Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2017
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _____ to _____
Commission File Number: 001-32421
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
58-2342021
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(IRS
Employer Identification No.)
|
420 Lexington Avenue, Suite 1718, New York, New
York 10170
(Address
of principal executive offices) (Zip
Code)
(212) 201-2400
(Registrants
telephone number, including area code)
Indicate
by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ☑ No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such
files).
Yes ☑ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer”, “accelerated
filer”, “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filler
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filler
|
☐
|
Smaller
reporting company
|
☑
|
(do not
check if a smaller reporting company)
|
Emerging
growth company
|
☐
|
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by checkmark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the
Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act). Yes
☐ No ☑
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable date: May 8,
2017.
Title of Each Class
|
Number of Shares Outstanding
|
Common
Stock, $0.01 par value
|
22,412,403
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
TABLE OF CONTENTS
Part 1
Financial Information.
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|
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Item 1.
Financial Statements.
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3
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Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
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20
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Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
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27
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Item 4.
Controls and Procedures.
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27
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Part II
Other Information.
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Item 1.
Legal Proceedings.
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28
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Item
1A. Risk Factors.
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28
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Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds.
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28
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Item 3.
Defaults Upon Senior Securities.
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28
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Item 4.
Mine Safety Disclosures.
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28
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Item 5.
Other Information.
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28
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Item 6.
Exhibits.
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28
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Signatures.
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29
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Index
to Exhibits
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30
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2
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
PART 1 –
FINANCIAL
INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
|
March 31,
2017
|
December 31,
2016
|
ASSETS
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(unaudited)
|
|
Current assets:
|
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Cash
and cash equivalents
|
$6,642,153
|
$7,221,910
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
approximately
$690,000 and $427,000, respectively
|
12,316,401
|
9,359,876
|
Prepaid
expenses and other current assets
|
1,590,928
|
1,084,209
|
Total current assets
|
20,549,482
|
17,665,995
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Property
and equipment, net
|
13,520,740
|
14,248,915
|
Security
deposits
|
630,373
|
630,373
|
Restricted
cash
|
27,153
|
27,153
|
Goodwill
|
35,286,629
|
35,689,215
|
Intangible
assets, net
|
63,190,659
|
63,617,471
|
Other
assets
|
68,822
|
77,117
|
TOTAL ASSETS
|
$133,273,858
|
$131,956,239
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities:
|
|
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Term
loan - current portion
|
$4,062,500
|
$2,979,167
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Obligations
under asset purchase agreements - current portion
|
912,212
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546,488
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Equipment
financing obligations
|
1,041,466
|
1,002,578
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Accounts
payable and accrued expenses
|
23,347,554
|
19,722,838
|
Total current liabilities
|
29,363,732
|
24,251,071
|
Long-term liabilities:
|
|
|
Notes
payable - non-related parties, net of discount
|
31,561,993
|
31,431,602
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Notes
payable - related parties
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889,413
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875,750
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Term
loan
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58,900,945
|
60,731,204
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Indebtedness
under revolving credit facility
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3,000,000
|
3,000,000
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Obligations
under asset purchase agreements
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1,315,811
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890,811
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Equipment
financing obligations
|
974,701
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1,237,083
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Derivative
liabilities
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376,321
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348,650
|
Total liabilities
|
126,382,916
|
122,766,171
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Commitments and contingencies
|
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Stockholders' equity:
|
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Preferred
stock, $0.01 par value, 10,000,000 shares authorized,
|
|
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14,341
and 17,299 shares issued and outstanding
|
143
|
174
|
Common stock, $0.01 par value, 90,000,000 and 50,000,000 shares
authorized,
|
|
|
22,412,403
and 20,642,028 shares issued and outstanding
|
224,124
|
206,422
|
Capital
in excess of par value
|
193,398,183
|
192,233,032
|
Accumulated
deficit
|
(186,731,508)
|
(183,249,560)
|
Total stockholders' equity
|
6,890,942
|
9,190,068
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$133,273,858
|
$131,956,239
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
3
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
(unaudited)
|
For the Three Months Ended March 31,
|
|
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2017
|
2016
|
Revenues
|
$35,811,876
|
$33,794,249
|
Cost
of revenues, exclusive of depreciation and
|
|
|
amortization,
shown separately below
|
19,270,913
|
20,531,511
|
Gross profit
|
16,540,963
|
13,262,738
|
Depreciation
and amortization
|
3,837,148
|
2,916,263
|
Selling,
general and administrative expenses (including
stock-based
|
|
|
compensation
of $224,647 and $198,884)
|
14,134,875
|
11,424,786
|
Operating loss
|
(1,431,060)
|
(1,078,311)
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Other (expenses) income:
|
|
|
Interest
expense
|
(2,092,312)
|
(1,627,964)
|
(Loss)
gain on change in fair value of derivative liabilities
|
(40,445)
|
182,400
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Loss
on disposal of property and equipment
|
(26,800)
|
-
|
Other
income, net
|
116,480
|
(9,670)
|
Total
other expenses
|
(2,043,077)
|
(1,455,234)
|
Loss
before income taxes
|
(3,474,137)
|
(2,533,545)
|
Provision
for income taxes
|
(7,811)
|
-
|
Net loss
|
(3,481,948)
|
(2,533,545)
|
Preferred
stock dividends
|
(1,254,109)
|
(1,531,982)
|
Net loss attributable to common stockholders
|
(4,736,057)
|
(4,065,527)
|
|
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|
Basic and diluted loss per common share:
|
$(0.23)
|
$(0.30)
|
Weighted average common shares outstanding:
|
|
|
Basic
and diluted
|
20,707,699
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13,741,366
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’
Equity
(unaudited)
|
Preferred Stock
|
Common Stock
|
Capital in Excess of Par Value
|
Accumulated Deficit
|
Stockholders' Equity
|
||
|
Shares
|
$
|
Shares
|
$
|
|
|
|
Balance
at December 31, 2016
|
17,299
|
$174
|
20,642,028
|
$206,422
|
$192,233,032
|
$(183,249,560)
|
$9,190,068
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,481,948)
|
(3,481,948)
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Conversion
of preferred stock into common stock
|
(2,958)
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(31)
|
986,665
|
9,866
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(9,835)
|
-
|
-
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Dividends
on preferred stock
|
-
|
-
|
106,876
|
1,069
|
(1,069)
|
-
|
-
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Proceeds
from the exercise of common stock
|
|
|
|
|
|
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purchase
warrants
|
-
|
-
|
561,834
|
5,617
|
775,334
|
-
|
780,951
|
Issuance
of common stock for services rendered
|
-
|
-
|
115,000
|
1,150
|
163,300
|
-
|
164,450
|
Reclassification
of derivative liability
|
-
|
-
|
0
|
-
|
12,774
|
-
|
12,774
|
Stock-based
compensation associated with
|
|
|
|
|
|
|
|
stock
incentive plans
|
-
|
-
|
-
|
-
|
224,647
|
-
|
224,647
|
Balance
at March 31, 2017
|
14,341
|
$143
|
22,412,403
|
$224,124
|
$193,398,183
|
$(186,731,508)
|
$6,890,942
|
The accompanying notes are an integral part of these Condensed
Consolidated Financial Statements.
