NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations
Fusion
Telecommunications International, Inc. is a Delaware corporation
incorporated in September 1997 (“Fusion” and together
with its subsidiaries, the “Company,” “we,”
“us” and “our”). The Company is
a provider of integrated cloud solutions, including cloud voice,
cloud connectivity, cloud infrastructure, cloud computing, and
managed cloud-based applications to businesses of all sizes, and
voice over IP (“VoIP”) - based voice services to
carriers. The Company currently operates in two business
segments, Business Services and Carrier Services.
Note 2.
Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the
consolidated accounts of Fusion and its wholly-owned and partially
owned subsidiaries, and have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) and in accordance with Regulation
S-X of the Securities and Exchange Commission (the
“SEC”). All intercompany balances and transactions have
been eliminated in consolidation.
Effective
September 1, 2017, Fusion transferred 40% of its membership
interests in Fusion Global Services LLC (“FGS”) to
XcomIP, LLC (“XcomIP”), in exchange for which XcomIP
contributed assets of its carrier business to FGS. In connection
with this transaction, Fusion and XcomIP also executed a members
agreement under which Fusion has agreed to provide up to $750,000
in working capital to FGS. The Company has determined that, based
on the terms of the members agreement, it has a controlling
financial interest in FGS under the guidance set forth in
Accounting Standards Codification (“ASC”) 810,
Consolidation, therefore the accounts of FGS are consolidated into
Fusion’s consolidated financial statements as of and for the
year ended December 31, 2017. Prior to the transfer of membership
interests to XcomIP, Fusion transferred its Carrier Services
business to FGS.
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 for these fees and surcharges 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
years ended December 31, 2017 and 2016 include $3.3 million and
$2.6 million, respectively, of federal and state universal service
fees and surcharges.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the year. On an on-going basis, the
Company evaluates its estimates, including, but not limited to,
those related to recognition of revenue, allowance for doubtful
accounts; fair value measurements of its financial instruments;
useful lives of its long-lived assets used in computing
depreciation and amortization; impairment assessment of goodwill
and intangible assets; accounting for stock options and other
equity awards, particularly related to fair value estimates,
accounting for income taxes, contingencies, and litigation. Changes
in the facts or circumstances underlying these estimates could
result in material changes, and actual results could differ from
those estimates. These changes in estimates are recognized in the
period they are realized.
Reclassifications
Certain
reclassifications have been made to the prior year’s
financial statements in order to conform to the current
year’s presentation. Specifically, approximately $76,000 due
from the counterparty to the Company’s purchase of customer
bases (see note 5) has been reclassified as a reduction to the
liability due to the same counterparty. The reclassification had no
impact on results of operations as previously
reported.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term,
highly-liquid investments with maturities of three months or less
at the date of purchase. As of December 31, 2017 and 2016, the
carrying value of cash and cash equivalents approximates fair value
due to the short period of time to maturity.
Restricted Cash
Restricted cash consists of certificates of deposit that serve to
collateralize outstanding letters of credit. Restricted cash is
recorded as current or non-current assets in the consolidated
balance sheets depending on the duration of the restriction and the
purpose for which the restriction exists. At December 31, 2017 and
2016, the Company had certificates of deposit collateralizing a
letter of credit aggregating approximately $27,000. The letter of
credit is required as security for one of the Company’s
non-cancelable operating leases for office facilities.
Revenue Recognition
The
Company recognizes revenue when persuasive evidence of a sale
arrangement exists, delivery has occurred or services have been
rendered, the sales price is fixed and determinable, and
collectability is reasonably assured. The Company records
provisions against revenue for billing adjustments, which are based
upon estimates derived from factors that include, but are not
limited to, historical results, analysis of credits issued and
current economic trends. The provisions for revenue adjustments are
recorded as a reduction of revenue when the revenue is recognized.
Below is a summary of the changes in the provisions against revenue
for the years ended December 31, 2017 and 2016:
|
Balance at Beginning of Period
|
|
Posted Credits and other Adjustments
|
|
Year
ended December 31, 2017
|
$
389,257
|
2,118,418
|
(1,918,155
)
|
$
589,520
|
|
|
|
|
|
Year
ended December 31, 2016
|
$
223,045
|
2,582,163
|
(2,415,951
)
|
$
389,257
|
The
Company’s Business Services revenue includes fixed revenue
earned from monthly recurring services provided to customers, for
whom charges are contracted for over a specified period of time,
and from variable usage fees charged to customers that purchase the
Company’s Business Services products and services. Revenue
recognition commences after the provisioning, testing and
acceptance of the service by the customer. The recurring customer
charges continue until the expiration of the contract, or until
cancellation of the service by the customer. To the extent that
payments received from a customer are related to a future period,
the payment is recorded as deferred revenue until the service is
provided or the usage occurs.
Carrier
Services revenue is primarily derived from usage fees charged to
other carriers that terminate voice traffic over the
Company’s network. Variable revenue is earned based on the
length of a call, as measured by the number of minutes of duration.
It is recognized upon completion of the call, and is adjusted to
reflect the Company’s allowance for billing adjustments.
Revenue for each customer is calculated from information received
through the Company’s network switches. The Company’s
customized software tracks the information from the switches and
analyzes the call detail records against stored detailed
information about revenue rates. This software provides the Company
with the ability to complete a timely and accurate analysis of
revenue earned in a period. The Company believes that the nature of
this process is such that recorded revenues are unlikely to be
revised in future periods.
Cost of Revenues
Cost of
revenues for the Company’s Business Services segment consist
of fixed expenses which include monthly recurring charges
associated with certain platform services purchased from other
service providers, monthly recurring costs associated with private
line services and the cost of broadband Internet access used to
provide service to business customers.
For the
Company’s Carrier Services segment, cost of revenues is
comprised primarily of costs incurred from other carriers to
originate, transport, and terminate voice calls for the
Company’s carrier customers. Thus, the majority of the
Company’s cost of revenues for this segment is variable,
based upon the number of minutes actually used by the
Company’s customers and the destinations they are calling.
Call activity is tracked and analyzed with customized software that
analyzes the traffic flowing through the Company’s network
switch. During each period, the call activity is analyzed and an
accrual is recorded for the costs associated with minutes not yet
invoiced. This cost accrual is calculated using minutes from the
system and the variable cost of revenue based upon predetermined
contractual rates. Fixed expenses reflect the costs associated with
connectivity between the Company’s network infrastructure,
including its New Jersey switching facility, and certain large
carrier customers and vendors.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable is recorded net of an allowance for doubtful accounts.
On a periodic basis, the Company evaluates accounts receivable and
records an allowance for doubtful accounts based on the
Company’s history of past write-offs, collections experience
and current credit conditions. Specific customer accounts are
written off as uncollectible when collection efforts have been
exhausted and payments are not expected to be received. During the
periods presented, the Company has not experienced any significant
defaults on its accounts receivable.
Below
is a summary of the changes in allowance for doubtful accounts for
the years ended December 31, 2017 and 2016 (in
thousands):
|
Balance at Beginning of Period
|
Additions - Charged to Expense
|
Deductions - Write-offs, Payments and other
Adjustments
|
|
Year
ended December 31, 2017
|
$
427
|
1,135
|
(862
)
|
$
700
|
|
|
|
|
|
Year
ended December 31, 2016
|
$
309
|
388
|
(270
)
|
$
427
|
Business Combinations
Business
combinations are accounted for using the purchase method of
accounting, whereby the purchase price of the acquisition,
including the fair value of contingent consideration, is allocated
to the assets acquired and liabilities assumed using the fair
values determined by management as of the acquisition date. The
results of operations of all business acquisitions are included in
our Consolidated Financial Statements from the date of
acquisition.
Goodwill
as of the acquisition date, if any, is measured as the excess of
consideration transferred over the net of the acquisition date fair
values of the assets acquired and the liabilities assumed. While
the Company uses its best estimates and assumptions as part of the
purchase price allocation process to accurately value assets
acquired and liabilities assumed at the acquisition date, the
Company’s estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may
be up to one year from the acquisition date, to the extent the
Company identifies adjustments to the purchase price or the
purchase price allocation, the Company records adjustments to the
assets acquired and liabilities assumed with the corresponding
offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or
liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated statements of
operations.
All
transaction costs incurred in connection with a business
combination are expensed as incurred and are reflected in selling,
general and administrative expense in the accompanying consolidated
statements of operations.
Goodwill
Goodwill
is the excess of the acquisition cost of a business combination
over the fair value of the identifiable net assets acquired.
Goodwill at December 31, 2017 and 2016 was $34.8 million and $35.7
million, respectively. All of the Company’s goodwill is
attributable to its Business Services segment.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
following table presents the changes in the carrying amounts of
goodwill during the years ended December 31, 2017 and
2016:
Balance
at December 31, 2015
|
$
27,060,297
|
Fidelity
purchase price adjustment*
|
134,216
|
TFB
acquisition*
|
993,637
|
Apptix
acquisition
|
7,091,065
|
Customer
base acquisition*
|
410,000
|
Balance
at December 31, 2016
|
35,689,215
|
Increase
in goodwill associated with a 2016 acquisition
|
7,414
|
Settlement
of litigation with Apptix sellers (see note 16)
|
(513,000
)
|
Adjustment
to goodwill associated with acquisition of customer
bases
|
(410,000
)
|
Balance
at December 31, 2017
|
$
34,773,629
|
* - See note 5 for discussion of acquisitions
|
Goodwill
is not amortized and is tested for impairment on an annual basis in
the fourth quarter of each fiscal year and whenever events or
circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying
amount.
