10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 001-32421

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	58-2342021
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

420 Lexington Avenue, Suite 1718, New York, New York   10170

   (Address of principal executive offices)    (Zip Code)

(212) 201-2400

 (Registrants telephone number, including area code)

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes ☑  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes ☐ No  ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 14, 2016.

Title of Each Class	Number of Shares Outstanding
Common Stock, $0.01 par value	18,062,879

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Part 1 Financial Information.	3
Item 1. Financial Statements.	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	31
Item 4. Controls and Procedures.	31
Part II Other Information.	31
Item 1. Legal Proceedings.	31
Item 1A. Risk Factors.	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	32
Item 3. Defaults Upon Senior Securities.	32
Item 4. Mine Safety Disclosures.	32
Item 5. Other Information.	32
Item 6. Exhibits.	32
Signatures.	33
Index to Exhibits	34

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Balance Sheets

	September 30,	December 31,
	2016	2015
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$882,040	$7,540,543
Accounts receivable, net of allowance for doubtful accounts of $366,422 and $308,813, respectively	8,199,522	7,650,141
Prepaid expenses and other current assets	2,457,736	1,618,603
Total current assets	11,539,298	16,809,287
Property and equipment, net	12,929,148	14,055,493
Other assets:
Security deposits	548,288	575,038
Restricted cash	27,153	165,123
Goodwill	28,049,775	27,060,297
Intangible assets, net	42,727,552	45,824,399
Other assets	302,053	281,045
Total other assets	71,654,821	73,905,902
TOTAL ASSETS	$96,123,267	$104,770,682
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - non-related parties	$685,780	$685,780
Due to RootAxcess seller	333,334	300,000
Due to TFB seller	100,000	-
Equipment financing obligations	997,089	959,380
Accounts payable and accrued expenses	12,610,885	13,129,225
Total current liabilities	14,727,088	15,074,385
Long-term liabilities:
Notes payable - non-related parties, net of discount	30,672,580	30,795,745
Term Loan	25,000,000	25,000,000
Indebtedness under revolving credit facility	15,000,000	15,000,000
Due to RootAxcess seller	-	333,333
Due to TFB seller	861,606	-
Notes payable - related parties	1,112,445	1,074,829
Equipment financing obligations	1,492,558	2,085,416
Derivative liabilities	233,934	953,005
Total liabilities	89,100,211	90,316,713
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
17,299 and 23,324 shares issued and outstanding	173	233
Common stock, $0.01 par value, 50,000,000 shares authorized,
15,064,953 and 12,788,971 shares issued and outstanding	150,650	127,889
Capital in excess of par value	185,764,507	184,859,084
Accumulated deficit	(178,892,274)	(170,533,237)
Total stockholders' equity	7,023,056	14,453,969
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$96,123,267	$104,770,682

The accompanying notes are an integral part of the consolidated financial statements.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Revenues	$29,497,129	$24,530,824	$93,101,835	$74,857,557
Cost of revenues (exclusive of depreciation and amortization, shown separately below)	16,769,587	13,533,647	53,936,078	41,359,955
Gross profit	12,727,542	10,997,177	39,165,757	33,497,602
Depreciation and amortization	2,998,628	3,140,427	8,946,781	9,183,632
Selling, general and administrative expenses	11,408,048	9,796,483	34,102,847	29,379,196
Total operating expenses	14,406,676	12,936,910	43,049,628	38,562,828
Operating loss	(1,679,134)	(1,939,733)	(3,883,871)	(5,065,226)
Other (expenses) income:
Interest expense	(1,625,195)	(1,434,734)	(4,877,828)	(4,650,286)
Gain on change in fair value of derivative liability	152,057	1,237,730	380,099	2,543,878
Loss on extinguishment of debt	-	(2,720,355)	-	(2,720,355)
Other income (expense), net	18,069	(2,399)	33,514	56,369
Total other expenses	(1,455,069)	(2,919,758)	(4,464,215)	(4,770,394)
Loss before income taxes	(3,134,203)	(4,859,491)	(8,348,086)	(9,835,620)
Provision for income taxes	(10,951)	-	(10,951)	-
Net loss	(3,145,154)	(4,859,491)	(8,359,037)	(9,835,620)
Preferred stock dividends	(285,646)	(379,740)	(2,102,467)	(1,186,826)
Net loss attributable to common stockholders	$(3,430,800)	$(5,239,231)	$(10,461,504)	$(11,022,446)
Basic and diluted loss per common share	$(0.23)	$(0.72)	$(0.72)	$(1.52)
Weighted average common shares outstanding:
Basic and diluted	14,990,816	8,958,815	14,536,893	8,529,642

See accompanying notes to the Condensed Consolidated Financial Statements.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

	Preferred Stock		Common Stock		Capital in Excess of Par	Accumulated Deficit	Stockholders' Equity
	Shares	$	Shares	$
Balance at December 31, 2015	23,324	$233	12,788,971	$127,889	$184,859,084	$(170,533,237)	$14,453,969
Net loss						(8,359,037)	(8,359,037)
Conversion of preferred stock into
common stock, including dividends	(6,025)	(60)	1,871,667	18,717	(18,657)		-
Dividends on preferred stock			343,510	3,435	(3,435)		-
Adjustment for prior issuances and							-
conversion of warrants					338,972		338,972
Adjustment for fractional shares			685	8	(8)		-
Cancellation of common stock issued
to PingTone sellers			(51,380)	(514)	(179,830)		(180,344)
Issuance of restricted stock			55,000	550	99,000		99,550
Issuance of common stock for services
rendered			56,500	565	96,385		96,950
Stock-based compensation associated
with stock incentive plans					572,996		572,996
Balance at September 30, 2016	17,299	$173	15,064,953	$150,650	$185,764,507	$(178,892,274)	$7,023,056

See accompanying notes to the Condensed Consolidated Financial Statements.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended September 30,
	2016	2015
Cash flows from operating activities:
Net loss	$(8,359,037)	$(9,835,620)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	8,946,781	9,183,632
Loss on extinguishment on debt	-	2,720,355
Loss on accounts receivable settlement exchanged for equipment	-	111,659
Loss on disposal of property	86,777	-
Bad debt expense	215,000	373,034
Stock-based compensation	572,996	392,676
Stock based compensation issued for services rendered by third parties	105,256	215,611
Amortization of debt discount and deferred financing fees	477,751	667,191
Gain in the change in fair value of derivative liability	(380,099)	(2,543,878)
Changes in operating assets and liabilities:
Accounts receivable	(625,771)	(565,227)
Prepaid expenses and other current assets	(1,373,378)	(83,205)
Other assets	(317,927)	(203,414)
Accounts payable and accrued expenses	(1,258,968)	(297,079)
Net cash (used in) provided by operating activities	(1,910,619)	135,735
Cash flows from investing activities:
Purchase of property and equipment	(3,782,232)	(2,479,335)
Proceeds from the sale of property and equipment	28,736	-
Net cash acquired through acqusition	16,895	-
Payments for acquisitions	-	(500,000)
Returns of security deposits	26,750	-
Escrow refund - PingTone acquisition	392,617	-
Change in restricted cash	137,970	1,000,000
Net cash used in investing activities	(3,179,264)	(1,979,335)
Cash flows from financing activities:
Proceeds from notes payable - non-related parties	-	9,000,000
Proceeds from revolving debt	-	12,500,000
Proceeds from accounts receivable factoring arrangement	-	1,630,045
Repayments of borrowings to accounts receivable factoring arrangement	-	(1,666,919)
Payments on equipment financing obligations	(743,647)	(592,514)
Repayments of notes payable	(824,973)	(20,835,022)
Payment of financing fees	-	(680,828)
Net cash used in financing activities	(1,568,620)	(645,238)
Net change in cash and cash equivalents	(6,658,503)	(2,488,838)
Cash and cash equivalents, beginning of period	7,540,543	6,444,683
Cash and cash equivalents, end of period	$882,040	$3,955,845

See accompanying notes to the Condensed Consolidated Financial Statements.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Business

Fusion Telecommunications International, Inc. is a Delaware corporation incorporated in September 1997 (“Fusion” and together with its subsidiaries, the “Company,” “we,” “us” and “our”). The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud infrastructure, cloud computing, and managed cloud-based applications to businesses of all sizes, and voice over IP (“VoIP”) - based voice services to carriers. The Company currently operates in two business segments: Business Services and Carrier Services.

Note 2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the fiscal year ended December 31, 2015.

Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies

For a detailed discussion of significant accounting policies, please refer to the 2015 Form 10-K. There have been no material changes in our accounting policies during the nine months ended September 30, 2016.

Principles of Consolidation

The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations of the Company taken as a whole, actual results could differ from those estimates, and such differences could be material.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less on the date of purchase. As of September 30, 2016 and December 31, 2015, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity.

Restricted Cash

Restricted cash consists primarily of cash held in reserve pursuant to the terms of financing arrangements and 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 September 30, 2016 and December 31, 2015, the Company had certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $27,000 and $165,000, respectively. The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.

Fair Value of Financial Instruments

At September 30, 2016 and December 31, 2015, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.

Long-Lived Asset Impairment

The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the nine month periods ended September 30, 2016 or 2015, as there were no indicators of impairment.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.

Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (see Note 15). The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. At September 30, 2016 and December 31, 2015, goodwill was approximately $28.0 million and $27.0 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. There was no impairment charge recorded for goodwill during the nine months ended September 30, 2016 or 2015, as there were no indicators of impairment.

The following table presents the changes in the carrying amounts of goodwill during the nine months ended September 30, 2016:

Balance at December 31, 2015	$27,060,297
Adjustment to the preliminary purchase price of Fidelity*	(10,619)
Increase in goodwill - Technology for Business Corporation (“TFB”) acquisition	1,000,097
Balance at September 30, 2016	$28,049,775

*Acquisition of Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC and Fidelity Access Networks, Inc., (together with Fidelity Telecom, LLC hereinafter collectively referred to as “Fidelity”)

Advertising and Marketing Costs

Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Our advertising and marketing expense was approximately $154,000 and $145,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $508,000 and $390,000 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 September 30, 2016 and December 31, 2015. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2011 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of September 30, 2016 and December 31, 2015. During the three and nine months ended September 30, 2016 and 2015, the Company recognized no adjustments for uncertain tax positions.

Stock-Based Compensation

The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. 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.

New and Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of the award as equity or as a liability, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016, including interim periods within those reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, 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, FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2015, FASB issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2015, FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance was effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016 and applied the provision

10

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

retrospectively for fiscal 2015 (see Note 11). The adoption of this guidance by the Company resulted in an approximately $1.0 million decrease in other assets, and a decrease of $1.0 million in notes payable as of December 31, 2015.

In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

Note 3. Loss per share

Basic and diluted loss per share is computed by dividing (i) loss available to common stockholders, adjusted by an approximately $1.2 million gain on the fair value of the Company’s derivative liability for the three months ended September 30, 2015, and $1.9 million gain on the fair value of the Company’s derivative liability for the nine months ended September 30, 2015, which was attributable to 728,333 outstanding warrants issued by Fusion with a nominal exercise price that were exercised in August 2015 and dividends paid on Fusion’s preferred stock, by (ii) the weighted-average number of common shares outstanding during the period, increased by the number of common shares underlying such warrants as if such exercise had occurred at the beginning of the year.

The following table sets forth the computation for basic and diluted net income per share for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Numerator
Net loss	$(3,145,154)	$(4,859,491)	$(8,359,037)	$(9,835,620)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock	(101,729)	(101,730)	(302,976)	(301,871)
Dividends declared on Series B-2 Convertible Preferred Stock	(183,917)	(278,010)	(1,799,491)	(884,955)
Gain on nominal warrants	-	(1,187,183)	-	(1,930,083)
Adjusted loss attributable to common stockholders	$(3,430,800)	$(6,426,414)	$(10,461,504)	$(12,952,529)
Denominator
Basic and diluted weighted average common shares outstanding	14,990,816	8,958,815	14,536,893	8,529,642
Loss per share
Basic and diluted	$(0.23)	$(0.72)	$(0.72)	$(1.52)

For the nine months ended September 30, 2016 and 2015, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

	Nine Months Ended September 30,
	2016	2015
Warrants	2,946,948	3,011,760
Convertible preferred stock	2,626,518	3,992,471
Stock options	1,157,512	677,126
	6,730,978	7,681,357

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’s outstanding Series A-1, A-2 and A-4 preferred stock (the “Series A Preferred Stock”) of approximately $102,000 for the three months ended September 30, 2016 and 2015, and approximately $302,000 for the nine months ended September 30, 2016 and 2015. Through September 30, 2016, the Board of Directors of Fusion has never declared a dividend on any series of the Series A Preferred Stock, resulting in approximately $4.6 million of accumulated preferred stock dividends. The Board of Directors has declared a dividend of $183,917 and $599,491 for the three and nine months ended September 30, 2016, respectively, on the Company’s Series B-2 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 122,601 and 343,510 shares, respectively, of Fusion’s common stock. In addition, during the three months ended March 31, 2016, the Board of Directors paid an additional $1.2 million in dividends 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 their agreement to convert all of their Series B-2 Preferred Stock holdings into shares of Fusion’s common stock.

Note 4. Intangible Assets

Intangible assets as of September 30, 2016 and December 31, 2015 are as follows:

	September 30,	December 31,
	2016	2015
Trademarks and tradenames	$1,093,400	$1,093,400
Proprietary technology	6,670,000	5,781,000
Non-compete agreements	10,711,043	10,703,043
Customer relationships	45,000,181	44,888,181
Favorable lease intangible	218,000	218,000
	63,692,624	62,683,624
Less: accumulated amortization	(20,965,072)	(16,859,225)
Intangible assets, net	$42,727,552	$45,824,399

Amortization expense was $1.4 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively, and for the nine months ended September 30, 2016 and 2015 was $4.1 million and $5.6 million, respectively. Estimated future aggregate amortization expense is expected to be as follows:

Year	Estimated Annual Amortization Expense
Remainder of  2016	$2,038,362
2017	6,065,102
2018	5,318,305
2019	4,293,561
2020	4,500,563
and thereafter	$20,511,659

Note 5. Stock–based compensation

Fusion's stock-based compensation plan provides for the issuance of stock options to the Company’s employees, officers, and directors. The Compensation Committee of Fusion’s Board of Directors (the "Compensation Committee") approves all awards under Fusion's stock-based compensation plan.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following weighted average assumptions were used to determine the fair value of the stock options granted under Fusion’s stock-based compensation plan using the Black-Scholes option-pricing model:

	Nine months ended September 30,
	2016	2015
Dividend yield (%)*	0.0	0.0
Expected volatility (%)	92.4	125.4
Average Risk-free interest rate (%)	1.56	1.70
Expected life of stock option term (years)	8.0	7.6

*The dividend yield is zero as the Company has never paid and does not expect to pay dividends on its common stock.

