143)
|
(5.5)
|
( 6,062,923)
|
(6.0)
|
Loss
on extinguishment of debt
|
( 214,294)
|
(0.2)
|
( 2,720,355)
|
(2.7)
|
Gain
on change in fair value of derivative liability
|
265,383
|
0.2
|
1,843,997
|
1.8
|
Loss
on disposal of property and equipment
|
( 129,119)
|
(0.1)
|
( 37,444)
|
(0.0)
|
Other
income, net
|
128,987
|
0.1
|
101,057
|
0.1
|
Total
other expenses
|
( 6,691,186)
|
(5.5)
|
( 6,875,668)
|
(6.8)
|
Loss before income taxes
|
( 14,325,808)
|
(11.7)
|
( 15,890,361)
|
(15.6)
|
Income
tax benefit
|
1,609,485
|
1.3
|
7,660,536
|
7.5
|
Net loss
|
$(12,716,323)
|
(10.4)
|
$(8,229,825)
|
(8.1)
|
*
Exclusive of depreciation and amortization, shown
separately.
Year Ended December 31, 2016 Compared with Year Ended December 31,
2015
Revenues
Consolidated
revenues were $122.0 million for the year ended December 31, 2016,
as compared to $101.7 million for the year ended December 31, 2015,
an increase of $20.4 million, or 20.0%. Revenues for the
Business Services segment increased by $20.4 million to $86.6
million for the year ended December 31, 2016, as compared to $66.2
million for the year ended December 31, 2015. This
increase is primarily attributable to revenue derived from new
customers obtained from our acquisitions of Fidelity in the amount
of $17.8 million, and Apptix in the amount of $3.0 million in 2016,
both of which were not present in 2015.
Carrier
Services revenue of $35.5 million for the year ended December
31, 2016 was essentially unchanged from the year ended December 31,
2015, as a 31% decrease in the number of minutes transmitted over
our network was offset by a 45% increase in the blended rate per
minute of traffic terminated.
Cost of Revenues and Gross Margin
Consolidated
cost of revenues was $68.1 million for the year ended December 31,
2016, as compared to $56.7 million for the year ended December 31,
2015. This increase is mainly due to additional costs arising from
our acquisition of Fidelity and, to a lesser extent, an increase in
cost of revenues in the Carrier Services of approximately $1.2
million.
Consolidated
gross margin was 44.2% for the years ended December 31, 2016 and
2015, due to a higher concentration of Business Services revenue,
which generates a higher margin than Carrier Services revenue,
within our consolidated results in 2016. The Business Services
gross margin decreased from 63.5% in 2015 to 60.4% 2016, to an
increase in total customer services costs attributable to the
RootAxcess and Fidelity acquisitions. The Carrier Services gross
margin was 4.8 % for the year ended December 31, 2016, as compared
to 8.2% in the prior year, mainly due to a 50.7% increase in the
blended cost per minute of traffic terminated.
27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
Depreciation and Amortization
Depreciation
and amortization expense was essentially unchanged in in 2016 as
compared to 2015, as a $2.0 million increase in depreciation
expense in 2016 was offset by a $2.0 million decrease in
amortization expense, as some our intangible assets became fully
amortized in 2016. During the year ended December 31, 2016, we
recorded depreciation expense of $0.9 million to write off some of
our capitalized internal development costs.
Selling, General and Administrative Expense
Selling,
general and administrative expenses (“SG&A”) was
$48.5 million for the year ended December 31, 2016, as compared to
$41.0 million for the year ended December 31, 2015. This
increase is mainly the result of higher salaries and employee
related benefit costs of approximately $6.2 million, driven
primarily by an increase in headcount attributable to our
acquisitions of Fidelity and, to a lesser extent Apptix. In
addition, we incurred higher sales commissions of $1.3 million as a
result of the 31% increase in Business Services
revenue.
Operating Loss
Our
operating loss was $7.6 million for the year ending December 31,
2016, as compared to $9.0 million for 2015. The decrease is
primarily due to the increase in gross profit of $9.0 million
resulting from the increase in Business Services revenue, largely
offset by the increase in SG&A of $7.5 million.
Interest Expense
Interest
expense was $6.7 million for the year ended December 31, 2016, as
compared to $6.1 million for the year ended December 31, 2015. The
increase was due to higher average indebtedness in 2016 to finance
our acquisitions (see “Liquidity and Capital
Resources”) and to higher amortization of debt discount and
debt issuance costs.
Loss on Extinguishment of Debt
During the year ended December 31, 2016, we recognized a loss on
the extinguishment of debt in the amount of $0.2 million when we
replaced our existing senior secured credit facility with a larger
senior secured facility in November of 2016 (see “Liquidity
and Capital Resources”). During the year ended December 31,
2015, we recognized a loss on the extinguishment of debt of $2.7
million as a result of debt discount and a debt issuance costs
write-off of $1.7 million and a prepayment penalty of approximately
$1.0 million associated with the retirement of approximately $20.0
million of outstanding notes.
Change in Fair Value of Derivative Liabilities
During
the year ended December 31, 2016, we recognized a gain on the
change in fair value of our derivative liabilities of $0.3 million,
as compared to $1.8 million during the year ended December 31,
2015. These gains are related to warrants we issued to our senior
lenders in 2012 and to purchasers of our Series B-2 Preferred Stock
in 2013 and 2014, the terms of which require them to be treated as
liabilities and not as equity instruments. The changes in their
fair value are required to be recorded through the statement of
operations at each accounting period. These warrants are valued
using an option pricing model and other valuation models, such that
increases in Fusion’s common stock price result in a higher
valuation of the derivative and a charge to our income statement,
and decreases in Fusion’s common stock price result in a
lower valuation and a gain being recorded in our income
statement.
We
expect that we will be subject to additional fluctuations in our
income statement in 2017 and beyond based on changes in
Fusion’s common stock price and the corresponding changes in
fair value of our derivative liabilities associated with the
warrants issued in connection with our Series B-2 Preferred
Stock.
Net Loss
Our net
loss for the year ended December 31, 2016 was $12.7 million, as
compared to $8.2 million for the year ended December 31, 2015. The
increase in net loss was largely due to a lower income tax benefit
in 2016 of $1.6 million, as compared to $7.7 million in
2015.
28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
LIQUIDITY AND CAPITAL RESOURCES
Since
our inception, we have incurred significant net
losses. At December 31, 2016, we had a working capital
deficit of $6.6 million and stockholders’ equity of $9.2
million, as compared to working capital and stockholders’
equity of $1.7 million and $14.5 million, respectively, at December
31, 2015. Our consolidated cash balance at December 31, 2016 was
$7.2 million, as compared to $7.5 million at December 31,
2015. While we believe we have sufficient cash to fund
our operations and meet our operating and debt obligations for the
next twelve months, we may be required to raise additional capital
to support our business plan. There can be no assurances that such
funds will be available to the Company as and when needed or on
terms acceptable to us, or at all.
During
2016 and 2015, we relied primarily on the sale of Fusion’s
equity securities and the cash generated from our Business Services
segment to fund operations, and we issued additional debt
securities to fund our acquisitions and growth strategy. On
November 16, 2016, we sold 2,213,700 shares of Fusion common stock
and received net proceeds, after offering expenses, of $2.3
million. We intend to use the net proceeds from this offering for
working capital and other general corporate purposes.
We have
never paid cash dividends on Fusion’s common stock, and
we do not anticipate paying cash dividends on
Fusion’s common stock in the foreseeable future. We
intend to retain all of our earnings, if any, for general corporate
purposes, and, if appropriate, to finance the expansion of our
business. Subject to the rights of holders of our outstanding
preferred stock, any future determination to pay dividends is at
the discretion of Fusion’s Board of Directors, and will be
dependent upon our financial condition, operating results, capital
requirements, Delaware law requirements, general business
conditions, the terms of our senior secured credit facilities and
other factors that Fusion’s Board of Directors and senior
management consider appropriate.
The
holders of our 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, under certain circumstances, in shares of Fusion common
stock. The Fusion Board of Directors declared a dividend of $2.0
million for the year ended December 31, 2016 on 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 1,140,568 shares of
Fusion’s common stock.
In
December 2015, the Company entered into an Amended and Restated
Credit Facility with Opus Bank (the “Opus Credit
Facility”), which facility amended and restated, in its
entirety, the $40.0 million credit facility originally entered into
by us with Opus Bank in August 2015. As was the case with the
original Opus facility, the Opus Credit Facility consisted of a
$15.0 million revolving credit facility and a $25.0 million term
loan. We used the proceeds from the Opus Credit Facility to fund
our acquisitions of Fidelity and RootAxcess, and to retire
approximately $11.0 million of notes issued under the Praesidian
Facility (as defined below).
Concurrent
with the execution of the Opus Credit Facility, we executed the
Fourth Amended Securities Purchase Agreement with Praesidian
Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity
Fund IIIA, LP and United Insurance Company of America (the
“Fourth Amended SPA”). The Fourth Amended SPA amended
and restated the terms of the Third Amended and Restated Securities
Purchase Agreement and Security Agreement (the “Third
Amendment”), which itself amended and restated earlier
versions of this securities purchase agreement. The Third
Amendment, together with each earlier and subsequent version of
this facility are hereinafter collectively referred to as the
“Praesidian Facility.” Specifically, the Fourth
Amended SPA amended the Third Amendment to (i) provide the consent
of the continuing lenders to the acquisition of Fidelity (ii) join
Fidelity as a guarantor and credit party under the Fourth Amended
SPA, and (iii) modify or eliminate certain of the financial
covenants contained in the Third Amendment, specifically the
requirement to maintain a minimum unencumbered cash bank balance of
$1.0 million at all times effective as of December 31,
2015.
On
November 14, 2016, contemporaneously with the Apptix acquisition,
we entered into a credit agreement (the “East West Credit
Agreement”) with East West Bank and Opus (collectively with
East West Bank, the “East West Lenders”). Under the
East West Credit Agreement, the East West Lenders extended the
Company (i) a $65.0 million term loan and (ii) a $5.0 million
revolving credit facility (which includes up to $4 million in
“swingline” loans that may be accessed on a short-term
basis). The proceeds of the term loan were used to retire the $40
million outstanding under the Opus Credit Facility, and to fund the
cash portion of the purchase price of the Apptix acquisition in the
amount of $23.1 million.
Borrowings
under the East West Credit Agreement are evidenced by promissory
notes bearing interest at rates to be computed based upon either
the then current “prime” rate of interest or
“LIBOR” rate of interest, as selected by us at the time
of borrowing. Interest on borrowings that we designate as
“base rate” loans bear interest at the greater of the
prime rate published by the Wall Street Journal or 3.25% per annum,
in each case plus 2% per annum. Interest on borrowings that we
designate as “LIBOR rate” loans bear interest at the
LIBOR rate published by the Wall Street Journal, plus 5% per
annum.
29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
We are
required to repay the term loan in equal monthly payments of
$270,833 commencing January 1, 2017 and continuing until January 1,
2018, when monthly payments increase to $541,667 until the maturity
date of the term loan on November 12, 2021, when the remaining
$36.8 million of principal is due. Borrowings under the revolving
credit facility are also payable on the November 12, 2021 maturity
date of the facility. At December 31, 2016, $3.0 million was
outstanding under the revolving credit facility.
In
conjunction with the execution of the East West Credit Agreement,
we and the East West Lenders also entered into (i) an IP Security
Agreement under which we pledged intellectual property to the East
West Lenders to secure payment of the East West Credit Agreement,
(ii) Subordination Agreements under which certain creditors of the
Company, including the lenders under the Praesidian Facility, and
the East West Lenders have established priorities among them and
reached certain agreements as to enforcing their respective rights
against the Company, and (iii) a Pledge and Security Agreement
under which Fusion and its Fusion NBS Acquisition Corp. subsidiary
(“FNAC”) have each pledged its equity interest in its
subsidiaries to the East West Lenders.
Under
the East West Credit Agreement:
●
The Company is
subject to a number of affirmative and negative covenants,
including but not limited to, restrictions on paying indebtedness
subordinate to its obligations to the East West Lenders, incurring
additional indebtedness, making capital expenditures, dividend
payments and cash distributions by subsidiaries.
●
The Company is
required to comply with various financial covenants, including
leverage ratio, fixed charge coverage ratio and minimum levels of
earnings before interest, taxes, depreciation and amortization; and
its failure to comply with any of the restrictive or financial
covenants could result in an event of default and accelerated
demand for repayment of its indebtedness.
●
The Company granted
the East West Lenders security interests on all of its assets, as
well as the capital stock of FNAC and each of its
subsidiaries.
●
Fusion and its
subsidiaries (and future subsidiaries of both) guaranteed
FNAC’s obligations, including FNAC’s repayment
obligations thereunder.
Also on
November 14, 2016, we entered into a fifth amendment and
restatement of the Praesidian Facility. This amendment, among other
things, extended the maturity date of the notes outstanding under
the Praesidian Facility to May 12, 2022, with no principal payments
required until the maturity date, and modified certain financial
covenants under the Praesidian Facility such that the covenants are
now substantially similar to those contained in the East West
Credit Agreement. In addition, the lenders under the Praesidian
facility agreed to subordinate their right to repayment to all
amounts owed under the East West Credit Agreement. At December 31,
2016, we were in compliance with all of the financial covenants
contained in the East West Credit Agreement and the Praesidian
Facility, and we had $33.6 million principal amount of notes
outstanding under the Praesidian Facility.
At
December 31, 2016, we have a note payable outstanding of $0.9
million to Marvin Rosen, the Chairman of Fusion’s Board. This
note is subordinated to all amounts borrowed under the East West
Credit Agreement and the Praesidian Facility. This note is
unsecured, pays interest monthly at an annual rate of 7%, and
matures 120 days after all borrowings under the East West Credit
Agreement are paid in full. For the years ended
December 31, 2016 and 2015, we paid interest of approximately
$97,000 on this note.
We have
entered into various capital lease agreements to finance the
purchase of property and equipment, at interest rates generally
ranging from 5.3% to 6.6%. Scheduled principal
payments under these leases for the year ended December 31, 2017
aggregate to $1.0 million.
On
September 12, 2011, we entered into a purchase and sale agreement
with Prestige Capital Corporation (“Prestige”), whereby
we may could certain of our Carrier Services accounts receivable to
Prestige at a discount in order to improve our liquidity and cash
flow. Under the terms of that agreement, Prestige paid a percentage
of the face amount of the receivables at the time of sale, and the
remainder, net of the discount, was paid to us within two
business days after Prestige received payment on those receivables.
For the year ended December 31, 2016 and 2015, proceeds from the
accounts receivable factoring arrangement was $0 and $1.8 million,
respectively. The arrangement with Prestige was
terminated during the third quarter of 2016.
30
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
The
following table sets forth a summary of our cash flows for the
periods indicated:
|
Year ended December 31,
|
|
|
2016
|
2015
|
Net
cash provided by (used in) operating activities
|
$326,287
|
$(152,603)
|
Net
cash used in investing activities
|
(27,460,035)
|
(30,863,462)
|
Net
cash provided by financing activities
|
26,815,115
|
32,111,925
|
Net
(decrease) increase in cash and cash equivalents
|
(318,633)
|
1,095,860
|
Cash
and cash equivalents, beginning of year
|
7,540,543
|
6,444,683
|
Cash
and cash equivalents, end of year
|
$7,221,910
|
$7,540,543
|
Cash
provided by (used in) operating activities was $0.3 million and
($0.2) million for each of the years ended December 31, 2016 and
2015, respectively. The following table illustrates the
primary components of our cash flows from operations:
|
Year ended December 31,
|
|
|
2016
|
2015
|
Net
loss
|
$(12,716,323)
|
$(8,229,825)
|
Non-cash
expenses, gains and losses
|
13,552,338
|
7,421,855
|
Changes
in accounts receivable
|
190,467
|
(883,253)
|
Changes
in accounts payable and accrued expenses
|
(1,254,445)
|
2,005,632
|
Other
|
554,250
|
(467,012)
|
Cash
provided by (used in) operating activities
|
$326,287
|
$(152,603)
|
Cash
used in investing activities was $27.5 million for the year ended
December 31, 2016, as compared to $30.9 million for the year ended
December 31, 2015. For the year ended December 31, 2016,
we paid $23.3 million in cash for acquisitions, primarily Apptix,
net of cash acquired, and had $4.8 million of capital expenditures.
For the year ended December 31, 2015, we paid approximately $28.5
million in cash, net of cash acquired, for acquisitions, and had
capital expenditures of $3.4 million.
Cash
provided by financing activities was $26.8 million for the year
ended December 31, 2016, as compared to $32.1 million for the year
ended December 31, 2015. During 2016, we received $66.7
million of proceeds, net of transaction costs, upon our entering
into the East West Credit Agreement, retired the $40.0 million Opus
Credit Facility, received $2.3 million from the sale of Fusion
common stock and made payments on equipment financing obligations
of $1.0 million. During 2015, we raised $5.6 million from the sale
of Fusion equity securities, issued $9.0 million of notes, borrowed
$40.0 million under the Opus Credit Facility to fund our
acquisitions of Fidelity and RootAxcess and to retire outstanding
notes of approximately $20.0 million, and made debt service and
equipment financing payments of approximately $1.9
million.