The
impairment test for goodwill uses a two-step approach, which is
performed at the reporting unit level. The Company has determined
that its reportable segments are its reporting units (see Note 23)
since that is the lowest level at which discrete, reliable
financial and cash flow information is available. Step one compares
the fair value of the reporting unit (calculated using a market
approach and/or a discounted cash flow method) to its carrying
value. If the carrying value exceeds the fair value, there is a
potential impairment and step two must be performed. Step two
compares the carrying value of the reporting unit’s goodwill
to its implied fair value, which is the fair value of the reporting
unit less the fair value of the unit’s assets and
liabilities, including identifiable intangible assets. If the
implied fair value of goodwill is less than its carrying amount, an
impairment is recognized.
In
testing goodwill for impairment, the Company has the option to
first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more
likely than not (more than 50%) that the estimated fair value of a
reporting unit is less than its carrying amount. If the Company
elects to perform a qualitative assessment and determines that an
impairment is more likely than not, it is then required to perform
a quantitative impairment test, otherwise no further analysis is
required. The Company also may elect not to perform the qualitative
assessment and, instead, proceed directly to the quantitative
impairment test.
The
Company performed a quantitative impairment analysis on its
goodwill as of December 31, 2017 and 2016 and determined that
goodwill was not impaired.
Impairment of Long-Lived Assets
The
Company reviews long-lived assets, including intangible assets, for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be fully recoverable.
If an impairment indicator is present, the Company evaluates
recoverability by a comparison of the carrying amount of the assets
to future undiscounted net cash flows expected to be generated by
the assets. If the carrying value of the asset exceeds the
projected undiscounted cash flows, the Company is required to
estimate the fair value of the asset and recognize an impairment
charge to the extent that the carrying value of the asset exceeds
its estimated fair value. The Company recorded an impairment charge
related to its intangible assets in the amount of $0.6 million in
the year ended December 31, 2017 and did not record any impairment
charges for the year ended December 31, 2016.
Property and Equipment
Property
and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets
as follows:
Asset
|
|
Estimated Useful
Lives
|
|
|
|
Network equipment
|
|
5 - 7 Years
|
Furniture and fixtures
|
|
3 - 7 Years
|
Computer equipment and software
|
|
3 - 5 Years
|
Customer premise equipment
|
|
2 - 3 Years
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Leasehold
improvements are depreciated over the shorter of the estimated
useful lives of the assets or the term of the associated lease.
Maintenance and repairs are recorded as a period expense, while
betterments and improvements are capitalized.
The
Company capitalizes a portion of its payroll and related costs for
the development of software for internal use and amortizes these
costs over three years. During the years ended December 31, 2017
and 2016, the Company capitalized costs pertaining to the
development of internally used software in the amount of $2.0
million and $1.2 million, respectively.
Fair Value of Financial Instruments
The
Company applies fair value accounting for all financial assets and
liabilities and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a recurring basis. Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for
assets and liabilities which are required to be recorded at fair
value, the Company considers the principal or most advantageous
market in which it would transact and the market-based risk
measurements or assumptions that market participants would use in
pricing the asset or liability, such as risks inherent in valuation
techniques, transfer restrictions and credit risk. Fair value is
estimated by applying the following hierarchy, which prioritizes
the inputs used to measure fair value into three levels and bases
the categorization within the hierarchy upon the lowest level of
input that is available and significant to the fair value
measurement:
●
Level 1 applies
to assets or liabilities for which there are quoted prices in
active markets for identical assets or liabilities that the Company
has the ability to access at the measurement date.
●
Level 2 applies
to assets or liabilities for which there are inputs other than
quoted prices included in Level 1 that are observable for the asset
or liability, either directly or indirectly, such as quoted prices
for similar assets or liabilities in active markets; quoted prices
for identical assets or liabilities in markets with insufficient
volume or infrequent transactions (less active
markets).
●
Level 3 applies
to assets or liabilities for which fair value is derived from
valuation techniques in which one or more significant inputs are
unobservable, including the Company's own assumptions.
The
estimated fair value of financial instruments is determined by the
Company using available market information and valuation
methodologies considered to be appropriate. At December 31, 2017
and 2016, the carrying value of the Company’s accounts
receivable, accounts payable and accrued expenses approximate their
fair values due to their short maturities.
Derivative Financial Instruments
The
Company accounts for equity and equity indexed instruments with
down round provisions issued in conjunction with the issuance of
debt or equity securities of the Company in accordance with the
guidance contained in Accounting Standards Codification
(“ASC”) Topic 815,
Derivatives and Hedging
(“ASC
815”). For warrant instruments that are not deemed to be
indexed to Fusion’s common stock, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until
exercised, and any change in fair value is recognized in the
Company’s statements of operations (see notes 17 and 18). The
fair values of the warrants have been estimated using option
pricing and other valuation models, and the quoted market price of
Fusion’s common stock (see notes 17 and 18).
Stock-Based Compensation
The
Company recognizes expense for its employee stock-based
compensation based on the fair value of the award at the date of
grant. The fair values of stock options are estimated using the
Black-Scholes option valuation model. The use of the Black-Scholes
option valuation model requires the input of subjective
assumptions. Measured compensation cost, net of estimated
forfeitures, is recognized ratably over the vesting period of the
related stock-based compensation award. For transactions in which
goods or services are the consideration received from non-employees
in return for the issuance of equity instruments, the expense is
recognized in the period when the goods and services are received
at the fair value of the consideration received or the fair value
of the equity instrument issued, whichever is determined to be a
more reliable measurement.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Advertising and Marketing
Advertising
and marketing expense includes cost for promotional materials and
trade show expenses for the marketing of the Company’s
products and services. Advertising and marketing expenses were $0.5
million and $0.7 million for the years ended December 31, 2017 and
2016, respectively.
Income Taxes
The
accounting and reporting requirements with respect to income taxes
require an asset and liability approach. Deferred income tax assets
and liabilities are computed for differences between the financial
statement and tax bases of assets and liabilities that will result
in future taxable or deductible amounts, based on enacted tax laws
and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred income tax assets
to the amount expected to be realized.
In
accordance with U.S. GAAP, the Company is required to determine
whether a tax position of the Company is more likely than not to be
sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation
processes, based on the technical merits of the position. The tax
benefit to be recognized is measured as the largest amount of
benefit that is greater than fifty percent likely of being realized
upon ultimate settlement. Derecognition of a tax benefit previously
recognized could result in the Company recording a tax liability
that would reduce net assets. Based on its analysis, the Company
has determined that it has not incurred any liability for
unrecognized tax benefits as of December 31, 2017 and
2016.
No
interest expense or penalties have been recognized as of December
31, 2017 and 2016. During the years ended December 31, 2017 and
2016, the Company recognized no adjustments for uncertain tax
positions.
Recently Issued Accounting Pronouncements
In July
2017, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815). The amendments in Part I of this update change
the classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. As a result, a freestanding
equity-linked financial instrument (or embedded conversion option)
no longer would be accounted for as a derivative liability at fair
value as a result of the existence of a down round feature. This
standard is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early
adoption permitted. The Company is currently evaluating the effect
that the new guidance will have on its financial statements and
related disclosures.
During
the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment. The amendments in this update eliminate the requirement
to perform step two of the goodwill impairment test, which requires
a hypothetical purchase price allocation when an impairment is
determined to have occurred. A goodwill impairment will now be the
amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. This
standard update is effective as of the first quarter of 2020;
however, early adoption is permitted for any interim or annual
impairment tests performed after January 1, 2017. Fusion will adopt
this standard on January 1, 2018. The adoption of this standard
update will not have a significant impact on Company’s
financial statements.
In
November 2016, the FASB issued 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. 2016-02, Leases, which is
effective for fiscal years, and interim periods within those years,
beginning after December 15, 2018 with early adoption permitted.
Under ASU 2016-02, lessees will be required to recognize for all
leases at the commencement date 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, 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 became
effective as of January 1, 2017. Adoption of this standard did not
have a material impact on the Company’s consolidated
financial statements.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
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, the FASB issued new guidance related to revenue recognition,
ASU 2014-09, Revenue from Contracts with Customers (“ASC
606”), which outlines a comprehensive revenue recognition
model and supersedes most current revenue recognition guidance. The
new guidance requires a company to recognize revenue upon transfer
of goods or services to a customer at an amount that reflects the
expected consideration to be received in exchange for those goods
or services. ASC 606 defines a five-step approach for recognizing
revenue: (i) identification of the contract, (ii) identification of
the performance obligations, (iii) determination of the transaction
price, (iv) allocation of the transaction price to the performance
obligations, and (v) recognition of revenue as the entity satisfies
the performance obligations. The new criteria for revenue
recognition may require a company to use more judgment and make
more estimates than under the current guidance. The new guidance
becomes effective in calendar year 2018 and early adoption in
calendar year 2017 is permitted. Two methods of adoption are
permitted: (a) full retrospective adoption, meaning the standard is
applied to all periods presented; or (b) modified retrospective
adoption, meaning the cumulative effect of applying the new
guidance is recognized at the date of initial application as an
adjustment to the opening retained earnings balance.
In
March 2016, April 2016 and December 2016, the FASB issued ASU No.
2016-08, Revenue From Contracts with Customers (ASC 606): Principal
Versus Agent Considerations, ASU No. 2016-10, Revenue From
Contracts with Customers (ASC 606): Identifying Performance
Obligations and Licensing, and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue From Contracts
with Customers, respectively, which further clarify the
implementation guidance on principal versus agent considerations
contained in ASU No. 2014-09. In May 2016, the FASB issued ASU
2016-12, Revenue from Contracts with Customers, narrow-scope
improvements and practical expedients which provides clarification
on assessing the collectability criterion, presentation of sales
taxes, measurement date for non-cash consideration and completed
contracts at transition. These standards will be effective for the
Company beginning in the first quarter of 2018. Early adoption is
permitted.