The Company recognized compensation expense of approximately $194,000 and $154,000 for the three months ended September 30, 2016 and 2015, respectively, and $573,000 and $393,000 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the condensed consolidated interim statements of operations.

The following table summarizes the stock option activity for the nine months ended September 30, 2016:

	Number of Options	Weighted Average Exercise Price
Balance at December 31, 2015	1,158,251	$4.96
Shares granted during the period	86,050	1.79
Shares exercised during the period	-	-
Shares forfeited during the period	(67,235)	2.50
Shares expired during the period	(19,554)	72.11
Shares outstanding at September 30, 2016	1,157,512	3.73
Shares exercisable at September 30, 2016	421,673	$5.77

As of September 30, 2016, the Company had approximately $1.0 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plan, which is expected to be recognized over a weighted-average period of 1.56 years.

Restricted Stock

During the nine months ended September 30, 2016, Fusion awarded 55,000 shares of its restricted common stock to its Chief Financial Officer. The restricted stock granted was valued at the closing stock price on the day employment commenced and vests in three equal installments on the first, second and third anniversary of employment. For the three and nine months ended September 30, 2016, the Company recognized compensation expense of approximately $8,300 and $17,000, respectively, and has unamortized compensation of $82,960.

Note 6. Acquisition

On March 31, 2016, the Company completed the acquisition of certain assets from TFB, a provider of industry leading contact center solutions for an estimated purchase price of approximately $1.3 million consisting of $277,281 in cash and a royalty fee equal to ten percent of the collected monthly recurring revenues derived from sales of the cloud version of the proprietary call center software and maintenance services. The estimated royalty fee of $1,011,606 was recognized as a “non-current liability” in the condensed consolidated balance sheet and will be paid on a quarterly basis, commencing as of the first full calendar quarter following the second anniversary of the closing date of the TFB acquisition. The aggregate purchase price has been allocated to the fair value of the assets acquired and liabilities assumed as follows:

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Covenant not to compete	$8,000
Customer contracts/relationships	99,000
Proprietary technology	889,000
Accounts receivable	80,845
Prepaid asset	5,535
Line of credit	(100,000)
Deferred liability	(693,590)
Goodwill	1,000,097
Purchase price	$1,288,887

The amount of goodwill recognized is primarily attributable to the expected contributions of TFB to the overall corporate strategy in the cloud based call center solutions and synergies of the acquired business. None of the goodwill recognized is expected to be deductible for income tax purposes. The intangible assets subject to amortization consist of proprietary technology, customer relationships and non-compete agreements, with an estimated useful life of 8, 3 and 2 years, respectively.

Note 7. Supplemental Disclosure of Cash Flow Information

The following table summarizes the Company’s supplemental cash flows information:

	Nine Months Ended September 30,
Supplemental Cash Flow Information	2016	2015
Cash paid for interest	$4,233,527	$3,961,498
Supplemental Non-Cash Investing and Financing Activities
Property and equipment acquired under capital leases	188,497	1,440,816
Dividends on Series B-2 preferred stock paid with the issuance of common stock	599,491	884,955
Due to Seller of RootAxcess	-	700,000
Equipment received in exchange for settlement of accounts receivable	-	105,570
Exercise of lenders warrants	-	364,167
Assets acquired under earn-out liability	$961,606	$-

Note 8. Prepaid Expenses and Other Current Assets

The following table sets forth the items in prepaid expenses and other current assets:

	September 30,	December 31,
	2016	2015
Insurance	$380,359	$93,040
Rent	81,731	101,916
Marketing	140,397	109,455
Software subscriptions	670,614	498,078
Due from seller of Fidelity	-	425,963
Due from factoring party	-	26,018
Commissions	104,273	20,805
Escrow receivable - Fidelity	500,829	50,759
Other	579,533	292,569
	$2,457,736	$1,618,603

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 9. Accounts Payable and Accrued Expenses

The following table sets forth the items in accounts payable and accrued expenses:

	September 30,	December 31,
	2016	2015
Trade accounts payable	$3,699,791	$1,101,393
Accrued bonus	336,259	700,000
Accrued professional and consulting fees	225,878	274,205
Accrued property and other taxes	629,247	534,388
Accrued network costs	1,692,959	3,423,483
Accrued rent	117,252	82,894
Accrued universal service fund fees	730,205	494,852
Customer deposits	384,597	358,227
Accrued credit card	160,596	384,257
Accrued payroll, employee benefits and vacation	349,997	555,493
Accrued sales and federal excise taxes	1,686,636	2,204,098
Accrued sales commissions	789,322	981,121
Accrued interest payable	12,452	32,221
Deferred revenue	1,444,423	1,157,036
Other	351,271	845,557
	$12,610,885	$13,129,225

Note 10. Equipment Financing Obligations

From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 5.3% and 6.6%. The Company’s equipment financing obligations are as follows:

	September 30,	December 31,
	2016	2015
Equipment financing obligations	$2,489,647	$3,044,796
Less: current portion	(997,089)	(959,380)
Long-term portion	$1,492,558	$2,085,416

The Company’s payment obligations under the capital leases are as follows:

Year	Principal Payments
Remainder of 2016	$247,693
2017	1,002,084
2018	958,846
2019	268,044
2020	$12,980

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 11. Debt

As of September 30, 2016 and December 31, 2015, long-term debt was as follows:

Secured Credit Facility

In August 2015, the Company entered into a $40.0 million credit facility with Opus Bank, which facility was amended and restated on December 8, 2015 (the “Opus Facility”). The Opus Facility consists of a $15.0 million revolving four-year credit facility, and a $25.0 million, five-year term loan. The maturity date of amounts borrowed under the revolving facility is August 28, 2019, and the maturity date of amounts borrowed under the term loan is August 28, 2020.

At September 30, 2016, the Company had borrowed $15.0 million under the revolver and $25.0 million under the term loan. For the three and nine months ended September 30, 2016, under the Opus Facility the Company recognized interest expense of approximately $0.5 million and $1.5 million, respectively, at a monthly interest rate of 4.75%. The interest rate is calculated as the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by the Wall Street Journal as its “prime rate” (or the average prime rate if a high and a low prime rate are therein reported) plus the Applicable Margin (as defined in the Opus Facility) in effect at such time, or (b) 3.25% plus the Applicable Margin.

Pursuant to the Opus Facility, the Company must satisfy various customary financial covenants such as borrower leverage ratio, fixed charge coverage ratio, capital expenditures annual limit, minimum adjusted EBITDA, and maximum senior leverage ratio. For the three and nine months ended September 30, 2016, the Company exceeded its leverage and senior leverage ratio covenants. On November 7, 2016, Opus Bank waived these covenants breaches. As a result of this waiver, we were in compliance with our obligations under this facility as of September 30, 2016.

Praesidian Facility

On December 8, 2015, the Company entered into the Fourth Amended and Restated Securities Purchase Agreement and Security Agreement (the “Fourth Amended SPA”) with the Company’s subordinated lenders (which, collectively with its prior versions is hereinafter referred to as the “Praesidian Facility”). Under the Praesidian Facility, the Company is required to satisfy financial covenants similar to those required under the Opus Facility. For the three and nine months ended September 30, 2016, the Company was not in compliance with the leverage ratio covenant under this facility. On November 7, 2016, Praesidian waived our events of default with respect to non-compliance with the leverage ratio. As a result of this waiver, we were in compliance with our obligations under the Fourth Amended SPA as of September 30, 2016.

During the three and nine months ended September 30, 2016, the Company paid interest expense of approximately $0.9 million and $2.8 million, at an annual interest rate of 10.8%.

	September 30,	December 31,
	2016	2015
Subordinated Notes	$33,645,865	$34,160,200
Unamortized discount on Subordinated Notes	(1,450,745)	(1,697,091)
Unamortized debt issuance costs	(836,760)	(981,584)
Total notes payable - non-related parties	31,358,360	31,481,525
Less: current portion	(685,780)	(685,780)
Long-term portion	$30,672,580	$30,795,745

16

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Related Party Note Payable

The note payable to Marvin Rosen, the Chairman of Fusion’s Board is subordinated to borrowings under the Opus Facility and the Fourth Amended SPA. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after amounts borrowed under the Opus Facility and the Fourth Amended SPA are paid in full.

	September 30,	December 31,
	2016	2015
Notes payable to Marvin Rosen	$1,178,082	$1,178,082
Discount on note	(65,637)	(103,253)
Total notes payable - related parties	$1,112,445	$1,074,829

For the nine months ended September 30, 2016, the Company recognized interest expense on the Rosen note of approximately $64,000 and amortization discount of approximately $38,000.

Note Payable to RootAxcess Seller

In connection with its purchase of the assets of RootAxcess, LLC (“RootAxcess”) in September 2015, the Company held back $0.7 million against potential claims arising from breaches of representation and warranties. Of such amount, $0.4 million is to be paid to the seller in six equal installments of $66,667 on each of the three, six, nine, twelve, fifteen and eighteen month anniversary of the closing date. The remaining $0.3 million to be paid in three equal installments of $100,000 on each of the twelve, fifteen, and eighteen month anniversary of the closing date. To the extent there is a unresolved claim notice pending (as defined in the RootAxcess asset purchase agreement), the monthly installment payable to seller immediately following the delivery of such claim notice may, at the Company’s reasonable discretion, be reduced by the amount in dispute under the claim notice and such amount will continue to be held by the Company until resolved, at which point, the Company will disburse the withheld amount in accordance with such resolution.

On September 30, 2016, the Company made a payment of $127,306 net of an adjustment of $39,360 to the seller in connection with the terms of the asset purchase agreement. At September 30, 2016, the remaining balance due is $333,334.

Note Due to TFB Seller

In connection with the purchase of the assets of TFB in March 2016, the Company recorded a contingent liability of $1,011,606 (see Note 6). The contingent liability was based on a royalty fee payable to the sellers equal to ten percent of the collected monthly recurring revenues to be derived from the sale of the cloud version of the proprietary call center software and maintenance services. In accordance with the terms of the asset purchase agreement, the royalty fees will be paid on a quarterly basis, commencing as of the first full calendar quarter following the second anniversary of the closing date of the TFB acquisition or March 31, 2018 and will continue for a period of 31 calendar quarters. In addition, a portion of the salary paid to the sellers for a period of two years following the acquisition date constitutes an advancement against any royalty fee owed to the sellers.

At September 30, 2016, the outstanding balance is $961,606, net of a salary advance of $50,000. There were no changes to the contingent liability based on the Company’s evaluation of the factors used to determine the fair value of the purchase price.

Note 12. Derivative Liability

Fusion has issued warrants to purchase shares of its common stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”). For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies such instruments as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrant is exercised or expires, and any change in fair value isrecognized in the Company’s statement of operations. In this regard, Fusion has 584,834 outstanding warrants which provide for a downward adjustment of the exercise price if Fusion were to issue

17

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

common stock at an issuance price, or issue convertible debt or equity securities with an exercise price, that is less than the exercise price of these warrants. In addition, in connection with the sale of certain notes under the original Praesidian Facility, Fusion issued nominal warrants to the original lenders to purchase an aggregate of 728,333 shares of Fusion’s common stock. The nominal warrants were exercised in August 2015. The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock.

The following assumptions were used to determine the fair value of the warrants for the nine months ended September 30, 2016 and 2015:

	Nine months ended September 30,
	2016	2015
Stock price ($)	1.65	1.88
Exercise price ($)	6.25	0 - 6.25
Risk-free interest rate (%)	1.56	1.75 - 2.06
Expected volatility (%)	92.4	125.4
Time to maturity (years)	2.25	7.08 - 8.25

At September 30, 2016 and December 31, 2015, the fair value of the derivative was $233,934 and $953,005, respectively. For the three months ended September 30, 2016 and 2015, the Company recognized a gain on the change in the fair value of this derivative of approximately $152,000 and $1.2 million, respectively, and a gain of approximately $380,000 and $2.5 million for the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016, the Company adjusted the valuation of its derivative liability for warrants issued in December 2013 and January 2014 and its valuation of certain warrants exercised during 2015. The amount of the adjustment was a net $772,022 impact on the condensed consolidated statements of operations resulting from the loss on the change in the fair value of the derivative and an additional $338,972 impact to capital in excess of par and $433,050 increase in derivative liability in the condensed consolidated balance sheets (see Note 17). 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.

Note 13. Equity Transactions

Common Stock

Fusion is authorized to issue 50,000,000 shares of its common stock. As of September 30, 2016 and December 31, 2015, 15,064,953 and 12,788,971 shares of its common stock, respectively, were issued and outstanding, respectively.

During the nine months ended September 30, 2016, Fusion issued 26,500 shares of its common stock to a third party consultant for services rendered, and 30,000 shares of common stock to an employee in lieu of a cash bonus valued of $96,950. In addition, the Fusion Board declared aggregate dividends of $599,491 on Fusion’s Series B-2 Preferred Stock, which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 343,510 shares of common stock. In addition, during the nine months ended September 30, 2016, certain holders of the Series B-2 Preferred Stock elected to convert 6,025 shares into an aggregate of 1,871,667 shares of Fusion’s common stock, including 666,667 shares of common stock which were issued as a payment of additional dividends for the conversion of these Series B-2 Preferred shares into Fusion’s common stock. The additional shares issued were valued at the closing market price at the date of issuance of $1.80 per share or $1.2 million.