OTHER MATTERS
Inflation
We do
not believe inflation has a significant effect on
our operations at this time.
Off Balance Sheet Arrangements
Through
December 31, 2016, we did not have any relationships with
unconsolidated organizations or financial partnerships, such as
structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance sheet
arrangements or other commercially narrow or limited
purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable for smaller reporting companies.
31
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The
Company’s consolidated financial statements required by this
Item are included after Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that are
designed to ensure that information required to be disclosed in
Exchange Act reports is recorded, processed, summarized, and
reported within the time periods specified in the rules and forms
of the SEC and that such information is accumulated and
communicated to our management, including our principal executive
officer and our principal financial officer, to allow timely
decisions regarding required disclosure. Any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control
objectives.
Our
management, with the participation of our principal executive
officer and our principal financial officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2016. Based
upon that evaluation and subject to the foregoing, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective to accomplish
their objectives. In designing and evaluating our
disclosure controls and procedures, management recognizes that any
disclosure controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the
desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are
resource constraints and that management is required to apply its
judgment in evaluating the benefits of possible controls and
procedures relative to their costs.
Management’s Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rule
13a-15(f) of the Exchange Act). Management conducted an assessment
of the effectiveness of our internal control over financial
reporting based on criteria set forth in Internal
Control-Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on the
assessment, management concluded that the internal control over
financial reporting was effective as of December 31, 2016 to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements in accordance
with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Under
the supervision and with the participation of our management,
including our principal executive officer and principal financial
officer, we conducted an evaluation of any changes in our internal
control over financial reporting (as such term is defined in Rules
13a-15(f) and 15D-15(f) under the Exchange Act) that occurred
during the year ended December 31, 2016. Based on that
evaluation, our principal executive officer and principal
accounting officer concluded that there has not been any material
change in our internal control over financial reporting during the
quarter ended December 31, 2016 that materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION.
Not
applicable.
32
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
As
permitted by Instruction G(3) to Form 10-K, the information
required by this Item has been omitted but will be filed by us on
or prior to April 30, 2017.
ITEM 11. EXECUTIVE COMPENSATION.
As
permitted by Instruction G(3) to Form 10-K, the information
required by this Item has been omitted but will be filed by us on
or prior to April 30, 2017.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
As
permitted by Instruction G(3) to Form 10-K, the information
required by this Item has been omitted but will be filed by us on
or prior to April 30, 2017.
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
As
permitted by Instruction G(3) to Form 10-K, the information
required by this Item has been omitted but will be filed by us on
or prior to April 30, 2017.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
As
permitted by Instruction G(3) to Form 10-K, the information
required by this Item has been omitted but will be filed by us on
or prior to April 30, 2017.
33
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) Financial Statements.
The
consolidated financial statements filed as part of this Annual
Report on Form 10-K are identified in the Index to Consolidated
Financial Statements.
(a) (2) Exhibits.
The
following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the SEC.
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (*)
|
3.1.1
|
|
Certificate of Amendment to Certificate of
Incorporation(14)
|
3.2
|
|
Bylaws (*)
|
10.1
|
|
1998 Stock Option Plan (*)
|
10.1.1
|
|
2009 Stock Option Plan(16)
|
10.1.2
|
|
2016 Equity Incentive Plan (14)
|
10.2
|
|
Employment Agreement, dated as of November 5, 2015, between
registrant and Matthew D. Rosen (12)
|
10.3
|
|
Form of Warrant to Purchase Common Stock (*)
|
10.4
|
|
Lease Agreement between registrant and SLG Graybar Sublease, LLC
for Suite 1718 at 420 Lexington Avenue, New York, NY office
(*)
|
10.4.1
|
|
Lease Modification Agreement dated November 19, 2014, between
registrant and SLG Graybar Sublease, LLC for the 420 Lexington
Avenue, New York, NY office (13)
|
10.5
|
|
Lease Agreement between registrant and Fort Lauderdale Crown
Center, Inc. for the Fort Lauderdale, Florida office, as amended
(*)
|
10.5.1
|
|
Sixth Amendment dated July 23, 2014, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office (13)
|
10.5.2
|
|
Seventh Amendment, dated August 2015, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office(1)
|
10.5.3
|
|
Eight Amendment, dated July 8, 2016, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office(1)
|
|
|
|
10.6
|
|
Form of Promissory Note and Security Agreement (2)
|
10.7
|
|
Non-Competition Agreement between registrant and Marvin Rosen
(*)
|
10.8
|
|
Form of Warrant (3)
|
10.9
|
|
Membership Interest Purchase and Sale Agreement dated January 30th,
2012 between the registrant, Network Billing Systems, LLC, Jonathan
Kaufman, and Christiana Trust as trustee of the LK Trust
(4)
|
10.10
|
|
Asset Purchase and Sale Agreement dated January 30th, 2012 between
the registrant, Interconnect Systems Group II LLC, Jonathan
Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan
Kaufman as trustee of the LKII Trust (4)
|
10.11
|
|
Amendment No. 1 dated June 6, 2013 to the Asset Purchase and Sale
Agreement dated January 30th, 2012 between the registrant,
Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman
as trustee of the JK Trust and Jonathan Kaufman as trustee of the
LKII Trust (10)
|
34
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
10.12
|
|
Warrant to Purchase Common Stock issued by registrant to Marvin
Rosen, dated July 31, 2002 (*)
|
10.13
|
|
Amendment No. 1 dated June 6, 2013 to the Membership Interest
Purchase and Sale Agreement dated January 30th, 2012 between the
registrant, Network Billing Systems, LLC, Jonathan Kaufman, and
Christiana Trust as trustee of the LK Trust (10)
|
10.14
|
|
Amendment No. 2 dated August 20, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.15
|
|
Amendment No. 2 dated August 20, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.16
|
|
Amendment No. 3 dated September 21, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.17
|
|
Amendment No. 3 dated September 21, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.18
|
|
Amendment No. 4 dated October 24, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.19
|
|
Amendment No. 4 dated October 24, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.20
|
|
Lease Agreement dated October 1, 2012 by and between Manchester
Realty, LLC and Fusion NBS Acquisition Corp (7)
|
10.20.1
|
|
Lease Modification Agreement, dated October 1, 2014 by and between
280 Holdings, LLC (successor in interest to Manchester Realty, LLC)
and Fusion NBS Acquisition Corp (11)
|
10.21
|
|
Series A Promissory Note dated October 29, 2012 payable to
Praesidian Fund III (5)
|
10.22
|
|
Series B Promissory Note dated October 29, 2012 payable to
Praesidian Fund III Praesidian Fund III Series B Note
(5)
|
10.23
|
|
Series A Promissory Note dated October 29, 2012 payable to
Praesidian Fund III-A (5)
|
10.24
|
|
Series B Promissory Note dated October 29, 2012 payable to
Praesidian Fund III-A (5)
|
10.25
|
|
Praesidian Fund III Common Stock Purchase Warrant dated October 29,
2012 (5)
|
10.26
|
|
Praesidian Fund III-A Common Stock Purchase Warrant dated October
29, 2012 (5)
|
10.27
|
|
Intellectual Property Security Agreement dated as of October 29,
2012 by the registrant and Network Billing systems, LLC, in favor
of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital
Opportunity Fund III-A, LP, and Plexus Fund II, LP (5)
|
10.28
|
|
Right of First Refusal Agreement dated as of October 29, 2012 by
and among Fthe
registrant, Praesidian Capital Opportunity Fund III, LP,
Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, LP
and Praesidian Capital Opportunity Fund III as agent
(5)
|
10.29
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among
the registrant, Fusion NBS Acquisition Corp. and Praesidian
Capital Opportunity Fund III (5)
|
10.30
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among
the registrant, Fusion NBS Acquisition Corp. and Praesidian
Capital Opportunity Fund III-A (5)
|
35
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
10.31
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among the registrant, Fusion NBS Acquisition Corp., and Plexus Fund
II, LP (5)
|
10.32
|
|
Asset Purchase and Sale Agreement effective as of August 30, 2013
by and among the registrant, Fusion Broadvox Acquisition Corp.;
BroadvoxGo!, LLC; and Cypress Communications, LLC (6)
|
10.33
|
|
First Amendment to the Asset Purchase and Sale Agreement effective
as of November 15, 2013 by and among
the registrant, Fusion Broadvox Acquisition Corp.;
BroadvoxGo!, LLC; and Cypress Communications, LLC (7)
|
10.34
|
|
Second Amendment to the Asset Purchase and Sale Agreement effective
as of December 16, 2013 by and among
the registrant, Fusion Broadvox Acquisition Corp.;
BroadvoxGo!, LLC,; and Cypress Communications, LLC (8)
|
10.35
|
|
Third Amendment to Securities Purchase Agreement is entered into as
of December 16, 2013, by and among Fusion NBS Acquisition
Corp,
the registrant, Network Billing Systems, LLC, Praesidian
Capital Opportunity Fund III, LP, Praesidian Capital Opportunity
Fund III-A, LP, and Plexus Fund II, LP, and Praesidian Capital
Opportunity Fund III, LP as agent (9)
|
10.36
|
|
Form of Common Stock Purchase Warrant (9)
|
10.37
|
|
Form of Registration Rights Agreement (9)
|
10.38
|
|
Form of Series C Note (9)
|
10.39
|
|
Form of Series D Note dated December 31, 2013 (9)
|
10.40
|
|
Form of Management Rights Letter dated December 31, 2013
(9)
|
10.41
|
|
Form of Lenders’ Warrant dated December 31, 2013
(9)
|
10.42
|
|
Joinder Agreement dated as of December 31, 2013 by and among
the registrant, Fusion NBS Acquisition Corp., Fusion BVX LLC
in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian
Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus
Fund III, L.P., Plexus Fund QP III, L.P., and United Insurance
Company Of America (9)
|
10.43
|
|
Assignment and Assumption Agreement dated as of December 31, 2013
by and among BroadvoxGo!, LLC, Cypress Communications, LLC,
the registrant, and Fusion BVX, LLC (9)
|
10.44
|
|
Bill of Sale dated as of December 31, 2013 delivered by
BroadvoxGo!, LLC and Cypress Communications, LLC (9)
|
10.45
|
|
Limited Trademark License Agreement dated as of December 31, 2013
by and among Broadvox, LLC; the registrant and Fusion BVX LLC
(9)
|
10.46
|
|
Form of Series E Note, dated as of October 31, 2014
(11)
|
10.47
|
|
Agreement and Plan of Merger, dated as of October 15, 2014, by and
among
the registrant, Fusion PTC Acquisition Inc., PingTone
Communications, Inc., the Majority Stockholders of PingTone
Communications, Inc. and J Shelby Bryan, as Stockholders
Representative (11)
|
10.48
|
|
Stock Purchase and Sale Agreement, dated as of December 8, 2015, by
and among Fusion NBS Acquisition Corp., Mitch Marks, Ron Kohn and
Robert Marks (13)
|
10.49
|
|
Credit Agreement dated as of November 14, 2016 by and among Fusion
NBS Acquisition Corp., and East West Bank and the Other Lenders
from time to time party hereto (15)
|
10.50
|
|
Subordination Agreement dated as of November 14, 2016 by and among
Fusion NBS Acquisition Corp.,
the registrant, Network Billing Systems, LLC, PingTone
Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity
Voice Services, LLC, Apptix, Inc., Praesidian Capital Opportunity
Fund III, LP, and East West Bank (15)
|
10.51
|
|
Intercreditor and Subordination Agreement dated as of November 14,
2016 by and among Marvin Rosen, the registrant and East West Bank
(15)
|
|
Pledge and Security Agreement dated as of November 14, 2016 by and
among each of the Grantors Party thereto and East West Bank
(15)
|
36
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
|
Guaranty dated as of November 14, 2016 from
the registrant, Network Billing Systems, LLC, PingTone
Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity
Voice Services, LLC and Apptix, Inc. to East West Bank
(15)
|
|
10.54
|
|
Intellectual Property Security Agreement dated as of November 14,
2016 by and among Fusion NBS Acquisition Corp., Fusion
Telecommunications International, Inc., Network Billing Systems,
LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity
Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect,
LLC, Fidelity Voice Services, LLC, Apptix, Inc., and East West Bank
(15)
|
10.55
|
|
Fifth Amended and Restated Securities Purchase Agreement and
Security Agreement, dated as of November 14, 2016, by and among
Fusion NBS Acquisition Corp., as borrower,
the registrant, Network Billing Systems, L.L.C., Fusion BVX,
LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC,
Fidelity Connect LLC, Fidelity Voice Services, LLC, Fidelity Access
Networks, Inc., Apptix, Inc., Praesidian Capital Opportunity Fund
III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United
Insurance Company of America (15)
|
10.56
|
|
Stock Purchase and Sale Agreement dated November 14, 2016 by and
among Fusion NBS Acquisition Corp.,
the registrant and Apptix ASA (15)
|
10.57
|
|
Registration Rights Agreement dated as of November 14, 2016 by and
between
the registrant and Apptix ASA (15)
|
10.58
|
|
Common Stock Purchase Agreement dated November 14, 2016 by and
among
the registrant and the Purchasers (15)
|
|
Office Lease, as amended between Chagrin-Green, LLC and Fidelity
Access Networks, LLC (1)
|
|
|
First Amendment to Lease Agreement dated as of August 2015 by and
between Piedmont Center, 1-4 LLC and
the registrant (1)
|
|
14
|
|
Code of Ethics of registrant (11)
|
|
List of Subsidiaries (1)
|
|
23.1
|
|
Consent of EisnerAmper LLP(1)
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (1)
|
31.2
|
|
Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
|
32.2
|
|
Section 1350 Certification of President Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (1)
|
101.INS***
|
|
XBRL Instance Document
|
101.SCH***
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL***
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF***
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB***
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE***
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
Originally filed with the Company’s Registration Statement
no. 33-120412 and incorporated herein by reference.
|
|
|
**
|
Originally filed with the Company’s Registration Statement
no. 33-120206 and incorporated herein by reference.
|
|
|
***
|
Pursuant to Rule 406T of Regulation S-T, these interactive data
files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, except as expressly set forth by specific
reference in such filing, are deemed not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise are not subject to liability under those
sections.
|
|
|
(1)
|
Filed herewith.
|
(2)
|
Filed as an Exhibit to the Company’s Annual Report on Form
10-K filed April 13, 2011 and incorporated herein by
reference.
|
(3)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 15, 2006 and incorporated herein by
reference.
|
37
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
(4)
|
Filed as an Exhibit to the Company’s Annual Report on Form
10-K filed March 30, 2012 and incorporated herein by
reference.
|
(5)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 2, 2012 and incorporated herein by
reference.
|
(6)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on September 4, 2013 and incorporated herein by
reference.
|
(7)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 21, 2013 and incorporated herein by
reference.
|
(8)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 19, 2013 and incorporated herein by
reference.
|
(9)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K/A filed on January 7, 2014 and incorporated herein by
reference.
|
(10)
|
Filed as an Exhibit to the Company’s Quarterly Report on Form
10-Q filed on August 14, 2013 and incorporated herein by
reference.
|
(11)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K dated November 3, 2014 and incorporated herein by
reference.
|
(12)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 10, 2015 and incorporated herein by
reference.
|
(13)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 14, 2015, and incorporated herein by
reference.
|
(14)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 18, 2016, and incorporated herein by
reference.
|
(15)
|
Filed as an Exhibit to the Company’s Form 10-K filed on March
28, 2016 and incorporated herein by reference.
|
38
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto
duly authorized on the date indicated.
|
FUSION TELECOMMUNICATIONS INTERNATIONAL,
INC.
|
||
|
|
|
|
Date: March 20,
2017
|
By:
|
/s/
MATTHEW
D. ROSEN
|
|
|
|
Matthew D.
Rosen
|
|
|
|
Chief Executive
Officer and Principal Executive Officer
|
|
|
|
|
|
|
|
|
|
Date: March 20,
2017
|
By:
|
/s/
MICHAEL
R. BAUER
|
|
|
|
Michael R.
Bauer
|
|
|
|
Chief Financial
Officer, Principal Financial Officer
|
|
|
|
|
|
|
By:
|
/s/
Lisa Taranto
|
|
|
|
Lisa Taranto
|
|
|
|
Vice President of
Finance and Accounting, Principal Accounting
Officer
|
|
39
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
POWER OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Matthew D. Rosen and Michael
R. Bauer, jointly and severally, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to
sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities and Exchange Act of 1934,
this Report on Form 10-K has been signed by the following persons
in the capacities and on the date indicated:
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
MARVIN S. ROSEN
|
|
Chairman
of the Board
|
|
|
Marvin
S. Rosen
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
PHILIP D. TURITS
|
|
Director
|
|
|
Philip
D. Turits
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
MATTHEW D. ROSEN
|
|
Chief
Executive Officer and Director
|
|
|
Matthew
D. Rosen
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
JACK ROSEN
|
|
Director
|
|
|
Jack
Rosen
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
WILLIAM RUBIN
|
|
Director
|
|
|
William
Rubin
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
LARRY BLUM
|
|
Director
|
|
|
Larry
Blum
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
PAUL C. O’BRIEN
|
|
Director
|
|
|
Paul C.