5
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Cash flows from operating activities:
|
|
|
Net
loss
|
$(3,481,948)
|
$( 2,533,545)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
Depreciation
and amortization
|
3,837,148
|
2,916,263
|
Loss
on disposal of property and equipment
|
26,800
|
60,822
|
Stock-based
compensation
|
224,647
|
198,884
|
Stock
issued for services rendered or in settlement of
liabilities
|
164,450
|
51,900
|
Amortization
of debt discount and deferred financing fees
|
209,628
|
158,878
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Loss
(gain) on the change in fair value of derivative
liability
|
40,445
|
(182,400)
|
Changes in operating assets and liabilities:
|
|
|
Accounts
receivable
|
(2,403,196)
|
(519,098)
|
Prepaid
expenses and other current assets
|
(874,327)
|
(930,554)
|
Other
assets
|
8,295
|
9,807
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Accounts
payable and accrued expenses
|
3,617,302
|
390,727
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Net cash provided by (used in) operating activities
|
1,369,244
|
(378,316)
|
|
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Cash flows from investing activities:
|
|
|
Purchase
of property and equipment
|
(984,642)
|
(988,768)
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Proceeds
from the sale of property and equipment
|
40,680
|
23,961
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Payment
for acquisitions, net of cash acquired
|
(558,329)
|
16,895
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Net cash used in investing activities
|
(1,502,291)
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(947,912)
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Cash flows from financing activities:
|
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Proceeds
from the exercise of common stock purchase warrants
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780,951
|
-
|
Repayments
of term loan
|
(812,500)
|
|
Payments
for obligations under asset purchase agreements
|
(191,668)
|
|
Repayments of notes payable-related
parties
|
-
|
(238,111)
|
Payments
on equipment financing obligations
|
(223,493)
|
(241,099)
|
Net cash used in financing activities
|
(446,710)
|
(479,210)
|
Net change in cash and cash equivalents
|
(579,757)
|
(1,805,438)
|
Cash and cash equivalents, including restricted cash, beginning of
period
|
7,249,063
|
7,705,666
|
Cash and cash equivalents, including restricted cash, end of
period
|
$6,669,306
|
$5,900,228
|
See accompanying notes to the Condensed Consolidated Financial
Statements.
6
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Business
Fusion
Telecommunications International, Inc. 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. Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared in all material respects in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for interim
financial information. Pursuant to the rules and regulations of the
U.S. Securities and Exchange Commission (the “SEC”),
certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted.
Because certain information and footnote disclosures have been
condensed or omitted, these unaudited consolidated financial
statements should be read in conjunction with the audited
consolidated financial statements and related notes contained in
the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2016, as amended (the “2016 Form
10-K”) as filed with the SEC. In management’s opinion,
all normal and recurring adjustments considered necessary for a
fair presentation of the financial position, results of operations
and cash flows for the periods presented have been included.
Management believes that the disclosures made in these unaudited
condensed consolidated interim financial statements are adequate to
make the information not misleading. The results of operations for
the interim periods presented are not necessarily indicative of the
results for the entire year.
Effective January 1, 2017, the Company changed the manner in which
it accounts for federal and state universal service fees and
surcharges in its consolidated statement of operations. The Company
now includes the amounts collected in revenues, and reports the
associated costs in cost of revenues, and this change has been
applied retrospectively in the Company’s consolidated
financial statements for all periods presented. As a result, both
the Company’s revenues and cost of revenues for the three
months ended March 31, 2017 and 2016 include $0.7 million and $0.6
million, respectively, of governmental fees and
surcharges.
During the three months ended March 31, 2017 and 2016,
comprehensive loss was equal to the net loss amounts presented for
the respective periods in the accompanying condensed consolidated
interim statements of operations. Also, as discussed further
below, effective January 1, 2017 the Company early adopted Accounting Standards
Update (“ASU”) 2016-18, Restricted Cash.
Liquidity
Since inception, the Company has incurred significant net losses.
At March 31, 2017, the Company had a working capital deficit of
$8.8 million and stockholders’ equity of $6.9 million. At
December 31, 2016, the Company had a working capital deficit of
$6.6 million and stockholders’ equity of $9.2 million. The
Company’s consolidated cash balance at March 31, 2017 was
$6.6 million. While the Company believes it has sufficient cash to
fund its operations and meet its operating and debt obligations for
the next twelve months, it may be required to either raise
additional capital, limit its discretionary capital expenditures or
borrow amounts available under its revolving credit facility to
support its business plan. There is currently no commitment for any
additional funding and there can be no assurances that funds will
be available on terms that are acceptable to the Company, or at
all.
Principles of Consolidation
The condensed consolidated interim financial statements include the
accounts of Fusion and each of its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of condensed consolidated interim financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated interim
financial statements and the reported amounts of revenues and
expenses during the reporting periods. 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.
7
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Equivalents
Cash
and cash equivalents include cash on deposit and short-term,
highly-liquid investments with maturities of three months or less
on the date of purchase. As of March 31, 2017 and December 31,
2016, the carrying value of cash and cash equivalents approximates
fair value due to the short period to maturity.
Fair Value of Financial Instruments
At
March 31, 2017, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximates its
fair value due to the short term nature of these financial
instruments.
Impairment of Long-Lived Assets
The
Company periodically reviews long-lived assets, including
intangible assets, for possible impairment when events or changes
in circumstances indicate that the carrying amount of an asset may
not be 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 during the three months ended
March 31, 2017 and 2016, as there were no indicators of
impairment.
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 March 31, 2017 and December 31, 2016 was $35.3 million
and $35.7 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 three months ended March 31, 2017:
Balance
at December 31, 2016
|
$35,689,215
|
Increase
in goodwill associated with a 2016 acquisition
|
7,414
|
Adjustment
to goodwill associated with acquisition of customer bases (see note
3)
|
(410,000)
|
Balance
at March 31, 2017
|
$35,286,629
|
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.
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 15) 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. The Company also may elect not to
perform the qualitative assessment and, instead, proceed directly
to the quantitative impairment test. The Company did not record any
impairment charges related to goodwill during the three months
ended March 31, 2017 and 2016.
Advertising and Marketing Costs
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
$0.1 million and $0.7 million for the three months ended March 31,
2017 and 2016, respectively, and are reflected in selling, general
and administrative expenses in the Company’s condensed
consolidated statements of operations.
8
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Income Taxes
The
accounting and reporting requirements with respect to accounting
for income taxes require an asset and liability approach. Deferred
income tax assets and liabilities are computed for differences
between the financial statement and tax bases of assets and
liabilities that will result in future taxable or deductible
amounts, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Valuation allowances are established, when necessary, to
reduce deferred income tax assets to the amount expected to be
realized.
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 March 31, 2017 and December 31,
2016. The Company is subject to income tax examinations by major
taxing authorities for all tax years since 2013 and its tax returns
may be subject to review and adjustment at a later date based on
factors including, but not limited to, on-going analyses of and
changes to tax laws, regulations and interpretations thereof. No
interest expense or penalties have been recognized as of March 31,
2017 and December 31, 2016. During the three months ended March 31,
2017 and 2016, the Company recognized no adjustments for uncertain
tax positions.
Stock-Based Compensation
The
Company recognizes expense for its employee stock-based
compensation based on the fair value of the awards at the date of
grant. 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. Compensation cost, net of estimated
forfeitures, is recognized ratably over the vesting period of the
related stock-based compensation award. For transactions in which
goods or services are received from non-employees in return for the
issuance of equity instruments, the expense is recognized in the
period when the goods and services are received at the fair value
of the consideration received or the fair value of the equity
instrument issued, whichever is more readily
determinable.
New and Recently Adopted Accounting Pronouncements
In
November 2016, the Financial Accounting Standard Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 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 early adopted ASU
2016-18 effective January 1, 2017. Adoption of this standard did
not have a material impact on the Company’s consolidated
financial statements.
In
February 2016, the FASB issued 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
as of January 1, 2017. Adoption of this standard did not have a
material impact on the Company’s consolidated financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock
Compensation, which is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2016. Under ASU 2016-09, all excess tax benefits and tax
deficiencies related to share-based payment awards are to be
recognized as income tax expense or income tax benefit in the
statement of operations. In addition, the tax effects of exercised
or vested awards should be treated as discrete items in the
reporting period in which they occur and excess tax benefits should
be recognized regardless of whether the benefit reduces taxes
payable in the current period. Adoption of this standard did not
have a material impact on the Company’s 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.