On May 9, 2016, the Company received a staff determination letter from Nasdaq stating that the Company was not in compliance with its rules for continued listing, Rule 5635(b), because it violated the shareholder approval requirement. The technical violation resulted from the purchase of 1,834,862 shares of the Company’s common stock by Unterberg Technology Partners, L.P. (“Unterberg”) in December 2015, which when aggregated with the common shares underlying the Company’s Series B Preferred Stock held by an affiliate of Unterberg in February 2016, caused the amount owned by Unterberg affiliates to exceed the level allowed by Nasdaq without a prior shareholder vote. The Nasdaq letter indicated that the Company had forty-five (45) calendar days to submit a plan to regain compliance.

18

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On July 19, 2016, Fusion entered into a Standstill Agreement with Unterberg, and notified Nasdaq of it plans to hold an annual stockholders meeting to obtain the requisite approval for the transactions. Consequently, Nasdaq granted the Company an extension of time to regain compliance with the Rule 5635(b). On October 28, 2016, Fusion’s shareholders approved the transaction with Unterberg and its affiliates and on November 2, 2016, Nasdaq notified Fusion that it has regained compliance with Rule 5635(b).

Restricted Stock

During the nine months ended September 30, 2016, the Company awarded 55,000 shares of restricted common stock to its Chief Financial Officer.

Preferred Stock

Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of September 30, 2016 and December 31, 2015 there was 5,045 shares of Series A Preferred Stock issued and outstanding. In addition, there were 12,254 and 18,279 shares of Series B-2 Preferred Stock issued and outstanding as of September 30, 2016 and December 31, 2015, 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 the Fusion’s Board, on January 1 of each year. As of September 30, 2016, no dividend had been declared by Fusion’s Board with respect to the Series A Preferred Stock, and the Company had accumulated approximately $4.6 million of preferred stock dividends. 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, in cash or shares of Fusion common stock, at the option of the Company.

Since 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.

Note 14. Commitments and Contingencies

Legal Matters

From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. Defending such proceedings can be costly and can impose a significant burden on management and employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of September 30, 2016, the Company did not have any ongoing legal matters.

19

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 15. Segment Information

Operating segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance.

The Company has two reportable segments – “Business Services” and “Carrier Services.” These segments are organized by the products and services that are sold and the customers that are served. The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company’s measurement of segment profit exclude the Company’s executive, administrative and support costs. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the 2015 Form 10-K. The Company’s segments and their principal activities consist of the following:

Business Services

Through this operating segment, the Company provides cloud voice, cloud connectivity, cloud infrastructure, cloud computing and managed cloud-based applications to businesses of all sizes. These services are sold through the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party agents to sell the Company’s products and services.The Business Services segment includes the business acquired from RootAxcess in September 2015, its acquisition of the stock of various Fidelity companies in December, 2015, and its acquisition of assets from TFB completed in March 2016.

Carrier Services

Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily VoIP technology. The Company currently interconnects with approximately 370 carriers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.

20

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Operating segment information for the three and nine months ended September 30, 2016 and 2015 is summarized in the following tables:

	Three months ended September 30, 2016
	Carrier Services	Business Services	Corporate	Consolidated
Revenues	$8,864,791	$20,632,338	$-	$29,497,129
Cost of revenues (exclusive of depreciation and amortization)	8,487,912	8,281,675	-	16,769,587
Gross profit	376,879	12,350,663	-	12,727,542
Depreciation and amortization	38,094	2,747,822	212,712	2,998,628
Selling, general and administrative expenses	653,462	9,547,547	1,207,039	11,408,048
Interest expense	-	1,551,534	73,661	1,625,195
Gain on change in fair value of derivative liability	-	-	(152,057)	(152,057)
Other expenses (income)	-	247,070	(265,139)	(18,069)
Provision for income taxes	-	10,951	-	10,951
Net loss	$(314,677)	$(1,754,261)	$(1,076,216)	$(3,145,154)
Total assets	$3,783,321	$90,027,291	$2,312,655	$96,123,267

	Nine months ended September 30, 2016
	Carrier Services	Business Services	Corporate	Consolidated
Revenues	$30,711,086	62,390,749	$-	$93,101,835
Cost of revenues (exclusive of depreciation and amortization)	29,341,982	24,594,096	-	53,936,078
Gross profit	1,369,104	37,796,653	-	39,165,757
Depreciation and amortization	116,102	8,128,378	702,301	8,946,781
Selling, general and administrative expenses	2,119,119	28,052,965	3,930,763	34,102,847
Interest expense	-	4,647,847	229,981	4,877,828
Gain on change in fair value of derivative liability	-	-	(380,099)	(380,099)
Other expenses (income)	-	764,308	(797,822)	(33,514)
Provision for income taxes		10,951		10,951
Net loss	$(866,117)	$(3,807,796)	$(3,685,124)	$(8,359,037)
Capital expenditures	$41,584	$3,740,648	$-	$3,782,232

21

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Three months ended September 30, 2015
	Carrier Services	Business Services	Corporate	Consolidated
Revenues	$8,269,529	$16,261,295	$-	$24,530,824
Cost of revenues (exclusive of depreciation and amortization)	7,642,008	5,891,639	-	13,533,647
Gross profit	627,521	10,369,656	-	10,997,177
Depreciation and amortization	48,022	2,898,068	194,337	3,140,427
Selling, general and administrative expenses	885,769	7,953,958	956,756	9,796,483
Interest expense	-	1,332,719	102,015	1,434,734
Gain on change in fair value of derivative liability	-	-	(1,237,730)	(1,237,730)
Loss on extinguishment of debt	-	2,538,272	182,083	2,720,355
Other expenses (income)	-	243,420	(241,021)	2,399
Net (loss) income	$(306,270)	$(4,596,781)	$43,560	$(4,859,491)
Total assets	$4,639,835	$59,128,769	$3,128,866	$66,897,470

	Nine months ended September 30, 2015
	Carrier Services	Business Services	Corporate	Consolidated
Revenues	$25,767,099	$49,090,458	$-	$74,857,557
Cost of revenues (exclusive of depreciation and amortization)	23,540,573	17,819,382	-	41,359,955
Gross profit	2,226,526	31,271,076	-	33,497,602
Depreciation and amortization	138,944	8,809,670	235,018	9,183,632
Selling, general and administrative expenses	2,619,818	23,684,671	3,074,707	29,379,196
Interest expense	-	4,457,080	193,206	4,650,286
Gain on change in fair value of derivative liability	-	-	(2,543,878)	(2,543,878)
Loss on extinguishment of debt	-	2,538,272	182,083	2,720,355
Other expenses (income)	-	591,691	(648,060)	(56,369)
Net loss	$(532,236)	$(8,810,308)	$(493,076)	$(9,835,620)
Capital expenditures	$69,905	$2,409,430	$-	$2,479,335

Note 16. Related Party Transactions

Since March 6, 2014, the Company has engaged a third party to prepare its tax returns and to provide related tax advisory services. Larry Blum, a member of Fusion’s Board, is a Senior Advisor and a former partner of that company.

Since 2015, the Company has an operating agreement with XcomIP, LLC a telecommunications carrier in Hoboken, New Jersey, whose CEO Jay Adams is the brother of John Adams Vice President of our Carrier Services division. For the three and nine months ended September 30, 2016, we recognized revenues of approximately $0.5 million and $2.0 million, respectively. For the nine months ended September 30, 2016, the outstanding balance of accounts receivable from XcomIP and accounts payable owed to XcomIP was approximately $98,000 and $14,000, respectively.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 17. Fair Value Disclosures

Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—No observable pricing inputs in the market

The following table represents the fair value of the liability measured at fair value on a recurring basis:

	Level 1	Level 2	Level 3	Total
As of September 30, 2016
Current liabilities:
Contingent liability (see note 11)	$-	$-	$100,000	100,000
Non-current liabilities:
Contingent liability (see note 11)		-	861,606	861,606
Derivative liability (see note 12)	-	-	233,934	233,934
Total non-current liabilities	$0	$-	$1,095,540	$1,095,540
As of December 31, 2015
Non-current liabilities:
Derivative liability (see note 12)	$-	$-	$953,005	$953,005

Changes in the derivative warrant liability for the nine months ended September 30, 2016 are as follows:

Balance at December 31, 2015	$953,005
Gain for the period:
Included in net loss	(1,152,121)
Adjustment for prior issuances and conversion of warrants (see note 12)	433,050
Balance at September 30, 2016	$233,934

Note 18. Subsequent Events

On November 14, 2016, the Company entered into a $70.0 million senior secured credit facility with East West Bank consisting of a $65.0 million, five-year term loan and a $5.0 million five-year revolver. The proceeds from the term loan were used to fund the acquisition of Apptix, Inc., pay in full the Opus Facility, and for general corporate purposes.  

On November 14, 2016, the Company completed the acquisition of Apptix, Inc. a cloud solutions provider based in Herndon, Virginia for a total purchase price of $28.0 million, consisting of approximately $23.0 million in cash and $5.0 million in Fusion’s restricted common stock.

On November 14, 2016, the Company completed an offering of $2.0 million of Fusion common stock in a private placement offering which is expected to fund on November 16, 2016. The proceeds will be used for general corporate purposes including working capital and capital expenditures.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in the 2015 Form 10-K.

Certain statements and the discussion contained herein regarding the Company’s business and operations may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “plans,” “expect,” “anticipate,” “intend,” “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. The primary risk of the Company is its ability to attract new capital to execute its comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, the Company’s ability to comply with its senior debt agreements, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, natural disasters, acts of war, terrorism or other events beyond the Company’s control and the other factors identified by the Company from time to time in its filings with the SEC. However, the risks included should not be assumed to be the only risks that could affect future performance.

All forward-looking statements included are made as of the date hereof, based on information available to as of the date thereof, and the Company assumes no obligation to update any forward-looking statements.

Overview

Our Business

We offer a comprehensive suite of cloud voice, cloud connectivity, cloud infrastructure, cloud computing and managed cloud-based applications to businesses of all size, and offer domestic and international VoIP services to carriers worldwide. Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors. We currently operate our business in two distinct business segments: Business Services and Carrier Services.

In the Business Services segment, we are focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud. Our core Business Services products and services include cloud voice and unified communications as a service (UCaaS), improving communication and collaboration on virtually any device, virtually anywhere, and cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency. Our cloud computing and infrastructure as a service (IaaS) solutions, are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered. Complemented by storage solutions, as well as software as a service (SaaS) solutions, such as security and business continuity, our advanced cloud offerings allow our larger enterprise customers to experience the increased efficiencies and agility delivered by the cloud. The Company’s cloud-based services are flexible, scalable and rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.

Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors, through which we sell domestic and international voice services to other carriers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic and expand service delivery capabilities for our Business Services segment.

We manage our business segments based on gross profit and gross margin, which represents net revenue less the cost of revenue, and on net profitability after excluding certain non-cash and non-recurring items. The majority of our operations, engineering, information systems and support personnel are assigned to either the Business Services or Carrier Services business segment for segment reporting purposes.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

We continue to increasingly focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art network and advanced services platforms. Our vertically oriented solutions, which are currently focused on healthcare, legal, hospitality and real estate, offer a substantial opportunity to gain additional market share. We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment. In addition to lowering the underlying costs of termination, we believe that our Carrier Services segment supports the growth of the Business Services segment by providing enhanced service offerings for business customers and by strengthening its relationships with major service providers throughout the world.

Results of Operations

Three Months Ended September 30, 2016 Compared with Three Months Ended September 30, 2015

The following table summarizes the results of our consolidated operations for the three months ended September 30, 2016 and 2015:

	Three Months Ended September 30,
	2016	% Revenues	2015	% Revenues
Revenues	$29,497,129	100.0%	$24,530,824	100.0%
Cost of revenues*	16,769,587	56.9%	13,533,647	55.2%
Gross profit	12,727,542	43.1%	10,997,177	44.8%
Depreciation and amortization	2,998,628	10.2%	3,140,427	12.8%
Selling, general and administrative expenses	11,408,048	38.7%	9,796,483	39.9%
Total operating expenses	14,406,676	48.8%	12,936,910	52.7%
Operating loss	(1,679,134)	(5.7%)	(1,939,733)	(7.9%)
Other (expenses) income:
Interest expense	(1,625,195)	(5.5%)	(1,434,734)	(5.8%)
Gain on change in fair value of derivative liability	152,057	0.5%	1,237,730	5.0%
Loss on extinguishment of debt	-	0.0%	(2,720,355)	(11.1%)
Other income (expense), net	18,069	0.1%	(2,399)	0.0%
Total other expenses	(1,455,069)	(4.9%)	(2,919,758)	(11.9%)
Loss before income taxes	(3,134,203)	(10.6%)	(4,859,491)	(19.8%)
Provision for income taxes	(10,951)	0%	-	0.0%
Net loss	$(3,145,154)	(10.7%)	$(4,859,491)	(19.8%)

*Exclusive of depreciation and amortization, shown separately below.

Revenues

Consolidated revenues were $29.5 million during the three months ended September 30, 2016 compared to $24.5 million during the three months ended September 30, 2015, an increase of $5.0 million, or 20.2%.

Revenues from the Business Services segment were $20.6 million for the three months ended September 30, 2016 as compared to $16.3 million for the three months ended September 30, 2015. The increase is primarily attributable to revenue derived from new customers obtained from our acquisitions of RootAxcess in September 2015 and various Fidelity companies in December 2015.

Carrier Services revenue of approximately $8.9 million represents an increase of $0.6 million, or 7.2%, from the same period a year earlier. The increase was primarily due to an increase of 93% or $0.03 in the blended rate per minute of traffic terminated from the same period a year earlier, partially offset by a decrease of 44% in the number of minutes of traffic carried during the quarter.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Cost of Revenues and Gross Margin

Consolidated cost of revenues was $16.8 million for the three months ended September 30, 2016 as compared to $13.5 million for the three months ended September 30, 2015. This increase was due to costs attributable to revenues derived from the RootAxcess and Fidelity acquisitions completed in the third and fourth quarter of 2015, and higher per minute rates for the cost of traffic terminated of 99.7% (or $0.03 per minute) in the Carrier Services segment.