O'Brien
|
|
|
|
March
20, 2017
|
|
|
|
|
|
/s/
MICHAEL J. DEL GIUDICE
|
|
Director
|
|
|
Michael
J. Del Giudice
|
|
|
|
March
20, 2017
|
40
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation (*)
|
3.1.1
|
|
Certificate of Amendment to Certificate of
Incorporation(14)
|
3.2
|
|
Bylaws (*)
|
10.1
|
|
1998 Stock Option Plan (*)
|
10.1.1
|
|
2009 Stock Option Plan(16)
|
10.1.2
|
|
2016 Equity Incentive Plan (14)
|
10.2
|
|
Employment Agreement, dated as of November 5, 2015, between
registrant and Matthew D. Rosen (12)
|
10.3
|
|
Form of Warrant to Purchase Common Stock (*)
|
10.4
|
|
Lease Agreement between registrant and SLG Graybar Sublease, LLC
for Suite 1718 at 420 Lexington Avenue, New York, NY office
(*)
|
10.4.1
|
|
Lease Modification Agreement dated November 19, 2014, between
registrant and SLG Graybar Sublease, LLC for the 420 Lexington
Avenue, New York, NY office (13)
|
10.5
|
|
Lease Agreement between registrant and Fort Lauderdale Crown
Center, Inc. for the Fort Lauderdale, Florida office, as amended
(*)
|
10.5.1
|
|
Sixth Amendment, dated July 23, 2014, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office (13)
|
10.5.2
|
|
Seventh Amendment, dated August 2015, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office(1)
|
10.5.3
|
|
Eight Amendment dated July 8, 2016, to Lease Agreement between
registrant and Fort Lauderdale Crown Center, Inc., for the Fort
Lauderdale, Florida office(1)
|
|
|
|
10.6
|
|
Form of Promissory Note and Security Agreement (2)
|
10.7
|
|
Non-Competition Agreement between registrant and Marvin Rosen
(*)
|
10.8
|
|
Form of Warrant (3)
|
10.9
|
|
Membership Interest Purchase and Sale Agreement dated January 30th,
2012 between the registrant, Network Billing Systems, LLC, Jonathan
Kaufman, and Christiana Trust as trustee of the LK Trust
(4)
|
10.10
|
|
Asset Purchase and Sale Agreement dated January 30th, 2012 between
the registrant, Interconnect Systems Group II LLC, Jonathan
Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan
Kaufman as trustee of the LKII Trust (4)
|
10.11
|
|
Amendment No. 1 dated June 6, 2013 to the Asset Purchase and Sale
Agreement dated January 30th, 2012 between the registrant,
Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman
as trustee of the JK Trust and Jonathan Kaufman as trustee of the
LKII Trust (10)
|
10.12
|
|
Warrant to Purchase Common Stock issued by registrant to Marvin
Rosen, dated July 31, 2002 (*)
|
41
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
10.13
|
|
Amendment No. 1 dated June 6, 2013 to the Membership Interest
Purchase and Sale Agreement dated January 30th, 2012 between the
registrant, Network Billing Systems, LLC, Jonathan Kaufman, and
Christiana Trust as trustee of the LK Trust (10)
|
10.14
|
|
Amendment No. 2 dated August 20, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.15
|
|
Amendment No. 2 dated August 20, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.16
|
|
Amendment No. 3 dated September 21, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.17
|
|
Amendment No. 3 dated September 21, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.18
|
|
Amendment No. 4 dated October 24, 2012 to the Asset Purchase and
Sale Agreement dated January 30, 2012 between the registrant,
Fusion NBS Acquisition Corp., Interconnect Services Group II LLC,
Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and
Jonathan Kaufman as trustee of the LKII Trust (5)
|
10.19
|
|
Amendment No. 4 dated October 24, 2012 to the Membership Interest
Purchase and Sale Agreement dated January 30, 2012 between the
registrant, Fusion NBS Acquisition Corp., Network Billing Systems,
LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK
Trust (5)
|
10.20
|
|
Lease Agreement dated October 1, 2012 by and between Manchester
Realty, LLC and Fusion NBS Acquisition Corp (7)
|
10.20.1
|
|
Lease Modification Agreement, dated October 1, 2014, by and between
280 Holdings, LLC (successor in interest to Manchester Realty, LLC)
and Fusion NBS Acquisition Corp (11)
|
10.21
|
|
Series A Promissory Note dated October 29, 2012 payable to
Praesidian Fund III (5)
|
10.22
|
|
Series B Promissory Note dated October 29, 2012 payable to
Praesidian Fund III Praesidian Fund III Series B Note
(5)
|
10.23
|
|
Series A Promissory Note dated October 29, 2012 payable to
Praesidian Fund III-A (5)
|
10.24
|
|
Series B Promissory Note dated October 29, 2012 payable to
Praesidian Fund III-A (5)
|
10.25
|
|
Praesidian Fund III Common Stock Purchase Warrant dated October 29,
2012 (5)
|
10.26
|
|
Praesidian Fund III-A Common Stock Purchase Warrant dated October
29, 2012 (5)
|
10.27
|
|
Intellectual Property Security Agreement dated as of October 29,
2012 by the registrant and Network Billing systems, LLC, in favor
of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital
Opportunity Fund III-A, LP, and Plexus Fund II, LP (5)
|
10.28
|
|
Right of First Refusal Agreement dated as of October 29, 2012 by
and among the registrant Praesidian Capital Opportunity Fund III,
LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II,
LP and Praesidian Capital Opportunity Fund III as agent
(5)
|
10.29
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among the registrant, Fusion NBS Acquisition Corp. and Praesidian
Capital Opportunity Fund III (5)
|
10.30
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among the registrant, Fusion NBS Acquisition Corp. and Praesidian
Capital Opportunity Fund III-A (5)
|
10.31
|
|
Management Rights Agreement dated as of October 29, 2012 by and
among the registrant, Fusion NBS Acquisition Corp., and Plexus Fund
II, LP (5)
|
42
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
10.32
|
|
Asset Purchase and Sale Agreement effective as of August 30, 2013
by and among the registrant, Fusion Broadvox Acquisition Corp.;
BroadvoxGo!, LLC; and Cypress Communications, LLC (6)
|
10.33
|
|
First Amendment to the Asset Purchase and Sale Agreement effective
as of November 15, 2013 by and among the registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress
Communications, LLC (7)
|
10.34
|
|
Second Amendment to the Asset Purchase and Sale Agreement effective
as of December 16, 2013 by and among the registrant, Fusion
Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress
Communications, LLC (8)
|
10.35
|
|
Third Amendment to Securities Purchase Agreement is entered into as
of December 16, 2013, by and among Fusion NBS Acquisition Corp, the
registrant, Network Billing Systems, LLC, Praesidian Capital
Opportunity Fund III, LP, Praesidian Capital Opportunity Fund
III-A, LP, and Plexus Fund II, LP, and Praesidian Capital
Opportunity Fund III, LP as agent (9)
|
10.36
|
|
Form of Common Stock Purchase Warrant (9)
|
10.37
|
|
Form of Registration Rights Agreement (9)
|
10.38
|
|
Form of Series C Note (9)
|
10.39
|
|
Form of Series D Note dated December 31, 2013 (9)
|
10.40
|
|
Form of Management Rights Letter dated December 31, 2013
(9)
|
10.41
|
|
Form of Lenders’ Warrant dated December 31, 2013
(9)
|
10.42
|
|
Joinder Agreement dated as of December 31, 2013 by and among the
registrant, Fusion NBS Acquisition Corp., Fusion BVX LLC in favor
of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital
Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III,
L.P., Plexus Fund QP III, L.P., and United Insurance Company Of
America (9)
|
10.43
|
|
Assignment and Assumption Agreement dated as of December 31, 2013
by and among BroadvoxGo!, LLC, Cypress Communications, LLC, the
registrant, and Fusion BVX, LLC (9)
|
10.44
|
|
Bill of Sale dated as of December 31, 2013 delivered by
BroadvoxGo!, LLC and Cypress Communications, LLC (9)
|
10.45
|
|
Limited Trademark License Agreement dated as of December 31, 2013
by and among Broadvox, LLC; Fusion Telecommunications
International, Inc. and Fusion BVX LLC (9)
|
10.46
|
|
Form of Series E Note, dated as of October 31, 2014
(11)
|
10.47
|
|
Agreement and Plan of Merger, dated as of October 15, 2014, by and
among the registrant, Fusion PTC Acquisition Inc., PingTone
Communications, Inc., the Majority Stockholders of PingTone
Communications, Inc. and J Shelby Bryan, as Stockholders
Representative (11)
|
10.48
|
|
Stock Purchase and Sale Agreement, dated as of December 8, 2015, by
and among Fusion NBS Acquisition Corp., Mitch Marks, Ron Kohn and
Robert Marks (13)
|
10.49
|
|
Credit Agreement dated as of November 14, 2016 by and among Fusion
NBS Acquisition Corp., and East West Bank and the Other Lenders
from time to time party hereto (15)
|
10.50
|
|
Subordination Agreement dated as of November 14, 2016 by and among
Fusion NBS Acquisition Corp., the registrant, Network Billing
Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC,
Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity
Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc.,
Praesidian Capital Opportunity Fund III, LP, and East West Bank
(15)
|
10.51
|
|
Intercreditor and Subordination Agreement dated as of November 14,
2016 by and among Marvin Rosen, Fusion Telecommunications
International, Inc. and East West Bank (15)
|
|
Pledge and Security Agreement dated as of November 14, 2016 by and
among each of the Grantors Party thereto and East West Bank
(15)
|
|
|
Guaranty dated as of November 14, 2016 from the registrant, Network
Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX
LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc.,
Fidelity Connect, LLC, Fidelity Voice Services, LLC and Apptix,
Inc. to East West Bank (15)
|
43
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
10.54
|
|
Intellectual Property Security Agreement dated as of November 14,
2016 by and among Fusion NBS Acquisition Corp.,
the registrant, Network Billing Systems, LLC, PingTone
Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC,
Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity
Voice Services, LLC, Apptix, Inc., and East West Bank
(15)
|
10.55
|
|
Fifth Amended and Restated Securities Purchase Agreement and
Security Agreement, dated as of November 14, 2016, by and among
Fusion NBS Acquisition Corp., as borrower, the registrant, Network
Billing Systems, L.L.C., Fusion BVX, LLC, PingTone Communications,
Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity
Voice Services, LLC, Fidelity Access Networks, Inc., Apptix, Inc.,
Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital
Opportunity Fund III-A, LP and United Insurance Company of America
(15)
|
10.56
|
|
Stock Purchase and Sale Agreement dated November 14, 2016 by and
among Fusion NBS Acquisition Corp., Fusion Telecommunications
International, Inc. and Apptix ASA (15)
|
10.57
|
|
Registration Rights Agreement dated as of November 14, 2016 by and
between
the
registrant and Apptix ASA (15)
|
10.58
|
|
Common Stock Purchase Agreement dated November 14, 2016 by and
among
the
registrant and the Purchasers (15)
|
|
Office
Lease, as amended between Chagrin-Green, LLC and Fidelity Access
Networks, LLC (1)
|
|
|
First
Amendment to Lease Agreement dated as of August 2015 by and between
Piedmont Center, 1-4 LLC and
the
registrant. (1)
|
|
14
|
|
Code of Ethics of registrant (11)
|
|
List of Subsidiaries (1)
|
|
23.1
|
|
Consent of EisnerAmper LLP(1)
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (1)
|
31.2
|
|
Certification of President Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (1)
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (1)
|
32.2
|
|
Section 1350 Certification of President Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (1)
|
101.INS***
|
|
XBRL Instance Document
|
101.SCH***
|
|
XBRL Taxonomy Extension Schema Document
|
101.CAL***
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
101.DEF***
|
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB***
|
|
XBRL Taxonomy Extension Label Linkbase Document
|
101.PRE***
|
|
XBRL Taxonomy Extension Presentation Linkbase Document
|
*
|
Originally filed with the Company’s Registration Statement
no. 33-120412 and incorporated herein by reference.
|
|
|
**
|
Originally filed with the Company’s Registration Statement
no. 33-120206 and incorporated herein by reference.
|
|
|
***
|
Pursuant to Rule 406T of Regulation S-T, these interactive data
files are deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, except as expressly set forth by specific
reference in such filing, are deemed not filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, and
otherwise are not subject to liability under those
sections.
|
|
|
(1)
|
Filed herewith.
|
(2)
|
Filed as an Exhibit to the Company’s Annual Report on Form
10-K filed April 13, 2011 and incorporated herein by
reference.
|
44
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
(3)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 15, 2006 and incorporated herein by
reference.
|
(4)
|
Filed as an Exhibit to the Company’s Annual Report on Form
10-K filed March 30, 2012 and incorporated herein by
reference.
|
(5)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 2, 2012 and incorporated herein by
reference.
|
(6)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on September 4, 2013 and incorporated herein by
reference.
|
(7)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 21, 2013 and incorporated herein by
reference.
|
(8)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 19, 2013 and incorporated herein by
reference.
|
(9)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K/A filed on January 7, 2014 and incorporated herein by
reference.
|
(10)
|
Filed as an Exhibit to the Company’s Quarterly Report on Form
10-Q filed on August 14, 2013 and incorporated herein by
reference.
|
(11)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K dated November 3, 2014 and incorporated herein by
reference.
|
(12)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 10, 2015 and incorporated herein by
reference.
|
(13)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on December 14, 2015, and incorporated herein by
reference.
|
(14)
|
Filed as an Exhibit to the Company’s Current Report on Form
8-K filed on November 18, 2016, and incorporated herein by
reference.
|
(15)
|
Filed as an Exhibit to the Company’s Form 10-K filed on March
28, 2016 and incorporated herein by reference.
|
45
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting
Firm
|
|
|
F- 1
|
|
|
|
|
Consolidated Balance Sheets
|
|
|
F- 2
|
|
|
|
|
Consolidated Statements of Operations
|
|
|
F- 3
|
|
|
|
|
Consolidated Statements of Changes in Stockholders'
Equity
|
|
|
F- 4
|
|
|
|
|
Consolidated Statements of Cash Flows
|
|
|
F- 5
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
F- 6
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Board of Directors and Stockholders
Fusion
Telecommunications International, Inc.
We have
audited the accompanying consolidated balance sheets of Fusion
Telecommunications International, Inc. and subsidiaries (the
“Company”) as of December 31, 2016 and 2015, and the
related consolidated statements of operations, changes in
stockholders’ equity, and cash flows for each of the years in
the two-year period ended December 31, 2016. The financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Fusion Telecommunications International, Inc. and subsidiaries as
of December 31, 2016 and 2015, and the consolidated results of
their operations and their cash flows for each of the years in the
two-year period ended December 31, 2016, in conformity with
accounting principles generally accepted in the United States of
America.