The
Company will adopt the new standard and related updates effective
January 1, 2018, using the modified retrospective method of
adoption. The Company estimates that, based on available
information, both the impact of the adjustment to opening retained
earnings and the ongoing impact from the deferral of acquisition
costs and activation and installation revenues will not be material
to the Company’s financial statements.
Note 3. Loss per Share
Basic
and diluted loss per share is computed by dividing (i) loss
available to common stockholders by (ii) the weighted-average
number of shares of common stock outstanding during the period,
increased by the number of shares underlying such warrants with a
nominal exercise price as if such exercise had occurred at the
beginning of the year.
The
following table sets forth the computation of the Company’s
basic and diluted net loss per share during the years ended
December 31, 2017 and 2016:
|
|
|
|
|
Numerator
|
|
|
Net
loss attributable to Fusion Telecommunications International,
Inc.
|
$
(14,014,523
)
|
$
(12,716,323
)
|
Undeclared
dividends on Series A-1, A-2 and A-4 Convertible Preferred
Stock
|
(403,600
)
|
(404,706
)
|
Conversion
price reduction on Series B-2 Preferred Stock (see note
16)
|
(623,574
)
|
-
|
Series
B-2 warrant exchange (see note 16)
|
(347,191
)
|
-
|
Dividends
declared on Series B-2 Convertible Preferred Stock
|
(463,162
)
|
(1,983,301
)
|
Net
loss attributable to common stockholders
|
$
(15,852,050
)
|
$
(15,104,330
)
|
|
|
|
Denominator
|
|
|
Basic
and diluted weighted average common shares outstanding
|
21,969,601
|
15,406,184
|
|
|
|
Loss per share
|
|
|
Basic
and diluted
|
$
(0.72
)
|
$
(0.98
)
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
For the
years ended December 31, 2017 and 2016, the following outstanding
securities were excluded from the calculation of diluted earnings
per common share because of their anti-dilutive
effects:
|
For the Years Ended December 31,
|
|
|
|
Warrants
|
2,000,988
|
2,902,862
|
Convertible
preferred stock
|
2,045,979
|
2,628,389
|
Stock
options
|
3,017,927
|
2,183,723
|
|
7,064,894
|
7,714,974
|
The net
loss per common share calculation includes a provision for
preferred stock dividends on the Company’s outstanding Series
A-1 Preferred Stock, Series A-2 Preferred Stock and Series A-4
Preferred Stock (collectively, the “Series A Preferred
Stock”) of $0.4 million for the years ended December 31, 2017
and 2016. As of December 31, 2017, Fusion’s Board of
Directors had not declared any dividends on the Series A Preferred
Stock, and the Company had accumulated $5.1 million of preferred
stock dividends.
Fusion’s
Board of Directors declared dividends in the aggregate of $1.4
million and $2.0 million for the years ended December 31, 2017 and
2016, respectively, related to the Company’s Series B-2
Convertible Preferred Stock (the “Series B-2 Preferred
Stock”), which, as permitted by the terms of the Series B-2
Preferred Stock, was paid in the form of 256,706 and 1,140,568
shares of Fusion’s common stock for the years ended December
31, 2017 and 2016, respectively. No dividends were declared or paid
on the Series B-2 Preferred Stock for the quarter ended December
31, 2017. The dividends paid in 2016 include an additional $1.2
million in dividends paid in the form of 666,667 shares of
Fusion’s common stock to a holder of 5,000 shares of Series
B-2 Preferred Stock in connection with the holder’s agreement
to convert all of its Series B-2 Preferred Stock holdings into
shares of Fusion’s common stock.
Note 4. Stock-Based Compensation
The
Company's stock-based compensation plan provides for the issuance
of stock options to the Company’s employees, officers, and
directors. The Compensation Committee of Fusion’s Board of
Directors approves all awards that are granted under the Company's
stock-based compensation plan.
The
Company's 2016 Equity Incentive Plan, ratified by the
Company’s stockholders on October 28, 2016, reserves a number
of shares of common stock equal to 10% of the Company’s
shares outstanding from time to time on a fully diluted basis. The
plan provides for the grant of incentive stock options, stock
appreciation rights, restricted stock, restricted stock units,
stock grants, stock units, performance shares and performance share
units to employees, officers, non-employee directors of, and
consultants to the Company. Options under the plan typically vest
in annual increments over a three or four year period, expire ten
years from the date of grant and are issued at exercise prices no
less than 100% of the fair market value at the time of
grant.
The following table summarizes the stock option activity under the
Company’s stock plans for the years ended December 31, 2017
and 2016:
|
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
Outstanding
at December 31, 2015
|
1,158,251
|
$
4.96
|
8.43
years
|
Granted
|
1,135,650
|
1.31
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
(89,826
)
|
2.51
|
|
Expired
|
(20,352
)
|
69.46
|
|
Outstanding
at December 31, 2016
|
2,183,723
|
2.56
|
8.56
years
|
Granted
|
949,298
|
2.37
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
( 85,802
)
|
1.65
|
|
Expired
|
( 29,292
)
|
17.32
|
|
Outstanding
at December 31, 2017
|
3,017,927
|
2.38
|
8.26
years
|
Exercisable
at December 31, 2017
|
1,860,667
|
2.81
|
7.82
years
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
Company recognized compensation expense of $2.5 million and $0.9
million related to stock options for the years ended December 31,
2017 and 2016, respectively. These amounts are included in selling,
general, and administrative expenses in the accompanying
consolidated statements of operations.
The
following range of assumptions were used to determine the fair
value of the stock options granted under the Company’s
stock-based compensation plan using the Black-Scholes
option-pricing model:
|
|
|
|
|
Dividend
yield
|
0.0
%
|
0.0
%
|
Expected
volatility
|
92.40
%
|
92.40
%
|
Average
Risk-free interest rate (%)
|
2.00-2.43
|
1.21-2.23
|
Expected
life of stock option term (years)
|
8.00
|
6.86-8.00
|
The
following table summarizes additional information regarding
outstanding and exercisable options under the stock option plans at
December 31, 2017:
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price
|
Aggregate
intrinsic Value
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
Aggregate
intrinsic Value
|
|
1,116,100
|
8.74
|
$
1.29
|
|
346,148
|
8.57
|
$
1.27
|
|
|
1,268,898
|
9.10
|
2.34
|
|
918,715
|
8.96
|
2.33
|
|
|
327,395
|
6.82
|
3.48
|
|
291,989
|
6.74
|
3.48
|
|
|
290,364
|
4.77
|
4.83
|
|
288,645
|
4.76
|
4.83
|
|
|
15,170
|
0.24
|
15.40
|
|
15,170
|
0.24
|
15.44
|
|
|
3,017,927
|
8.26
|
2.38
|
$
4,620,526
|
1,860,667
|
7.82
|
2.81
|
$
2,243,741
|
The
weighted-average estimated fair value of stock options granted was
$1.96 and $1.08 during the years ended December 31, 2017 and 2016,
respectively. No stock options were exercised during the years
ended December 31, 2017 and 2016. As of December 31, 2017, there
was approximately $1.2 million of total unrecognized compensation
cost related to stock options granted under the Company’s
stock incentive plans, which is expected to be recognized over a
weighted-average period of 1.52 years.
During
the year ended December 31, 2016, the Company issued 55,000 shares
of restricted stock to an employee valued at $99,950, which vests
over a three year period. The Company recognized compensation
expense in connection with this grant in the approximate amount of
$33,000 for the year ended December 31, 2017.
Note 5. Acquisitions
Apptix
On
November 14, 2016, Fusion NBS Acquisition Corp.
(“FNAC”), a subsidiary of Fusion, entered into a Stock
Purchase and Sale Agreement (the “Apptix Purchase
Agreement”) with Apptix, ASA (the “Seller”),
pursuant to which FNAC acquired all of the issued and outstanding
capital stock of Apptix, Inc., a wholly-owned subsidiary of the
Seller (“Apptix”). Apptix provided cloud-based
communications, collaboration, virtual desktop, compliance,
security and cloud computing solutions to approximately 1,500
business customers across the U.S.
The
purchase price paid by FNAC for Apptix was $26.7 million, including
an adjustment for the closing date cash on hand. The purchase price
was paid with (i) $23,063,484 in cash, and (ii) 2,997,926 shares of
Fusion’s common stock (the “Seller Shares”),
valued at $1.21 per share. The cash portion of the purchase price
was funded through a new senior secured facility entered into
simultaneously with the Apptix acquisition (see note 14). Upon
acquisition, Apptix became a wholly-owned subsidiary of FNAC. The
acquisition was accounted for as a business combination. The
allocation of the purchase price as of the acquisition date is as
follows:
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Cash
|
$
67,071
|
Accounts
receivable
|
2,207,024
|
Prepaid
expenses and other current assets
|
620,270
|
Property
and equipment
|
2,878,877
|
Deferred
tax liability
|
(1,633,853
)
|
Covenant
not to compete
|
1,417,000
|
Customer
contracts
|
20,948,000
|
Accrued
liabilities
|
(6,904,479
)
|
Goodwill
|
7,091,065
|
Total
purchase price
|
$
26,690,975
|
The
customer relationship intangible assets have estimated useful lives
of 5 to 15 years, and the non-compete agreement has a useful life
of one year. In August 2017, in connection with the settlement of
litigation with Apptix, FNAC was paid $150,000 in cash and Apptix
surrendered 300,000 shares of Fusion common stock valued at $0.4
million, resulting in a reduction to goodwill of $0.5 million. In
November 2017, the Company changed its estimate of property tax
liabilities assumed in the acquisition as of the acquisition date,
resulting in a $0.2 million reduction to goodwill.