Consolidated gross margin was 43.1% for the three months ended September 30, 2016 compared to 44.8% in the same period for 2015. The decrease is primarily due to approximately $0.8 million of additional costs of traffic terminated by our Carrier Services segment and an increase of approximately $2.4 million in our Business Services segment driven primarily by an increase in total customer services costs as a result of the RootAxcess and Fidelity acquisitions.

Gross margin for the Business Services segment was 59.9% for the three months ending September 30, 2016 as compared to 63.8% for the three months ending September 30, 2015. The decrease is due primarily to an increase in costs of revenue driven primarily by an increase in lower margin connectivity services associated with services offered by the acquired Fidelity companies.

Gross margin for the Carrier Services segment was 4.3% for the three months ended September 30, 2016 as compared to 7.6% in the three months ended September 30, 2015. The decrease was due to higher cost per minute of traffic terminated of $0.8 million, over the same period a year earlier.

Depreciation and Amortization

Depreciation and amortization expense was $3.0 million for the three months ended September 30, 2016 compared to $3.1 million in the same period of 2015. For the three months ended September 30, 2016, amortization expense of the intangible assets decreased by approximately $0.5 million from the same period in 2015 as a result of some of the intangible assets being fully amortized, and depreciation expense increased by approximately $0.4 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2016 was $11.4 million as compared to $9.8 million for the three months ended September 30, 2015. This increase is driven primarily by higher salaries and employee related benefits of approximately $1.6 million due to increased headcount resulting from our acquisitions of Fidelity, RootAxcess and TFB.

Interest Expense

Interest expense was approximately $1.6 million for the three months ended September 30, 2016 compared to $1.4 million in the same period of 2015. The increase in interest expense of $0.2 million is due to an increase in interest expense of approximately 0.4 million from the credit facility with Opus Bank offset by a decrease in interest expense of approximately $0.2 million from Praesidian as a result of the debt restructuring in August 2015 which lower the interest rate from 11.5% to 10.8%.

Change in Fair Value of Derivative Liability

During the three months ended September 30, 2016 and 2015, we recognized a gain on the change in fair value of our derivative liabilities in the amount of approximately $152,000 (see Notes 12 and 17) and $1.2 million, respectively. The gain and loss on the derivative are related to warrants that we issued to our senior lenders in 2012 and 2013 and warrants issued to purchasers of our Series B-2 Preferred Stock, the terms of which cause them to be treated as liabilities and not as equity instruments. The changes in their fair value are required to be recorded through the statement of operations at each accounting period. These warrants are valued using an option pricing model and other valuation models, such that increases in Fusion’s stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases in Fusion’s stock price result in a lower valuation and a gain being recorded in our income statement.

We may be subject to additional fluctuations in our income statement in 2016 and beyond based on changes in Fusion’s stock price and the corresponding changes in fair value of our derivative liabilities associated with the warrants issued in connection with our Series B-2 Preferred Stock.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015

The following table summarizes the results of our consolidated operations for the nine months ended September 30, 2016 and 2015:

	Nine Months Ended September 30,
	2016	% Sales	2015	% Sales
Revenues	$93,101,835	100.0%	$74,857,557	100.0%
Cost of revenues*	53,936,078	57.9%	41,359,955	55.3%
Gross profit	39,165,757	42.1%	33,497,602	44.7%
Depreciation and amortization	8,946,781	9.6%	9,183,632	12.3%
Selling, general and administrative expenses	34,102,847	36.6%	29,379,196	39.2%
Total operating expenses	43,049,628	46.2%	38,562,828	51.5%
Operating loss	(3,883,871)	(4.2%)	(5,065,226)	(6.8%)
Other (expenses) income:
Interest expense	(4,877,828)	(5.2%)	(4,650,286)	(6.2%)
Gain on change in fair value of derivative liability	380,099	0.4%	2,543,878	3.4%
Loss on extinguishment of debt	-	0.0%	(2,720,355)	(3.6%)
Other income, net	33,514	0.0%	56,369	0.1%
Total other expenses	(4,464,215)	(4.8%)	(4,770,394)	(6.4%)
Loss before income taxes	(8,348,086)	(9.0%)	(9,835,620)	(13.1%)
Provision for income taxes	(10,951)	0%	-	0.0%
Net loss	$(8,359,037)	(9.0%)	$(9,835,620)	(13.1%)

*Exclusive of depreciation and amortization, shown separately below.

Revenues

Consolidated revenues were $93.1 million for the nine months ended September 30, 2016 compared to $74.9 million for the nine months ended September 30, 2015, an increase of $18.2 million, or 24.4%.

Revenues from the Business Services segment increased by $13.3 million for the first nine months of 2016 to $62.4 million from $49.1 million for the first nine months of 2015. The increase is primarily attributable to revenue derived from new customers obtained from the RootAxcess and Fidelity acquisitions which were completed in the third and fourth quarter of 2015.

Carrier Services revenue of $30.7 million represents an increase of $4.9 million, or 19.2%, from the same period a year earlier. The increase is the result of a 52.3% or $0.02 increase in the blended rate per minute of traffic terminated offset by a decrease of 21.8% in volume of traffic carried.

Cost of Revenues and Gross Margin

Consolidated cost of revenues was $53.9 million for the nine months ended September 30, 2016 compared to $41.4 million for the nine months ended September 30, 2015. This increase is due to costs attributable to revenues resulting from the RootAxcess and Fidelity acquisitions during the third and fourth quarter of 2015, and higher per minute rates for the cost of traffic terminated of 59.3% (or $0.02 per minute) in the Carrier Services segment.

Consolidated gross margin was 42.1% in the nine months ended September 30, 2016 compared to 44.7% in the nine months ended September 30, 2015. The decrease is primarily due to an increase in costs of revenue driven primarily by the inclusion of the Fidelity acquisition and an increase in costs in our Carrier Services segment of $5.8 million as a result of higher per minute rates associated with the cost of traffic terminated.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Gross margin for the Business Services segment was 60.6% for the first nine months of 2016 compared to 63.7% for the first nine months of 2015. The decrease is due primarily to an increase in costs of revenue driven primarily by an increase in lower margin connectivity services associated with services offered by the Fidelity companies.

Gross margin for the Carrier Services business segment was 4.5% for the nine months ended September 30, 2016 compared to 8.6% for the nine months ended September 30, 2015. The decrease was due to higher cost per minute of traffic terminated of $5.8 million, or 59.3%, over the same period a year earlier.

Depreciation and Amortization

Depreciation and amortization expense was $8.9 million and $9.2 million for the nine months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016, amortization expense of the intangible assets decreased by approximately $1.5 million from the same period a year earlier as a result of certain intangible assets being fully amortized, and depreciation expense increased by approximately $1.2 million from the same period a year earlier.

Selling, General and Administrative Expenses

SG&A expenses increased by $4.7 million to $34.1 million for the nine months ended September 30, 2016 from $29.4 million for the nine months ended September 30, 2015. This increase is primarily driven by higher salaries and employee related benefits of approximately $4.8 million due to increased headcount resulting from our acquisitions of Fidelity, RootAxcess and TFB.

Interest Expense

Interest expense was approximately $4.9 million for the nine months ended September 30, 2016 and $4.7 million for the same period in 2015. The increase in interest expense of approximately $0.2 million is primarily due to an increase in interest expense of approximately 1.4 million from the credit facility with Opus Bank offset by a decrease in interest expense of approximately $0.9 million from Praesidian as a result of the debt restructuring in August 2015 which lower the interest rate from 11.5% to 10.8% and resulted in a reduction in the amortization of debt discount and debt issuance costs of approximately $0.4 million.

Change in Fair Value of Derivative Liability

The change in fair value of the derivative was a gain of $380,000 in the nine months ended September 30, 2016 compared to a gain of $2.5 million the nine months ended September 30, 2015. This change is due to the decrease in Fusion's stock price during these periods, which decreases the value of our derivative liability.

Liquidity and Capital Resources

Since our inception, we have incurred significant net losses. At September 30, 2016, we had working capital deficit of approximately $3.2 million and stockholders’ equity of $7.0 million. At December 31, 2015, we had working capital of $1.7 million and stockholders’ equity of approximately $14.5 million. Our consolidated cash balance at September 30, 2016 was approximately $0.9 million as compared to $7.5 million at December 31, 2015. While we believe we have sufficient cash to fund our operations and meet our operating and debt obligations for the next twelve months, we may be required to raise additional capital to support our business plan. There can be no assurances that such funds will be available to the Company as and when needed or on terms deemed by us to be acceptable.

We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable future. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Subject to the rights of holders of our outstanding preferred stock, any future determination to pay dividends is at the discretion of Fusion’s Board, and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, the terms of our credit facilities, limitations under Delaware law and other factors that Fusion’s Board and senior management consider appropriate.

The holders of our Series A Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, as and if declared by Fusion’s Board. The holders of our Series B-2 Preferred Stock are entitled to receive quarterly dividends at an annual rate of 6%. These dividends can be paid, at the Company’s option, either in cash or, under certain circumstances, in shares of Fusion’s common stock.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Through September 30, 2016, Fusion’s Board has never declared dividends on any series of the Series A Preferred Stock, and, as a result, the Company had accumulated approximately $4.6 million of preferred stock dividends. The Fusion Board declared a dividend of $183,917 for the three months ended September 30, 2016 on its Series B-2 Preferred Stock, which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 122,601 shares of Fusion’s common stock.

Secured Credit Facility

In December 2015, the Company entered into the Opus Facility, which facility amended and restated, in its entirety, the $40.0 million credit facility originally entered into by the Company with Opus Bank in August 2015. The Opus Facility consists of a $15.0 million revolving credit facility and a $25.0 million term loan. All borrowings under the Opus Facility bear interest at a rate equal to the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by the Wall Street Journal as its “prime rate” (or the average prime rate if a high and a low prime rate are therein reported) plus the Applicable Margin then in effect at such time, or (b) 3.25% plus the Applicable Margin and are secured by a first priority security interest in all of the assets of Fusion and its subsidiaries, including the capital stock of each such subsidiary. Under the Opus Facility, “Applicable Margin” is calculated based on the ratio of Senior Indebtedness to Adjusted EBITDA (each as defined in the Opus Facility) and ranges from 1.25% to 2.00% based on the ratio level. In addition, subject to certain limitations, Fusion and certain of its subsidiaries have guaranteed the obligations of the borrower (Fusion NBS Acquisition Corp.) under the Opus Facility, including its obligations to repay all borrowings. The maturity date of amounts borrowed under the revolver is four years or August 28, 2019, and the maturity date of any amounts borrowed under the term loan portion of this facility is August 28, 2020. The Opus Facility contains a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to borrowings under the Opus Facility, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries. The Opus Facility also requires on-going compliance with various financial covenants, including a maximum senior leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization. Effective December 31, 2015, the Company’s obligation to maintain a minimum unencumbered cash bank balance of no less than $1.0 million at all times was eliminated.

At September 30, 2016, we have outstanding $15.0 million under the revolver and $25.0 million under the term loan. The Company paid monthly interest at a rate of 4.75%, and paid interest expense of approximately $0.5 million and $1.4 million during the three and nine months ended September 30, 2016, respectively. As of September 30, 2016, we were not in compliance with our leverage and senior leverage ratio covenants in the Opus Facility. On November 7, 2016, the Company and Opus Bank entered into a Waiver and Amendment to Amended and Restated credit Agreement (“Amended Opus Facility”) whereby Opus agreed to waive our default with respect to the leverage and senior leverage ratios covenant requirements, and refinance the existing credit facility into a new $20.0 million senior secured credit facility with East West Bank. As a result of this waiver, we were in compliance with our obligations under the Secured Credit Facility as of September 30, 2016.

Praesidian Facility

Simultaneous with the execution of the Opus Facility, the Company executed the Fourth Amended SPA. The Fourth Amended SPA amended and restated the terms of the Third Amended and Restated Securities Purchase Agreement and Security Agreement (the “Third Amendment”). Specifically, the Fourth Amended SPA amended the Third Amendment to (i) provide the consent of the continuing lenders to the acquisition of Fidelity (ii) add Fidelity as a guarantor and credit party under the Praesidian Facility, and (iii) modify or eliminate certain of the financial covenants contained in the Third Amendment, including the requirement to maintain a minimum unencumbered cash bank balance of $1.0 million at all times. As of September 30, 2016, we were not in compliance with our leverage ratio covenant in the Fourth Amended SPA. On November 7, 2016, Praesidian waived our events of default with respect to non-compliance with the leverage ratio. As a result of this waiver and amendment, we were in compliance with our obligations under the Fourth Amended SPA as of September 30, 2016.

The following notes have been issued by us under the Praesidian Facility:

● Series A and B Notes. The Company sold $6.5 million aggregate principal amount of Series A notes, and $10.0 million aggregate principal amount of Series B notes in October 2012, the proceeds of which were used to finance our acquisition of Network Billing Systems, LLC.

● Series C and D Notes. The Company sold $0.5 million aggregate principal amount of Series C notes and $25.0 million aggregate principal amount of Series D notes in December 2013, to finance our acquisition of certain assets of Broadvox.

● Series E Notes. The Company sold $5.0 million aggregate principal amount of Series E notes in October 2014 to fund our acquisition of PingTone Communications Inc.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

● Series F Notes. The Company sold $9.0 million aggregate principal amount of Series F notes in August 2015 to retire a portion of the approximately $20.0 million of notes held by one of the original lenders.

At September 30, 2016, we had approximately $34.0 million principal amount of notes outstanding under the Praesidian Facility. In accordance with the terms of the Fourth Amended SPA, the notes bear interest at an annual rate of 10.8%, with monthly principal payments of approximately $57,148 with the outstanding principal balance on all the notes payable at maturity on February 28, 2021.