/s/
EisnerAmper LLP
New
York, New York
March
20, 2017
F-1
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
CONSOLIDATED BALANCE SHEETS
|
December 31, 2016
|
December 31, 2015
|
ASSETS
|
|
|
Current assets:
|
|
|
Cash
and cash equivalents
|
$7,221,910
|
$7,540,543
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
approximately
$427,000 and $309,000, respectively
|
9,359,876
|
7,650,141
|
Inventory
|
|
|
Prepaid
expenses and other current assets
|
1,160,184
|
1,618,603
|
Total current assets
|
17,741,970
|
16,809,287
|
Property
and equipment, net
|
14,248,915
|
14,055,493
|
Security
deposits
|
630,373
|
575,038
|
Restricted
cash
|
27,153
|
165,123
|
Goodwill
|
35,689,215
|
27,060,297
|
Intangible
assets, net
|
63,617,471
|
45,824,399
|
Other
assets
|
77,117
|
9,808
|
Deferred
tax asset
|
-
|
-
|
TOTAL ASSETS
|
$132,032,214
|
$104,499,445
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
Current liabilities:
|
|
|
Notes
payable - non-related parties
|
$2,979,167
|
$685,780
|
Obligations
under asset purchase agreements - current portion
|
622,463
|
300,000
|
Equipment
financing obligations
|
1,002,578
|
959,380
|
Escrow
payable
|
-
|
-
|
Accounts
payable and accrued expenses
|
19,722,838
|
13,129,225
|
Related
party payable
|
-
|
-
|
Current
liabilities from discontinued operations
|
-
|
-
|
Total current liabilities
|
24,327,046
|
15,074,385
|
Long-term liabilities:
|
|
|
Notes
payable - non-related parties, net of discount
|
31,431,602
|
30,795,746
|
Notes
payable - related parties
|
875,750
|
1,074,829
|
Term
loan
|
60,731,204
|
24,728,762
|
Indebtedness
under revolving credit facility
|
3,000,000
|
15,000,000
|
Obligations
under asset purchase agreements
|
890,811
|
333,333
|
Equipment
financing obligations
|
1,237,083
|
2,085,416
|
Derivative
liabilities
|
348,650
|
953,005
|
Other
long-term liabilities
|
-
|
-
|
Total liabilities
|
122,842,146
|
90,045,476
|
Commitments and contingencies
|
|
|
Stockholders' equity (deficit):
|
|
|
Preferred
stock, $0.01 par value, 10,000,000 shares authorized,
|
|
|
17,299
and 23,324 shares issued and outstanding
|
174
|
234
|
Common
stock, $0.01 par value, 90,000,000 and 50,000,000 shares
authorized,
|
|
|
20,642,028
and 12,788,971 shares issued and outstanding
|
206,422
|
127,890
|
Capital
in excess of par value
|
192,233,032
|
184,859,082
|
Accumulated
deficit
|
(183,249,560)
|
(170,533,237)
|
Total stockholders' equity (deficit)
|
9,190,068
|
14,453,969
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$132,032,214
|
$104,499,445
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-2
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
CONSOLIDATED STATEMENTS OF OPERATIONS
|
For the Year Ended December 31,
|
|
|
2016
|
2015
|
Revenues
|
$122,045,320
|
$101,694,516
|
Cost
of revenues, exclusive of depreciation and
|
|
|
amortization,
shown separately below
|
68,058,432
|
56,724,121
|
Gross profit
|
53,986,888
|
44,970,395
|
Depreciation
and amortization
|
13,096,587
|
12,975,981
|
Selling
general and administrative expenses (including
stock-based
|
|
|
compensation
of $878,343 and $639,296 for the years ended
|
|
|
December
31, 2016 and 2015, respectively)
|
48,524,923
|
41,009,107
|
Impairment
charge
|
-
|
-
|
Total
operating expenses
|
61,621,510
|
53,985,088
|
Operating loss
|
(7,634,622)
|
(9,014,693)
|
Other (expenses) income:
|
|
|
Interest
expense
|
(6,742,143)
|
(6,062,923)
|
Loss
on extinguishment of debt
|
(214,294)
|
(2,720,355)
|
Gain
on change in fair value of derivative liabilities
|
265,383
|
1,843,997
|
Loss
on disposal of property and equipment
|
(129,119)
|
(37,444)
|
Other
income, net
|
128,987
|
101,057
|
Total
other expenses
|
(6,691,186)
|
(6,875,668)
|
Loss
before income taxes
|
(14,325,808)
|
(15,890,361)
|
Income
tax benefit
|
1,609,485
|
7,660,536
|
Net loss
|
(12,716,323)
|
(8,229,825)
|
Preferred
stock dividends
|
(2,388,007)
|
(1,578,220)
|
Net loss attributable to common stockholders
|
(15,104,330)
|
(9,808,045)
|
Loss applicable to common stockholders:
|
|
|
Basic and diluted loss per common share:
|
$(0.98)
|
$(1.32)
|
Weighted average common shares outstanding:
|
|
|
Basic
and diluted
|
15,406,184
|
8,873,766
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
|
Preferred Stock
|
Common Stock |
Capital in
Excess of Par
|
Accumulated Deficit
|
Stockholders' Equity
|
||
|
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
|
|
|
|
|
|
( 8,229,825)
|
(8,229,825)
|
Conversion of
preferred stock into common stock
|
( 3,469)
|
( 34)
|
782,550
|
7,826
|
(7,792)
|
|
-
|
Dividends on
preferred stock
|
|
|
434,201
|
4,344
|
(4,344)
|
|
-
|
Proceeds from
the sale of common stock
|
|
|
2,582,568
|
25,826
|
5,604,174
|
|
5,630,000
|
Conversion of
related party note to common stock
|
|
|
137,615
|
1,376
|
298,624
|
|
300,000
|
Issuance of
common stock in lieu of cash bonus
|
|
|
11,468
|
115
|
24,885
|
|
25,000
|
Settlement of
outstanding debt with common stock
|
|
|
3,700
|
37
|
11,840
|
|
11,877
|
Exercise of
lenders warrants
|
|
|
728,333
|
7,282
|
356,885
|
|
364,167
|
Common stock
issued as part of purchase price -
|
|
|
|
|
|
|
|
Fidelity
acquisition
|
|
|
696,508
|
6,965
|
1,493,035
|
|
1,500,000
|
Modification
of previously issued warrants and
|
|
|
|
|
|
|
|
reclassification
to stockholders' equity
|
|
|
|
|
678,400
|
|
678,400
|
Issuance of
common stock for services rendered
|
|
|
67,000
|
670
|
244,620
|
|
245,290
|
Stock-based
compensation associated with stock incentive
plans
|
|
|
|
|
639,296
|
|
639,296
|
Balance at
December 31, 2015
|
23,324
|
234
|
12,788,971
|
127,890
|
184,859,082
|
(170,533,237)
|
14,453,969
|
Net
loss
|
|
|
|
|
|
(12,716,323)
|
(12,716,323)
|
Conversion of
preferred stock into common stock
|
(6,025)
|
(60)
|
1,205,000
|
12,050
|
(11,990)
|
|
-
|
Dividends on
preferred stock
|
|
|
1,140,568
|
11,406
|
(11,406)
|
|
-
|
Proceeds from
the sale of common stock
|
|
|
2,213,700
|
22,137
|
2,323,009
|
|
2,345,146
|
Conversion of
related party note to common stock
|
|
|
217,391
|
2,174
|
247,826
|
|
250,000
|
Adjustment for
prior issuances and conversions of warrants
|
|
|
|
|
338,972
|
|
338,972
|
Adjustment for
fractional shares
|
|
|
685
|
8
|
(8)
|
|
-
|
Cancellation
of common stock issued to PingTone Sellers
|
|
|
(51,380)
|
(514)
|
(179,830)
|
|
(180,344)
|
Stock-based
compensation associated with stock incentive
plans
|
|
|
|
|
853,458
|
|
853,458
|
Issuance of
common stock - Apptix acquisition
|
|
|
2,997,926
|
29,979
|
3,597,511
|
|
3,627,490
|
Issuance of
restricted stock
|
|
|
55,000
|
550
|
99,000
|
|
99,550
|
Issuance of
common stock for services rendered
|
|
|
74,167
|
742
|
117,408
|
|
118,150
|
Balance at
December 31, 2016
|
17,299
|
$174
|
20,642,028
|
$206,422
|
$192,233,032
|
$(183,249,560)
|
$9,190,068
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31,
|
|
|
2016
|
2015
|
Cash flows from operating activities:
|
|
|
Net
loss
|
$(12,716,323)
|
$( 8,229,825)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
Depreciation
and amortization
|
13,096,587
|
12,975,981
|
Loss
on extinguishment on debt
|
214,294
|
1,682,035
|
Loss
on accounts receivable settlement exchanged for
equipment
|
-
|
111,659
|
Deferred
taxes
|
(1,669,485)
|
(7,710,536)
|
Loss
on disposal of property and equipment
|
129,119
|
37,444
|
Bad
debt expense
|
387,667
|
435,376
|
Stock-based
compensation
|
878,343
|
639,296
|
Stock
and warrants issued for services rendered or in settlement of
liabilities
|
118,150
|
245,290
|
Amortization
of debt discount and deferred financing fees
|
663,046
|
849,307
|
Gain
in the change in fair value of derivative liability
|
(265,383)
|
(1,843,997)
|
Changes in operating assets and liabilities:
|
|
|
Accounts
receivable
|
190,467
|
(883,253)
|
Prepaid
expenses and other current assets
|
585,928
|
(22,351)
|
Other
assets
|
(31,678)
|
(444,661)
|
Accounts
payable and accrued expenses
|
(1,254,445)
|
2,005,632
|
Net cash provided by (used in) operating activities
|
326,287
|
(152,603)
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase
of property and equipment
|
(4,766,214)
|
(3,440,450)
|
Proceeds
from the sale of property and equipment
|
234,753
|
35,469
|
Payment
for acquisitions, net of cash acquired
|
(23,273,892)
|
(28,457,739)
|
Refunds
of purchase price from acquisitions
|
262,683
|
-
|
Payment
of security deposits
|
(55,335)
|
-
|
Change
in restricted cash
|
137,970
|
999,258
|
Net cash used in investing activities
|
(27,460,035)
|
(30,863,462)
|
|
|
|
Cash flows from financing activities:
|
|
|
Proceeds
from sale of common stock, net of offering costs
|
2,345,146
|
5,630,000
|
Proceeds
from notes payable - non-related parties
|
-
|
9,000,000
|
Proceeds
from term loan
|
65,000,000
|
25,000,000
|
Proceeds
from revolving debt
|
3,000,000
|
15,000,000
|
Repayments
of term loan
|
(25,000,000)
|
|
Repayments
of revolving debt
|
(15,000,000)
|
|
Payments
for obligations under asset purchase agreements
|
(641,665)
|
|
Proceeds
from accounts receivable factoring arrangement
|
-
|
1,789,094
|
Repayments
of borrowings to accounts receivable factoring
arrangement
|
-
|
(1,789,094)
|
Payments
on equipment financing obligations
|
(993,632)
|
(887,864)
|
Payment
of financing fees
|
(1,323,250)
|
(623,745)
|
Repayments
of notes payable - non-related parties
|
(571,484)
|
(21,006,466)
|
Net cash provided by financing activities
|
26,815,115
|
32,111,925
|
Net change in cash and cash equivalents
|
(318,633)
|
1,095,860
|
Cash and cash equivalents, beginning of year
|
7,540,543
|
6,444,683
|
Cash and cash equivalents, end of year
|
$7,221,910
|
$7,540,543
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1.
Nature
of Operations
Fusion
Telecommunications International, Inc. is a Delaware corporation
incorporated in September 1997 (“Fusion” and together
with its subsidiaries, the “Company,” “we,”
“us” and “our”). The Company is
a provider of integrated cloud solutions, including cloud voice,
cloud connectivity, cloud infrastructure, cloud computing, and
managed cloud-based applications to businesses of all sizes, and
voice over IP (“VoIP”) - based voice services to other
carriers. The Company currently operates in two business
segments, Business Services and Carrier Services.
Note
2.
Significant
Accounting Policies
Principles of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the
consolidated accounts of Fusion and its wholly-owned subsidiaries,
and have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S
GAAP”) and in accordance with Regulation S-X of the
Securities and Exchange Commission (the “SEC”). All
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the year. On an on-going basis, the
Company evaluates its estimates, including, but not limited to,
those related to recognition of revenue, allowance for doubtful
accounts; fair value measurements of its financial instruments;
useful lives of its long-lived assets used in computing
depreciation and amortization; impairment assessment of goodwill
and intangible assets; accounting for stock options and other
equity awards, particularly related to fair value estimates,
accounting for income taxes, contingencies, and litigation. Changes
in the facts or circumstances underlying these estimates could
result in material changes, and actual results could differ from
those estimates. These changes in estimates are recognized in the
period they are realized.
Reclassifications
Certain
reclassifications have been made to the prior year’s
financial statements in order to conform to the current
year’s presentation. Specifically, approximately $1.2
million of deferred loan costs that had been included within Other
assets on the Company’s consolidated balance sheets is now
retrospectively reflected for all periods presented as a reduction
to the carrying amount of the underlying debt upon the adoption of
ASU 2015-03, and the amounts due to the Root Axcess seller are now
reflected in Obligations under asset purchase agreements. In
addition, the loss on disposal of property and equipment of
approximately $37,000 is now separately identified from Other
income (expense) in the accompanying consolidated statement of
operations. The reclassifications had no impact on results of
operations as previously reported.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term,
highly-liquid investments with maturities of three months or less
at the date of purchase. As of December 31, 2016 and 2015, the
carrying value of cash and cash equivalents approximates fair value
due to the short period of time to maturity.
Restricted Cash
Restricted cash consists of certificates of deposit that serve to
collateralize outstanding letters of credit. Restricted
cash is recorded as current or non-current assets in the
consolidated balance sheets depending on the duration of the
restriction and the purpose for which the restriction
exists.
At December 31, 2016 and 2015, the Company had certificates of
deposit collateralizing a letter of credit aggregating to
approximately $27,000 and $165,000, respectively. The letter of
credit is required as security for one of the Company’s
non-cancelable operating leases for office facilities.
Under the terms of the Company’s Amended and Restated Secured
Credit Agreement, dated as of December 8, 2015 with Opus Bank (the
“Amended Credit Facility”) and the Fourth Amended and
Restated Securities Purchase Agreement and Security Agreement,
dated as of December 8, 2015, with Praesidian Capital Opportunity
Find III, LP and other lenders (the “Fourth Amended
SPA”), the Company is no longer required to maintain a cash
reserve of $1 million.
F-6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Revenue Recognition
The
Company recognizes revenue when persuasive evidence of a sale
arrangement exists, delivery has occurred or services have been
rendered, the sales price is fixed and determinable, and
collectability is reasonably assured. The Company
records provisions against revenue for billing adjustments, which
are based upon estimates derived from factors that include, but are
not limited to, historical results, analysis of credits issued and
current economic trends. The provisions for revenue
adjustments are recorded as a reduction of revenue when the revenue
is recognized. Below is a summary of the provisions against revenue
for the years ended December 31, 2016 and 2015:
|
Balance at Beginning of Period
|
Additions to Reserve
|
Posted Credits and other Adjustments
|
Balance at End of Period
|
Year
ended December 31, 2016
|
$223,045
|
2,494,986
|
2,415,951
|
$302,080
|
|
|
|
|
|
Year
ended December 31, 2015
|
$312,187
|
1,852,168
|
1,941,310
|
$223,045
|
The
Company’s Business Services revenue includes fixed revenue
earned from monthly recurring services provided to customers, for
whom charges are contracted for over a specified period of time,
and from variable usage fees charged to customers that purchase the
Company’s Business Services products and
services. Revenue recognition commences after the
provisioning, testing and acceptance of the service by the
customer. The recurring customer charges continue until
the expiration of the contract, or until cancellation of the
service by the customer. To the extent that payments
received from a customer are related to a future period, the
payment is recorded as deferred revenue until the service is
provided or the usage occurs.
Carrier
Services revenue is primarily derived from usage fees charged to
other carriers that terminate voice traffic over the
Company’s network. Variable revenue is earned
based on the length of a call, as measured by the number of minutes
of duration. It is recognized upon completion of the call, and is
adjusted to reflect the Company’s allowance for billing
adjustments. Revenue for each customer is calculated
from information received through the Company’s network
switches. The Company’s customized software tracks
the information from the switches and analyzes the call detail
records against stored detailed information about revenue
rates. This software provides the Company with the
ability to complete a timely and accurate analysis of revenue
earned in a period. The Company believes that the nature
of this process is such that recorded revenues are unlikely to be
revised in future periods.
Cost of Revenues
Cost of
revenues for the Company’s Business Services segment consist
of fixed expenses which include monthly recurring charges
associated with certain platform services purchased from other
service providers, monthly recurring costs associated with private
line services and the cost of broadband Internet access used to
provide service to business customers.
For the
Company’s Carrier Services segment, cost of revenues is
comprised primarily of costs incurred from other carriers to
originate, transport, and terminate voice calls for the
Company’s carrier customers. Thus, the majority of
the Company’s cost of revenues for this segment is variable,
based upon the number of minutes actually used by the
Company’s customers and the destinations they are
calling. Call activity is tracked and analyzed with
customized software that analyzes the traffic flowing through the
Company’s network switch. During each period, the
call activity is analyzed and an accrual is recorded for the costs
associated with minutes not yet invoiced. This cost
accrual is calculated using minutes from the system and the
variable cost of revenue based upon predetermined contractual
rates. Fixed expenses reflect the costs associated with
connectivity between the Company’s network infrastructure,
including its New Jersey switching facility, and certain large
carrier customers and vendors.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable is recorded net of an allowance for doubtful
accounts. On a periodic basis, the Company evaluates
accounts receivable and records an allowance for doubtful accounts
based on the Company’s history of past write-offs,
collections experience and current credit
conditions. Specific customer accounts are written off
as uncollectible when collection efforts have been exhausted and
payments are not expected to be received. During the periods
presented, the Company has not experienced any significant defaults
on its accounts receivable.
Below
is a summary of the changes in allowance for doubtful accounts for
the years ended December 31, 2016 and 2015 (in
thousands):
F-7
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
|
Balance at Beginning of Period
|
Additions - Charged to Expense
|
Deductions - Write-offs, Payments and other
Adjustments
|
Balance at End of Period
|
Year
ended December 31, 2016
|
$309
|
388
|
270
|
$427
|
|
|
|
|
|
Year
ended December 31, 2015
|
$245
|
435
|
371
|
$309
|
Business Combinations
Business
combinations are accounted for using the purchase method of
accounting, whereby the purchase price of the acquisition,
including the fair value of contingent consideration, is allocated
to the assets acquired and liabilities assumed using the fair
values determined by management as of the acquisition date. The
results of operations of all business acquisitions are included in
our Consolidated Financial Statements from the date of
acquisition.
Goodwill
as of the acquisition date, if any, is measured as the excess of
consideration transferred over the net of the acquisition date fair
values of the assets acquired and the liabilities assumed. While
the Company uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value assets
acquired and liabilities assumed at the acquisition date, the
Company’s estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, to the extent the
Company identifies adjustments to the purchase price or the
purchase price allocation, the Company records adjustments to the
assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or
liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of
operations.