9
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Acquisitions
On
November 18, 2016, the Company entered into an asset purchase
agreement pursuant to which the Company assumed obligations to
provide services to a customer base. In connection with that
transaction, the Company recognized goodwill and a corresponding
obligation to the seller in the amount of $0.4 million. In
such agreement, the Company also agreed to pay additional
consideration to the seller if it was able to facilitate the
assignment of certain additional customers to the
Company.
On
March 1, 2017, the Company entered into an additional asset
purchase agreement with another party pursuant to which the Company
assumed obligations to provide services to a customer base and also
purchased the outstanding accounts receivables associated with that
customer base of approximately $0.6 million. As this customer base was included in the
November 2016 agreement, the Company is required to pay
consideration to the counterparty to that agreement the estimated
aggregate amount of $1.7 million (included in customer base
acquisitions in note 11). The March 2017 agreement
also provides for a
management period during which the Company will be responsible for
all aspects of the customer relationship with respect to the
acquired customer base until such time as all regulatory approvals
have been obtained, and the Company’s consolidated statement
of operations includes the revenue associated with the customer
base acquisition effective March 1, 2017. The March 2017
agreement also provides for a transition period during which the
seller thereunder will provide certain services and assistance to
the Company.
The
aggregate amount for the November 2016 and March 2017 agreements
totaled $2.3 million, comprised of the $0.6 million paid for the
accounts receivable and the $1.7 million of contingent
consideration related to the customer base which was valued at a
multiple of monthly revenue and that will be paid over a period of
18 months. These agreements did not have a material
effect on the Company’s results of operations or financial
condition.
Note 4. Loss per share
Basic
and diluted loss per share is computed by dividing the loss
attributable to common stockholders by the weighted-average number
of common shares outstanding during the period.
The
following table sets forth the computation for basic and diluted
net income per share for the three months ended March 31, 2017 and
2016:
|
Three
Months Ended March 31,
|
|
|
2017
|
2016
|
Numerator
|
|
|
Net
loss
|
$(3,481,948)
|
$(2,533,545)
|
Undeclared
dividends on Series A-1, A-2 and A-4 Convertible Preferred
Stock
|
( 99,518)
|
( 100,623)
|
Conversion
price reduction on Series B-2 Preferred Stock (see note
13)
|
( 623,574)
|
-
|
Series
B-2 warrant exchange (see note 13)
|
( 347,190)
|
-
|
Dividends
declared on Series B-2 Convertible Preferred Stock
|
( 183,827)
|
( 1,431,359)
|
Net
loss attributable to common stockholders
|
$(4,736,057)
|
$(4,065,527)
|
|
|
|
Denominator
|
|
|
Basic
and diluted weighted average common shares outstanding
|
20,707,699
|
13,741,366
|
|
|
|
Loss per share
|
|
|
Basic
and diluted
|
$(0.23)
|
$(0.30)
|
For the
three months ended March 31, 2017 and 2016, the following were
excluded from the calculation of diluted earnings per common share
because of their anti-dilutive effects:
|
For the Three Months Ended March 31,
|
|
|
2017
|
2016
|
Warrants
|
2,697,679
|
3,005,337
|
Convertible
preferred stock
|
2,063,125
|
2,627,795
|
Stock
options
|
2,151,073
|
1,123,508
|
|
6,911,877
|
6,756,640
|
The net
loss per common share calculation includes a provision for
preferred stock dividends on Fusion’s outstanding Series A-1,
A-2 and A-4 preferred stock (the “Series A Preferred
Stock”) of $0.1 million for the three months ended March 31,
2017 and 2016. Through March 31, 2017,
the Board of Directors of Fusion has never declared a dividend on
any series of the Series A Preferred Stock, resulting in
approximately $4.8 million of accumulated preferred stock
dividends. The Fusion Board declared dividends on the
Company’s Series B-2 Convertible Preferred Stock (the
“Series B-2 Preferred Stock”) of $0.2 million and $1.4
million for the three months ended March 31, 2017 and 2016,
respectively, which, as permitted by the terms of the Series B-2
Preferred Stock, was paid in the form of 106,876 and 791,946 shares
of Fusion’s common stock for the three months ended March 31,
2017 and 2016, respectively.
10
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Intangible Assets
Intangible
assets as of March 31, 2017 and December 31, 2016 are as
follows:
|
March 31, 2017
|
December 31, 2016
|
||||
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
|
|
|
|
|
|
|
Trademarks
and tradename
|
$1,093,400
|
$(544,565)
|
$548,835
|
$1,093,400
|
$(501,982)
|
$591,418
|
Proprietary
technology
|
6,670,000
|
(4,367,392)
|
2,302,608
|
6,670,000
|
(4,036,915)
|
2,633,085
|
Non-compete
agreement
|
12,128,043
|
(10,391,130)
|
1,736,913
|
12,128,043
|
(9,891,892)
|
2,236,151
|
Customer
relationships
|
67,713,181
|
(9,136,312)
|
58,576,869
|
65,948,181
|
(7,827,697)
|
58,120,484
|
Favorable
lease intangible
|
218,000
|
(192,566)
|
25,434
|
218,000
|
(181,667)
|
36,333
|
Total
acquired intangibles
|
$87,822,624
|
$(24,631,965)
|
$63,190,659
|
$86,057,624
|
$(22,440,153)
|
$63,617,471
|
Amortization
expense was $2.2 million and $1.4 million for the three months
ended March 31, 2017 and 2016, respectively. Estimated future
aggregate amortization expense is expected to be as
follows:
Year
|
Amortization Expense
|
remainder
of 2017
|
$8,583,253
|
2018
|
6,559,942
|
2019
|
5,576,211
|
2020
|
5,535,827
|
2021
|
5,361,460
|
Note 6. Supplemental
Disclosure of Cash Flow Information
Supplemental
cash flow information for the three months ended March 31, 2017 and
2016 is as follows:
|
Three Months Ended March 31,
|
|
Supplemental Cash Flow Information
|
2017
|
2016
|
Cash paid for interest
|
$2,186,314
|
$1,460,306
|
Cash paid for income taxes
|
$-
|
$-
|
|
|
|
Supplemental Non-Cash Investing and Financing
Activities
|
|
|
Property and equipment acquired under capital leases
|
$-
|
$141,240
|
Conversion
of preferred stock into common stock
|
$2,958,000
|
$-
|
Dividend on Series B-2 preferred stock paid with the issuance of
Fusion common stock
|
$183,827
|
$1,431,359
|
Obligations under asset purchase agreements
|
$1,350,000
|
$1,011,607
|
Note 7. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets at March 31, 2017 and December
31, 2016 are as follows:
|
March 31,
2017
|
December 31,
2016
|
Insurance
|
$180,523
|
$160,262
|
Rent
|
-
|
5,389
|
Marketing
|
189,905
|
74,665
|
Software
subscriptions
|
786,018
|
419,431
|
Comisssions
|
132,097
|
159,146
|
Other
|
302,385
|
265,316
|
Total
|
$1,590,928
|
$1,084,209
|
11
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses at March 31, 2017 and December 31,
2016 are as follows:
|
March 31,
2017
|
December 31,
2016
|
Trade
accounts payable
|
$5,068,040
|
$6,358,548
|
Accrued
license fees
|
2,881,331
|
2,881,331
|
Accrued
sales and federal excise taxes
|
2,647,773
|
2,863,363
|
Deferred
revenue
|
1,923,870
|
1,874,641
|
Accrued
network costs
|
6,362,545
|
1,416,000
|
Accrued
sales commissions
|
841,928
|
819,106
|
Property
and other taxes
|
814,236
|
581,956
|
Accrued
payroll and vacation
|
379,683
|
421,733
|
Customer
deposits
|
368,285
|
365,249
|
Interest
payable
|
12,025
|
304,409
|
Credit
card payable
|
53,890
|
265,985
|
Accrued
USF fees
|
244,121
|
249,825
|
Accrued
bonus
|
657,282
|
249,361
|
Professional
and consulting fees
|
128,777
|
164,878
|
Rent
|
129,164
|
127,781
|
Other
|
834,603
|
778,672
|
Total
|
$23,347,553
|
$19,722,838
|
Note 9. Equipment Financing Obligations
From time to time, the Company enters into equipment financing or
capital lease arrangements to finance the purchase of network
hardware and software utilized in its operations. These
arrangements require monthly payments over a period of 24 to 48
months with interest rates ranging between 5.3% and 6.6%. The
Company’s equipment financing obligations are as
follows:
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Equipment
financing obligations
|
$2,016,167
|
$2,239,661
|
Less:
current portion
|
(1,041,466)
|
(1,002,578)
|
Long-term
portion
|
$974,701
|
$1,237,083
|
The Company’s payment obligations under its capital leases
are as follows:
Year ending December 31:
|
Principal
|
2017
|
$779,084
|
2018
|
958,845
|
2019
|
268,044
|
2020
|
10,194
|
|
$2,016,167
|
12
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 10. Long-Term Debt
Secured Credit Facilities
As of
March 31, 2017 and December 31, 2016, secured credit facilities
consists of the following:
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Term
loan
|
$64,187,500
|
$65,000,000
|
Less:
|
|
|
Deferred
financing fees
|
(1,224,055)
|
(1,289,629)
|
Current
portion
|
(4,062,500)
|
(2,979,167)
|
Term
loan - long-term portion
|
$58,900,945
|
$60,731,204
|
|
|
|
Indebtedness
under revolving credit facility
|
$3,000,000
|
$3,000,000
|
On
November 14, 2016, Fusion NBS Acquisition Corp.