For the three months ended September 30, 2016 and 2015, we paid interest expense on the notes of approximately $0.9 million and $1.1 million, respectively, and $2.8 million and $3.7 million for the nine months ended September 30, 2016 and 2015, respectively.

Related Party Note Payable

We have a note payable outstanding of approximately $1.2 million to Marvin Rosen, the Chairman of Fusion’s Board. This note is subordinated to all amounts borrowed under the Opus Facility and the Praesidian Facility. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after all borrowings under the Opus Facility and the Praesidian Facility are paid in full. For the quarter ended September 30, 2016, the Company recognized interest expense of approximately $21,300.

We have entered into various capital lease agreements to finance the purchase of property and equipment, at interest rates generally ranging from 5.3% to 6.6%. During the nine months ended September 30, 2016, we paid $743,647 scheduled principal payments under these leases and approximately $129,000 in interest expense.

The following table sets forth a summary of our cash flows for the periods indicated:

	Nine Months Ended September 30,
	2016	2015
Net cash (used in) provided by operating activities	$(1,910,619)	$135,735
Net cash used in investing activities	(3,179,264)	(1,979,335)
Net cash used in financing activities	(1,568,620)	(645,238)
Net decrease in cash and cash equivalents	(6,658,503)	(2,488,838)
Cash and cash equivalents, beginning of period	7,540,543	6,444,683
Cash and cash equivalents, end of period	$882,040	$3,955,845

Cash used in operating activities was $1.9 million for the nine months ended September 30, 2016, compared to cash provided by operating activities of $0.1 million during the nine months ended September 30, 2015.

The following table illustrates the primary components of our cash flows from operations:

	Nine Months Ended September 30,
	2016	2015
Net loss	$(8,359,037)	$(9,835,620)
Non-cash expenses, gains and losses	10,024,462	11,120,280
Accounts receivable	(625,771)	(565,227)
Accounts payable and accrued expenses	(1,258,968)	(297,079)
Other	(1,691,305)	(286,619)
Cash (used in) provided by operating activities	$(1,910,619)	$135,735

Cash used in investing activities, comprised mainly of capital expenditures, was $3.8 million for the nine months ended September 30, 2016 as compared to $2.5 million for the nine months ended September 30, 2015. Capital expenditures for the remainder of 2016 are expected to be approximately $0.7 million to fund the purchase of network and related equipment and operational support systems as we continue to grow our Business Services segment. A portion of our capital expenditure requirements may be financed through capital leases or other equipment financing arrangements.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Cash used in financing activities was $1.6 million for the nine months ended September 30, 2016 and $0.6 million for the same period in 2015. For the nine months ended September 30, 2016, the use of cash was the result of debt service payments and equipment financing obligations of $824,973 and $743,647 respectively. Cash used in financing activities for the nine months ended September 30, 2015 of approximately $0.6 million was primarily attributable to payments of $0.8 million to our senior lenders, retirement of debt of approximately $20.0 million, $0.6 million in capital lease payments, and approximately $1.7 million repayment of borrowings under a factoring arrangement with a third party, offset by approximately $1.6 million in proceeds received from the transfer of receivables from such third party. In addition, during the quarter ended September 30, 2015, we issued the Series F Notes for $9.0 million under the Praesidian Facility and borrowed $12.5 million under the Secured Credit Facility.

Other Matters

Inflation

We do not believe inflation has a significant effect on our operations at this time.

Off Balance Sheet Arrangements

At September 30, 2016, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Disclosure under this section is not required for a smaller reporting company.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of anysystem of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

None.

31

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 1A. Risk Factors.

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors,” in our 2015 Form 10-K. There have been no material changes to our risk factors from those previously disclosed in such Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

During the nine months ended September 30, 2016, we have issued 26,500 shares of common stock valued at $45,051 to a third party consultant for services rendered. In addition, the Company awarded 55,000 shares of restricted stock to its Chief Financial Officer.

These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits

EXHIBIT NO.	DESCRIPTION
31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.58	2016 Fusion Equity Incentive Plan
10.59	Certificate of Amendement to Certificate of Incorporation
10.60	Waiver to Fourth Amended and Restated Securities Purchase Agreement and Security Agreement, dated November 7, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect, LLC, Fidelity Access Networks, Inc., Fidelity Voice Services, LLC, Fidelity Telecom, LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and United Insurance Company of America
10.61	Waiver and Amendement to Amended and Restated Credit Agreement, dated November 7, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect, LLC, Fidelity Access Networks, Inc., Fidelity Voice Services, LLC, Fidelity Telecom, LLC, Opus Bank
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

32

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
November 14, 2016	By:	/s/ Michael R. Bauer
		Michael R. Bauer
		Chief Financial Officer

33

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Index to Exhibit

EXHIBIT NO.	DESCRIPTION
31.1	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.58	2016 Fusion Equity Incentive Plan
10.59	Certificate of Amendement to Certificate of Incorporation
10.60	Waiver to Fourth Amended and Restated Securities Purchase Agreement and Security Agreement, dated November 7, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect, LLC, Fidelity Access Networks, Inc., Fidelity Voice Services, LLC, Fidelity Telecom, LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and United Insurance Company of America
10.61	Waiver and Amendement to Amended and Restated Credit Agreement, dated November 7, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect, LLC, Fidelity Access Networks, Inc., Fidelity Voice Services, LLC, Fidelity Telecom, LLC, Opus Bank
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

34

EX-10.58

EXHIBIT 10.58

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC

2016 EQUITY INCENTIVE PLAN

EFFECTIVE DATE: October 28, 2016

APPROVED BY STOCKHOLDERS: October 28, 2016

TERMINATION DATE: October 27, 2026

ARTICLE 1

Establishment, Purpose, Effective Date, Expiration Date

1.1           Establishment.  Fusion Telecommunications International, Inc., a Delaware corporation (the “Company”), hereby establishes the Fusion Telecommunications International, Inc. 2016 Equity Incentive Plan (the “Plan”). The Plan will supersede and replace the Fusion Telecommunications International, Inc. 2009 Stock Option Plan, effective as of December 2009 (the “2009 Plan”). No awards will be made pursuant to the 2009 Plan on or after the Effective Date; provided, however, that the 2009 Plan shall remain in effect until all awards granted under the 2009 Plan have been exercised, forfeited, canceled, expired or otherwise terminated in accordance with the terms of such grants.

1.2           Purpose. The purpose of the Plan is to advance the interests of the Company and its stockholders by enhancing the Company’s ability to attract and retain qualified persons to perform services for the Company, by providing incentives to such persons to put forth maximum efforts for the Company and by rewarding persons who contribute to the achievement of the Company’s economic objectives. To further these objectives, the Plan provides for the grant of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Stock Grants, Stock Units, Performance Shares, Performance Share Units, and Performance Cash. The Plan also permits the grant of Awards that qualify for the “performance-based compensation” exception to the limitations on the deduction of compensation imposed by Section 162(m) of the Code. At the same time, the Plan permits the Committee, in the exercise of its discretion, to grant Awards to Covered Employees that do not qualify for the “performance-based compensation” exception.

1.3           Effective Date. The Plan will become effective on the date it is approved by the stockholders at the Company’s 2016 Annual Meeting (the “Effective Date”).

1.4           Expiration Date. The Plan will expire on, and no Award may be granted under the Plan after, the tenth (10th) anniversary of the Effective Date (the “Expiration Date”). Any Awards that are outstanding on the Expiration Date shall remain in force according to the terms of the Plan and the applicable Award Agreement.

ARTICLE 2

Glossary; Construction

2.1           Glossary. When a word or phrase appears in this Plan document with the initial letter capitalized, and the word or phrase does not commence a sentence, the word or phrase will generally be given the meaning ascribed to it in Article 1 or in the attached Glossary, which is incorporated into and is part of the Plan. All of these key terms are listed in the Glossary. Whenever these key terms are used, they will be given the defined meaning unless a clearly different meaning is required by the context.

2.2           Construction. The masculine gender, where appearing in the Plan, shall include the feminine gender (and vice versa), and the singular shall include the plural, unless the context clearly indicates to the contrary. If any provision of this Plan is determined to be for any reason invalid or unenforceable, the remaining provisions shall continue in full force and effect.

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ARTICLE 3

Eligibility and Participation

3.1           General Eligibility. Persons eligible to participate in this Plan include all employees, officers, Non-Employee Directors of, and Consultants to, the Company or any Affiliate. Awards may also be granted to prospective employees or Non-Employee Directors but no portion of any such Award will vest, become exercisable, be issued, or become effective prior to the date on which such individual begins to provide services to the Company or its Affiliates.

3.2           Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from among all eligible individuals, those to whom Awards will be granted and will determine the nature and amount of each Award.

ARTICLE 4

Administration

4.1           General. The Plan shall be administered by the Committee or, with respect to individuals who are Non-Employee Directors, the Board. All references in the Plan to the “Committee” shall refer to the Committee or Board, as applicable. The Committee, by majority action thereof, is authorized to interpret the Plan, to prescribe, amend, and rescind rules and regulations as it may deem necessary or advisable to administer the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interests of the Company, and to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Determinations, interpretations, or other actions made or taken by the Committee in good faith pursuant to the provisions of the Plan shall be final, binding and conclusive for all purposes of the Plan.

4.2           Committee Responsibilities. Subject to the provisions of the Plan, the Committee shall have the authority to: (a) designate the Participants who are entitled to receive Awards under the Plan; (b) determine the types of Awards and the times when Awards will be granted; (c) determine the number of Awards to be granted and the number of shares of Stock to which an Award will relate; (d) determine the terms and conditions of any Award, including, but not limited to, the purchase price or exercise price or base value, the grant price, the period(s) during which such Awards shall be exercisable (whether in whole or in part); (e) any restrictions or limitations on the Award, any schedule for lapse of restrictions or limitations, and accelerations or waivers thereof, based in each case on such considerations as the Committee determines; provided, however, that except in the case of a Change in Control, the Committee shall not have the authority to accelerate the vesting or waive the forfeiture restrictions on any Performance-Based Award; (f) determine whether, to what extent, and in what circumstances an Award may be settled in, or the exercise price or purchase price of an Award may be paid in cash, Stock, or other Awards, or other property, or whether an Award may be canceled, forfeited, exchanged or surrendered; (g) prescribe the form of each Award Agreement, which need not be the same for each Participant; (h) decide all other matters that must be determined in connection with an Award; (i) interpret the terms of, and determine any matter arising pursuant to, the Plan or any Award Agreement; and (j) make all other decisions or determinations that may be required pursuant to the Plan or an Award Agreement as the Committee deems necessary or advisable to administer the Plan. The Committee shall also have the authority to modify existing Awards to the extent that such modification is within the power and authority of the Committee as set forth in the Plan.

4.3           Decisions Final. The Committee shall have the authority to interpret the Plan and subject to the provisions of the Plan, any Award Agreement, and all decisions and determinations by the Committee with respect to the Plan are final, binding and conclusive on all parties. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under the Plan.

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ARTICLE 5

Shares Available for Grant

5.1           Number of Shares.  Subject to adjustment as provided in Section 5.4, the aggregate number of shares of Stock reserved and available for grant pursuant to the Plan shall be an amount equal to ten percent (10%) of our shares of common stock outstanding from time-to-time on a fully-diluted basis, plus shares from any award granted under the 2009 Plan that terminates, expires or lapses for any reason in the future. In addition, the 101,749 shares not granted under the 2009 Plan will be available for grant under this Plan. The shares of Stock delivered pursuant to any Award may consist, in whole or in part, of authorized by unissued Stock, treasury Stock not reserved for any other purposes, or Stock purchased on the open market.

5.2           Share Counting. The following rules shall apply solely for purposes of determining the number of shares of Stock available for grant under the Plan at any given time:

(a)           In the event any Award granted under the Plan, or any award outstanding under the 2009 Plan after the Effective Date is terminated, expired, forfeited, or canceled for any reason, the number of shares of Stock subject to such Award will again be available for grant under the Plan (i.e., any prior charge against the limit set forth in Section 5.1 shall be reversed).

(b)           If shares of Stock are not delivered in connection with an Award because the Award may only be settled in cash rather than in Stock, no shares of Stock shall be counted against the limit set forth in Section 5.1. If any Award may be settled in cash or Stock, the rules set forth in Section 5.2(a) shall apply until the Award is settled, at which time the underlying shares of Stock will be added back to the shares available for grant pursuant to Section 5.1 but only if the Award is settled in cash.

(c)           The exercise of a stock-settled SAR or broker-assisted “cashless” exercise of an Option (or a portion thereof) will reduce the number of shares available for grant under Section 5.1 by the entire number of shares of Stock subject to that SAR or Option (or applicable portion thereof), even though a smaller number of shares of Stock will be issued upon such an exercise.

(d)           Shares of Stock tendered to pay the exercise price of an Option or tendered, withheld or otherwise relinquished by a Participant to satisfy a tax withholding obligation arising in connection with an Award will not again become Stock available for grant under the Plan. Moreover, shares of Stock purchased on the open market with cash proceeds generated by the exercise of an Option will not increase or replenish the number of shares available for grant under Section 5.1.

(e)           If the provisions of this Section 5.2 are inconsistent with the requirements of any regulations issued pursuant to Section 422 of the Code, the provisions of such regulations shall control over the provisions of this Section 5.2, but only as this Section 5.2 relates to Incentive Stock Options.

(f)           The Committee may adopt such other reasonable rules and procedures as it deems to be appropriate for determining the number of shares of Stock that are available for grant under Section 5.1.

5.3           Award Limits. Notwithstanding any other provision in the Plan, and subject to adjustment as provided in Section 5.4:

(a)           The maximum number of shares of Stock that may be issued as Incentive Stock Options under the Plan shall be the same numeric limit set forth in Section 5.1.

(b)           The maximum number of shares of Stock that may be granted to any one Participant during any 12-month period with respect to one or more Awards shall be 1,000,000.

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(c)           The maximum Performance Cash Award payable for any 12-month Performance Period to any one Participant is $1,000,000. If the Performance Period exceeds 12 months, the dollar limit expressed in the preceding sentence shall be reduced or increased proportionately.