The Company underwent a compliance audit for the use of certain
software licenses by one of the Company’s recently acquired
businesses. The Company is negotiating with the software vendor
with regard to a settlement and based upon the initial meeting with
the vendor, the Company has recorded an estimate for the accrual in
accounts payable and accrued expenses in the accompanying
consolidated balance sheet. There can be no assurances that this
matter will be settled and, if settled, the amount that would be
paid in any such settlement.
The
results of operations of Apptix are reflected in the
Company’s consolidated statement of operations effective
November 14, 2016. The following table provides certain unaudited
pro forma financial information for the Company for the year ended
December 31, 2016 as if the acquisition of Apptix had been
consummated effective as of January 1, 2016 (in
millions):
|
|
Revenues
|
$
141.3
|
Net
loss
|
$
(16.5
)
|
Technology for Business
On March 31, 2016, the Company completed the acquisition of
substantially all of the assets of Technology for Business
Corporation (“TFB”), a provider of contact center
solutions, for an estimated purchase price of $1.3 million
consisting of $0.3 million in cash and a royalty fee equal to ten
percent of the collected monthly recurring revenues derived from
sales of the cloud version of the proprietary call center software
and maintenance services. The estimated royalty fee of $1.1 million
was recognized as a non-current liability in the condensed
consolidated balance sheet as of December 31, 2016.
Accounts
receivable, net
|
$
80,845
|
Prepaid
expenses and other current assets
|
5,535
|
Proprietary
technology
|
889,000
|
Covenant
not to compete
|
8,000
|
Customer
contracts
|
99,000
|
Current
liabilities
|
( 687,130
)
|
Accrued
royalty
|
(1,111,606
)
|
Goodwill
|
993,637
|
Total
cash purchase price
|
$
277,281
|
The acquisition of the assets of TFB did not have a material effect
on the Company’s results of operations or financial
condition. At December 31, 2017, the Company determined that all of
the intangible assets related to TFB were fully impaired, and that
the Company would not be required to pay any royalties under the
terms of the purchase agreement. As a result the Company recognized
an impairment charge of $0.6 million to write-off the remaining
book value of the acquired intangible assets and derecognized the
royalty liability of $1.1 million, which is reflected in the
accompanying consolidated statement of operations for the year
ended December 31, 2017.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Customer Base Acquisitions
In a
two-step transaction, the Company completed customer base
acquisitions on November 18, 2016 and March 1, 2017 with two
parties.
On November 18, 2016, the Company entered into a purchase agreement
pursuant to which the Company assumed obligations to provide
services to the seller’s 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. 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 having a value of approximately $0.6
million. As this customer base is within the scope of the November
2016 agreement, the Company is required to pay consideration to the
seller in an estimated aggregate amount of $1.7 million. 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 transition
period related to the March 2017 Agreement ended in February 2018
and on February 23, 2018, the Company purchased the remaining
assets related to this customer base for a de minimis
amount.
The aggregate amount payable by the Company under the November 2016
and March 2017 agreements totals $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, as
provided for in the November 2016 agreement, was valued at a
multiple of monthly revenue and will be paid over a period of 18
months. The March 2017 agreement resulted in a reduction
to the goodwill in the amount of $0.4 million. These agreements did
not have a material effect on the Company’s results of
operations or financial condition.
Fidelity
In a
two-step transaction completed in December 2015 and February 2016,
FNAC acquired all of the outstanding equity securities of Fidelity
Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice
Services, LLC, Fidelity Access Networks, Inc., and Fidelity
Telecom, LLC (hereinafter collectively referred to as
“Fidelity”). Fidelity provides customers with a suite
of cloud based services, including cloud voice, cloud connectivity,
cloud computing and cloud storage.
The
purchase price paid to Fidelity shareholders was $29.9 million,
consisting of $28.4 million in cash and 696,508 shares of
Fusion’s common stock valued at $1.5 million (based upon the
volume weighted average price of the common stock over a ten
trading day period ending four trading days prior to the closing
date). The acquisition was funded through borrowings under a credit
facility of approximately $27.5 million and cash on hand of
approximately $0.9 million. At closing, $1.5 million of the cash
portion of the purchase price was placed into escrow to protect the
Company against any breaches in the sellers’ representations,
warranties and covenants in the purchase agreement, to be released
in accordance with the terms of the related escrow
agreement.
The
allocation of the purchase price as of the acquisition date is as
follows:
Cash
|
$
503,059
|
Accounts
receivable, net
|
273,809
|
Prepaids
|
44,735
|
Property
and equipment
|
1,111,699
|
Covenant
not to compete
|
618,000
|
Customer
contracts
|
19,243,000
|
Accrued
liabilities
|
(692,606
)
|
Deferred
tax liability
|
(7,710,536
)
|
Goodwill
|
16,502,971
|
Total
purchase price
|
$
29,894,133
|
The
amount of goodwill recognized is primarily attributable to the
expected contributions of Fidelity to the overall corporate
strategy in addition to synergies and acquired workforce of the
acquired business. None of the goodwill or intangible assets
recognized is expected to be deductible for income tax purposes.
The intangible assets subject to amortization consist of customer
relationships and non-compete agreements, with an estimated useful
life of 14 and 5 years, respectively. During the year ended
December 31, 2016, $0.4 million of the foregoing escrowed portion
of the purchase price was remitted back to the Company, resulting
in a decrease in the purchase price and a corresponding reduction
in goodwill. Also during the year ended December 31, 2016, the
Company increased goodwill by $0.5 million due to changes in the
estimated fair values of assets and liabilities at
acquisition.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
All of
the forgoing acquisitions are included as part of the Business
Services business segment (See Note 12).
Note 6. Intangible Assets
All of
the Company’s identifiable intangible assets are associated
with its Business Services segment and as of December 31, 2017 and
2016 are comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradename
|
$
1,093,400
|
$
(672,314
)
|
$
421,086
|
$
1,093,400
|
$
(501,982
)
|
$
591,418
|
Proprietary
technology
|
5,781,000
|
(5,005,400
)
|
775,600
|
6,670,000
|
(4,036,915
)
|
2,633,085
|
Non-compete
agreement
|
12,120,043
|
(11,701,307
)
|
418,736
|
12,128,043
|
(9,891,892
)
|
2,236,151
|
Customer
relationships
|
67,614,181
|
(13,073,580
)
|
54,540,601
|
65,948,181
|
(7,827,697
)
|
58,120,484
|
Favorable
lease
|
218,000
|
(218,000
)
|
-
|
218,000
|
(181,667
)
|
36,333
|
Total
acquired intangibles
|
$
86,826,624
|
$
(30,670,601
)
|
$
56,156,023
|
$
86,057,624
|
$
(22,440,153
)
|
$
63,617,471
|
Aggregate
amortization expense for each of the five years subsequent to
December 31, 2017 is expected to be as follows:
Year
|
|
2018
|
$
6,361,523
|
2019
|
5,469,042
|
2020
|
5,458,742
|
2021
|
5,284,375
|
2022
|
4,612,642
|
Note 7. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets at December 31, 2017 and 2016 are
as follows:
|
|
|
Insurance
|
$
18,639
|
$
160,262
|
Rent
|
16,326
|
5,389
|
Marketing
|
55,801
|
74,665
|
Software
subscriptions
|
610,191
|
419,431
|
Commissions
|
46,755
|
159,146
|
Network
costs
|
817,704
|
-
|
Other
|
525,828
|
265,316
|
Total
|
$
2,091,244
|
$
1,084,209
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 8. Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following at December
31, 2017 and 2016:
|
|
|
Trade
accounts payable
|
$
9,336,838
|
$
6,358,548
|
Accrued
license fees
|
2,881,331
|
2,881,331
|
Accrued
sales and federal excise taxes
|
3,496,697
|
2,863,363
|
Deferred
revenue
|
1,283,969
|
1,874,641
|
Accrued
network costs
|
2,151,271
|
1,416,000
|
Accrued
sales commissions
|
911,192
|
819,106
|
Property
and other taxes
|
759,770
|
581,956
|
Accrued
payroll and vacation
|
422,097
|
421,733
|
Customer
deposits
|
383,032
|
365,249
|
Interest
payable
|
7,263
|
304,409
|
Credit
card payable
|
114,209
|
265,985
|
Accrued
USF fees
|
728,826
|
249,825
|
Accrued
bonus
|
333,337
|
249,361
|
Professional
and consulting fees
|
171,163
|
164,878
|
Rent
|
163,030
|
127,781
|
Other
|
1,945,021
|
778,672
|
Total
|
$
25,089,046
|
$
19,722,838
|
Note 9. Property and Equipment
At
December 31, 2017 and 2016, property and equipment is comprised of
the following:
|
|
|
Network
equipment
|
$
20,350,334
|
$
13,716,468
|
Furniture
and fixtures
|
436,697
|
421,689
|
Computer
equipment and software
|
1,934,984
|
5,868,370
|
Customer
premise equipment
|
7,650,496
|
9,695,643
|
Vehicles
|
55,884
|
55,884
|
Leasehold
improvements
|
1,069,670
|
1,188,207
|
Assets
in progress
|
-
|
383,137
|
Total
|
31,498,065
|
31,329,398
|
Less:
accumulated depreciation
|
(18,641,531
)
|
(17,080,483
)
|
Total
|
$
12,856,534
|
$
14,248,915
|
Depreciation
expense was $5.9 million and $7.5 million for the years ended
December 31, 2017 and 2016, respectively. For the years ended
December 31, 2017 and 2016, $2.2 million and $3.2 million,
respectively, of the Company’s property and equipment were
financed under equipment financing obligations.