(“FNAC”), a wholly-owned subsidiary of Fusion, entered
into a new credit agreement (the “East West Credit
Agreement”) with East West Bank, as administrative agent and
the lenders identified therein (collectively with East West Bank,
the “East West Lenders”). Under the East West Credit
Agreement, the East West Lenders extended FNAC (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 a previously
existing credit facility, and to fund the cash portion of the
purchase price of the Company’s acquisition of Apptix, Inc.
(“Apptix”).
Borrowings
under the East West Credit Agreement are evidenced by 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.
The
Company is required to repay the term loan in equal monthly
payments of $270,833 from January 1, 2017 through 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 March 31, 2017 and 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 amounts outstanding.
●
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) other than FNAC have
guaranteed FNAC’s obligations, including FNAC’s
repayment obligations thereunder.
13
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
March 31, 2017 and December 31, 2016, the Company was in compliance
with all of the financial covenants contained in the East West
Credit Agreement.
Notes Payable – Non-Related Parties
At
March 31, 2017 and December 31, 2016, notes payable –
non-related parties consists of the following:
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Subordinated
notes
|
$33,588,717
|
$33,588,717
|
Discount
on subordinated notes
|
(1,286,514)
|
(1,368,629)
|
Deferred
financing fees
|
(740,210)
|
(788,486)
|
Total
notes payable - non-related parties
|
31,561,993
|
31,431,602
|
Less:
current portion
|
-
|
-
|
Long-term
portion
|
$31,561,993
|
$31,431,602
|
On
November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries
other than FNAC entered into the Fifth Amended and Restated
Securities Purchase Agreement (the “Praesidian
Facility”) 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 Praesidian Facility amends and restates a
prior facility, 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”).
Under
the terms of the Praesidian Facility, the maturity date of the SPA
Notes is May 12, 2022, no payments of principal are due until the
maturity date, and the financial covenants contained in the
Restated Purchase Agreement are substantially similar to those
contained in the East West Credit Agreement. In connection with the
execution of the Praesidian Facility, the Praesidian Lenders
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. At March 31, 2017 and December 31,
2016, the Company was in compliance with all of the financial
covenants contained in the Praesidian Facility.
Notes Payable – Related Parties
At
March 31, 2017 and December 31, 2016, notes payable – related
parties consists of the following:
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Notes
payable to Marvin Rosen
|
$928,081
|
$928,081
|
Discount
on notes
|
(38,668)
|
(52,331)
|
Total
notes payable - related parties
|
$889,413
|
$875,750
|
The
notes payable to Marvin Rosen, Fusion’s Chairman of the
Board, are 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.
Note 11. Obligations Under Asset Purchase Agreements
In
connection with certain acquisitions and asset purchases completed
by the Company during 2015, 2016 and 2017, the Company has various
obligations to the sellers, mainly for payments of portions of the
purchase price that have been deferred under the terms of the
respective purchase and sale agreements. Such obligations to
sellers or other parties associated with these transactions as of
March 31, 2017 and December 31, 2016 are as follows:
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Root
Axcess
|
$-
|
$166,668
|
Customer
base acquisitions
|
1,316,417
|
334,025
|
Technology
For Business, Inc.
|
911,606
|
936,606
|
|
2,228,023
|
1,437,299
|
Less:
current portion
|
(912,212)
|
(546,488)
|
Long-term
portion
|
$1,315,811
|
$890,811
|
14
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Derivative Liability
Fusion has issued warrants to purchase shares of its 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 are not deemed to be
indexed to Fusion’s own stock, the Company classifies such
instruments 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. At March 31, 2017,
Fusion had 565,634 warrants outstanding which provide for a
downward adjustment of the exercise price if Fusion were to issue
common stock at an issuance price, or issue convertible debt or
warrants with a conversion or exercise price, that is less than the
exercise price of these warrants. During the three months ended
March 31, 2017, 19,200 of such warrants were exercised, and as a
result approximately $13,000 was reclassified from the
Company’s derivative liability into
equity.
The fair values of these warrants have been estimated using option
pricing and other valuation models, and the quoted market price of
Fusion’s common stock. The following assumptions were
used to determine the fair value of the warrants for the three
months ended March 31, 2017 and 2016:
|
Three months ended March 31,
|
|
|
2017
|
2016
|
Stock
price ($)
|
1.58
|
1.79
|
Adjusted
Exercise price ($)
|
1.54
|
6.25
|
Risk-free
interest rate (%)
|
2.23
|
1.78
|
Expected
volatility (%)
|
74.40
|
96.70
|
Time
to maturity (years)
|
1.75
|
3.0
|
At
March 31, 2017 and December 31, 2016, the fair value of the
derivative was $0.4 million and $0.3 million, respectively. For the
three months ended March 31, 2017, the Company recognized a loss on
the change in fair value of the derivative of approximately
$28,000, and for the three months ended March 31, 2016, the Company
recognized a gain on the change in the fair value of this
derivative of $0.2 million.
Note 13. Equity Transactions
Common Stock
Fusion is authorized to issue 90,000,000 shares of its common
stock. As of March 31, 2017 and December 31, 2016, 22,412,403 and
20,642,028 shares of its common stock, respectively, were issued
and outstanding.
Effective
as of March 31, 2017, the Company entered into exchange agreements
with certain holders of Fusion’s outstanding warrants whereby
the outstanding warrants were exchanged for new warrants (the
“2017 Warrants”), which warrants permitted the holders
to exercise and purchase, for a limited period of 60 days,
unregistered shares of Fusion’s common stock at a discount of
up to 10% below the closing bid price of the common stock at the
time of exercise but in no event at a price of less than $1.30 per
share. In connection with these exchange agreements, the warrant
holders exercised warrants to purchase 561,834 shares of common
stock on March 31, 2017 at an exercise price of $1.39 per share.
The Company received proceeds from the exercise of the 2017
Warrants in the amount of $0.8 million, which will be used for
general corporate purposes. All of the 2017 Warrants were
immediately exercised and none remained outstanding as of March 31,
2017. As a result of the exchange, the Company recorded a preferred
stock dividend in the amount of $0.3 million for the difference in
fair value of the warrants that were exchanged (see note
4).