(d)           The aggregate Grant Date Fair Market Value of Awards granted to any one Participant who is a Non-Employee Director during any one 12-month period with respect to one or more Awards shall be $500,000.

5.4           Adjustments in Capitalization. In the event of any change in the outstanding shares of Stock by reason of a Stock dividend or split, recapitalization, liquidation, merger, consolidation, combination, exchange of shares, or other similar corporate change, the Committee shall make a proportionate adjustment in: (a) the number and class of shares of Stock made available for grant pursuant to Section 5.1; (b) the number of shares of Stock set forth in Section 5.3, 11.9, and any other similar numeric limit expressed in the Plan; (c) the number and class of and/or price of shares of Stock subject to then outstanding Awards; (d) subject to the limitations imposed on Performance-Based Awards, the performance targets or other goals applicable to any outstanding Awards; or (e) any other terms of an Award that are affected by the event. Moreover, in the event of such transaction or event, the Committee, in its discretion may provide in substitution for any or all outstanding awards under the Plan such alternative consideration (including cash) as it, in good faith, may determine to be equitable under the circumstances and may require in connection therewith the surrender of all Awards so replaced. Any action taken pursuant to this Section 5.4 shall be taken in a manner consistent with the requirements of Section 409A of the Code and, in the case of Incentive Stock Options, in accordance with the requirements of Section 424(a) of the Code.

5.5           Replacement Awards. In the event of any corporate transaction in which the Company or an Affiliate acquires a corporate entity which, at the time of such transaction, maintains an equity compensation plan pursuant to which awards of stock options, SARs, restricted stock, or any other form of equity based compensation are then outstanding (the “Acquired Plan”), the Committee may make Awards to assume, substitute or convert such outstanding awards in such manner as may be determined to be appropriate and equitable by the Committee; provided, however, that the number of shares of Stock subject to any Award shall always be a whole number by rounding any fractional share to the nearest whole share. Options or SARs issued pursuant to this Section 5.5 shall not be subject to the requirement that the exercise price of such Award not be less than the Fair Market Value of Stock on the date the Award is granted. Shares used in connection with an Award granted in substitution for an award outstanding under an Acquired Plan under this Section 5.5 shall not be counted against the number of shares of Stock available for grant under Section 5.1. Any shares of Stock authorized and available for issuance under the Acquired Plan shall, subject to adjustment as described in Section 5.4, be available for use in making Awards under this Plan with respect to persons eligible under such Acquired Plan, by virtue of the Company’s assumption of such Acquired Plan, consistent with Nasdaq Listing Rules (or rules of any other exchange upon which the Stock is then traded), as such rules may be amended or replaced from time to time.

5.6           Fractional Shares. No fractional shares of Stock shall be issued pursuant to the Plan. Unless the Committee specifies otherwise in the Award Agreement, or pursuant to any policy adopted by the Committee, cash will be given in lieu of fractional shares. In the event of adjustment as provided in Section 5.4 or the issuance of replacement awards as provided in Section 5.5, the total number of shares of Stock subject to any affected Award shall always be a whole number by rounding any fractional share to the nearest whole share.

ARTICLE 6

Stock Options

6.1           Options. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Options to one or more Participants upon such terms and conditions and in such amounts, as shall be determined by the Committee. Options are also subject to the following additional terms and conditions:

(a)           Exercise Price.  No Option shall be granted at an exercise price that is less than the Fair Market Value of one share of Stock on the Grant Date.

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(b)           Exercise of Option.  Options shall be exercisable at such times and in such manner, and shall be subject to such restrictions or conditions, as the Committee shall in each instance approve, which need not be the same for each grant or for each Participant.

(c)           Term of Option. Each Option shall expire at such time as determined by the Committee; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary the Grant Date.

(d)           Payment.  The exercise price for any Option shall be paid in cash or shares of Stock held for longer than six (6) months (through actual tender or by attestation). In the Award Agreement, the Committee also may prescribe other methods by which the exercise price of an Option may be paid and the form of payment including, without limitation, any net-issuance arrangement or other property acceptable to the Committee (including broker-assisted “cashless exercise” arrangements), and the methods by which shares of Stock shall be delivered or deemed to be delivered to Participants. The Committee, in consideration of applicable accounting standards and applicable law, may waive the six (6) month share holding period described in the first sentence of this paragraph (d) in the event payment of an Option is made through the tendering of shares.

(e)           Repricing of Options.  Notwithstanding any other provision in the Plan to the contrary, without approval of the Company’s stockholders, an Option may not be amended, modified or repriced to reduce the exercise price after the Grant Date. Except as otherwise provided in Section 5.4 with respect to an adjustment in capitalization, an Option also may not be surrendered in consideration of a new Option having an exercise price below the exercise price of the Option being surrendered or exchanged.

(f)           Nontransferability of Options. No Option may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all Options granted to a Participant shall be exercisable during his or her lifetime only by such Participant or his or her legal representative. Notwithstanding the foregoing, the Committee may, in its discretion, permit the transfer of an Option to a Family Member, trust or partnership, or to a charitable organization, provided that no value or consideration is received by the Participant with respect to such transfer.

6.2           Incentive Stock Options. Incentive Stock Options shall be granted only to Participants who are employees and the terms of any Incentive Stock Options granted pursuant to the Plan must comply with the following additional provisions of this Section 6.2:

(a)           Exercise Price. Subject to Section 6.2(e), the exercise price per share of Stock pursuant to any Incentive Stock Option shall be set by the Committee, provided that the exercise price for any Incentive Stock Option shall not be less than the Fair Market Value of one share of Stock as of the Grant Date.

(b)           Term of Incentive Stock Option.  In no event may any Incentive Stock Option be exercisable for more than ten (10) years from the Grant Date.

(c)           Lapse of Option. An Incentive Stock Option shall lapse in the following circumstances:

(1)           The Incentive Stock Option shall lapse ten (10) years from the Grant Date, unless an earlier time is set in the Award Agreement;

(2)           The Incentive Stock Option shall lapse upon a Termination of Employment for any reason other than the Participant’s death or Disability, unless otherwise provided in the Award Agreement; and

(3)           If the Participant incurs a Termination of Employment on account of Disability or death before the Option lapses pursuant to paragraph (i) or (ii) above, the Incentive Stock Option shall lapse, unless it is previously exercised, on the earlier of: (a) the scheduled termination date of the Option; or (b) twelve months after the date of the Participant’s Termination of Employment on account of death or Disability. Upon the Participant’s death or Disability, any Incentive Stock Options exercisable at the Participant’s death or Disability may be exercised by the Participant’s legal representative or representatives, by the person or persons entitled to do so pursuant to the Participant’s last will and testament, or, if the Participant fails to make testamentary disposition of such Incentive Stock Option or dies intestate, by the person or persons entitled to receive the Incentive Stock Option pursuant to the applicable laws of descent and distribution.

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(d)           Individual Dollar Limitation.  The aggregate Fair Market Value (determined as of the time an Award is made) of all shares of Stock with respect to which Incentive Stock Options are first exercisable by a Participant in any calendar year may not exceed $100,000 or such other limitation as imposed by Section 422(d) of the Code, or any successor provision. To the extent that Incentive Stock Options are first exercisable by a Participant in excess of such limitation, the excess shall be considered Non-Qualified Stock Options.

(e)           Ten Percent Owners.  An Incentive Stock Option may be granted to any individual who, at the Grant Date, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of Stock of the Company only if such Option is granted at a price that is not less than 110% of Fair Market Value on the Grant Date and the Option is exercisable for no more than five (5) years from the Grant Date.

(f)           Right to Exercise. Except as provided in Section 6.2(c)(iii), an Incentive Stock Option may be exercised only by the Participant during the Participant’s lifetime.

(g)           Limitation on Number of Shares Subject to Awards.  In accordance with Section 5.3(a), but subject to adjustment as provided in Section 5.4, the maximum number of shares of Stock that may be issued as Incentive Stock Options under the Plan shall be the same numeric limit set forth in Section 5.1.

ARTICLE 7

Stock Appreciation Rights

7.1           Stock Appreciation Rights.  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant SARs to one or more Participants upon such terms and conditions and in such amounts, as shall be determined by the Committee. SARs may be granted in connection with the grant of an Option, in which case the exercise of such SARs will result in the surrender of the right to purchase the shares under the Option as to which the SARs were exercised. When SARs are granted in connection an Incentive Stock Option, the SARs shall have such terms and conditions as shall be required by Section 422 of the Code. Alternatively, SARs may be granted independently of Options. SARs are also subject to the following additional terms and conditions:

(a)           Base Value.  No SAR shall be granted at a base value that is less than the Fair Market Value of one share of Stock on the Grant Date.

(b)           Exercise of SARs.  SARs shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall, in each instance approve, which need not be the same for all Participants.

(c)           Term of SARs. Each SAR shall expire at such time as determined by the Committee; provided, however, that no SAR shall be exercisable later than the tenth (10th) anniversary the Grant Date.

(d)           Payment of SAR Amount. Upon the exercise of a SAR, the Participant shall be entitled to receive the payment of an amount determined by multiplying: (i) the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise, over the base value fixed by the Committee on the Grant Date; by (ii) the number of shares with respect to which the SAR is exercised. Payment for SARs shall be made in manner and at the time specified by the Committee in the Award Agreement. At the discretion of the Committee, the Award Agreement may provide for payment of SARs in cash, shares of Stock of equivalent value, or in a combination thereof. 

(e)           Repricing of SARs.   Notwithstanding any other provision in the Plan to the contrary, without approval of the Company’s stockholders, a SAR may not be amended, modified or repriced to reduce the base value after the Grant Date. Except as otherwise provided in Section 5.4 with respect to an adjustment in capitalization, a SAR also may not be surrendered in consideration of or exchanged for cash, other Awards or a new SAR having a base value below the base value of the SAR being surrendered or exchanged.

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(f)           Nontransferability of SARs. No SAR may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all SARs granted to a Participant shall be exercisable during his or her lifetime only by such Participant or his or her legal representative. Notwithstanding the foregoing, the Committee may, in its discretion, permit the transfer of a SAR to a Family Member, trust or partnership, or to a charitable organization, provided that no value or consideration is received by the Participant with respect to such transfer.

ARTICLE 8

Restricted Stock and Restricted Stock Units

8.1           Restricted Stock.  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Stock to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. Restricted Stock Awards are also subject to the following additional terms and conditions:

(a)           Issuance and Restrictions. Restricted Stock shall be subject to such conditions and/or restrictions as the Committee may impose (including, without limitation, limitations on transferability, the right to receive dividends, or the right to vote the Restricted Stock), which need not be the same for each grant or for each Participant. These restrictions may lapse separately or in combination at such times, pursuant to such circumstances, in such installments, or otherwise, as determined by the Committee. Except as otherwise provided in the Award Agreement, Participants holding shares of Restricted Stock may not exercise voting rights with respect to the shares of Restricted Stock during the period of restriction.

(b)           Forfeiture. Except as otherwise provided in the Award Agreement, upon a Termination of Employment (or Termination of Service in the case of a Consultant or Non-Employee Director) during the applicable period of restriction, Restricted Stock that is at that time subject to restrictions shall be forfeited.

(c)           Evidence of Ownership for Restricted Stock.  Restricted Stock granted pursuant to the Plan may be evidenced in such manner as the Committee shall determine, which may include an appropriate book entry credit on the books of the Company or a duly authorized transfer agent of the Company. If certificates representing shares of Restricted Stock are registered in the name of the Participant, the certificates must bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company may, in its discretion, retain physical possession of the certificate until such time as all applicable restrictions lapse.

8.2           Restricted Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Restricted Stock Units to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. Restricted Stock Unit Awards are also subject to the following additional terms and conditions:

(a)           Issuance and Restrictions.  Restricted Stock Unit Awards grant a Participant the right to receive a specified number of shares of Stock, or a cash payment equal to the Fair Market Value (determined as of a specified date) of a specified number of shares of Stock, subject to such conditions and/or restrictions as the Committee may impose, which need not be the same for each grant or for each Participant. These restrictions may lapse separately or in combination at such times, in such circumstances, in such installments, or otherwise, as determined by the Committee.

(b)           Forfeiture. Except as otherwise provided in the Award Agreement, upon a Termination of Employment (or Termination of Service in the case of a Consultant or Non-Employee Director) during the applicable period of restriction, Restricted Stock Units that are at that time subject to restrictions shall be forfeited.

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(c)           Form and Timing of Payment.  Payment for vested Restricted Stock Units shall be made in the manner and at the time designated by the Committee in the Award Agreement. In the Award Agreement, the Committee may provide that payment will be made in cash or Stock, or in a combination thereof.

ARTICLE 9

Stock Grant and Stock Units

9.1           Stock Grants.  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Stock Awards to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. Subject to Section 5.3(e), a Stock Grant Award grants the Participant the right to receive (or purchase at such price as determined by the Committee) a designated number of shares of Stock free of any vesting restrictions. The purchase price, if any, for a Stock Grant Award shall be payable in cash or other form of consideration acceptable to the Committee. A Stock Grant Award may be granted or sold as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such Participant.

9.2           Stock Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Stock Unit Awards to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. Subject to Section 5.3(e), a Stock Unit Award grants the Participant the right to receive a designated number of shares of Stock, or a cash payment equal to the Fair Market Value (determined as of a specified date) of a designated number of shares of Stock, in the future free of any vesting restrictions. A Stock Unit Award may be granted as described in the preceding sentence in respect of past services or other valid consideration, or in lieu of any cash compensation due to such Participant.

ARTICLE 10

Performance Shares, Performance Share Units,

and Performance Cash

10.1           Performance Shares.  Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance Shares to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. A Performance Share grants the Participant the right to receive a specified number of shares of Stock depending on the satisfaction of any one or more Performance Goals. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee. Unless otherwise provided in the Award Agreement, payment for vested Performance Shares shall be made in Stock.