All
transaction costs incurred in connection with a business
combination are expensed as incurred and are reflected in selling,
general and administrative expense in the accompanying consolidated
statements of operations.
Debt Issuance Costs
Costs
incurred for the issuance of debt are reflected as a reduction in
the carrying amount of the debt and are accreted as interest
expense over the life of the debt using the interest
method.
Goodwill
Goodwill
is the excess of the acquisition cost of a business combination
over the fair value of the identifiable net assets acquired.
Goodwill at December 31, 2016 and 2015 was $36.7 million and $27.1
million, respectively. All of the Company’s goodwill is
attributable to its Business Services
segment.
The
following table presents the changes in the carrying amounts of
goodwill during the years ended December 31, 2016 and
2015:
Balance
at December 31, 2014
|
$10,397,460
|
RootAxcess
acquisition*
|
159,866
|
Fidelity
acquisition*
|
16,502,971
|
Balance
at December 31, 2015
|
27,060,297
|
Fidelity
purchase price adjustment
|
134,216
|
TFB
acquisition*
|
993,637
|
Apptix
acquisition*
|
7,091,065
|
TOG
acquistion*
|
410,000
|
Balance
at December 31, 2016
|
$35,689,215
|
* -
See note 5 for discussion of acquisitions
|
|
Goodwill
is not amortized and is tested for impairment on an annual basis in
the fourth quarter of each fiscal year and whenever events or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying
amount.
F-8
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
The
impairment test for goodwill uses a two-step approach, which is
performed at the reporting unit level. The Company has
determined that its reporting units are its operating segments (see
Note 23) since that is the lowest level at which discrete, reliable
financial and cash flow information is available. Step
one compares the fair value of the reporting unit (calculated using
a market approach and/or a discounted cash flow method) to its
carrying value. If the carrying value exceeds the fair
value, there is a potential impairment and step two must be
performed. Step two compares the carrying value of the
reporting unit’s goodwill to its implied fair value, which is
the fair value of the reporting unit less the fair value of the
unit’s assets and liabilities, including identifiable
intangible assets. If the implied fair value of goodwill
is less than its carrying amount, an impairment is
recognized.
In
testing goodwill for impairment, the Company has the option to
first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more
likely than not (more than 50%) that the estimated fair value of a
reporting unit is less than its carrying amount. If the Company
elects to perform a qualitative assessment and determines that an
impairment is more likely than not, it is then required to perform
a quantitative impairment test, otherwise no further analysis
is required. The Company also may elect not to perform the
qualitative assessment and, instead, proceed directly to the
quantitative impairment test.
The
Company performed a quantitative impairment analysis on its
goodwill as of December 31, 2016 and qualitative evaluation as of
December 31, 2015 and determined that goodwill was not
impaired.
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully
recoverable. If an impairment indicator is present, the
Company evaluates recoverability by a comparison of the carrying
amount of the assets to future undiscounted net cash flows expected
to be generated by the assets. If the carrying value of
the asset exceeds the projected undiscounted cash flows, the
Company is required to estimate the fair value of the asset and
recognize an impairment charge to the extent that the carrying
value of the asset exceeds its estimated fair value. The
Company did not record any impairment charges for the years ended
December 31, 2016 and 2015, as there were no indicators of
impairment.
Property and Equipment
Property
and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets
as follows:
Asset
|
|
Estimated Useful Lives
|
|
|
|
Network equipment |
|
5 - 7
Years
|
Furniture
and fixtures
|
|
3 - 7
Years
|
Computer
equipment and software
|
|
3 - 5
Years
|
Customer
premise equipment
|
|
2 - 3
Years
|
Leasehold
improvements are depreciated over the shorter of the estimated
useful lives of the assets or the term of the associated lease.
Maintenance and repairs are recorded as a period expense, while
betterments and improvements are capitalized.
The
Company capitalizes a portion of its payroll and related costs for
the development of software for internal use and amortizes these
costs over three years. During the years ended December
31, 2016 and 2015, the Company capitalized costs pertaining to the
development of internally used software in the amount of $1.2
million and $0.9 million, respectively.
Fair Value of Financial Instruments
We
apply fair value accounting for all financial assets and
liabilities and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a recurring basis. We define fair value as the price that would
be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for
assets and liabilities which are required to be recorded at fair
value, we consider the principal or most advantageous market in
which we would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset
or liability, such as risks inherent in valuation techniques,
transfer restrictions and credit risk. Fair value is estimated by
applying the following hierarchy, which prioritizes the inputs used
to measure fair value into three levels and bases the
categorization within the hierarchy upon the lowest level of input
that is available and significant to the fair value
measurement:
F-9
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
●
Level 1 applies to
assets or liabilities for which there are quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date.
●
Level 2 applies to
assets or liabilities for which there are inputs other than quoted
prices included in Level 1 that are observable for the asset or
liability, either directly or indirectly, such as quoted prices for
similar assets or liabilities in active markets; quoted prices for
identical assets or liabilities in markets with insufficient volume
or infrequent transactions (less active markets).
●
Level 3 applies to
assets or liabilities for which fair value is derived from
valuation techniques in which one or more significant inputs are
unobservable, including the Company's own assumptions.
The
estimated fair value of financial instruments is determined by the
Company using available market information and valuation
methodologies considered to be appropriate. At December 31, 2016
and 2015, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximate their
fair values due to their short maturities.
Derivative Financial Instruments
The
Company accounts for equity and equity indexed instruments with
down round provisions issued in conjunction with the issuance of
debt or equity securities of the Company in accordance with the
guidance contained in Accounting Standards Codification
(“ASC”) Topic 815, Derivatives and Hedging (“ASC
815”). For warrant instruments that are not deemed
to be indexed to Fusion’s common stock, the Company
classifies the warrant instrument as a liability at its fair value
and adjusts the instrument to fair value at each reporting period.
This liability is subject to re-measurement at each balance sheet
date until exercised, and any change in fair value is recognized in
the Company’s statements of operations (see notes 17 and
18). The fair values of the warrants have been estimated
using option pricing and other valuation models, and the quoted
market price of Fusion’s common stock (see notes 17 and
18).
Stock-Based Compensation
The
Company recognizes expense for its employee stock-based
compensation based on the fair value of the 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. For
transactions in which goods or services are the consideration
received from non-employees in return for the issuance of equity
instruments, the expense is recognized in the period when the goods
and services are received at the fair value of the consideration
received or the fair value of the equity instrument issued,
whichever is determined to be a more reliable
measurement.
Advertising and Marketing
Advertising
and marketing expense includes cost for promotional materials and
trade show expenses for the marketing of the Company’s
products and services. Advertising and marketing
expenses were $0.7 million and $0.5 million for the years ended
December 31, 2016 and 2015, respectively.
Income Taxes
The
accounting and reporting requirements with respect to income taxes
require an asset and liability approach. Deferred income
tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities that
will result in future taxable or deductible amounts, based on
enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable
income. Valuation allowances are established, when
necessary, to reduce deferred income tax assets to the amount
expected to be realized.
In
accordance with U.S. GAAP, the Company is required to determine
whether a tax position of the Company is more likely than not to be
sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation
processes, based on the technical merits of the
position. The tax benefit to be recognized is measured
as the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate
settlement. Derecognition of a tax benefit previously
recognized could result in the Company recording a tax liability
that would reduce net assets. Based on its analysis, the
Company has determined that it has not incurred any liability for
unrecognized tax benefits as of December 31, 2016 and
2015. The Company is subject to income tax examinations
by major taxing authorities for all tax years since 2012 and for
previous periods as it relates to the Company’s net operating
loss carryforward.
F-10
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
No
interest expense or penalties have been recognized as of December
31, 2016 and 2015. During the years ended December 31,
2016 and 2015, the Company recognized no adjustments for uncertain
tax positions.
Factoring of accounts receivable
During
the year ended December 31, 2015, the Company had a factoring
agreement with Prestige Capital Corporation
(“Prestige”). Under the terms of the
agreement, upon receipt and acceptance of each transfer of accounts
receivable Prestige advanced the Company up to 75% of the net face
value of the accounts receivable or 65% of the net face value of
any unbilled yet earned amounts associated with the accounts
receivable. The Company paid a discount fee which was deducted from
the face value of the accounts receivable. The discount fee was
based on the number of days the accounts receivable is outstanding
from the date of the advance. For the years ended December 31, 2016
and 2015, the Company recognized discount fees on the transfer of
the accounts receivable of $0 and approximately $40,000,
respectively. These amounts are recorded in Other (expenses) income
in the accompanying consolidated statements of
operations. During the year ended December 31, 2015, the
Company factored $1.8 million of accounts receivable under this
agreement. The Prestige agreement was terminated in 2016 and there
were no transfers of receivables to Prestige during the year ended
December 31, 2016.
In
accordance with ASC 860, ‘Transfers and Servicing’, the
Company recognizes the accounts receivable and the associated
liability when the accounts receivable were transferred to
Prestige, and derecognizes the accounts receivable and the
liability upon receipt of collections of the transferred
receivables by Prestige.
Recently Issued Accounting Pronouncements
In
November 2016, the Financial Accounting Standard Board
(“FASB”) issued ASU 2016-18, Restricted Cash, which clarifies
guidance and presentation related to restricted cash in the
statement of cash flows, including stating that restricted cash
should be included within cash and cash equivalents in the
statement of cash flows. The standard is effective for fiscal years
beginning after December 15, 2017, with early adoption permitted,
and is to be applied retrospectively. The Company does not expect
this guidance to have a material impact on its consolidated
financial statements.
In
February 2016, the FASB issued Accounting Standards Update
(“ASU”) No. 2016-2, Leases, which is effective for
fiscal years, and interim periods within those years, beginning
after December 15, 2018 with early adoption permitted. Under ASU
2016-02, lessees will be required to recognize for all leases at
the commencement date a lease liability, which is a lessee’s
obligation to make lease payments arising from a lease measured on
a discounted basis, and a right –to-use asset, which is an
asset that represents the lessee’s right to use or control
the use of a specified asset for the lease term. The Company is
currently evaluating the effect that the new guidance will have on
its financial statements and related disclosures.
In
November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet
Classification of Deferred Taxes (ASU 2015-17), which
simplifies the presentation of deferred income taxes by requiring
that deferred tax assets and liabilities be classified as
noncurrent on the balance sheet. The updated standard is effective
beginning on January 1, 2017 with early application permitted as of
the beginning of any interim or annual reporting period. The
Company does not expect this guidance to have a material impact on
its consolidated financial statements.
In
September 2015, the FASB issued guidance that eliminates the
requirement for an acquirer in a business combination to account
for measurement-period adjustments retrospectively. Instead,
acquirers must recognize measurement-period adjustments during the
period in which they determine the amounts, including the effect on
earnings of any amounts they would have recorded in previous
periods if the accounting had been completed at the acquisition
date. This guidance became effective for interim and annual
reporting periods beginning after December 15, 2015. Adoption
of this standard did not have a material impact on the
Company’s 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 reduction from the carrying amount of that debt liability,
consistent with debt discounts. This guidance became effective for
interim and annual reporting periods beginning after
December 15, 2015. The Company adopted this guidance
retrospectively for all periods presented and reclassified the debt
issuance costs in the accompanying consolidated financial
statements.
F-11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
In May
2014, FASB issued 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, FASB deferred
the effective date of this guidance until January 1, 2018 and
the Company is currently assessing the impact of this guidance on
its consolidated financial statements.
Note 3. Loss per Share
Basic
and diluted loss per share is computed by dividing (i) loss
available to common stockholders, adjusted by approximately $1.9
million for the gain on the fair value of the Company’s
derivative liability for the year ended December 31, 2015 that was
attributable to 728,333 outstanding warrants with a nominal
exercise price and dividends paid on Fusion’s preferred
stock, by (ii) the weighted-average number of shares of common
stock outstanding during the period, increased by the number of
shares underlying such warrants with a nominal exercise price as if
such exercise had occurred at the beginning of the
year.
The
following table sets forth the computation of the Company’s
basic and diluted net loss per share during the years ended
December 31, 2016, and 2015:
|
Year
Ended December 31,
|
|
|
2016
|
2015
|
Numerator
|
|
|
Net
loss
|
$( 12,716,323)
|
$( 8,229,825)
|
Undeclared
dividends on Series A-1, A-2 and A-4 Convertible Preferred
Stock
|
( 404,706)
|
( 403,600)
|
Dividends
declared on Series B-2 Convertible Preferred Stock
|
( 1,983,301)
|
( 1,174,620)
|
Gain
on derivative warrants
|
-
|
( 1,930,083)
|
Net
loss attributable to common stockholders
|
$( 15,104,330)
|
$( 11,738,128)
|
|
|
|
Denominator
|
|
|
Basic
and diluted weighted average common shares outstanding
|
15,406,184
|
8,873,766
|
|
|
|
Loss per share
|
|
|
Basic
and diluted
|
$(0.98)
|
$(0.92)
|
For the
years ended December 31, 2016 and 2015, the following outstanding
securities were excluded from the calculation of diluted earnings
per common share because of their anti-dilutive
effects:
|
For the Year Ended December 31,
|
|
|
2016
|
2015
|
Warrants
|
2,902,862
|
3,011,760
|
Convertible
preferred stock
|
2,628,389
|
3,825,942
|
Stock
options
|
2,183,723
|
1,158,251
|
|
7,714,974
|
7,995,953
|
The net
loss per common share calculation includes a provision for
preferred stock dividends on the Company’s outstanding Series
A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-4
Preferred Stock (collectively, the “Series A Preferred
Stock”) of $0.4 million for the years ended December 31, 2016
and 2015. As of December 31, 2016, Fusion’s Board
of Directors had not declared any dividends on the Series A
Preferred Stock, and the Company had accumulated $4.7 million of
preferred stock dividends. These dividends could be paid, at
the Company’s option, either in cash or, in 84,729 shares of
Fusion’s common stock, based on the respective conversion
prices of the Series A Preferred Stock.
F-12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Fusion’s
Board of Directors declared a dividend of $2.0 million and $1.2
million for the years ended December 31, 2016 and 2015,
respectively, related to the Company’s Series B-2 Convertible
Preferred Stock (the “Series B-2 Preferred Stock”),
which, as permitted by the terms of the Series B-2 Preferred Stock,
was paid in the form of 1,140,568 and 434,201 shares of
Fusion’s common stock. The dividends paid in 2016 include an
additional $1.2 million in dividends paid in the form of 666,667
shares of Fusion’s common stock to a holder of 5,000 shares
of Series B-2 Preferred Stock in connection with the holder’s
agreement to convert all of its Series B-2 Preferred Stock holdings
into shares of Fusion’s common stock.
Note 4. Stock-Based Compensation
The
Company's stock-based compensation plan provides for the issuance
of stock options to the Company’s employees, officers, and
directors. The Compensation Committee of Fusion’s Board of
Directors approves all awards that are granted under the Company's
stock-based compensation plan.
The
Company's 2016 Equity Incentive Plan, ratified by the
Company’s stockholders on October 28, 2016, reserves a number
of shares of common stock equal to 10% of the Company’s
shares outstanding from time to time on a fully diluted basis. The
plan provides for the grant of incentive stock options, stock
appreciation rights, restricted stock, restricted stock units,
stock grants, stock units, performance shares and performance share
units to employees, officers, non-employee directors of, and
consultants to the Company. Options under the plan typically vest
in annual increments over a three or four year period, expire ten
years from the date of grant and are issued at exercise prices no
less than 100% of the fair market value at the time of
grant.
The following table summarizes the stock option activity under our
stock plans for the years ended December 31, 2016 and
2015:
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
Outstanding
at December 31, 2014
|
607,877
|
$8.00
|
8.08
years
|
Granted
|
614,730
|
2.44
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
( 53,280)
|
3.81
|
|
Expired
|
( 11,076)
|
32.71
|
|
Outstanding
at December 31, 2015
|
1,158,251
|
4.96
|
8.43
years
|
Granted
|
1,135,650
|
1.31
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
( 89,826)
|
2.51
|
|
Expired
|
( 20,352)
|
69.46
|
|
Outstanding
at December 31, 2016
|
2,183,723
|
2.56
|
8.56
years
|
Exercisable
at December 31, 2016
|
689,963
|
4.52
|
6.85
years
|
The
Company recognized compensation expense of $853,458 and $639,296
related to stock options for the years ended December 31, 2016 and
2015, respectively. These amounts are included in
selling, general, and administrative expenses in the consolidated
statements of operations.