Note 10. Equipment Financing Obligations
During
the years ended December 31, 2017 and 2016, the Company entered
into several equipment financing or capital lease arrangements to
finance the purchase of network hardware and software utilized in
the Company’s operations. These arrangements require monthly
payments over a period of 24 to 48 months with interest rates
ranging between 5.3% and 6.6%.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
Company’s equipment financing obligations at December 31,
2017 and 2016 are as follows:
|
|
|
|
|
|
Equipment
financing obligations
|
$
1,797,374
|
$
2,239,661
|
Less:
current portion
|
(1,206,773
)
|
(1,002,578
)
|
Long-term
portion
|
$
590,601
|
$
1,237,083
|
The
estimated principal payments under capital lease agreements for the
years ending subsequent to December 31, 2017 are as
follows:
Year ending December 31:
|
|
2018
|
$
1,206,773
|
2019
|
502,589
|
2020
|
88,012
|
|
$
1,797,374
|
Note 11. Supplemental Disclosure of Cash Flow
Information
Supplemental
cash flow information for the years ended December 31, 2017 and
2016 is as follows:
|
|
Supplemental Cash Flow Information
|
|
|
Cash
paid for interest
|
$
7,756,230
|
$
5,806,910
|
Cash
paid for income taxes
|
$
-
|
$
-
|
|
|
|
Supplemental Non-Cash Investing and Financing
Activities
|
|
|
Property
and equipment acquired under capital leases or equipment financing
obligations
|
$
677,071
|
$
188,497
|
Conversion
of preferred stock into common stock
|
$
3,083,000
|
$
-
|
Dividend
on Series B-2 preferred stock paid with the issuance of Fusion
common stock
|
$
463,162
|
$
1,983,301
|
Common
stock issued for acquisitions
|
$
-
|
$
3,627,490
|
Obligations
under asset purchase agreements
|
$
968,035
|
$
1,521,606
|
Note 12. 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 asset purchase agreements. Such obligations to sellers
or other parties associated with these transactions as of December
31, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
|
Root
Axcess
|
$
-
|
$
166,668
|
Customer
base acquisitions
|
450,000
|
334,025
|
Technology
For Business, Inc.
|
-
|
936,606
|
|
450,000
|
1,437,299
|
Less:
current portion
|
(227,760
)
|
(546,488
)
|
Long-term
portion
|
$
222,240
|
$
890,811
|
In
connection with the purchase of the assets of TFB in March 2016,
the Company recorded a contingent liability of $1.1 million (see
Note 5). The contingent liability was based on an estimated royalty
fee based on future revenues. At December 31, 2017, the Company
determined that it would not be required to pay any royalties under
the terms of the purchase agreement. As a result, the Company
reduced its obligations under asset purchase agreements by this
amount, and this reduction is reflected
in the accompanying consolidated statement of
operations for the year ended December 31,
2017.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 13. Secured Credit Facilities
At
December 31, 2017 and 2016, secured credit facilities are comprised
of the following:
|
|
|
|
|
|
Term
loan
|
$
61,750,000
|
$
65,000,000
|
Less:
|
|
|
Deferred
financing fees
|
(1,027,332
)
|
(1,289,629
)
|
Current
portion
|
(6,500,000
)
|
(2,979,167
)
|
Term
loan - long-term portion
|
$
54,222,668
|
$
60,731,204
|
|
|
|
Indebtedness
under revolving credit facility
|
$
1,500,000
|
$
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 $40 million that was outstanding under a
previously existing credit facility, and to fund the cash portion
of the purchase price of FNAC’s acquisition Apptix (see note
5). In connection with the retirement of the previous credit
facility, FNAC recognized a loss on the extinguishment of debt in
the amount of $0.2 million in the year ended December 31,
2016.
Borrowings
under the East West Credit Agreement are evidenced by promissory
notes bearing interest at rates computed based upon either the then
current “prime” rate of interest or “LIBOR”
rate of interest, as selected by FNAC. Interest on borrowings that
FNAC designates as “base rate” loans bear interest at
the greater of the prime rate published by the Wall Street Journal
or 3.25% per annum, in each case plus 2% per annum. Interest on
borrowings that FNAC designates as “LIBOR rate” loans
bear interest at the LIBOR rate of interest published by the Wall
Street Journal, plus 5% per annum, and the rate of interest on the
term loan ranged from 6.02% to 6.61% for the year ended December
31, 2017.
From
January 1, 2017 through January 1, 2018, the Company is required to
repay the term loan in equal monthly payments of $270,833 and
thereafter the monthly payments increase to $541,667 until the
maturity date of the term loan on November 12, 2021, when the
remaining $36.8 million of principal is due. Borrowings under the
revolving credit facility are also payable on the November 12, 2021
maturity date of the facility. At December 31, 2017 and 2016, $1.5
million and $3.0 million, respectively, was outstanding under the
revolving credit facility.
In
conjunction with the execution of the East West Credit Agreement,
the Company and the East West Lenders also entered into (i) an IP
Security Agreement under which the Company has pledged intellectual
property to the East West Lenders to secure payment of the East
West Credit Agreement, (ii) Subordination Agreements under which
certain creditors of the Company and the East West Lenders have
established priorities among them and reached certain agreements as
to enforcing their respective rights against the Company, and (iii)
a Pledge and Security Agreement under which Fusion and FNAC have
each pledged its equity interest in its subsidiaries to the East
West Lenders.
Under
the East West Credit Agreement:
●
The
Company is subject to a number of affirmative and negative
covenants, including but not limited to, restrictions on paying
indebtedness subordinate to its obligations to the East West
Lenders, incurring additional indebtedness, making capital
expenditures, dividend payments and cash distributions by
subsidiaries
.
●
The
Company is required to comply with various financial covenants,
including leverage ratio, fixed charge coverage ratio and minimum
levels of earnings before interest, taxes, depreciation and
amortization; and its failure to comply with any of the restrictive
or financial covenants could result in an event of default and
accelerated demand for repayment of its indebtedness.
●
The
Company granted the East West Lenders security interests in all of
our assets, as well as our 60% membership interest in FGS and the
capital stock of our Fusion NBS Acquisition Corp. subsidiary
(“FNAC”) and each of its
subsidiaries
.
●
Fusion and its
subsidiaries (and future subsidiaries of both) have guaranteed
FNAC’s obligations, including FNAC’s repayment
obligations thereunder.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
At
December 31, 2017, the Company was in compliance with all of the
financial covenants contained in the East West Credit
Agreement.
On January 26, 2018, the Company obtained a waiver under its senior
secured credit facility with East West Bank (the “East West
Bank Credit Facility”) permitting the Company to sell up to
approximately $30.0 million (net proceeds) of its common stock
without having to use any of those proceeds to prepay amounts
outstanding under that facility (the "January 2018 EWB Waiver").
Prior to receiving the January 2018 EWB Waiver, the Company was
obligated under the East West Bank Credit Facility to use any net
proceeds for any sale of its equity securities that are in excess
of $4.0 million to pay down outstanding borrowings thereunder. In
addition, on February 23, 2018 the Company obtained an additional
waiver under the East West Bank Credit Facility permitting the
Company to retain the entire amount of the net
proceeds.
Note 14. Notes Payable – Non-Related Parties
At
December 31, 2017 and 2016, notes payable – non-related
parties are comprised of the following:
|
|
|
|
|
|
Subordinated
notes
|
$
33,588,717
|
$
33,588,717
|
Discount
on subordinated notes
|
(1,040,167
)
|
(1,368,629
)
|
Deferred
financing fees
|
(595,387
)
|
(788,486
)
|
Total
notes payable - non-related parties
|
31,953,163
|
31,431,602
|
Less:
current portion
|
-
|
-
|
Long-term
portion
|
$
31,953,163
|
$
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 “Restated Purchase
Agreement”) with Praesidian Capital Opportunity Fund III,
L.P., Praesidian Capital Opportunity Fund III-A, LP and United
Insurance Company of America (collectively, the “Praesidian
Lenders”). The Restated Purchase Agreement amends the
previous purchase agreement, 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 Company pays interest monthly at a
rate of 10.8% and recognized interest expense of approximately $3.6
million and $3.7 million during 2017 and 2016,
respectively.
The
Restated Purchase Agreement amends the previous purchase agreement
to (i) provide the Praesidian Lenders’ consent to the
acquisition of Apptix, (ii) join Apptix as a guarantor and credit
party under the Restated Purchase Agreement, (iii) modify certain
financial covenants such that the covenants are now substantially
similar to those contained in the East West Credit Agreement, and
(iv) extend the maturity date of the SPA Notes to May 12, 2022. The
Praesidian Lenders also entered into a subordination agreement with
the East West Lenders pursuant to which the Praesidian Lenders have
subordinated their right to payment under the Restated Purchase
Agreement and the SPA Notes to repayment of the Company’s
obligations under the East West Credit Agreement. For the year
ended December 31, 2017, the Company was in compliance with all of
the financial covenants contained in the Restated Purchase
Agreement.
Note 15. Notes Payable-Related Parties
At
December 31, 2017 and 2016, components of notes payable –
related parties are comprised of the following:
|
|
|
|
|
|
Notes
payable to Marvin Rosen
|
$
928,081
|
$
928,081
|
Discount
on notes
|
-
|
(52,331
)
|
Total
notes payable - related parties
|
$
928,081
|
$
875,750
|
The
note payable to Marvin Rosen, Fusion’s Chairman of the Board,
is subordinated to borrowings under the East West Credit Agreement
and the Restated Purchase Agreement. This note is unsecured, pays
interest monthly at an annual rate of 7%, and matures 120 days
after the Company’s obligations under the East West Credit
Agreement and the Restated Purchase Agreement are paid in
full.