10.2           Performance Share Units. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance Share Units to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. A Performance Share Unit grants the Participant the right to receive a specified number of shares of Stock or a cash payment equal to the Fair Market Value (determined as of a specified date) of a specified number of shares of Stock depending on the satisfaction of any one or more Performance Goals. Performance may be measured on a specified date or dates or over any period or periods determined by the Committee. At the discretion of the Committee, the Award Agreement may provide for payment for vested Performance Share Units in cash, shares of Stock of equivalent cash value, or in a combination thereof.

10.3           Performance Cash. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Performance Cash to one or more Participants upon such terms and conditions, and in such amounts, as shall be determined by the Committee. A Performance Cash Award grants the Participant the right to receive an amount of cash depending on the satisfaction of any one or more Performance Goals.  Performance may be measured on a specified date or dates or over any period or periods determined by the Committee.

10.4           Performance Goals. The Performance Goal or Goals applicable to any Performance Share, Performance Share Unit or Performance Cash Award shall be based on the Performance Criteria selected by the Committee and designated in the Award Agreement. The Performance Criteria applicable to any Performance Share, Performance Share Unit or Performance Cash Award granted to a Covered Employee that is designated as, or deemed to be, a Performance-Based Award pursuant to Section 11 shall be limited to the Performance Criteria specifically listed in the Glossary. The Performance Criteria applicable to any other Performance Share, Performance Share Unit or Performance Cash Award shall include the Performance Criteria specifically listed in the Glossary and such other criteria or factors as may be determined by the Committee and specified in the Award Agreement. Except as otherwise provided in Section 11 with respect to Performance-Based Awards to Covered Employees, the Committee shall retain the power to adjust the Performance Goals, the level of attainment of the Performance Goals or otherwise increase or decrease the amount payable with respect to any Award made pursuant to this Section 10.

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ARTICLE 11

Performance-Based Awards

11.1           Purpose.  Section 162(m) of the Code limits the amount of the Company’s deductions for compensation payable to Covered Employees to $1,000,000 per year. “Performance-based compensation” that meets the requirements set forth in Section 162(m) of the Code is not subject to this limitation. The purpose of this Section 11 is to enable the Committee to qualify some or all of the Awards granted pursuant to Sections 8 and 10 as “performance-based compensation” pursuant to Section 162(m) of the Code. If the Committee decides that a particular Award to a Covered Employee should qualify as “performance-based compensation,” the Committee will provide in the Award Agreement or otherwise that the Award is intended to be a Performance-Based Award.

11.2           Applicability. This Section 11 shall apply only to Performance-Based Awards. If this Section 11 applies, its provisions control over any contrary provision contained in any other section of this Plan or any Award Agreement. The provisions of this Section 11 and any Award Agreement for a Performance-Based Award shall be interpreted in a manner consistent with the requirements of Section 162(m) of the Code. If any provision of this Plan or any Award Agreement for a Performance-Based Award does not comply with or is inconsistent with the requirements of Section 162(m) of the Code, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

11.3           Committee Discretion with Respect to Performance-Based Awards. With regard to a particular Performance Period, the Committee shall have full discretion to select the length of the Performance Period, the type of Performance-Based Awards to be issued, the kind and/or level of the Performance Goal or Goals and whether the Performance Goal or Goals apply to the Company or an Affiliate or any division or business unit thereof or the Participant or any group of Participants. Depending on the Performance Criteria used to establish the Performance Goals, the Performance Goals may be stated in terms of absolute levels or relative to another company or to an index or indices.

11.4           Establishment of Performance Goals. A Performance-Based Award shall provide for payment only upon the attainment of one or more pre-established, objective Performance Goals. The Performance Goals, and the process by which they are established, shall satisfy all of the requirements of Section 162(m) of the Code. By way of illustration, but not limitation, the following requirements must be satisfied:

(a)           The Performance Goals shall be based solely on the Performance Criteria specifically identified in the Glossary;

(b)           The Performance Goals shall be considered to be pre-established only if the Performance Goals are established by the Committee in writing not later than 90 days after the commencement of the Performance Period for such Award provided that: (i) the outcome must be substantially uncertain at the time the Committee establishes the Performance Goals; and (ii) in no event may the Committee establish the Performance Goals for any Performance-Based Award after 25% of the Performance Period for such Award has elapsed;

(c)           A Performance Goal will be considered to be objective only if a third party having knowledge of the relevant facts could determine whether the Performance Goal has been met;

(d)           The Performance Goal must state, in terms of an objective formula or standard, the method for computing the amount of compensation payable to the Covered Employee if the Goal is attained. For this purpose, the formula will be considered to be objective only if a third party having knowledge of the relevant performance results could calculate the amount to be paid to the Covered Employee; and

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(e)           The objective formula or standard must preclude discretion to increase the amount of compensation payable that would otherwise be due upon attainment of the Performance Goal.

11.5           Performance Evaluation; Adjustment of Goals. At the time a Performance-Based Award is first issued, the Committee, in the Award Agreement or in another written document, shall specify whether performance will be evaluated including or excluding the effect of any of the following events that occur during the Performance Period, as the Committee deems appropriate: (a) judgments entered or settlements reached in litigation or regulator proceedings; (b) the write down or sale of assets; (c) the impact of any reorganization or restructuring; (d) the impact of changes in tax laws, accounting principles, regulatory actions or other laws affecting reported results; (e) items that are unusual in nature or infrequently occurring as described in Accounting Standards Update 2015-01 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to stockholders or Annual Report on Form 10-K, as the case may be, for the applicable year; (f) the impact of any mergers, acquisitions, spin-offs or other divestitures; and (g) foreign exchange gains and losses.

The inclusion or exclusion of these items shall be expressed in a form that satisfies the requirements of Section 162(m) of the Code. The Committee, in its discretion, also may, within the time prescribed by Section 162(m) of the Code, adjust or modify the calculation of Performance Goals for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants: (i) in the event of, or in anticipation of, any unusual or extraordinary corporate item, transaction, event, or development; or (ii) in recognition of, or in anticipation of, any other unusual or nonrecurring events affecting the Company, or the financial statements of the Company, or in response to, or in anticipation of, changes in applicable laws, regulations, accounting principles, or business conditions.

11.6           Adjustment of Performance-Based Awards. Notwithstanding any provision herein to the contrary, the Committee may not make any adjustment or take any other action with respect to any Performance-Based Award that will increase the amount payable under any such Award. The Committee shall retain the sole discretion to adjust Performance-Based Awards downward or to otherwise reduce the amount payable with respect to any Performance-Based Award.

11.7           Continued Employment Required. Unless otherwise provided in the relevant Award Agreement or in the case of a Change in Control, a Participant must be an employee of the Company or an Affiliate on the day a Performance-Based Award for such Performance Period is paid to the Participant.

             11.8           Certification By Committee. Notwithstanding any provisions to the contrary, the payment of a Performance-Based Award shall not occur until the Committee certifies, in writing, that the pre-established Performance Goals and any other material terms and conditions precedent to such payment have been satisfied. Committee certification is not required for compensation that is attributable solely to the increase in the value of the Company’s Stock.

11.9           Maximum Award Payable. In accordance with Section 5.3, but subject to adjustment as provided in Section 5.4, the maximum Performance-Based Award (other than a Performance Cash Award of Performance Share Unit Award payable in cash) payable to any one participant for any 12-month Performance Period is 1,000,000 shares of Stock or the equivalent cash value. The maximum Performance Cash Award (or Performance Share Unit Award payable in cash) payable to any one Participant for any 12-month Performance Period is $1,000,000. If the Performance Period exceeds 12 months, the dollar and share limits expressed in the preceding sentences shall be reduced or increased proportionately, as the case may be. For example, if the Performance Period is three (3) years, the limit shall be increased by multiplying it by three.

11.10           Miscellaneous. The designation of a Covered Employee as a Participant for any Performance Period shall not in any manner entitle the Participant to receive a Performance-Based Award for such Performance Period. Moreover, designation of a Covered Employee as a Participant for a particular Performance Period shall not require designation of such Covered Employee as a Participant for any subsequent Performance Period.

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ARTICLE 12

Change in Control

12.1           Vesting. If so specified by the Committee at the time of the grant of an Award, such Award shall become fully vested and exercisable and all restrictions on such Awards shall lapse if, following a Change in Control, the Participant’s employment is terminated without Cause or Participant resigns for Good Reason. To the extent that this provision causes Incentive Stock Options to exceed the dollar limitation set forth in Section 422(d) of the Code or any successor provision, the excess Options shall be deemed to be Non-Qualified Stock Options.

12.2           Participant Consent Not Required. Nothing in this Section 12 or any other provision of this Plan is intended to provide any Participant with any right to consent to or object to any transaction that might result in a Change in Control and each provision of this Plan shall be interpreted in a manner consistent with this intent. Similarly, nothing in this Section 12 or any other provision of this Plan is intended to provide any Participant with any right to consent to or object to any action taken by the Board or Committee in connection with a Change in Control transaction.

ARTICLE 13

Other Provisions Applicable to Awards

13.1           Award Agreements.  All Awards shall be evidenced by an Award Agreement. The Award Agreement shall include such terms and provisions as the Committee determines appropriate. The terms of the Award Agreement may vary depending on the type of Award, the employee or classification of the employee to whom the Award is made and such other factors as the Committee deems appropriate.

13.2           Termination of Employment or Service. Subject to the provisions of this Plan, the Committee shall determine and set forth in the applicable Award Agreement the extent to which a Participant shall (i) have the right to retain and/or exercise an Award following a Termination of Employment or (Termination of Service in the context of a Consultant or Non-Employee Director) or (ii) be entitled to accelerated vesting if the Participant is terminated following a Change in Control. Such provisions need not be uniform among all types of Awards and may reflect distinctions based on the reasons for such terminations, including, but not limited to, death, Disability, a termination for Cause or reasons relating to the breach or threatened breach of restrictive covenants.

13.3           Form of Payment. Subject to the provisions of this Plan, the Award Agreement and any applicable law, payments or transfers to be made by the Company or any Affiliate on the grant, exercise, or settlement of any Award may be made in such form as determined by the Committee including, without limitation, cash, Stock, other Awards, or other property, or any combination thereof, and may be made in a single payment or transfer, in installments, or any combination thereof, in each case determined by rules adopted by the Committee.

13.4          Limits on Transfer.

(a)           General. Except as provided in Section 6.1(f), Section 7.1(f), Section 13.4(b) or Section 13.5, no Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution or pursuant to a domestic relations order (that would otherwise qualify as a qualified domestic relations order as defined in the Code or Title I of ERISA but for the fact that the order pertains to an Award) in favor of a spouse or, if applicable, until the expiration of any period during which any restrictions are applicable or any Performance Period as determined by the Committee.

(b)           Transfer to Family Members. The Committee shall have the authority to adopt a written policy that is applicable to existing Awards, new Awards, or both, which permits a Participant to transfer Awards during his or her lifetime to any Family Member. In the event an Award is transferred as permitted by such policy, such transferred Award may not be subsequently transferred by the transferee (other than another transfer meeting the conditions set forth in the policy) except by will or the laws of descent and distribution. A transferred Award shall continue to be governed by and subject to the terms and limitations of the Plan and relevant Award Agreement, and the transferee shall be entitled to the same rights as the Participant, as if the transfer had not taken place.

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13.5           Beneficiaries. Notwithstanding Section 13.4(a), a Participant may, in the manner determined by the Committee, designate a beneficiary to exercise the rights of the Participant and to receive any distribution with respect to any Award upon the Participant’s death, and in accordance with Section 6.2(c)(iii), upon the Participant’s Disability. A beneficiary, legal guardian, legal representative, or other person claiming any rights pursuant to the Plan is subject to all terms and conditions of the Plan and any Award Agreement applicable to the Participant, except to the extent the Plan and Award Agreement otherwise provide, and to any additional restrictions deemed necessary or appropriate by the Committee. If no beneficiary has been designated or survives the Participant, payment shall be made to the person entitled thereto pursuant to the Participant’s will or the laws of descent and distribution. Subject to the foregoing, a beneficiary designation may be changed or revoked by a Participant at any time provided the change or revocation is provided to the Committee.

13.6           Evidence of Ownership.  Notwithstanding anything herein to the contrary, the Company shall not be required to issue or deliver any certificates, make any book entry credits, or take any other action to evidence shares of Stock pursuant to the exercise of any Award, unless and until the Company has determined, with advice of counsel, that the issuance and delivery of such certificates, book entry credits, or other evidence of ownership is in compliance with all applicable laws, regulations of governmental authorities and, if applicable, the requirements of any exchange or quotation system on which the shares of Stock are listed, quoted or traded. All Stock certificates, book entry credits, or other evidence of ownership delivered pursuant to the Plan are subject to any stop-transfer orders and other restrictions as the Company deems necessary or advisable to comply with Federal, state, or foreign jurisdiction, securities or other laws, rules and regulations and the rules of any national securities exchange or automated quotation system on which the Stock is listed, quoted, or traded. The Company may place legends on any Stock certificate to reference restrictions applicable to the Stock. In addition to the terms and conditions provided herein, the Company may require that a Participant make such reasonable covenants, agreements, and representations as the Company, in its discretion, deems advisable in order to comply with any such laws, regulations, or requirements.

  13.7           Claw back.  Every Award issued pursuant to this Plan is subject to potential forfeiture or recovery to the fullest extent called for by law, any applicable listing standard, or any current or future claw back policy that may be adopted by the Company from time to time, including, without limitation, any claw back policy adopted to comply with the final rules issued by the Securities and Exchange Commission and the final listing standards to be adopted by Nasdaq pursuant to Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. By accepting an Award, each Participant consents to the potential forfeiture or recovery of his or her Awards pursuant to applicable law, listing standard, and/or Company claw back policy, and agrees to be bound by and comply with the claw back policy and to return the full amount required by the claw back policy. As a condition to the receipt of any Award, a Participant may be required to execute any requested additional documents consenting to and agreeing to abide by the Company claw back policy as it may be amended from time to time.