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:
|
Year Ended December 31,
|
|
|
2016
|
2015
|
Dividend
yield
|
0.0%
|
0.0%
|
Expected
volatility
|
92.40%
|
132.99%
|
Average
Risk-free interest rate (%)
|
1.21-2.23
|
1.78-2.25
|
Expected
life of stock option term (years)
|
6.86-8.00
|
8.43
|
F-13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
The
following table summarizes additional information regarding
outstanding and exercisable options under the stock option plans
at December 31, 2016:
Stock Options Outstanding
|
Stock Options Exercisable
|
||||||||
Range of Exercise Prices
|
Options Outstanding
|
Weighted Average Remaining Contractual Life (Years)
|
Weighted Average Exercise Price
|
Aggregate intrinsic Value
|
Options Exercisable
|
Weighted Average Remaining Contractual Life (Years)
|
Weighted Average Price
|
Aggregate intrinsic Value
|
|
$1.26
to $1.91
|
1,130,250
|
9.64
|
$1.31
|
|
-
|
-
|
$-
|
|
|
$1.93
to $2.94
|
421,950
|
8.73
|
2.14
|
|
186,995
|
8.71
|
2.12
|
|
|
$3.00
to $4.50
|
496,813
|
7.22
|
3.83
|
|
375,818
|
7.00
|
3.91
|
|
|
$4.70
to $7.50
|
106,440
|
4.69
|
5.89
|
|
98,880
|
4.50
|
5.84
|
|
|
$9.00
to $15.50
|
15,530
|
1.25
|
15.43
|
|
15,530
|
1.25
|
15.43
|
|
|
$19.50
to $34.50
|
12,730
|
0.25
|
34.38
|
|
12,730
|
0.25
|
34.38
|
|
|
$37.50
to $37.50
|
10
|
0.31
|
37.50
|
|
10
|
0.31
|
37.50
|
|
|
|
|
2,183,723
|
8.56
|
2.56
|
$242,945
|
689,963
|
6.85
|
4.52
|
$196,587
|
The
weighted-average estimated fair value of stock options granted was
$1.08 and $2.44 during the years ended December 31, 2016 and 2015,
respectively. No stock options were exercised during the
years ended December 31, 2016 and 2015. As of December
31, 2016, there was approximately $1.9 million of total
unrecognized compensation cost related to stock options granted
under the Company’s stock incentive plans, which is expected
to be recognized over a weighted-average period of 2.26
years.
During
the year ended December 31, 2016, the Company issued 55,000 shares
of restricted stock to an employee valued at $99,950, which vests
over a three year period. The Company recognized compensation
expense in connection with this grant in the approximate amount of
$25,000 for the year ended December 31, 2016.
Note 5. Acquisitions
Apptix
On
November 14, 2016, Fusion NBS Acquisition Corp.
(“FNAC”), a subsidiary of Fusion, entered into a Stock
Purchase and Sale Agreement (the “Apptix Purchase
Agreement”) with Apptix, ASA (the “Seller”),
pursuant to which FNAC acquired all of the issued and outstanding
capital stock of Apptix, Inc., a wholly-owned subsidiary of the
Seller (“Apptix”). Apptix provided cloud-based
communications, collaboration, virtual desktop, compliance,
security and cloud computing solutions to approximately 1,500
business customers across the U.S.
The
purchase price paid by FNAC for Apptix was $26.7 million, including
an adjustment for the closing date cash on hand. The purchase price
was paid with (i) $23,063,484 in cash, and (ii) 2,997,926 shares of
Fusion’s common stock (the “Seller Shares”),
valued at $1.21 per share. The cash portion of the purchase price
was funded through a new senior secured facility entered into
simultaneous with the Apptix acquisition (see note
14).
Fusion
has agreed, on or prior to November 14, 2017, at its expense (i) to
file a registration statement under the Securities Act of 1933, as
amended (the “Securities Act”) to register resale of
the Seller Shares on behalf of the Seller (and, if applicable,
distribution of the Seller Shares to the shareholders of the
Seller), (ii) to cause the registration statement to become
effective no more than 90 days following the date it is filed (120
days under certain circumstances), and (iii) to maintain the
effectiveness of the registration statement for up to two years.
Notwithstanding the foregoing, the Seller has agreed to use its
reasonable efforts to obtain an agreement from certain of its
shareholders, not to sell any such Seller Shares, including under
the registration statement, prior to November 14,
2017.
Upon
acquisition, Apptix became a wholly-owned subsidiary of FNAC. The
acquisition was accounted for as a business combination. The
preliminary allocation of the purchase price as of the acquisition
date is as follows:
F-14
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Cash
|
$67,071
|
Accounts
receivable
|
2,207,024
|
Prepaid
expenses and other current assets
|
620,270
|
Property
and equipment
|
2,878,877
|
Deferred
tax liability
|
( 1,633,853)
|
Covenant
not to compete
|
1,417,000
|
Customer
contracts
|
20,948,000
|
Accrued
liabilities
|
( 6,904,479)
|
Goodwill
|
7,091,065
|
Total
purchase price
|
$26,690,975
|
The
customer relationship intangible assets have estimated useful lives
of 5 to 15 years, and the non-compete agreement has a useful life
of one year.
The
results of operations of Apptix are reflected in the
Company’s consolidated statement of operations effective
November 14, 2016. The following table provides certain
unaudited pro forma financial information for the Company for the
years ended December 31, 2016 and 2015 as if the acquisition of
Apptix had been consummated effective as of January 1, 2015 (in
millions):
|
2016
|
2015
|
Revenues
|
$141.3
|
$136.1
|
Net
loss
|
$(16.5)
|
$(16.6)
|
Technology for Business
On March 31, 2016, the Company completed the acquisition of
substantially all of the assets of Technology for Business
Corporation (“TFB”), a provider of contact center
solutions, for an estimated purchase price of $1.3 million
consisting of $277,281 in cash and a royalty fee equal to ten
percent of the collected monthly recurring revenues derived from
sales of the cloud version of the proprietary call center software
and maintenance services. The estimated royalty fee of $1,111,606
was recognized as a non-current liability in the condensed
consolidated balance sheet and will be paid on a quarterly basis,
commencing as of the first full calendar quarter following the
second anniversary of the closing date of this acquisition. The
aggregate purchase price was allocated to the fair value of the
assets acquired and liabilities assumed as follows:
Accounts
receivable, net
|
$80,845
|
Prepaid
expenses and other current assets
|
5,535
|
Proprietary
technology
|
889,000
|
Covenant
not to compete
|
8,000
|
Customer
contracts
|
99,000
|
Current
liabilities
|
( 687,130)
|
Accrued
royalty
|
( 1,111,606)
|
Goodwill
|
993,637
|
Total
cash purchase price
|
$277,281
|
The acquisition of the assets of TFB did not have a material effect
on the Company’s results of operations or financial
condition.
Technology Opportunity Group
On
November 18, 2016, the Company entered into an agreement with
Technology Opportunity Group and an affiliated company
(collectively, “TOG”) in which the Company agreed to
assume TOG’s obligations to provide services to a list of
specified customers of TOG. In exchange for the transfer of these
customer contracts, the Company will make a cash payment to TOG in
an amount equal to twice the customer’s gross monthly
revenue. The required payment will be paid out in 18 equal monthly
installments, commencing with the customer’s first full month
of billing by the Company. The required monthly payment is subject
to adjustment in the event that the monthly revenue from the
customer increases or decreases by specified amounts. In connection
with this agreement, the Company recognized a payable to TOG and
corresponding goodwill in the amount of $0.4 million. This
acquisition did not have a material effect on the Company’s
results of operations or financial condition.
F-15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Fidelity
In a
two-step transaction completed in December 2015 and February 2016,
FNAC acquired all of the outstanding equity securities of Fidelity
Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice
Services, LLC, Fidelity Access Networks, Inc., and Fidelity
Telecom, LLC (hereinafter collectively referred to as
“Fidelity”). Fidelity provides customers with a suite
of cloud based services, including cloud voice, cloud connectivity,
cloud computing and cloud storage.
The
purchase price paid to Fidelity shareholders was $29.9 million,
consisting of $28.4 million in cash and 696,508 shares of
Fusion’s common stock valued at $1.5 million (based upon the
volume weighted average price of the common stock over a ten
trading day period ending four trading days prior to the closing
date). The acquisition was funded through borrowings under a credit
facility of approximately $27.5 million and cash on hand of
approximately $0.9 million. At closing, $1.5 million of the cash
portion of the purchase price was placed into escrow to protect the
Company against any breaches in the sellers’ representations,
warranties and covenants in the purchase agreement, to be released
in accordance with the terms of the related escrow
agreement.
The
allocation of the purchase price as of the acquisition date is as
follows:
Cash
|
$503,059
|
Accounts
receivable, net
|
273,809
|
Prepaids
|
44,735
|
Property
and equipment
|
1,111,699
|
Covenant
not to compete
|
618,000
|
Customer
contracts
|
19,243,000
|
Accrued
liabilities
|
(692,606)
|
Deferred
tax liability
|
(7,710,536)
|
Goodwill
|
16,502,971
|
Total
purchase price
|
$29,894,133
|
The
amount of goodwill recognized is primarily attributable to the
expected contributions of Fidelity to the overall corporate
strategy in addition to synergies and acquired workforce of the
acquired business. None of the goodwill or intangible assets
recognized is expected to be deductible for income tax purposes.
The intangible assets subject to amortization consist of customer
relationships and non-compete agreements, with an estimated useful
life of 14 and 5 years, respectively. During the year ended
December 31, 2016, $0.4 million of the foregoing escrowed portion
of the purchase price was remitted back to the Company, resulting
in a decrease in the purchase price and a corresponding reduction
in goodwill. Also during the year ended December 31, 2016, the
Company increased goodwill by $0.5 million due to changes in the
estimated fair values of assets and liabilities at
acquisition.
The
results of operations of Fidelity are reflected in the
Company’s consolidated statement of operations effective
December 8, 2015. The following table provides certain
unaudited pro forma financial information for the Company for the
year ended December 31, 2015 as if the acquisition of Fidelity had
been consummated effective as of January 1, 2015 (in
millions):
|
2015
|
|
|
Revenues
|
$119.2
|
Net
loss
|
$(6.9)
|
RootAxcess
In
September 2015, the Company acquired the customer base, technology
platform, infrastructure and certain other assets of RootAxcess
(“RootAxcess”), for an aggregate purchase price of $1.2
million, payable in either cash or in a mix of cash and, at the
Company’s election, in up to $300,000 in shares of
Fusion’s common stock. Of the $1.2 million
purchase price, $0.7 million was held by the Company against
potential claims arising from breaches of representation and
warranties, of which $0.2 million and $0.6 million is reflected in
Obligations under asset purchase agreements in the accompanying
consolidated balance sheets at December 31, 2016 and 2015,
respectively.
F-16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
The
aggregate purchase price was allocated to the fair value of the
assets acquired as follows:
Covenant
not to compete
|
$232,943
|
Customer
contracts/relationships
|
747,381
|
Fixed
assets acquired
|
59,810
|
Goodwill
|
159,866
|
Purchase
price
|
$1,200,000
|
All of
the forgoing acquisitions are included as part of the Business
Services business segment (See Note 12).
Note 6. Intangible Assets
All of
the Company’s identifiable intangible assets are associated
with its Business Services segment and as of December 31, 2016 and
2015 are comprised of:
|
December 31, 2016
|
December 31, 2015
|
||||
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
|
|
|
|
|
|
|
Trademarks
and tradename
|
$1,093,400
|
$(501,982)
|
$591,418
|
$1,093,400
|
$(331,651)
|
$761,749
|
Proprietary
technology
|
6,670,000
|
(4,036,915)
|
2,633,085
|
5,781,000
|
(2,756,433)
|
3,024,567
|
Non-compete
agreement
|
12,128,043
|
(9,891,892)
|
2,236,151
|
10,703,043
|
(9,220,255)
|
1,482,788
|
Customer
relationships
|
65,948,181
|
(7,827,697)
|
58,120,484
|
44,888,181
|
(4,412,819)
|
40,475,362
|
Favorable
lease intangible
|
218,000
|
(181,667)
|
36,333
|
218,000
|
(138,067)
|
79,933
|
Total
acquired intangibles
|
$86,057,624
|
$(22,440,153)
|
$63,617,471
|
$62,683,624
|
$(16,859,225)
|
$45,824,399
|
|
|
|
|
|
|
|
Aggregate
amortization expense for each of the five years subsequent to
December 31, 2016 is expected to be as follows:
Year
|
Amortization Expense
|
2017
|
$8,471,187
|
2018
|
6,425,463
|
2019
|
5,441,731
|
2020
|
5,401,348
|
2021
|
5,226,981
|
Note 7. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets at December 31, 2016 and 2015 are
as follows:
|
2016
|
2015
|
Insurance
|
$160,262
|
$93,040
|
Rent
|
5,389
|
101,916
|
Marketing
|
74,665
|
109,455
|
Software
subscriptions
|
419,431
|
498,078
|
Due
from seller of Fidelity
|
-
|
425,963
|
Due
from factoring party
|
-
|
26,018
|
Due
from seller of TOG
|
75,975
|
-
|
Comisssions
|
159,146
|
20,805
|
Other
|
265,316
|
343,328
|
Total
|
$1,160,184
|
$1,618,603
|
F-17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Note 8. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following at December
31, 2016 and 2015:
|
2016
|
2015
|
Trade
accounts payable
|
$6,358,548
|
$1,101,393
|
Accrued
license fees
|
2,881,331
|
-
|
Accrued
sales and federal excise taxes
|
2,863,363
|
2,204,098
|
Deferred
revenue
|
1,874,641
|
1,157,036
|
Accrued
network costs
|
1,416,000
|
3,423,483
|
Accrued
sales commissions
|
819,106
|
981,121
|
Property
and other taxes
|
581,956
|
534,388
|
Accrued
payroll and vacation
|
421,733
|
555,493
|
Customer
deposits
|
365,249
|
358,227
|
Interest
payable
|
304,409
|
32,221
|
Credit
card payable
|
265,985
|
384,257
|
Accrued
USF fees
|
249,825
|
494,852
|
Accrued
bonus
|
249,361
|
700,000
|
Professional
and consulting fees
|
164,878
|
274,205
|
Rent
|
127,781
|
82,894
|
Other
|
778,672
|
845,557
|
Total
|
$19,722,838
|
$13,129,225
|
Note 9. Property and Equipment
At
December 31, 2016 and 2015, property and equipment is comprised of
the following:
|
2016
|
2015
|
Network
equipment
|
$13,716,468
|
$7,875,478
|
Furniture
and fixtures
|
421,689
|
292,451
|
Computer
equipment and software
|
5,868,370
|
7,290,577
|
Customer
premise equipment
|
9,695,643
|
9,121,788
|
Vehicles
|
55,884
|
55,884
|
Leasehold
improvements
|
1,188,207
|
1,073,631
|
Assets
in progress
|
383,137
|
190,749
|
Total
|
31,329,398
|
25,900,558
|
Less:
accumulated depreciation
|
(17,080,483)
|
(11,845,065)
|
Total
|
$14,248,915
|
$14,055,493
|
Depreciation
expense was $7.5 million and $5.5 million for the years ended
December 31, 2016 and 2015, respectively. For the years ended
December 31, 2016 and 2015, $3.2 million and $3.0 million,
respectively, of the Company’s property and equipment were
financed under capital leases.
Note 10. Equipment Financing Obligations
During
the years ended December 31, 2016 and 2015, the Company entered
into several equipment financing or capital lease arrangements to
finance the purchase of network hardware and software utilized in
the Company’s operations. These arrangements
require monthly payments over a period of 24 to 48 months with
interest rates ranging between 5.3% and
6.6%.
F-18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
The
Company’s equipment financing obligations at December 31,
2016 and 2015 are as follows:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Equipment
financing obligations
|
$2,239,661
|
$3,044,796
|
Less:
current portion
|
(1,002,578)
|
(959,380)
|
Long-term
portion
|
$1,237,083
|
$2,085,416
|
The
estimated principal payments under capital lease agreements for the
years ending subsequent to December 31, 2016 are as
follows:
Year ending December 31:
|
Principal
|
2017
|
$1,002,578
|
2018
|
958,845
|
2019
|
268,044
|
2020
|
10,194
|
|
$2,239,661
|
Note 11. Supplemental Disclosure of Cash
Flow Information
Supplemental
cash flow information for the years ended December 31, 2016 and
2015 is as follows:
Supplemental Cash Flow Information
|
2016
|
2015
|
Cash paid for interest
|
$5,806,910
|
$5,064,880
|
Cash paid for income taxes
|
$-
|
$-
|
|
|
|
Supplemental Non-Cash Investing and Financing
Activities
|
|
|
Property and equipment acquired under capital leases
|
$188,497
|
$1,440,816
|
Dividend on Series B-2 preferred stock paid with the issuance of
Fusion common stock
|
$1,983,301
|
$1,174,620
|
Obligations under asset purchase agreements
|
$1,521,606
|
$633,333
|
Equipment received in exchange for settlement of accounts
receivable
|
$-
|
$105,570
|
Common stock issued for acquisitions
|
$3,627,490
|
$1,500,000
|
Common stock issued in settlement of debt - related
party
|
$-
|
$300,000
|
Common stock issued in lieu of cash bonus
|
$-
|
$25,000
|
Common stock issued to settle oustanding accounts
payable
|
$-
|
$11,877
|
Note 12. Obligations Under Asset Purchase
Agreements
In
connection with the purchase of assets of RootAxcess, the Company
held back $0.7 million of the purchase price against potential
claims arising from breaches of representation and warranties. Of
such amount, $0.4 million is to be paid to the seller in six equal
monthly installments of $66,667 on the three, six, nine, twelve,
fifteen and eighteen month anniversary of the closing
date. In addition, the Company held back $0.3 million to
be paid in three equal installments of $100,000 on each of the
twelve, fifteen, and eighteen month anniversary of the closing
date. To the extent there is an unresolved claim notice
pending (as defined in the asset purchase agreement), the monthly
installment payable to seller immediately following the delivery of
such claim notice may at the Company’s reasonable discretion
be reduced by the amount in dispute under the claim notice and such
amount will continue to be held by the Company until the claim is
resolved, at which point, the Company will disburse the withheld
amount in accordance with such resolution. During the years ended
December 31, 2016 and 2015, the Company made payments of $466,665
and $66,667, respectively, to the sellers in connection with the
terms of the holdback agreement.