On
February 23, 2017, Fusion issued 115,000 shares of its common stock
valued at approximately $0.2 million for services rendered. During
the three months ended March 31, 2017, Fusion’s Board of
Directors declared a dividend on the Series B-2 Preferred Stock
that was paid in the form of 106,876 shares of Fusion common stock
(see note 4).
15
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Preferred Stock
Fusion
is authorized to issue up to 10,000,000 shares of preferred stock.
As of March 31, 2017 and December 31, 2016 there were 5,045 shares
of Series A Preferred Stock issued and outstanding. In addition,
there were 9,296 and 12,254 shares of Series B-2 Preferred Stock
issued and outstanding as of March 31, 2017 and December 31, 2016,
respectively.
On
March 31, 2017, the Company agreed with certain holders of its
Series B-2 Preferred Stock to convert their shares of Series B-2
Preferred Stock into shares of Fusion common stock at a conversion
price of $3.00 per share (the conversion price for such preferred
stock otherwise being $5.00 per share). As a result, 2,958 shares
of Series B-2 Preferred Stock were converted into a total of
986,665 shares of common stock, and the Company recorded a
preferred stock dividend of $0.6 million for the value of the
incremental number of common shares issued in connection with the
reduction in the Series B-2 conversion price (see note
4).
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 the Fusion’s Board, on January 1 of each year.
As of March 31, 2017, no dividend had been declared with respect to
the Series A Preferred Stock (see note 4). The holders of the
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, in cash or shares of Fusion common stock, at
the option of the Company (see note 4).
Stock Options
Fusion's 2016 Equity Incentive Plan reserves a number of
shares of common stock equal to 10% of Fusion’s shares
outstanding from time to time on a fully diluted basis, adjusted
upward for the number of shares not granted under Fusion’s
2009 Stock Option plan and for shares covered by options granted
thereunder that expire without being exercised. The 2016 Equity
Incentive Plan provides for the grant of incentive stock options,
stock appreciation rights, restricted stock, restricted stock
units, stock grants, stock units, performance shares and
performance share units to employees, officers, non-employee
directors of, and consultants to the Company. Options issued under
the various Fusion plans typically vest in annual increments over a
three or four year period, expire ten years from the date of grant
and are issued at exercise prices no less than 100% of the fair
market value at the time of grant.
The following assumptions were used to determine the fair value of
the stock options granted under Fusion’s stock-based
compensation plans using the Black-Scholes option-pricing
model:
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Dividend
yield
|
0.0%
|
0.0%
|
Expected
volatility
|
92.40%
|
96.70%
|
Average
Risk-free interest rate (%)
|
2.27
|
1.78
|
Expected
life of stock option term (years)
|
8.00
|
8.00
|
The
Company recognized compensation expense of $0.2 million for the
three months ended March 31, 2017 and 2016. These amounts are
included in selling, general and administrative expenses in the
condensed consolidated interim statements of
operations.
The
following table summarizes stock option activity for the three
months ended March 31, 2017:
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
Outstanding
at December 31, 2016
|
2,183,723
|
$2.56
|
8.56
years
|
Granted
|
14,000
|
1.48
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
( 33,700)
|
1.73
|
|
Expired
|
( 12,950)
|
33.72
|
|
Outstanding
at March 31, 2017
|
2,151,073
|
2.38
|
8.33 years
|
Exercisable
at March 31, 2017
|
698,821
|
3.97
|
6.66
years
|
As of
March 31, 2017, the Company had approximately $1.6 million of
unrecognized compensation expense, net of estimated forfeitures,
related to stock options granted under the Company’s
stock-based compensation plans, which is expected to be recognized
over a weighted-average period of 2.1 years.
16
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 14. Commitments and Contingencies
From time to time, the Company may be involved in a variety of
claims, lawsuits, investigations and proceedings relating to
contractual disputes, employment matters, regulatory and compliance
matters, intellectual property rights and other litigation arising
in the ordinary course of business. Defending such proceedings can
be costly and can impose a significant burden on management and
employees. The Company does not expect that the outcome of any such
claims or actions will have a material adverse effect on the
Company’s liquidity, results of operations or financial
condition. As of March 31, 2017, the Company did not have any
ongoing legal matters that would have a material adverse effect on
its liquidity, results of operations or financial
condition.
Recently,
Apptix underwent a compliance audit relating to its resale of
certain software licenses. The audit covers periods prior to
November 14, 2016, the date on which the Company acquired Apptix.
Based on preliminary findings from this audit, as of March 31, 2017
the Company has accrued approximately $2.9 million as part of the
Apptix purchase price allocation. On May 3, 2017, FNAC commenced a
lawsuit against the seller and certain of its and Apptix’s
officers seeking to recover all amounts that it may be required to
pay to the software vendor as well as to recoup a portion of the
purchase price paid. This suit, which was filed in the United
States District Court for the Southern District of New York,
currently seeks a total of approximately $18.0 million in damages.
There can be no assurances, however, that the Company will be able
to recover all or any portion of the amount it seeks to recover. On
May 9, 2017, the Company received formal notification from the
software vendor asserting that the total amount owed is
approximately $3.7 million. The Company is reviewing the materials
provided and is evaluating whether a further accrual may be
required. FNAC intends to amend its suit to increase the amount of
damages claimed by an additional $1.0 million.
Note 15. Segment Information
Operating segments are defined under U.S. GAAP as components of an
enterprise for which discrete financial information is available
and evaluated regularly by a company's chief operating decision
maker in deciding how to allocate resources and assess
performance.
The Company has two reportable segments – “Business
Services” and “Carrier 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 profit exclude the
Company’s executive, administrative and support costs. The
accounting policies of the segments are the same as those described
in Note 2, Summary of Significant Accounting Policies, of the
audited consolidated financial statements included in the 2016 Form
10-K. The Company’s segments and their principal activities
consist of the following:
Business Services
Through
this operating segment, the Company provides a comprehensive suite
of cloud communications, cloud connectivity, cloud computing and
managed cloud-based applications 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.
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.
17
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating
segment information for the three months ended March 31, 2017 and
2016 is summarized in the following tables:
|
Three Months Ended March 31, 2017
|
|||
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
Revenues
|
$7,330,836
|
$28,481,040
|
$-
|
$35,811,876
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
7,130,207
|
12,140,706
|
-
|
19,270,913
|
Gross
profit
|
200,629
|
16,340,334
|
-
|
16,540,963
|
Depreciation
and amortization
|
39,253
|
3,586,979
|
210,916
|
3,837,148
|
Selling,
general and administrative expenses
|
521,213
|
12,191,174
|
1,422,488
|
14,134,875
|
Interest
expense
|
-
|
(2,023,552)
|
(68,760)
|
(2,092,312)
|
Loss
on change in fair value of derivative liability
|
-
|
-
|
(40,445)
|
(40,445)
|
Other
(expenses) income
|
(39)
|
170,322
|
(80,603)
|
89,680
|
Income
tax provision
|
-
|
(7,811)
|
-
|
(7,811)
|
Net
loss
|
$(359,876)
|
$(1,298,860)
|
$(1,823,212)
|
$(3,481,948)
|
Total
assets
|
$6,367,811
|
$125,088,903
|
$1,817,144
|
$133,273,858
|
Capital
expenditures
|
$21,443
|
$963,199
|
$-
|
$984,642
|
|
Three Months Ended March 31, 2016
|
|||
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
Revenues
|
$12,231,665
|
$21,562,584
|
$-
|
$33,794,249
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
11,699,547
|
8,831,964
|
-
|
20,531,511
|
Gross
profit
|
532,118
|
12,730,620
|
-
|
13,262,738
|
Depreciation
and amortization
|
31,310
|
2,675,521
|
209,432
|
2,916,263
|
Selling,
general and administrative expenses
|
1,381,688
|
9,011,989
|
1,031,109
|
11,424,786
|
Interest
expense
|
(1,566)
|
(1,551,141)
|
(75,257)
|
(1,627,964)
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
182,400
|
182,400
|
Other
income (expenses)
|
13
|
(289,018)
|
279,335
|
(9,670)
|
Net
loss
|
$(882,433)
|
$(797,049)
|
$(854,063)
|
$(2,533,545)
|
Total
assets
|
$7,740,286
|
$93,789,887
|
$2,179,070
|
$103,709,243
|
Capital
expenditures
|
$16,244
|
$972,524
|
$-
|
$988,768
|
Note 16. Related Party Transactions
Since March 6, 2014, the Company has engaged a tax advisor to
prepare its tax returns and to provide related tax advisory
services. The Company was billed approximately $30,000 and
$34,000 for the three months ended March 31, 2017 and 2016,
respectively, by this firm. Larry Blum, a member of Fusion’s
Board of Directors, is a Senior Advisor and a former partner of
this firm.