For the
years ended December 31, 2017 and 2016, the Company paid interest
on the notes payable to Mr. Rosen in the amount of $0.1 million.
During the year ended December 31, 2016, Mr. Rosen converted
$250,000 of the outstanding notes into 217,391 shares
Fusion’s common stock in conjunction with Fusion’s
private placement of common stock in November of 2016 (see note
16).
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 16. Equity Transactions
Common Stock
On
October 28, 2016, Fusion’s Stockholders ratified an amendment
to the Company’s Certificate of incorporation to increase the
number of authorized common shares to 90,000,000. At December 31,
2017 and 2016, there were 22,471,133 and 20,642,028 shares of
common stock outstanding, respectively.
In
March 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 Fusion’s 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 exchanged outstanding warrants and thereafter
exercised 2017 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 were used for general corporate
purposes. In connection with the exchange agreements, all of the
2017 Warrants were immediately exercised and none remained
outstanding as of December 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 3). In October of 2017, warrants to issue
124,484 shares of common stock were exercised, and the Company
received cash proceeds of $0.2 million.
During
the year ended December 31, 2017, 104,000 warrants were exercised
on a cashless basis and, as a result, the Company issued 54,194
shares of common stock to the holders of those
warrants.
During
the year ended December 31, 2017, Fusion issued 125,870 shares of
its common stock valued at approximately $0.2 million for services
rendered. Also during year ended December 31, 2017, (i)
Fusion’s Board of Directors declared dividends on the Series
B-2 Preferred Stock that were paid in the form of 256,706 shares of
Fusion common stock (see note 4), and (ii) an officer of the
Company forfeited a portion of his 2016 restricted stock award and
5,938 shares of common stock were returned to the
Company.
On
November 14, 2016, Fusion issued 2,997,926 shares of common stock
as partial consideration in the Apptix acquisition transaction. In
August 2017, in connection with the settlement of litigation with
Apptix, FNAC was paid $150,000 in cash and Apptix surrendered
300,000 shares of Fusion common stock valued at $363,000 to the
Company.
On
November 16, 2016, Fusion sold an aggregate of 2,213,700 shares of
common stock to 20 accredited investors in a private placement
transaction, and received net proceeds of $2.3 million. In
connections with this transaction, Mr. Rosen converted $250,000 of
his outstanding notes into 217,391 shares of common
stock.
During
the year ended December 31, 2016, 6,025 shares of Series B-2
Preferred Stock were converted into 1,205,000 shares of common
stock. Also during the year ended December 31, 2016, the
Fusion’s Board of Directors declared dividends of $2.0
million on outstanding shares of Series B-2 Preferred Stock, which
were paid in the form of 1,140,568 shares of common stock as
permitted by the terms of the Series B-2 Preferred
Stock.
During
the year ended December 31, 2016, 51,380 shares of common stock
previously issued to the sellers in a 2014 business acquisition
were cancelled by mutual agreement between the Company and the
sellers. Also during the year ended December 31, 2016, 55,000
shares of restricted common stock valued at $0.1 million were
issued to one of Fusion’s executive officers and 74,167
shares of common stock valued at $0.1 million were issued to a
third party for services rendered.
Preferred Stock
Fusion is authorized to issue up to 10,000,000 shares of preferred
stock. At December 31, 2017 and 2016, there were 5,045 shares of
Series A Preferred Stock issued and outstanding. In addition, as of
December 31 2017 and 2016, there were 9,171 and 12,254 shares of
Series B-2 Preferred Stock issued and outstanding,
respectively.
The holders of the Series A Preferred Stock are entitled to receive
cumulative dividends of 8% per annum payable in arrears, when and
if declared by Fusion’s Board of Directors. As of December
31, 2017, no dividend had been declared by the Fusion Board of
Directors with respect to any series of Series A Preferred Stock,
and the Company had accumulated approximately $5.1 million of
preferred stock dividends. The Series A Preferred Stock is
convertible at the option of the holder at any time at conversion
prices ranging from $34.50 per share to $72.94 per share.
The
Company is not permitted to pay dividends on its Series A Preferred
Stock without the consent of the holders or in case of a forced
conversion. At December 31, 2017, if the Series A Preferred Stock
were convertible into the Company’s common stock, such shares
would convert into an aggregate of 211,800 shares of common stock
(inclusive of accrued and unpaid
dividends).
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The holders of the shares of Series B-2 Preferred Stock are
entitled to receive a cumulative 6% annual dividend payable
quarterly in arrears when and if declared by the Fusion Board of
Directors, in cash or shares of Fusion common stock, at the option
of the Company. Commencing January 1, 2016, Fusion has the right to
force the conversion of the Series B-2 Preferred Stock into Fusion
common stock at a conversion price of $5.00 per share; provided
that the volume weighted average price for its common stock is at
least $12.50 for ten consecutive trading days.
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 (a two dollar reduction from the specified
conversion price). As a result, 2,958 shares of Series B-2
Preferred Stock were converted into a total of 986,665 shares of
Fusion common stock, and the Company recorded a preferred stock
dividend of $0.6 million for the value of the incremental number of
shares of Fusion common stock issued in connection with the
reduction in the conversion price of the Series B-2 Preferred Stock
(see note 3). In December of 2017, 125 shares of Series B Preferred
Stock were converted into 25,290 shares of common
stock.
The
following table summarizes the activity in the Company’s
various classes of preferred stock for the years ended December 31,
2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2015
|
2,375
|
$
24
|
2,625
|
$
26
|
45
|
$
-
|
18,279
|
$
184
|
23,324
|
$
234
|
Conversion
of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(6,025
)
|
(60
)
|
(6,025
)
|
(60
)
|
Balance
at December 31, 2016
|
2,375
|
24
|
2,625
|
26
|
45
|
-
|
12,254
|
124
|
17,299
|
174
|
Conversion
of preferred stock into common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,083
)
|
(32
)
|
(3,083
)
|
(32
)
|
Balance
at December 31, 2017
|
2,375
|
$
24
|
2,625
|
$
26
|
45
|
$
-
|
9,171
|
$
92
|
14,216
|
$
142
|
Each
share of Series B-2 Preferred Stock has a stated value of $1,000,
and is convertible into shares of Fusion’s common stock at
the option of the holder at a conversion price of $5.00 per share,
subject to adjustment. At December 31, 2017, the Series B-2
Preferred Stock is convertible into an aggregate of 1,834,200
shares of Fusion’s common stock.
The
holders of Series B-2 Preferred Stock have liquidation rights that
are senior to those afforded to holders of the Company’s
other equity securities, and are entitled to vote as one group with
holders of Fusion’s common stock on all matters brought to a
vote of such holders (with each share of Series B-2 Preferred Stock
being entitled to that number of votes into which the registered
holder could have converted the Series B-2 Preferred Stock on the
record date for the meeting at which the vote will be cast).
Holders of common stock are also entitled to vote as a separate
class on all matters adversely affecting (within the meaning of
Delaware law) such class.
Warrants
In
connection with various debt and equity financing transactions and
other agreements, the Company has issued warrants to purchase
shares of Fusion’s common stock. All of the outstanding
warrants are fully exercisable as of December 31, 2017. The
following table summarizes the information relating to warrants
issued and the activity during the years ended December 31, 2017
and 2016:
|
|
|
Weighted
Average Exercise Price
|
Outstanding
at December 31, 2015
|
3,011,764
|
$
3.95 to $10.15
|
$
6.14
|
Granted
in 2016
|
-
|
-
|
|
Exercised
in 2016
|
-
|
-
|
|
Expired
in 2016
|
(108,902
)
|
$
4.00-$7.00
|
$
5.00
|
Outstanding
at December 31, 2016
|
2,902,862
|
$
4.25-$10.15
|
$
6.18
|
Granted
in 2017
|
65,000
|
$
1.50
|
$
1.50
|
Exercised
in 2017
|
(359,067
)
|
$
1.39-$1.56
|
$
1.48
|
Expired
in 2017
|
(607,807
)
|
$
4.50-$10.15
|
$
6.81
|
Outstanding
at December 31, 2017
|
2,000,988
|
|
$
5.06
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Note 17. Derivative Liability
The
Company has issued warrants to purchase shares of Fusion’s
common stock in connection with certain debt and equity financing
transactions. These warrants are accounted for in accordance with
the guidance contained in
ASC
Topic 815
, ‘
Derivatives and Hedging’
(“ASC 815”). For warrant instruments that do not meet
an exclusion from derivative accounting, the Company classifies the
warrant instrument as a liability at its fair value and adjusts the
instrument to fair value at each reporting period. This liability
is subject to re-measurement at each balance sheet date until the
warrant is exercised or expires, and any change in fair value is
recognized in the Company’s statement of operations. The
Company has 361,150 outstanding warrants at December 31, 2017 which
provide for a downward adjustment of the exercise price if the
Company were to issue common stock at an issuance price or issue
convertible debt or equity securities with an exercise price that
is less than the exercise price for these warrants.
The
following assumptions were used to determine the fair value of the
warrants for the year ended December 31, 2017 and
2016:
|
|
|
|
|
Stock
price ($)
|
3.75
|
1.50
|
Adjusted
exercise price ($)
|
1.55
|
1.65
|
Expected
volatility (%)
|
84.10
|
71.40
|
Time
to maturity (years)
|
1.25
|
2.0
|
During
the year ended December 31, 2016, the Company adjusted the
valuation of its derivative liability for warrants issued in
December 2013 and January 2014 and its valuation of certain
warrants exercised during 2015. The amount of the adjustment was a
net $772,022 impact on the condensed consolidated statements of
operations resulting from the loss on the change in the fair value
of the derivative and an additional $0.3 million impact to capital
in excess of par and a $0.4 million increase in derivative
liability in the condensed consolidated balance sheets (see Note
18). The Company has evaluated these adjustments in accordance with
ASC 250-10-S99, SEC Materials (formerly SEC Staff Accounting
Bulletin 99, Materiality) and concluded that both quantitatively
and qualitatively the adjustments were not material. These
adjustments were also evaluated by management in their assessment
of internal controls over financial reporting.