F-19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
In
connection with the purchase of the assets of TFB in March 2016,
the Company recorded a contingent liability of $1,111,606 (see Note
5). The contingent liability was based on a royalty fee equal to
ten percent of the collected monthly recurring revenues to be
derived from the sale of the cloud version of the proprietary call
center software and maintenance services. In accordance with the
terms of the asset purchase agreement, the royalty fees will be
paid on a quarterly basis, commencing as of the first full calendar
quarter following the second anniversary of the closing date of
this acquisition or March 31, 2018, and will continue for a period
of 31 calendar quarters. In addition, a portion of the salary paid
to the sellers for a period of two years following the acquisition
date constitutes an advance against any royalty fee owed to the
sellers. At December 31, 2016, the outstanding balance of the
royalty fee is $936,606. There were no changes to the contingent
liability based on our evaluation of the factors used to determine
the fair value of the purchase price.
In
connection with the purchase of TOG in November of 2016, the
Company recognized a liability in the amount $0.4 million as of
December 31, 2016.
Note 13. Secured Credit
Facilities
At
December 31, 2016 and 2015, secured credit facilities are comprised
of the following:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Term
loan
|
$65,000,000
|
$25,000,000
|
Less:
|
|
|
Deferred
financing fees
|
(1,289,629)
|
(271,238)
|
Current
portion
|
(2,979,167)
|
|
Term
loan - long-term portion
|
$60,731,204
|
$24,728,762
|
|
|
|
Indebtedness
under revolving credit facility
|
$3,000,000
|
$15,000,000
|
On
August 28, 2015, FNAC entered into a $40.0 million Credit Facility
with Opus Bank, which facility was amended and restated in December
2015 (the “Amended Credit Facility”). The Amended
Credit Facility consisted of a $15.0 million, four-year revolving
credit facility, and a $25.0 million, five-year term loan. The
maturity date of amounts borrowed under the credit facility was
August 28, 2019, and the maturity date of any amounts borrowed
under the term loan was August 28, 2020.
As of
December 31, 2015, the Company had borrowed $15.0 million under the
Amended Credit Facility and $25.0 million under the term
loan. The proceeds from this credit facility were used
to retire approximately $11.0 million of notes held by Plexus Fund II, L.P., Plexus Funds III,
L.P. and Plexus Fund QP III, L.P. (“Plexus”) and $28.0
million to fund our purchase of the assets of RootAxcess and the
stock of Fidelity (see Note 5).
On
November 14, 2016, contemporaneously with the Apptix acquisition
(see note 5), FNAC entered into a new credit agreement (the
“East West Credit Agreement”) with East West Bank and
Opus (collectively with East West Bank, the “East West
Lenders”). Under the East West Credit Agreement, the East
West Lenders extended the Company (i) a $65.0 million term loan and
(ii) a $5.0 million revolving credit facility (which includes up to
$4 million in “swingline” loans that may be accessed on
a short-term basis). The proceeds of the term loan were used to
retire the $40 million outstanding under the Amended Credit
Facility, and to fund the cash portion of the purchase price of the
Apptix acquisition. In connection with the retirement of the
Amended Credit Facility, FNAC recognized a loss on the
extinguishment of debt in the amount of $0.2 million.
Borrowings
under the East West Credit Agreement are evidenced by promissory
notes bearing interest at rates computed based upon either the then
current “prime” rate of interest or “LIBOR”
rate of interest, as selected by FNAC. Interest on borrowings that
FNAC designates as “base rate” loans bear interest at
the greater of the prime rate published by the Wall Street Journal
or 3.25% per annum, in each case plus 2% per annum. Interest on
borrowings that FNAC designates as “LIBOR rate” loans
bear interest at the LIBOR rate of interest published by the Wall
Street Journal, plus 5% per annum.
F-20
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
The
Company is required to repay the term loan in equal monthly
payments of $270,833 commencing January 1, 2017 and continuing
until January 1, 2018, when monthly payments increase to $541,667,
until the maturity date of the term loan on November 12, 2021, when
the remaining $36.8 million of principal is due. Borrowings under
the revolving credit facility are also payable on the November 12,
2021 maturity date of the facility. At December 31, 2016, $3.0
million was outstanding under the revolving credit
facility.
In
conjunction with the execution of the East West Credit Agreement,
the Company and the East West Lenders also entered into (i) an IP
Security Agreement under which the Company has pledged intellectual
property to the East West Lenders to secure payment of the East
West Credit Agreement, (ii) Subordination Agreements under which
certain creditors of the Company and the East West Lenders have
established priorities among them and reached certain agreements as
to enforcing their respective rights against the Company, and (iii)
a Pledge and Security Agreement under which Fusion and FNAC have
each pledged its equity interest in its subsidiaries to the East
West Lenders.
Under
the East West Credit Agreement:
●
The Company is
subject to a number of affirmative and negative covenants,
including but not limited to, restrictions on paying indebtedness
subordinate to its obligations to the East West Lenders, incurring
additional indebtedness, making capital expenditures, dividend
payments and cash distributions by subsidiaries.
●
●
The Company is
required to comply with various financial covenants, including
leverage ratio, fixed charge coverage ratio and minimum levels of
earnings before interest, taxes, depreciation and amortization; and
its failure to comply with any of the restrictive or financial
covenants could result in an event of default and accelerated
demand for repayment of its indebtedness.
●
The Company granted
the lenders security interests on all of its assets, as well as the
capital stock of FNAC and each of its subsidiaries.
●
Fusion and its
subsidiaries (and future subsidiaries of both) have guaranteed
FNAC’s obligations, including FNAC’s repayment
obligations thereunder.
At
December 31, 2016, the Company was in compliance with all of the
financial covenants contained in the East West Credit
Agreement.
Note 14. Notes Payable – Non-Related
Parties
At
December 31, 2016 and 2015, notes payable – non-related
parties are comprised of the following:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Subordinated
notes
|
$33,588,717
|
$34,160,200
|
Discount
on subordinated notes
|
(1,368,629)
|
(1,697,091)
|
Deferred
financing fees
|
(788,486)
|
(981,553)
|
Total
notes payable - non-related parties
|
31,431,602
|
31,481,556
|
Less:
current portion
|
-
|
(685,780)
|
Long-term
portion
|
$31,431,602
|
$30,795,776
|
On
August 28, 2015, simultaneously with the execution of the original
Credit Facility with Opus Bank (see Note 13), the Company executed
the Third Amended and Restated Securities Purchase Agreement and
Security Agreement (the “Third Amendment”) with
Praesidian. Under the Third Amendment, approximately $11.0 million
of the notes held by Plexus were paid in full with borrowings
under the Amended Credit Facility, and $9.0 million of the notes
held by Plexus were paid using the proceeds from the sale of Series
F senior notes in the aggregate principal amount of $9.0 million,
bearing interest at 10.8% annually and having a maturity date of
February 28, 2021. Additionally, the maturity date of the remaining
notes was extended to February 28, 2021, and the continuing lenders
agreed to subordinate their notes to borrowings extended under the
Amended Credit Facility.
F-21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
As a
result of the retirement of the notes held by Plexus, the Company
recorded a loss on extinguishment of debt of $2.7 million in the
year ended December 31, 2015, substantially consisting of
unamortized discount. The
Company pays interest monthly at a rate of 10.8%, and recognized
interest expense of approximately $4.6 million during
2015.
On
December 8, 2015, the Company executed the Fourth Amended and
Restated Securities Purchase Agreement and Security Agreement, (the
“Fourth Amendment”), which amended the Third Amendment
to (i) provide the consent of the continuing lenders to the
acquisition of Fidelity (ii) joined Fidelity as a guarantor and
credit party under the Fourth Amended SPA, and (iii) modifying or
eliminating certain of the financial covenants contained in the
Third Amendment, specifically the requirement to maintain a minimum
unencumbered cash bank balance of $1.0 million at all times
effective as of December 31, 2015.
On
November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries
other than FNAC entered into the Fifth Amended and Restated
Securities Purchase Agreement (the “Restated Purchase
Agreement”) with Praesidian Capital Opportunity Fund III,
L.P., Praesidian Capital Opportunity Fund III-A, LP and United
Insurance Company of America (collectively, the “Praesidian
Lenders”). The Restated Purchase Agreement amends the Fourth
Amendment, pursuant to which FNAC previously sold its Series A,
Series B, Series C, Series D, Series E and Series F senior notes in
an aggregate principal amount of $33.6 million (the “SPA
Notes”).
The
Restated Purchase Agreement amends the Fourth Amendment to (i)
provide the Praesidian Lenders’ consent to the acquisition of
Apptix, (ii) join Apptix as a guarantor and credit party under the
Restated Purchase Agreement, (iii) modify certain financial
covenants contained in the Fourth Amendment such that the covenants
are now substantially similar to those contained in the East West
Credit Agreement, and (iv) extend the maturity date of the SPA
Notes to May 12, 2022. The Praesidian Lenders also entered into a
subordination agreement with the East West Lenders pursuant to
which the Praesidian Lenders have subordinated their right to
payment under the Restated Purchase Agreement and the SPA Notes to
repayment of the Company’s obligations under the East West
Credit Agreement.
Except
as described in the preceding paragraph, the Restated Purchase
Agreement contains substantially the same terms and conditions as
the Fourth Amendment. For the year ended December 31, 2016, the
Company was in compliance with all of the financial covenants
contained in the Restated Purchase Agreement.
Note 15. Notes Payable-Related Parties
At
December 31, 2016 and 2015, components of notes payable –
related parties are comprised of the following:
|
December 31,
|
December 31,
|
|
2016
|
2015
|
Notes
payable to Marvin Rosen
|
$928,081
|
$1,178,081
|
Discount
on notes
|
(52,331)
|
(103,252)
|
Total
notes payable - related parties
|
$875,750
|
$1,074,829
|
The
note payable to Marvin Rosen, Fusion’s Chairman of the Board,
is subordinated to borrowings under the East West Credit Agreement
and the Restated Purchase Agreement. This note is unsecured, pays
interest monthly at an annual rate of 7%, and matures 120 days
after the Company’s obligations under the East West Credit
Agreement and the Restated Purchase Agreement are paid in
full.
For the
years ended December 31, 2016 and 2015, the Company paid interest
on the notes payable to Mr. Rosen in the amount of $0.1 million.
During the year ended December 31, 2016, Mr. Rosen converted
$250,000 of the outstanding notes into 217,391 shares
Fusion’s common stock in conjunction with Fusion’s
private placement of common stock in November of 2016 (see note
16).
During
the year ended December 31, 2015, Mr. Rosen converted $0.3 million
of his outstanding notes into 137,615 shares of Fusion’s
common stock at conversion price of $2.18 per share of common
stock, the closing bid price of Fusion’s common stock on
December 4, 2015.
F-22
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Note 16. Equity Transactions
Common Stock
On
October 28, 2016, Fusion’s Stockholders ratified an amendment
to the Company’s Certificate of incorporation to increase the
number of authorized common shares to 90,000,000.
During
the year ended December 31, 2016, 6,025 shares of Series B-2
Preferred Stock were converted into 1,205,000 shares of common
stock. Also during the year ended December 31, 2016, the
Fusion’s Board of Directors declared dividends of $2.0
million on outstanding shares of Series B-2 Preferred Stock, which
were paid in the form of 1,140,568 shares of common stock as
permitted by the terms of the Series B-2 Preferred
Stock.
On
November 16, 2016, Fusion sold an aggregate of 2,213,700 shares of
common stock to 20 accredited investors in a private placement
transaction, and received net proceeds of $2.3 million. In
connections with this transaction, Mr. Rosen converted $250,000 of
his outstanding notes into 217,391 shares of common
stock.
During
the year ended December 31, 2016, 51,380 shares of common stock
previously issued to the sellers in a 2014 business acquisition
were cancelled by mutual agreement between the Company and the
sellers. Also during the year ended December 31, 2016, 55,000
shares of restricted common stock valued at $0.1 million were
issued to one of Fusion’s executive officers and 74,167
shares of common stock valued at $0.1 million were issued to a
third party for services rendered.
On
November 14, 2016, Fusion issued to 2,997,926 shares of common
stock as partial consideration in the Apptix acquisition
transaction.
On
December 8, 2015, Fusion sold approximately 2.6 million shares of
its common stock for aggregate proceeds of $5.6 million. In
addition, during 2015, 137,615 shares of Fusion’s common
stock were issued to Marvin Rosen upon conversion of $0.3 million
of his outstanding notes (see note 15) and $25,000 in annual bonus
due to Matthew Rosen, the Company’s Chief Executive Officer,
was paid through the issuance of 11,468 shares of common
stock.
On
August 28, 2015, in connection with the Third Amendment, Fusion
issued 728,333 shares of its common stock to the original
Praesidian Lenders under the original credit agreement upon their
cashless exercise of lenders’ warrants.
During
the three months ended December 31, 2015, Fusion issued 8,833
shares of its common stock to third party consultants at a price of
$3.36 per share of common stock, and through the fiscal year ended
December 31, 2015, Fusion has issued an aggregate of 67,000 shares
of common stock to third party consultants for services rendered
valued at $245,290.
For the
year ended December 31, 2015, Fusion’s Board of Directors
declared aggregate dividends of $1.2 million 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 434,201 shares of Fusion’s common stock. During 2015,
certain holders of Series B-2 Preferred Stock elected to convert
3,469 shares of their Series B-2 Preferred Stock into an aggregate
of 782,550 shares of Fusion’s common stock at an average
conversion price of $4.43 per share.
Preferred Stock
Fusion is authorized to issue up to 10,000,000 shares of preferred
stock. At December 31, 2016 and 2015, there were 5,045 shares of
Series A Preferred Stock issued and outstanding. In addition, as of
December 31 2016 and 2015, there were 12,254 and 18,279 shares of
Series B-2 Preferred Stock issued and outstanding,
respectively.
The holders of the Series A Preferred Stock are entitled to receive
cumulative dividends of 8% per annum payable in arrears, when and
if declared by Fusion’s Board of Directors. As of December
31, 2016, no dividend had been declared by the Fusion Board of
Directors with respect to any series of Series A Preferred Stock,
and the Company had accumulated approximately $4.7 million of
preferred stock dividends. The Series A Preferred Stock is
convertible at the option of the holder at any time at conversion
prices ranging from $39.50 per share to $83.50 per share. The
Series A preferred stock, including the accumulated dividends, is
convertible into an aggregate of 177,589 shares of common stock.
The holders of the shares of Series B-2 Preferred Stock are
entitled to receive a cumulative 6% annual dividend payable
quarterly in arrears when and if declared by the Fusion Board of
Directors, in cash or shares of Fusion common stock, at the option
of the Company.
F-23
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Commencing January 1, 2016, Fusion has the right to force the
conversion of the Series B-2 Preferred Stock into Fusion common
stock at a conversion price of $5.00 per share; provided that the
volume weighted average price for its common stock is at least
$12.50 for ten consecutive trading days.
The
following table summarizes the activity in the Company’s
various classes of preferred stock for the years ended December 31,
2016 and 2015:
|
Series A-1
|
Series A-2
|
Series A-4
|
Series B-2
|
Total
|
|||||
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
Shares
|
$
|
Balance
at December 31, 2014
|
2,375
|
$24
|
2,625
|
$26
|
45
|
$-
|
21,748
|
$218
|
26,793
|
$268
|
Conversion
of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,469)
|
(34)
|
(3,469)
|
(34)
|
Balance
at December 31, 2015
|
2,375
|
24
|
2,625
|
26
|
45
|
-
|
18,279
|
184
|
23,324
|
234
|
Conversion of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,025)
|
(60)
|
(6,025)
|
(60)
|
Balance
at December 31, 2016
|
2,375
|
$24
|
2,625
|
$26
|
45
|
$-
|
12,254
|
$124
|
17,299
|
$174
|
Each
share of Series B-2 Preferred Stock has a stated value of $1,000,
and is convertible into shares of Fusion’s common stock at
the option of the holder at a conversion price of $5.00 per share,
subject to adjustment. At December 31, 2016, the Series B-2
Preferred Stock is convertible into an aggregate of 2,450,800
shares of Fusion’s common stock.