Note 17. Fair Value Disclosures
Fair
value of financial and non-financial assets and liabilities is
defined as an exit price, representing the amount that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants. The three-tier
hierarchy for inputs used in measuring fair value, which
prioritizes the inputs used in the methodologies of measuring fair
value for assets and liabilities, is as follows:
Level
1—Quoted prices in active markets for identical assets or
liabilities
Level
2—Observable inputs other than quoted prices in active
markets for identical assets and liabilities
Level
3—No observable pricing inputs in the market
18
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following table represents the liabilities measured at fair value
on a recurring basis:
|
Level 1
|
Level 2
|
Level 3
|
Total
|
As of March 31, 2017
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$912,212
|
$912,212
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$1,315,811
|
$1,315,811
|
Derivative
liability (see note 12)
|
-
|
-
|
$376,321
|
$376,321
|
As of December 31, 2016
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$546,488
|
$546,488
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$890,811
|
$890,811
|
Derivative
liability (see note 12)
|
-
|
-
|
$348,650
|
$348,650
|
Changes
in the derivative warrant liability for the three months ended
March 31, 2017 are as follows:
Balance
at December 31, 2016
|
$348,650
|
Change
for the period:
|
|
Change
in fair value included in net loss
|
40,445
|
Warrant
exchange (see note 12)
|
(12,774)
|
Balance
at March 31, 2017
|
$376,321
|
Changes
in the contingent purchase price liability for the three months
ended March 31, 2017 are as follows:
Balance
at December 31, 2016
|
$1,437,299
|
Change
for the period:
|
|
Acquired
customer base
|
1,350,000
|
Increase
in amounts due from Technology Opportunity Group
|
(367,608)
|
Payments
made
|
(191,668)
|
Balance
at March 31, 2017
|
$2,228,023
|
19
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion should be read in conjunction with the
information contained in our unaudited consolidated financial
statements and the notes thereto appearing elsewhere herein and in
conjunction with the Management’s Discussion and Analysis set
forth in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016, as amended, originally filed with the
SEC on March 21, 2017 (the “2016 Form
10-K”).
Certain statements and the discussion contained herein regarding
the Company’s business and operations may include
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 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,” “plans,”
“expect,” “anticipate,”
“intend,” “estimate” or
“continue” or the negative thereof or other variations
thereof or comparable terminology. The reader is cautioned that all
forward-looking statements are speculative, and there are certain
risks and uncertainties that could cause actual events or results
to differ from those referred to in such forward-looking
statements. The primary risk of the Company is its ability to
attract new capital to execute its comprehensive business strategy.
There may be additional risks associated with the integration of
businesses following an acquisition, the Company’s ability to
comply with the terms of its senior debt agreements, competitors
with broader product lines and greater resources, emergence into
new markets, natural disasters, acts of war, terrorism or other
events beyond the Company’s control and the other factors
identified by the Company from time to time in its filings with the
SEC. However, the risks included should not be assumed to be the
only risks that could affect future performance. All
forward-looking statements included are made as of the date hereof,
based on information available to the Company as of the date
thereof, and the Company assumes no obligation to update any
forward-looking statements.
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 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, we are focused on becoming our business
customers’ single source for leveraging the increasing power
of the cloud, providing a robust package of what we believe to be
the essential services that form the foundation for their
successful migration to, and efficient use of, the
cloud. Our core Business Services products and services
include cloud voice and Unified Communications as a Service,
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 Infrastructure as a Service solutions are
designed to provide our larger enterprise customers with a platform
on which additional cloud services can be
layered. Complemented by our Software as a Service
solutions, such as security and business continuity, our advanced
cloud offerings include private and hybrid cloud, storage, backup
and recovery and secure file sharing that allow our customers to
experience the increased efficiencies and agility delivered by the
cloud. 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.
20
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Recent Acquisitions and Asset Purchases
On
November 14, 2016, we acquired Apptix, Inc. (“Apptix”),
for a purchase price of $26.7 million, consisting of approximately
$23.0 million in cash and 2,997,926 shares of Fusion’s common
stock. Apptix provides cloud-based communications, collaboration,
virtual desktop, compliance, security and cloud computing solutions
to approximately 1,500 business customers throughout the
U.S.
In
November 2016 and March 2017, we acquired customer bases and
recorded corresponding intangible assets of approximately $2.3
million.
Our Performance
Revenues
for the three months ended March 31, 2017 were $35.8 million, an
increase of $2.0 million, or 6%, compared to the three months ended
March 31, 2016. Our operating loss for the first three months of
2017 was $1.4 million, as compared with $1.1 million for the first
three months of 2016. Our net loss for the three months ended March
31, 2017 was $3.5 million, as compared to $2.5 million for the
three months ended March 31, 2016.
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 in the 2016 Form 10-K.
Effective January 1, 2017, we changed the manner in which we
account for federal and state universal service fees and surcharges
in our consolidated statement of operations. We now include the
amounts collected in revenues, and reports the associated costs in
cost of revenues, and this change has been applied retrospectively
in the accompanying consolidated financial statements for all
periods presented. As a result, both our revenues and cost of
revenues for the three months ended March 31, 2017 and 2016 include
$0.7 million and $0.6 million, respectively, of governmental fees
and surcharges.
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.
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.
21
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
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 these business customers.
Cost of
revenues for our Carrier Services segment is consists 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
or as they expire, 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.
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 three months ended March 31,
2017 and 2016.
Impairment
testing for goodwill is performed in the fourth fiscal quarter of
each year. 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 did not
record any impairment charges for goodwill or long-lived assets for
the three months ended March 31, 2017 and 2016.
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 Accounting Standards Update
(“ASU”) No. 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. We early adopted ASU 2016-18
effective January 1, 2017. Adoption of this standard did not have a
material impact on the Company’s consolidated financial
statements.
22
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
In
February 2016, the FASB issued 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
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock
Compensation, which is effective for fiscal years, and
interim periods within those years, beginning after December 15,
2016. Under ASU 2016-09, all excess tax benefits and tax
deficiencies related to share-based payment awards are to be
recognized as income tax expense or income tax benefit in the
statement of operations. In addition, the tax effects of exercised
or vested awards should be treated as discrete items in the
reporting period in which they occur and excess tax benefits should
be recognized regardless of whether the benefit reduces taxes
payable in the current period. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
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 as of January
1, 2017. Adoption of this standard did not have a material impact
on our 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.