During
the year ended December 31, 2017 $0.4 million of the derivative
liability was reclassified into equity as a result of warrant
exercises.
At
December 31, 2017 and 2016, the fair value of the derivative was
$0.9 million and $0.3 million, respectively. For the year ended
December 31, 2017, the Company recognized a loss on the change in
fair value of the derivative liability in the amount of $0.9
million, and the Company recognized a gain on the change in the
fair value of this derivative of $0.3 million for the year ended
December 31, 2016.
Note 18. Fair Value Disclosures
The
following table represents the fair value of the liability measured
at fair value on a recurring basis, by level within the fair value
hierarchy:
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability (see note 12)
|
-
|
-
|
$
227,760
|
$
227,760
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$
222,240
|
$
222,240
|
Derivative
liability (see note 17)
|
-
|
-
|
$
872,900
|
$
872,900
|
As of December 31, 2016
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$
100,000
|
$
100,000
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$
836,606
|
$
836,606
|
Derivative
liability (see note 17)
|
-
|
-
|
$
348,650
|
$
348,650
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
following table reconciles the changes in the derivative liability
categorized within Level 3 of the fair value hierarchy for the
years ended December 31, 2017 and 2016:
Balance
at December 31, 2015
|
$
953,005
|
Change
in fair value included in net loss
|
(1,037,405
)
|
Adjustment
for prior issuances and exercise of warrants
|
433,050
|
Balance
at December 31, 2016
|
348,650
|
Change
in fair value included in net loss
|
909,272
|
Warrant
exercises (see note 12)
|
(385,022
)
|
Balance
at December 31, 2017
|
$
872,900
|
Note 19. Income Taxes
The
provision (benefit) for income taxes for the years ending December
31, 2017 and 2016 consists of the following:
|
|
|
Current
|
|
|
Federal
|
-
|
-
|
State
|
$
61,511
|
$
60,000
|
|
61,511
|
60,000
|
|
|
|
Deferred
|
|
|
Federal
|
-
|
(1,493,485
)
|
State
|
-
|
(176,000
)
|
|
-
|
(1,669,485
)
|
|
|
|
Tax
provision (benefit)
|
$
61,511
|
$
(1,609,485
)
|
For the
year ended December 31, 2016, the Company recorded deferred tax
liabilities of $1.7 million as a result of intangible assets
subject to amortization acquired in business acquisitions that are
not amortizable for income tax purposes. As a result of these
business combinations, the recording of the deferred tax
liabilities resulted in a release of the valuation allowance
against the Company’s deferred tax assets of $1.7 for the
year ended December 31, 2016, with a corresponding income tax
benefit. The tax benefit will be realized as the Company amortizes
the intangible assets over their estimated useful lives (see Note
5).
The
following reconciles the Federal statutory tax rate to the
effective income tax rate for the years ended December 31, 2017 and
2016:
|
|
|
|
|
|
Federal
statutory rate
|
(34.0
)
|
(34.0
)
|
State
net of federal tax
|
(2.9
)
|
(3.4
)
|
Permanent
and other items
|
4.9
|
1.2
|
Effect
of change in tax rate
|
98.5
|
-
|
Change
in valuation allowance
|
(66.0
)
|
25.0
|
|
0.5
|
(11.2
)
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. In assessing the realizability of deferred tax assets,
management evaluates whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected
future taxable income and tax planning strategies in making this
assessment. Based on management’s evaluation, it is more
likely than not that the net deferred tax assets will not be
realized and as such a valuation allowance has been recorded as of
December 31, 2017 and 2016.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
The
components of the Company's deferred tax assets and liabilities
consist of the following at December 31, 2017 and
2016:
|
|
|
Deferred
income tax assets:
|
|
|
Net
operating losses
|
$
29,447,000
|
$
43,292,000
|
Allowance
for doubtful accounts
|
105,000
|
99,000
|
Derivative
liability
|
500,000
|
391,000
|
Accrued
liabilities
|
1,016,000
|
910,000
|
Other
|
55,000
|
83,000
|
|
31,123,000
|
44,775,000
|
|
|
|
Deferred
income tax liabilities:
|
|
|
Intangible
assets
|
5,700,000
|
9,943,000
|
Property
and equipment
|
718,000
|
761,000
|
|
6,418,000
|
10,704,000
|
Deferred
tax asset, net
|
24,705,000
|
34,071,000
|
|
|
|
Less:
valuation allowance
|
(24,705,000
)
|
(34,071,000
)
|
|
|
|
Net
deferred tax assets
|
$
-
|
$
-
|
At
December 31, 2017 and 2016, the Company had federal net operating
loss carryforwards of approximately $127.0 million and $122.0
million, respectively, which expire in varying amounts through
December 31, 2037. Pursuant to Code Sec. 382 of the Internal
Revenue Code (“the Code”), the utilization of net
operating loss carryforwards may be limited as a result of a
cumulative change in stock ownership of more than 50% over a
three-year period. The Company underwent such a change and
consequently, the utilization of a portion of the net operating
loss carryforwards is subject to certain limitations.
Impact of 2017 Tax Reform
On
December 22, 2017 the Tax Cuts and Jobs Act (the “Tax
Act”) was enacted in the United States. Among its many
provisions, the Tax Act reduces the U.S. corporate income tax rate
from 35% to 21%; requires companies to pay a one-time transition
tax on certain unrepatriated earnings of foreign subsidiaries;
eliminates the corporate alternative minimum tax (AMT); creates a
new limitation on deductible interest expense; and changes rules
related to uses and limitations of net operating loss carryforwards
created in tax years beginning after December 31, 2017. As a result
of the Tax Act, the Company remeasured its deferred tax assets and
liabilities to reflect the new statutory federal rate of 21% which
resulted in a net adjustment of approximately $13.8 million to
deferred income tax expense for the year ended December 31, 2017.
This adjustment was offset by a reduction in the valuation
allowance.
Note 20. Commitments and Contingencies
Operating Leases
The
Company has various non-cancelable operating lease agreements for
office facilities. A summary of the approximate lease commitments
under non-cancelable leases for years ending subsequent to December
31, 2017 are as follows:
Year ending December 31:
|
|
2018
|
$
1,200,000
|
2019
|
1,246,000
|
2020
|
1,104,000
|
2021
|
500,000
|
2022
|
417,000
|
Thereafter
|
1,397,000
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Rent
expense for all operating leases was $1.5 million and $1.6 million
for the years ended December 31, 2017 and 2016, respectively.
Certain of the Company’s leases include fixed rent escalation
schedules or rent escalations based upon a fixed percentage. The
Company recognizes rent expense (including escalations) on a
straight-line basis over the lease term.
Legal Matters
The
Company is from time to time involved in claims and legal actions
arising in the ordinary course of business. Management does not
expect that the outcome of any such claims or actions will have a
material effect on the Company’s liquidity, results of
operations or financial condition. In addition, due to the
regulatory nature of the communications industry, the Company
periodically receives and responds to various inquiries from state
and federal regulatory agencies. Management does not expect the
outcome of any such claims, legal actions or regulatory inquiries
to have a material impact on the Company’s liquidity, results
of operations or financial condition.
Note 21. Profit Sharing Plan
On June
1, 1997, the Company adopted a defined contribution profit sharing
plan, which covers all employees who meet certain eligibility
requirements. Contributions to the plan are made at the discretion
of the Board of Directors. No contributions to the profit sharing
plan were made for the years ended December 31, 2017 and
2016.
Note 22. Concentrations
Major Customers
For the
years ended December 31, 2017 and 2016, no single customer
accounted for more than 10% of the Company’s consolidated
revenues or consolidated accounts receivable.
Geographic Concentrations
The
Company’s operations are significantly influenced by economic
factors and risks inherent in conducting business in foreign
countries, including government regulations, currency restrictions
and other factors that may significantly affect management’s
estimates and the Company’s performance.
For the
years ended December 31, 2017 and 2016, the Company generated
approximate revenues from customers as follows:
|
|
|
United
States
|
$
138,212,257
|
$
111,863,657
|
International
Customers
|
12,318,300
|
12,790,613
|
|
$
150,530,557
|
$
124,654,270
|
Revenues
by geographic area are based upon the location of the
customers.
Credit Risk
The
Company maintains its cash balances in high credit quality
financial institutions. The Company’s cash balances may, at
times, exceed the deposit insurance limits provided by the Federal
Deposit Insurance Corp.
Note 23. Segment Information
Operating
segments are defined under U.S. GAAP as components of an enterprise
for which separate financial information is available and evaluated
regularly by a company's chief operating decision maker in
determining how to allocate resources and assess
performance.
The
Company has two reportable segments – “Carrier
Services” and “Business Services.” These segments
are organized by the products and services that are sold and the
customers that are served. The Company measures and evaluates its
reportable segments based on revenues and gross profit margins. The
Company’s measurement of segment gross profit exclude the
Company’s executive, administrative and support costs. The
Company’s segments and their principal activities consist of
the following:
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
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.
Since September 1, 2017, the Company has operated its Carrier
Services business segment through FGS (see note 2).
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.
The Business Services segment
includes the Company’s acquisition of Apptix effective as of
November 14, 2016 and TFB effective as of March 31,
2016.