The
holders of Series B-2 Preferred Stock have liquidation rights that
are senior to those afforded to holders of the Company’s
other equity securities, and are entitled to vote as one group with
holders of Fusion’s common stock on all matters brought to a
vote of such holders (with each share of Series B-2 Preferred Stock
being entitled to that number of votes into which the registered
holder could have converted the Series B-2 Preferred Stock on the
record date for the meeting at which the vote will be
cast). Holders of common stock are also entitled to vote
as a separate class on all matters adversely affecting (within the
meaning of Delaware law) such class.
Warrants
In
connection with various debt and equity financing transactions and
other agreements, the Company has issued warrants to purchase
shares of Fusion’s common stock. All of the
outstanding warrants are fully exercisable as of December 31, 2016.
For the years ended December 31, 2016 and 2015, the Company did not
issue any warrants.
The
following table summarizes the information relating to warrants
issued and the activity during the years ended December 31, 2016
and 2015:
|
Number of Warrants
|
Per share Exercise Price
|
Weighted Average Exercise Price
|
Outstanding
at December 31, 2014
|
4,165,108
|
$0.50 to $10.50
|
$5.48
|
Granted
in 2015
|
-
|
-
|
|
Exercised
in 2015
|
(728,333)
|
$0.50
|
$0.50
|
Expired
in 2015
|
(425,011)
|
$7.00 to $10.50
|
$9.30
|
Outstanding
at December 31, 2015
|
3,011,764
|
$3.95 to $10.15
|
$6.14
|
Granted
in 2016
|
-
|
-
|
|
Exercised
in 2016
|
-
|
-
|
|
Expired
|
(105,198)
|
$4.00-$7.00
|
$5.00
|
Outstanding
at December 31, 2016
|
2,906,566
|
$4.25-$10.15
|
$6.18
|
F-24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Note 17. Derivative
Liability
The
Company has issued warrants to purchase shares of Fusion’s
common stock in connection with certain debt and equity financing
transactions. These warrants are accounted for in accordance with
the guidance contained in ASC
Topic 815, ‘Derivatives and
Hedging’ (“ASC 815”). For
warrant instruments that do not meet an exclusion from derivative
accounting, the Company classifies the warrant instrument as a
liability at its fair value and adjusts the instrument to fair
value at each reporting period. This liability is subject to
re-measurement at each balance sheet date until the warrant is
exercised or expires, and any change in fair value is recognized in
the Company’s statement of operations. The Company
has 584,834 outstanding warrants at December 31, 2016 which provide
for a downward adjustment of the exercise price if the Company were
to issue common stock at an issuance price or issue convertible
debt or equity securities with an exercise price that is less than
the exercise price for these warrants. In addition, in
connection with the sale of the original notes to the original
Praesidian Lenders, the Company issued nominal warrants to the
original Praesidian Lenders to purchase an aggregate of 728,333
shares of its common stock. The fair values of these
warrants have been estimated using option pricing and other
valuation models, and the quoted market price of Fusion’s
common stock.
The
following assumptions were used to determine the fair value of the
warrants for the year ended December 31, 2016 and
2015:
|
Year ended December 31,
|
|
|
2016
|
2015
|
Stock
price ($)
|
1.50
|
1.88
|
Adjusted
exercise price ($)
|
1.65
|
6.25
|
Risk-free
interest rate (%)
|
1.21-2.23
|
1.78 - 2.25
|
Expected
volatility (%)
|
71.40
|
132.99
|
Time
to maturity (years)
|
2.0
|
3.0 - 4.0
|
During
the year ended December 31, 2016, the Company adjusted the
valuation of its derivative liability for warrants issued in
December 2013 and January 2014 and its valuation of certain
warrants exercised during 2015. The amount of the adjustment was a
net $772,022 impact on the condensed consolidated statements of
operations resulting from the loss on the change in the fair value
of the derivative and an additional $338,972 impact to capital in
excess of par and $433,050 increase in derivative liability in the
condensed consolidated balance sheets (see Note 18). The Company
has evaluated these adjustments in accordance with ASC 250-10-S99,
SEC Materials (formerly SEC Staff Accounting Bulletin 99,
Materiality) and concluded that both quantitatively and
qualitatively the adjustments were not material. These adjustments
were also evaluated by management in their assessment of internal
controls over financial reporting.
In
connection with the sale of certain notes to original Praesidian
Lenders, Fusion issued nominal warrants to the Praesidian Lenders
to purchase an aggregate of 728,333 shares of Fusion’s common
stock. On August 28, 2015 these nominal warrants were exercised,
and the Company recognized a reduction in the derivative liability
of $364,167 with a reclassification to equity.
During
the year ended December 31, 2015, warrants to purchase 320,000
shares of Fusion common stock that contained a downward adjustment
of the exercise price were modified to remove this provision and
thus qualified for equity treatment. As a result, the Company
reclassified $0.7 million (the fair value of the derivative
liability relative to the modified warrant at the date of the
amendment) from the derivative liability into equity.
At
December 31, 2016 and 2015, the fair value of the derivative was
$0.3 million and $1.0 million, respectively. For the
years ended December 31, 2016 and 2015, the Company recognized a
gain on the change in the fair value of this derivative of $0.5
million and $1.8 million, respectively.
F-25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Note 18. Fair Value Disclosures
The
following table represents the fair value of the liability measured
at fair value on a recurring basis, by level within the fair value
hierarchy:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
As of December 31, 2016
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
liability (see note 5)
|
|
|
$100,000
|
$100,000
|
Non-current
liabilities:
|
|
|
|
|
Contingent
liability (see note 5)
|
|
|
$836,606
|
$836,606
|
Derivative
liability (see note 17)
|
-
|
-
|
$348,650
|
$348,650
|
As of December 31, 2015
|
|
|
|
|
Non-current
liabilities:
|
|
|
|
|
Derivative
liability (see note 17)
|
-
|
-
|
$953,005
|
$953,005
|
The
following table reconciles the changes in the derivative liability
categorized within Level 3 of the fair value hierarchy for the
years ended December 31, 2016 and 2015:
Balance
at December 31, 2014
|
$3,839,569
|
Change
for the period:
|
|
Change
in fair value included in net loss
|
(1,843,997)
|
Modification
of warrant contracts reclassified to equity
|
(678,400)
|
Exercise
of lenders' warrants
|
(364,167)
|
Balance
at December 31, 2015
|
953,005
|
Change
for the period:
|
|
Change
in fair value included in net loss
|
(1,037,405)
|
Adjustment
for prior issuances and conversion of warrants
|
433,050
|
Balance
at December 31, 2016
|
$348,650
|
Note 19. Income Taxes
The
provision (benefit) for income taxes for the years ending December
31, 2016 and 2015 consists of the following:
|
2016
|
2015
|
Current
|
|
|
Federal
|
$-
|
$(7,710,000)
|
State
|
60,000
|
-
|
|
60,000
|
(7,710,000)
|
|
|
|
Deferred
|
|
|
Federal
|
(1,493,485)
|
-
|
State
|
(176,000)
|
50,000
|
|
(1,669,485)
|
50,000
|
|
|
|
Tax
provision (benefit)
|
$(1,609,485)
|
$(7,660,000)
|
F-26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
For the
years ended December 31, 2016 and 2015, the Company recorded
deferred tax liabilities of $1.7 million and $7.7 million,
respectively, as a result of intangible assets subject to
amortization acquired in business acquisitions that are not
amortizable for income tax purposes. As a result of these business
combinations, the recording of the deferred tax liabilities
resulted in a release of the valuation allowance against the
Company’s deferred tax assets of $1.7 million and $7.7
million for the years ended December 31, 2016 and 2015,
respectively, with a corresponding income tax benefit. The tax
benefit will be realized as the Company amortizes the intangible
assets over their estimated useful lives (see Note 5).
The
following reconciles the Federal statutory tax rate to the
effective income tax rate for the years ended December 31, 2016 and
2015:
|
2016
|
2015
|
|
%
|
%
|
Federal
statutory rate
|
(34.0)
|
(34.0)
|
State
net of federal tax
|
(3.4)
|
(3.6)
|
Permanent
and other items
|
1.2
|
1.1
|
Change
in valuation allowance
|
25.0
|
(11.8)
|
|
(11.2)
|
(48.3)
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets,
Management evaluates whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Based on Management’s evaluation, it is more
likely than not that the deferred tax asset will not be realized
and as such a valuation allowance has been recorded as of December
31, 2016 and 2015.
The
components of the Company's deferred tax assets and liabilities
consist of the following at December 31, 2016 and
2015:
|
2016
|
2015
|
Deferred
income tax assets:
|
|
|
Net
operating losses
|
$43,292,000
|
$32,569,000
|
Allowance
for doubtful accounts
|
99,000
|
77,000
|
Derivative
liability
|
391,000
|
620,000
|
Accrued
liabilities
|
910,000
|
1,037,000
|
Other
|
83,000
|
-
|
|
44,775,000
|
34,303,000
|
|
|
|
Deferred
income tax liabilities:
|
|
|
Intangible
assets
|
9,943,000
|
3,305,000
|
Property
and equipment
|
761,000
|
1,103,000
|
Debt
discount
|
-
|
388,000
|
|
10,704,000
|
4,796,000
|
Deferred
tax asset, net
|
34,071,000
|
29,507,000
|
|
|
|
Less:
valuation allowance
|
(34,071,000)
|
(29,507,000)
|
|
|
|
Net
deferred tax assets
|
$-
|
$-
|
At
December 31, 2016 and 2015, the Company had federal net operating
loss carryforwards of approximately $122.0 million and $93.0
million, respectively, which expire in varying amounts through
December 31, 2036. Pursuant to Code Sec. 382 of the Internal
Revenue Code (“the Code”), the utilization of net
operating loss carryforwards may be limited as a result of a
cumulative change in stock ownership of more than 50% over a three
year period. The Company underwent such a change and consequently,
the utilization of a portion of the net operating loss
carryforwards is subject to certain limitations.
F-27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
Note 20. Commitments and Contingencies
Operating Leases
The
Company has various non-cancelable operating lease agreements for
office facilities. A summary of the approximate lease commitments
under non-cancelable leases for years ending subsequent to December
31, 2016 are as follows:
Year
ending December 31:
|
|
2017
|
$1,543,787
|
2018
|
1,061,075
|
2019
|
1,034,249
|
2020
|
892,842
|
2021
|
283,116
|
Thereafter
|
192,673
|
Rent
expense for all operating leases was $1.6 million and $1.8 million
for the years ended December 31, 2016 and 2015,
respectively. Certain of the Company’s leases
include fixed rent escalation schedules or rent escalations based
upon a fixed percentage. The Company recognizes rent
expense (including escalations) on a straight-line basis over the
lease term.
Legal Matters
The
Company is from time to time involved in claims and legal actions
arising in the ordinary course of business. Management
does not expect that the outcome of any such claims or actions will
have a material effect on the Company’s liquidity, results of
operations or financial condition. In addition, due to
the regulatory nature of the communications industry, the Company
periodically receives and responds to various inquiries from state
and federal regulatory agencies. Management does not
expect the outcome of any such claims, legal actions or regulatory
inquiries to have a material impact on the Company’s
liquidity, results of operations or financial
condition.
Apptix
is currently undergoing a compliance audit for its use of certain
software licenses. The audit covers periods prior to the date the
Company acquired Apptix, and the Company has accrued approximately
$2.9 million based on the preliminary findings of the compliance
audit as part of the Apptix purchase price allocation (see notes 5
and 8). In connection with
the Apptix transaction, the Company purchased representation and
warranty insurance. Subject to applicable deductibles, the Company
believes it will be able to recover amounts arising from the audit
under this policy. Under limited circumstances, the Company may
also seek recourse directly from the seller. There can be no
assurances, however, that the Company will be able to recover any
amount related to this liability.
Note 21. Profit Sharing Plan
On June
1, 1997, the Company adopted a defined contribution profit sharing
plan, which covers all employees who meet certain eligibility
requirements. Contributions to the plan are made at the
discretion of the Board of Directors. No contributions
to the profit sharing plan were made for the years ended December
31, 2016 and 2015.
Note 22. Concentrations
Major Customers
For the
years ended December 31, 2016 and 2015, no single customer
accounted for more than 10% of the Company’s consolidated
revenues or consolidated accounts
receivable.
Geographic Concentrations
The
Company’s operations are significantly influenced by economic
factors and risks inherent in conducting business in foreign
countries, including government regulations, currency restrictions
and other factors that may significantly affect management’s
estimates and the Company’s performance.
F-28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
For the
years ended December 31, 2016 and 2015, the Company generated
approximate revenues from customers as follows:
|
2016
|
2015
|
United
States
|
$109,254,707
|
$88,526,867
|
International
Customers
|
12,790,613
|
13,167,649
|
|
$122,045,320
|
$101,694,516
|
Revenues
by geographic area are based upon the location of the
customers.
Credit Risk
The
Company maintains its cash balances in high credit quality
financial institutions. The Company’s cash
balances may, at times, exceed the deposit insurance limits
provided by the Federal Deposit Insurance Corp.
Note 23. Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise
for which separate financial information is available and evaluated
regularly by a company's chief operating decision maker in 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 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 VoIP
technology. VoIP permits a less costly and more rapid
interconnection between the Company and international
telecommunications carriers, and generally provides better profit
margins for the Company than other technologies. The
Company currently interconnects with approximately 370 carrier
customers and vendors, and is working to expand its interconnection
relationships, particularly with carriers in emerging
markets.
Business Services
Through
this operating segment, the Company provides cloud communications,
cloud connectivity, cloud 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 Apptix
effective as of November 14, 2016, TFB effective as of March 31,
2016, RootAxcess effective as of September 30, 2015, and Fidelity
effective as of December 8, 2015/February 2016.
Operating
segment information for the years ended December 31, 2016 and 2015
is summarized as follows:
F-29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
|
Year ended December 31, 2016
|
|||
|
Carrier Services
|
Business Services
|
Corporate and Unallocated*
|
Consolidated
|
Revenues
|
$35,484,101
|
$86,561,219
|
$-
|
$122,045,320
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
33,783,130
|
34,275,302
|
-
|
68,058,432
|
Gross
profit
|
1,700,971
|
52,285,917
|
-
|
53,986,888
|
Depreciation
and amortization
|
153,567
|
12,033,551
|
909,469
|
13,096,587
|
Selling,
general and administrative expenses
|
2,710,880
|
40,331,439
|
5,482,604
|
48,524,923
|
Impairment
charge
|
|
-
|
|
-
|
Interest
expense
|
-
|
(6,442,224)
|
(299,919)
|
(6,742,143)
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
265,383
|
265,383
|
Loss
on extinguishment of debt
|
-
|
(214,294)
|
-
|
(214,294)
|
Other
income (expenses)
|
-
|
36,763
|
(36,895)
|
(132)
|
Income
tax benefit
|
-
|
1,609,485
|
-
|
1,609,485
|
Net
loss
|
$(1,163,476)
|
$(5,089,343)
|
$(6,463,504)
|
$(12,716,323)
|
|
|
|
|
|
Total
assets
|
$6,265,402
|
$125,766,812
|
$-
|
$132,032,214
|
Capital
expenditures
|
$-
|
$4,766,214
|
$-
|
$4,766,214
|
|
Year ended December 31, 2015
|
|||
|
Carrier
Services
|
Business
Services
|
Corporate
and
Unallocated*
|
Consolidated
|
Revenues
|
$35,521,679
|
$66,172,837
|
$-
|
$101,694,516
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
32,596,384
|
24,127,737
|
-
|
56,724,121
|
Gross
profit
|
2,925,295
|
42,045,100
|
-
|
44,970,395
|
Depreciation
and amortization
|
185,397
|
12,359,821
|
430,763
|
12,975,981
|
Selling,
general and administrative expenses
|
4,412,087
|
32,810,336
|
3,786,685
|
41,009,107
|
Interest
expense
|
(99,010)
|
(5,757,609)
|
(206,304)
|
(6,062,923)
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
1,843,997
|
1,843,997
|
Loss
on extinguishment of debt
|
(182,083)
|
(2,538,272)
|
-
|
(2,720,355)
|
Other
income (expenses)
|
875,067
|
(818,544)
|
7,090
|
63,613
|
Income
tax benefit
|
-
|
7,660,536
|
-
|
7,660,536
|
Net
loss
|
$(1,078,215)
|
$(4,578,945)
|
$(2,572,665)
|
$ (8,229,825)
|
|
|
|
|
|
Total
assets
|
$ 4,703,799
|
$98,547,943
|
$2,500,524
|
$105,752,266
|
Capital
expenditures
|
$ 73,115
|
$3,367,335
|
$-
|
$ 3,440,450
|
*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 & Unallocated represent those operating expenses,
assets and capital expenditures that were not allocated to a
business segment or product line.
Note 24. Related Party
Transactions
Since
March 6, 2014, the Company has engaged a third party tax advisor to
prepare its tax returns and to provide related tax advisory
services. The Company paid this firm approximately $135,000 and
$155,000 for the years ended December 31, 2016 and 2015,
respectively. Larry Blum, a member of Fusion’s Board of
Directors, is a Senior Advisor and a former partner of the
Company’s outside tax advisor.
F-30