RESULTS OF
OPERATIONS
Three Months Ended March 31, 2017 Compared with Three Months Ended
March 31, 2016
The
following table summarizes the results of our consolidated
operations for the three months ended March 31, 2017 and
2016:
|
2017
|
2016
|
||
|
$
|
%
|
$
|
%
|
Revenues
|
$35,811,876
|
100.0
|
$33,794,249
|
100.0
|
Cost
of revenues *
|
19,270,913
|
53.8
|
20,531,511
|
60.8
|
Gross profit
|
16,540,963
|
46.2
|
13,262,738
|
39.2
|
Depreciation
and amortization
|
3,837,148
|
10.7
|
2,916,263
|
8.6
|
Selling,
general and administrative expenses
|
14,134,875
|
39.5
|
11,424,786
|
33.8
|
Total
operating expenses
|
17,972,023
|
50.2
|
14,341,049
|
42.4
|
Operating loss
|
( 1,431,060)
|
(4.0)
|
( 1,078,311)
|
(3.2)
|
Other (expenses) income:
|
|
|
|
|
Interest
expense
|
( 2,092,312)
|
(5.8)
|
( 1,627,964)
|
(4.8)
|
(Loss)
gain on change in fair value of derivative liability
|
( 40,445)
|
(0.1)
|
182,400
|
0.5
|
Loss
on disposal of property and equipment
|
( 26,800)
|
(0.1)
|
-
|
-
|
Other
income, net
|
116,480
|
0.3
|
( 9,670)
|
(0.0)
|
Total
other expenses
|
( 2,043,077)
|
(5.7)
|
( 1,455,234)
|
(4.3)
|
Loss before income taxes
|
( 3,474,137)
|
(9.7)
|
( 2,533,545)
|
(7.5)
|
Provision
for income taxes
|
(7,811)
|
(0.0)
|
-
|
-
|
Net loss
|
$(3,481,948)
|
(9.7)
|
$(2,533,545)
|
(7.5)
|
*Exclusive
of depreciation and amortization, shown separately.
23
FUSION
TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Revenues
Consolidated
revenues were $35.8 million for the three months ended March 31,
2017, as compared to $33.8 million for the three months ended March
31, 2016, an increase of $2.0 million, or 6%.
Revenues
from the Business Services segment were $28.5 million for the three
months ended March 31, 2017 as compared to $21.6 million for the
three months ended March 31, 2016. The increase is
primarily attributable to revenue derived from new customers
obtained from our acquisition of Apptix in November
2016.
Revenues
from the Carrier Services segment were $7.3 million for the three
months ended March 31, 2017 as compared to $12.2 million for the
three months ended March 31, 2016. The decrease in Carrier Services
revenue was primarily due to a 58% reduction in the number of
minutes transmitted over our network in the first quarter of 2017,
partially offset by a 41% increase in the blended rate per minute
of traffic terminated.
Effective January 1, 2017, we changed the manner in which we
account for federal and state universal service fees and surcharges
in our consolidated statement of operations. We now include the
amounts in net revenues, and report the associated costs in cost of
revenues, and this change has been applied retrospectively in the
Company’s consolidated financial statements for all periods
presented. As a result, our Business Services revenues and cost of
revenues for the three months ended March 31, 2017 and 2016 include
$0.7 million and $0.6 million, respectively, of universal service
fees and surcharges.
Cost of Revenues and Gross Margin
Consolidated
cost of revenues was $19.3 million for the three months ended March
31, 2017, as compared to $20.5 million for the three months ended
March 31, 2016. This decrease was due
to the decline in call volume serviced by our Carrier Services
segment resulting in a $4.6 million decrease in cost of revenues
for this segment, largely offset by a $3.3 million increase in
costs resulting from higher revenues in our Business Services
segment.
Consolidated gross margin was 46.2% for the three months ended
March 31, 2017, compared to 39.2% for the three months ended March
31, 2016. The increase is due to a higher mix of Business Services
revenue, which generates a substantially higher margin than our
Carrier Services revenue, in 2017 as compared to 2016.
Gross
margin for the Business Services segment was 57.4% for the three
months ending March 31, 2017, as compared to 59.0% for the three
months ending March 31, 2016. The decrease is due
primarily to lower margins associated with revenues from the
acquired customer bases.
Gross
margin for the Carrier Services segment was 2.7% for the three
months ended March 31, 2016, as compared to 4.4% for the three
months ended March 31, 2016. The decrease in gross
margin was mainly due to a 42% increase in the cost per minute of
traffic terminated in the first quarter of 2017 as compared to the
same period of a year ago.
Depreciation and Amortization
Depreciation
and amortization expense was $3.8 million for the three months
ended March 31, 2017, as compared to $2.9 million in the same
period of 2016. The increase is primarily due to amortization expense
related to the intangible assets recognized in the Apptix
acquisition, primarily customer contracts.
Selling, General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) for
the three months ended March 31, 2017 was $14.1 million, as
compared to $11.4 million for the three months ended March 31,
2016. This
increase is driven primarily by higher salaries and employee
related costs, as well as other expenses resulting from the Apptix
acquisition in November of 2016.
Operating Loss
Our
operating loss of $1.4 million for the three months ended March 31,
2017 represents an increase of $0.4 million from the operating loss
for the three months ended March 31, 2016. The increase is due to
the increases in SG&A and depreciation and amortization
expense, largely offset by the increase in consolidated gross
profit.
Interest Expense
Interest expense was $2.1 million for the three months ended March
31, 2017, as compared to $1.6 million for the three months ended
March 31, 2016. The increase is due to an increase in outstanding
indebtedness incurred in November of 2016 to finance the Apptix
acquisition. This new financing increased our outstanding debt by
approximately $25 million.
24
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Net Loss
Our net loss for the three months ended March 31, 2017 was $3.5
million, as compared to $2.5 million for the three months ended
March 31, 2016. The increase in net loss is due to the increase in
operating loss of $0.4 million, the increase in interest expense of
$0.5 million, and the decrease in other income, net of other
expenses, of $0.1 million.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have incurred significant net losses. At
March 31, 2017, we had a working capital deficit of $8.8 million
and stockholders’ equity of $6.9 million. At December 31,
2016, we had a working capital deficit of $6.6 million and
stockholders’ equity of $9.2 million. Our consolidated cash
balance at March 31, 2017 was $6.6 million. 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 either raise additional capital, limit our discretionary capital
expenditures or borrow amounts available under our revolving credit
facility to support our business plan. There is currently no
commitment for additional funding and there can be no assurances
funds will be available on terms that are acceptable to us or at
all.
We have never paid cash dividends on our common stock, and we do
not anticipate paying cash dividends on our common stock in the
foreseeable future. We intend to retain all of our earnings, if
any, for general corporate purposes, and, if appropriate, to
finance the 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, and will be dependent upon our financial
condition, operating results, capital requirements, general
business conditions, the terms of our then existing credit
facilities, limitations under Delaware law and other factors that
Fusion’s Board 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’s
common stock. For the three months ended March 31, 2017 the Fusion
Board declared a dividend of $0.2 million 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 106,876 shares of
Fusion’s common stock.
For the
past several years we have relied primarily on the sale of
Fusion’s equity securities and the cash generated from our
Business Services segment to fund our operations, and we issued
additional debt securities to fund our acquisitions and growth
strategy. On March 31, 2017, certain holders of outstanding
warrants to purchase Fusion’s common stock exercised their
warrants and we received proceeds of approximately $0.8
million.
On
November 14, 2016, contemporaneously with the Apptix acquisition,
we entered into a credit agreement (the “East West Credit
Agreement”) with East West Bank, as administrative agent and
the lenders identified therein (collectively the “East West
Lenders”). Under the East West Credit Agreement, the East
West Lenders extended us (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 that was outstanding under a previously
existing 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 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.
We are
required to repay the term loan in equal monthly payments of
$270,833 commencing January 1, 2017 and continuing through 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 March 31, 2017, $64.2 million was
outstanding under the term loan and $3.0 million was outstanding
under the revolving credit facility.
Under
the East West Credit Agreement:
●
We are subject to a
number of affirmative and negative covenants, including but not
limited to, restrictions on paying indebtedness subordinate to our
obligations to the East West Lenders, incurring additional
indebtedness, making capital expenditures, dividend payments and
cash distributions by subsidiaries.
●
We are 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 our failure to
comply with any of the restrictive or financial covenants could
result in an event of default and accelerated demand for repayment
of this indebtedness.