Operating
segment information for the years ended December 31, 2017 and 2016
is summarized as follows:
|
Year ended December 31, 2017
|
|
|
|
Corporate and Unallocated
|
|
Revenues
|
$
33,188,930
|
$
117,341,627
|
$
-
|
$
150,530,557
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
31,981,586
|
51,051,815
|
-
|
83,033,401
|
Gross
profit
|
1,207,344
|
66,289,812
|
-
|
67,497,156
|
Depreciation
and amortization
|
340,835
|
13,568,673
|
611,538
|
14,521,046
|
Selling,
general and administrative expenses
|
2,314,530
|
48,566,229
|
6,843,443
|
57,724,202
|
Interest
expense
|
-
|
(8,385,595
)
|
(263,005
)
|
(8,648,600
)
|
Loss
on change in fair value of derivative liability
|
-
|
-
|
(909,272
)
|
(909,272
)
|
Asset
impairment charge
|
-
|
641,260
|
-
|
641,260
|
Gain
on change in fair value of contingent liability
|
-
|
1,011,606
|
-
|
1,011,606
|
Loss
on disposal of property and equipment
|
-
|
(311,707
)
|
-
|
(311,707
)
|
Other
(expenses) income, net
|
(9,454
)
|
329,855
|
(111,166
)
|
209,235
|
Income
tax provision
|
-
|
(61,511
)
|
-
|
(61,511
)
|
Net
loss
|
$
(1,457,475
)
|
$
(3,903,702
)
|
$
(8,738,424
)
|
$
(14,099,601
)
|
|
|
|
|
|
Capital
expenditures
|
$
35,442
|
$
4,986,988
|
$
-
|
$
5,022,430
|
|
|
|
|
|
Total
assets
|
$
2,888,933
|
$
116,807,604
|
$
2,361,024
|
$
122,057,561
|
|
|
|
|
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
|
Year ended December 31, 2016
|
|
|
|
Corporate and Unallocated
|
|
Revenues
|
$
35,484,101
|
$
89,170,169
|
$
-
|
$
124,654,270
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
33,783,130
|
36,884,252
|
-
|
70,667,382
|
Gross
profit
|
1,700,971
|
52,285,917
|
-
|
53,986,888
|
Depreciation
and amortization
|
153,567
|
12,033,551
|
909,469
|
13,096,587
|
Selling,
general and administrative expenses
|
2,710,880
|
40,331,439
|
5,482,604
|
48,524,923
|
Loss
on disposal of property and equipment
|
-
|
(129,119
)
|
-
|
(129,119
)
|
Interest
expense
|
-
|
(6,442,224
)
|
(299,919
)
|
(6,742,143
)
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
265,383
|
265,383
|
Loss
on extinguishment of debt
|
-
|
(214,294
)
|
-
|
(214,294
)
|
Other
income (expenses)
|
-
|
165,882
|
(36,895
)
|
128,987
|
Income
tax benefit
|
-
|
1,609,485
|
-
|
1,609,485
|
Net
loss
|
$
(1,163,476
)
|
$
(5,089,343
)
|
$
(6,463,504
)
|
$
(12,716,323
)
|
|
|
|
|
|
Total
assets
|
$
6,265,402
|
$
125,690,837
|
$
-
|
$
131,956,239
|
|
|
|
|
|
Capital
expenditures
|
$
-
|
$
4,954,711
|
$
-
|
$
4,954,711
|
Note 24. Related Party Transactions
Since
March 6, 2014, the Company has engaged a third party tax advisor to
prepare its tax returns and to provide related tax advisory
services. The Company paid this firm approximately $0.2 million and
$0.1 million for the years ended December 31, 2017 and 2016,
respectively. Larry Blum, a member of Fusion’s Board of
Directors, is a Senior Advisor and a former partner of this tax
advisor.
Note 25. Proposed Merger Transaction
On
August 26, 2017, Fusion and its wholly owned subsidiary, Fusion
BCHI Acquisition LLC, a Delaware limited liability company
(“Merger Sub”), entered into an Agreement and Plan of
Merger, as subsequently amended (the “Merger
Agreement”) with Birch Communications Holdings, Inc., a
Georgia corporation (“Birch”). The Merger Agreement,
provides, among other things, that upon the terms and conditions
set forth therein, Birch will merge with and into Merger Sub (the
“Merger”), with Merger Sub surviving such
merger.
On the
effective date of the Merger, the outstanding shares of common
stock, par value $0.01 per share, of Birch (other than treasury
shares or shares owned of record by any Birch subsidiary) will be
cancelled and converted into the right to receive, in the
aggregate, that number of shares of Fusion common stock equal to
three times the number of shares of (i) Fusion common stock issued
and outstanding immediately prior to the Effective Time (as defined
in the Merger Agreement) (but excluding the shares of our common
stock issued by us in a public offering of our shares of common
stock completed in February 2018 (see note 26) as well as certain
other issued and outstanding shares of our common stock, plus
(ii) the number of shares of our common stock issued or
issuable upon the conversion of all classes or series of our
preferred stock outstanding immediately prior to the closing of the
Merger, plus (iii) the number of shares of Fusion common stock
issuable upon the exercise of all in-the-money Fusion warrants (the
“Merger Shares”). Pursuant to subscription agreements
executed by each of the stockholders of Birch, the Merger Shares
will be issued in the name of, and held by BCHI Holdings, LLC
(“BCHI”), a limited liability company owned by the
stockholders of Birch. On the closing date of the Merger, BCHI and
Fusion will enter into a Registration Rights Agreement governing
the registration rights of the BCHI in respect of the Merger Shares
and pursuant to which Fusion will agree, among other things, to use
reasonable best efforts to cause a shelf registration statement
covering the resale of the Merger Shares to be declared effective
by the SEC within 120 days of the closing of the
Merger.
Fusion,
Birch and Merger Sub each made customary representations,
warranties and covenants in the Merger Agreement, including, among
others, covenants by each of Fusion and Birch to, subject to
certain exceptions, (a) conduct its business in the ordinary
course, (b) preserve intact its business organization and
significant business relationships, preserve satisfactory
relationships with its officers and key employees and maintain its
current rights and franchises, (c) maintain insurance on material
assets, and (d) maintain all permits, each during the interim
period between the execution of the Merger Agreement and the
earlier of the consummation of the Merger or termination of the
Merger Agreement.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017 and 2016
Closing of the Merger is subject to numerous conditions, including
(i) receipt of the requisite approval of Fusion’s voting
shares, which approval was secured by the Company on February 21,
2018, (ii) Fusion obtaining financing for the transaction, which
will be used to retire existing senior debt facilities at Birch and
Fusion, (iii) all existing shares of our preferred stock being
converted into shares of our common stock, and (iv) Fusion using
its reasonable best efforts to cause the Merger Shares to be
approved for listing on The Nasdaq Stock Market, LLC
(“Nasdaq”), including, if necessary, in order to comply
with Nasdaq listing requirements, amending Fusion’s existing
certificate of incorporation prior to the effective time of the
Merger to effect a reverse stock split of our common stock to
satisfy Nasdaq’s minimum pricing requirements (the
“Reverse Stock Split”). If the Reverse Stock Split must
be completed prior to the closing of the Merger, it will be in a
range of up to 5:1, with the final ratio to be determined by our
existing board.
In addition, prior to the closing of the Merger, Birch is required
to spin-off to the existing Birch stockholders, its US-based
consumer business, which consists of (i) the residential customer
base, life line and consumer wireless business in the United
States, and (ii) its single-line business customer base in the
United States. In addition, as discussed above, we have agreed that
on or prior to the consummation of the Merger, we will use our
reasonable best efforts to either (i) divest our 60% ownership
interest in FGS or (ii) dissolve FGS.
On the effective date of the Merger, the certificate of
incorporation of Fusion will be amended and restated, which
amendments will, among other things, (i) increase the number of
authorized shares of Fusion common stock to 150,000,000 and (ii)
change the name of Fusion to “Fusion Connect, Inc.” The
Merger is currently expected to be completed by mid-April
2018.
The
terms of the Merger Agreement are such that the Merger, if
consummated, will result in a change in control. As a result, the
transaction will be accounted for as a reverse acquisition and
recapitalization, with Birch as the acquirer for accounting
purposes, and the historical financial statements of Birch will
become the historical financial statements of the
Company.
Note 26. Subsequent Events
(a)
On February 5,
2018, the Company closed an underwritten public offering of
12,937,500 shares of its common stock, including 1,687,500 shares
for which the underwriters exercised their over-allotment option in
full, at a price to the public of $3.20 per share for gross
proceeds of $41.4 million. The net proceeds, after underwriting
discounts and commissions, but before estimated expenses of the
offering payable by the Company, were $38.7 million.
Pursuant to the
terms of the Merger Agreement, the shares sold in the offering will
not be counted as issued and outstanding for purposes of
calculating the number of shares of Fusion common stock to be
issued as consideration to the Birch shareholders in connection
with the closing of the Merger. As a result, on a post-closing
basis, the dilutive effect of this offering will be shared pro rata
by current Fusion and Birch shareolders with current Fusion
stockholders bearing approximately 25% of the dilution and current
Birch shareholders bearing approximately 75% of the dilution from
this offering.
(b)
In
January 2018, the Company acquired substantially all of the assets
of IQMax, a provider of secure messaging, enterprise data
integration and advanced cloud communications solutions. The total
consideration for this transaction is $1.0 million, which will paid
in shares of the Company’s common stock. These shares will
remain in escrow until 12 months following the closing of the
transaction. This acquisition is not expected to have a material
effect on the Company’s consolidated financial
statements.