●
We granted the East
West Lenders security interests in all of our assets, as well as
the capital stock of our Fusion NBS Acquisition Corp. subsidiary
(“FNAC”) and each of its subsidiaries.
●
Fusion and its
subsidiaries other than FNAC (and future subsidiaries of both)
guaranteed FNAC’s obligations, including FNAC’s
repayment obligations thereunder.
25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
On
November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries
other than FNAC entered into the Fifth Amended and Restated
Securities Purchase Agreement (the “Praesidian
Facility”) 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 Praesidian Facility amends and restates a
prior facility, 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 proceeds from the SPA Notes were used to finance
previous acquisitions within our Business Services segment. These
notes require payments of monthly interest in the amount of $0.3
million and the entire principal amount of the notes are due May
12, 2022.
The
Praesidian Facility contains financial covenants that are
substantially similar to those contained in the East West Credit
Agreement. At March 31, 2017, we were in compliance with all of the
financial covenants under the East West Credit Agreement and the
Praesidian Facility.
The following table sets forth a summary of our cash flows for the
periods indicated:
|
Three Months ended March 31,
|
|
|
2017
|
2016
|
Net
cash provided by (used in) operating activities
|
$1,445,219
|
$(378,316)
|
Net
cash used in investing activities
|
(1,502,291)
|
(947,912)
|
Net
cash used in financing activities
|
(522,685)
|
(479,210)
|
Net
(decrease) increase in cash and cash equivalents
|
(579,757)
|
(1,805,438)
|
Cash
and cash equivalents, including restricted cash, beginning of
period
|
7,249,063
|
7,705,666
|
Cash
and cash equivalents, including restricted cash, end of
period
|
$6,669,306
|
$5,900,228
|
Cash provided by operating activities was $1.4 million for the
three months ended March 31, 2017, as compared to cash used in
operating activities of $0.4 million during the three months ended
March 31, 2016.
The following table illustrates the primary components of our cash
flows from operations:
|
Three Months ended March 31,
|
|
|
2017
|
2016
|
Net
loss
|
$(3,481,948)
|
$(2,533,545)
|
Non-cash
expenses, gains and losses
|
4,503,118
|
3,269,347
|
Changes
in accounts receivable
|
(2,403,196)
|
(584,098)
|
Changes
in accounts payable and accrued expenses
|
3,617,302
|
390,727
|
Other
|
(790,057)
|
(920,747)
|
Cash
provided by (used in) operating activities
|
$1,445,219
|
$(378,316)
|
Cash used in investing activities for the three months ended March
31, 2017 consists primarily of capital expenditures in the amount
of $1.0 million, and cash paid for the acquisition of the accounts
receivables associated with the customer bases acquired (see note 3
to the accompanying Consolidated Financial Statements) in the
amount of $0.6 million. Cash used in investing activities for the
three months ended March 31, 2016 consists primarily of capital
expenditures in the amount of $1.0 million. Capital expenditures
for the remainder of 2017 are expected to be approximately $3.5
million to fund the purchase of network and related equipment and
operational support systems as we continue to grow our Business
Services segment. While we expect capital expenditures to remain at
approximately 3% to 4% of revenue, we may incur limited increases
in our capital expenditures in support of new acquisition or
revenue opportunities as they develop. A portion of our capital
expenditure requirements may be financed through capital leases or
other equipment financing arrangements.
Cash used in financing activities was $0.4 million and $0.5 million
for the three months ended March 31, 2017 and 2016, respectively.
During the first three months of 2017, we received proceeds from
the exercise of common stock purchase warrants in the amount of
$0.8 million, made principal payments on the East West Credit
Facility term loan in the amount of $0.8 million, made payments
under capital lease obligations of $0.2 million and paid down
obligations under asset purchase agreements in the amount of $0.2
million. During the first three months of 2016, we made capital
lease payments of approximately $0.2 million and made payments on
outstanding notes payable in the amount of $0.2
million.
26
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Other Matters
Inflation
We do
not believe inflation has a significant effect on our operations at
this time.
Off Balance Sheet Arrangements
At March 31, 2017, we have no off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future effect
on the Company’s financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Disclosure
under this section is not required for a smaller reporting
company.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934 (the “Exchange Act”) that are designed to
ensure that information required to be disclosed in Exchange Act
reports is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the SEC and that
such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosure. Any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures as of March 31, 2017. Based upon that
evaluation and subject to the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were effective to accomplish their
objectives.
Our Chief Executive Officer and Chief Financial Officer do not
expect that our disclosure controls or our internal controls will
prevent all error and all fraud. The design of a control system
must reflect the fact that there are resource constraints and the
benefit of controls must be considered
relative to their cost. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance
that we have detected all of our control issues and all instances
of fraud, if any. The design of any system of controls also is based
partly on certain assumptions about the likelihood of future events
and there can be no assurance that any design will succeed in
achieving our stated goals under all potential future
conditions.
There have been no changes in our internal control over financial
reporting that occurred during the three months ended March 31,
2017 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
On May
1, 2017, FNAC commenced an action in the United States District
Court for the Southern District of New York against Apptix, ASA,
Johan Lindqvist, Christopher E. Mack and Peter J. Walther. In this
action, FNAC currently seeks damages in the amount of $18.0
million, consisting of approximately $2.9 million arising from
underpayments to a software vendor and approximately $15.1 million
to recoup a portion of the purchase price paid for Apptix. FNAC
alleges, among other things, fraud under both the Securities
Exchange Act of 1934 and common law, negligent misrepresentations
and breaches of representations and warranties. On May 8, 2017,
FNAC was advised by the software vendor that it was seeking a total
of $3.9 million due to underpayments. As a result, FNAC intends to
amend its suit to increase the amount it seeks to recover by an
additional $1.0 million. At this stage of the proceeding, the
Company is not able to predict the outcome of this
lawsuit.
Item 1A. Risk Factors.
Risk
factors describing the major risks to our business can be found
under Item 1A, “Risk Factors,” in our 2016 Form 10-K.
There have been no material changes to our risk factors from those
previously disclosed in the 2016 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
Effective
as of March 31, 2017, Fusion entered into exchange agreements with
certain holders of Fusion’s outstanding warrants whereby the
outstanding warrants were exchanged for new warrants, which
warrants permitted the holders to exercise and purchase, for a
limited period of 60 days, unregistered shares of Fusion’s
common stock at a discount of up to 10% below the closing bid price
of the common stock at the time of exercise but in no event at a
price of less than $1.30 per share. The exchange was conducted
under the exemption provided by Rule 3(a)(9) of the Securities Act
of 1933, as amended (the "Securities Act"). In connection with
these exchange agreements, the warrant holders exercised warrants
to purchase 561,834 shares of Fusion common stock on March 31, 2017
at an exercise price of $1.39 per share. These shares were not
registered under the Securities Act, but were issued in reliance
upon the exemption from registration provided by Section 4(2) under
the Securities Act and/or Regulation D thereunder. The
warrantholders also represented that they were accredited investors
and that they were acquiring shares for investment purposes and not
with a view to, or for sale in connection with, any distribution
thereof. The certificates evidencing the shares bear a legend
restricting their transferability absent registration under the
Securities Act or the availability of an applicable exemption
therefrom.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not
applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
EXHIBIT NO.
|
DESCRIPTION
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
|
|
|
|
|
May 12,
2017
|
By:
|
/s/
Michael R. Bauer
|
|
|
Michael
R. Bauer
|
|
|
Chief
Financial Officer
|
|
|
|
May 12,
2017
|
By:
|
/s/
Lisa Taranto
|
|
|
Lisa
Taranto
|
|
|
Principal
Accounting Officer
|
|
|
|
29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND
SUBSIDIARIES
Index to Exhibits
EXHIBIT NO.
|
DESCRIPTION
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
30