ARTICLE 14

Amendment, Modification and Termination

14.1           Amendment, Modification and Termination of the Plan. The Board may at any time, and from time to time, terminate, amend or modify the Plan; provided however, that any such action of the Board shall be subject to approval of the stockholders to the extent required by law, regulation or any stock exchange rule for any exchange on which shares of Stock are listed. Notwithstanding the above, to the extent permitted by law, the Board may delegate to the Committee or the CEO the authority to approve non-substantive amendments to the Plan.  Except as provided in Section 5.4, neither the Board, the CEO, nor the Committee may, without the approval of the stockholders: (a) increase the number of shares available under the Plan; (b) reprice previously granted Options or SARs or take any action relative to Options or SARs that would be treated as a repricing under applicable Nasdaq Listing Rules (or the rules of any exchange on which the Stock is then listed); (c) grant Options or SARs with an exercise price or base value that is below Fair Market Value on the Grant Date; (d) extend the exercise period or term of any Option or SAR beyond 10 years from the Grant Date; (e) expand the types of Award available for grant under the Plan; or (f) expand the class of individuals eligible to participant in the Plan.

14.2           Awards Previously Granted. No amendment, modification, or termination of the Plan or any Award under the Plan shall in any manner adversely affect in any material way the rights of the holder under any Award previously granted pursuant to the Plan without the prior written consent of the holder of the Award. Such consent shall not be required if the change: (a) is required by law or regulation; (b) does not adversely affect in any material way the rights of the holder; (c) is required to cause the benefits under the Plan to qualify as performance-based compensation within the meaning of Section 162(m) of the Code or to comply with the requirements of Section 409A of the Code; or (d) is made pursuant to any adjustment described in Section 5.4.

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14.3           Performance-Based Awards.  Except in the case of a Change in Control, the Committee shall not have the authority to amend an Award Agreement to accelerate the vesting or waive the forfeiture restrictions of any Performance-Based Award. In addition, the Committee shall not take any other action that would cause a Performance-Based Award to fail to satisfy the requirements of the performance-based compensation exception to the deduction limitations imposed by Section 162(m) of the Code unless the Committee concludes that the deduction limitations will not become applicable or that the amendment is appropriate despite the deduction limitations imposed by Section 162(m) of the Code.

ARTICLE 15

Tax Withholding

The Company shall have the power to withhold, or require a Participant to remit to the Company, the minimum amount necessary to satisfy federal, state, and local withholding tax requirements on any Award under the Plan. The Company may permit the Participant to satisfy a tax withholding obligation by: (a) directing the Company to withhold shares of Stock to which the Participant is entitled pursuant to the Award in an amount necessary to satisfy the Company’s applicable federal, state, local or foreign income and employment tax withholding obligations with respect to such Participant; (b) tendering previously-owned shares of Stock held by the Participant for six (6) months or longer to satisfy the Company’s applicable federal, state, local, or foreign income and employment tax withholding obligations with respect to the Participant (which holding period may be waived in accordance with Section 6.1(d)); (c) a broker-assisted “cashless” transaction; or (d) personal check or other cash equivalent acceptable to the Company.

ARTICLE 16

Indemnification

Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company against and from any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his or her behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such person may be entitled under the Company’s certificate of incorporation, bylaws, resolution or agreement, as a matter of law, or otherwise.

ARTICLE 17

General Provisions

17.1           No Rights to Awards.  No Participant or other person shall have any claim to be granted any Award and neither the Company nor the Committee is obligated to treat Participants and other persons uniformly.

17.2           Continued Employment.  Nothing in the Plan or any Award Agreement shall interfere with or limit in any way the right of the Company or any Affiliate to terminate any Participant’s employment or service at any time, nor confer upon any Participant any right to continue in the employ or service of the Company.

17.3           Funding.  The Company shall not be required to segregate any of its assets to ensure the payment of any Award under the Plan. Neither the Participant nor any other persons shall have any interest in any fund or in any specific asset or assets of the Company or any other entity by reason of any Award, except to the extent expressly provided hereunder. The interests of each Participant and former Participant hereunder are unsecured and shall be subject to the general creditors of the Company.

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17.4           Expenses. The expenses of administering the Plan shall be borne by the Company.

17.5           No Stockholders Rights.  No Award gives the Participant any of the rights of a stockholder of the Company unless and until shares of Stock are in fact issued to such person in connection with such Award.

17.6           Titles and Headings.  The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

17.7           Successors and Assigns. The Plan shall be binding upon and inure to the benefit of the successors and permitted assigns of the Company, including without limitation, whether by way of merger, consolidation, operation of law, assignment, purchase, or other acquisition of substantially all of the assets or business of the Company, and any and all such successors and assigns shall absolutely and unconditionally assume all of the Company’s obligations under the Plan.

17.8           Survival of Provisions. The rights, remedies, agreements, obligations and covenants contained in or made pursuant to this Plan, any Agreement, and any other notices or agreements in connection therewith, shall survive the execution and delivery of such notices and agreements and the delivery and receipt of such shares of Stock.

17.9           Requirements of Law.  The granting of Awards and the issuance of shares and/or cash under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. The Company shall be under no obligation to register pursuant to the Securities Act of 1933, any of the shares of Stock paid pursuant to the Plan. If the shares of Stock paid pursuant to the Plan may in certain circumstances be exempt from registration pursuant to the Securities Act of 1933, the Company may restrict the transfer of such shares in such manner as it deems advisable to ensure the availability of any such exemption. The Committee shall impose such restrictions on any Award as it may deem advisable, including without limitation, restrictions under applicable federal securities law, under the requirements of Nasdaq (or any other exchange upon which the Stock is then traded), and under any other blue sky or state securities law applicable to such Award.

17.10           Governing Law.  The place of administration of the Plan shall be conclusively deemed to be within the State of New York, and the rights and obligations of any and all persons having or claiming to have had an interest under the Plan or any Award Agreement shall be governed by and construed exclusively and solely in accordance with the laws of the State of New York without regard to the conflict of law’s provisions of any jurisdictions. All parties agree to submit to the jurisdiction of the state and federal courts of New York with respect to matters relating to the Plan and agree not to raise or assert the defense that such forum is not convenient for such party. The Plan is an unfunded performance-based bonus plan for a select group of persons or highly compensated employees and is not intended to be either an employee pension or welfare benefit plan subject to ERISA.

17.11           Securities Law Compliance.  With respect to any Participant who is, on the relevant date, obligated to file reports pursuant to Section 16 of the Exchange Act, transactions pursuant to this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors pursuant to the Exchange Act. Notwithstanding any other provision of the Plan, the Committee may impose such conditions on the exercise of any Award as may be required to satisfy the requirements of Rule 16b-3 or its successors pursuant to the Exchange Act. To the extent any provision of the Plan or action by the Committee fails to so comply, it shall be void to the extent permitted by law and voidable as deemed advisable by the Committee.

17.12           Section 409A of the Code.

(a)           General Compliance. Some of the Awards that may be granted pursuant to the Plan (including, but not necessarily limited to, Restricted Stock Units Awards, Performance Share Awards, Performance Share Unit Awards, Performance Cash and Stock Unit Awards) may be considered to be “non-qualified deferred compensation” subject to Section 409A of the Code. If an Award is subject to Section 409A of the Code, the Company intends (but cannot and does not guarantee) that the Award Agreement and this Plan comply with and meet all of the requirements of Section 409A of the Code or an exception thereto and the Award Agreement shall include such provisions, in addition to the provisions of this Plan, as may be necessary to assure compliance with Section 409A of the Code or an exception thereto.

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(b)           Delay for Specified Employees. If, at the time of a Participant’s Separation from Service, the Company has any Stock which is publicly traded on an established securities market or otherwise, and if the Participant is considered to be a Specified Employee, to the extent any payment for any Award is subject to the requirements of Section 409A of the Code and is payable upon the Participant’s Separation from Service, such payment shall not commence prior to the first business day following the date which is six (6) months after the Participant’s Separation from Service (or the date of the Participant’s death if earlier than the end of the six (6) month period). Any amounts that would have been distributed during such six (6) month period will be distributed on the day following the expiration of the six (6) month period.

(c)           Prohibition on Acceleration or Deferral. Under no circumstances may the time or schedule of any payment for any Award that is subject to the requirements of Section 409A of the Code be accelerated or subject to further deferral except as otherwise permitted or required pursuant to regulations and other guidance issued pursuant to Section 409A of the Code. If the Company fails to make any payment pursuant to the payment provisions applicable to an Award that is subject to Section 409A of the Code, either intentionally or unintentionally, within the time period specified in such provisions, but the payment is made within the same calendar year, such payment will be treated as made within the specified time period. In addition, in the event of a dispute with respect to any payment, such payment may be delayed in accordance with the regulations and other guidance issued pursuant to Section 409A of the Code.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:  /s/ Philip Turits

Its: Philip Turits, Secretary and Treasurer

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GLOSSARY

(a)           “Affiliate” means any member of a “controlled group of corporations” (within the meaning of Section 414(b) of the Code as modified by Section 415(h) of the Code) that includes the Company as a member of the group. In applying Section 1563(a)(1), (2) and (3) of the Code for purposes of determining the members of a controlled group of corporations under Section 414(b) of the Code, the language “at least 50 percent” shall be used instead of “at least 80 percent” each place it appears in Section 1563(a)(1), (2) and (3).

(b)           “Award” means any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Stock Grant, Stock Unit, Performance Share, Performance Share Unit, or Performance Cash Award granted to a Participant under the Plan.

(c)           “Award Agreement” means any written agreement, contract, or other instrument or document, including an electronic agreement or document, evidencing an Award.

(d)           “Board” means the Company’s Board of Directors, as constituted from time to time.

(e)           “Cause” means any of the following:

(1)           Participant’s commission of, or assistance to or conspiracy with others to commit, fraud, misrepresentation, theft or embezzlement of Company assets;

(2)           Participant’s material intentional violations of law or of material Company policies;

(3)           Participant’s repeated insubordination or willful failure to substantially perform his or her employment duties or duties as a Non-Employee Director; or

(4)           Participant’s willful engagement in conduct that is demonstrably and materially injurious to the Company or any Affiliate.

(f)           “CEO” means the Chief Executive Officer of the Company.

(g)           “Change in Control” means any of the following:

(1)           The sale, lease, exchange or other transfer of all or substantially all of the Company’s assets in one transaction or in a series of related transactions;

(2)           any person (as such term is used in Section 13(d) and 14(d) of the Exchange Act) becoming directly or indirectly the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), of securities representing more than 50% of the combined voting power of the Company’s outstanding securities ordinarily having the right to vote at the elections of directors, except that any change in the ownership of the stock of the Company as a result of a financing by the Company that is approved by the Board will not be considered a change in control; or

(3)           individuals who constitute the Board as of the Effective Date cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the Effective Date whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors comprising or deemed pursuant hereto to comprise the Board as of the Effective Date (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director) shall be, for purposes of this clause, considered as though such person were a member of the Board as of the Effective Date of the Plan.

16

(4)           For sake of clarity, a “Change in Control” will not be deemed to have occurred for purposes of the Plan until the transaction (or services of transactions) that would otherwise be considered a “Change in Control” closes. The transfer of Stock or assets of the Company in connection with a bankruptcy filing by or against the Company under Title 11 of the United States Code will not be considered to be a “Change in Control” for purposes of this Plan. Notwithstanding the foregoing a “Change in Control” shall not occur for purposes of this Plan in the case of Awards that are subject to the requirements of Section 409A of the Code unless such “Change in Control” constitutes a “change in control event” as defined in Section 409A of the Code and the regulations thereunder. Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if, (i) its sole purpose is to change the state of the Company’s incorporation, or (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

(h)           “Code” means the Internal Revenue Code of 1986, as amended. All references to the Code shall be interpreted to include a reference to any applicable regulations, rulings or other official guidance promulgated pursuant to such section of the Code.

(i)           “Committee” except as set forth in Section 4.1, means the Compensation Committee of the Board. At all times the Committee shall consist of at least two (2) or more individuals, each of whom qualifies as: (i) a “non-employee director” as defined in Rule 16b-3(b)(3) of the Exchange Act; (ii) an “outside director” as defined in Section 162(m) of the Code; and (iii) as “independent” for purposes of the applicable Nasdaq Listing Rules.

(j)           “Company” means Fusion Telecommunications International, Inc., a Delaware company.

(k)           “Consultant” means a consultant or adviser that provides bona fide services to the Company or an Affiliate as an independent contractor and not as an employee; provided, however that such person may become a Participant in the Plan only if the Consultant: (i) is a natural person; and (ii) does not provide services in connection with the offer or sale of the Company’s securities in a capital-raising transaction and do not promote or maintain a market for the Company’s securities.

(1)           “Covered Employee” means an Employee who is or could be a “covered employee” within the meaning of Section 162(m) of the Code.

(m)           “Disability” means the inability of a Participant to engage in any substantially gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. The permanence and degree of impairment shall be supported by medical evidence. For purposes of an Incentive Stock Option, “Disability” shall have the meaning ascribed to it in Section 22(e)(3) of the Code.

(n)           “Effective Date” means the date the Plan is approved by the stockholders at the Company’s 2016 Annual Meeting.

(o)           “ERISA” means the Employee Retirement Income Security Act of 1974, as amended. All references to a section of ERISA shall be interpreted to include a reference to any applicable regulations, rulings or other official guidance promulgated pursuant to such section of ERISA.

(p)           “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time. All references to the Exchange Act shall be interpreted to include a reference to any applicable regulations, rulings or other official guidance promulgated pursuant to such section of the Exchange Act.

(q)           “Expiration Date” means the tenth (10th) anniversary of the Effective Date.

(r)           “Fair Market Value” means, as of any date, the closing price for the Stock as reported on  Nasdaq (or any other exchange on which the Stock is than listed) for that date or, if no prices are reported for that date, the closing price on the last day on which such prices were reported.

(s)           “Family Member” means a Participant’s spouse and any parent, stepparent, grandparent, child, stepchild, or grandchild, including adoptive relationships or a trust or any other entity in which these persons (or the Participant) have more than 50% of the beneficial interest.

17

(t)           “Good Reason” means any of the following:

(1)           A material reduction of Participant’s duties, authority or responsibilities, in effect immediately prior to such reduction;

(2)           A material reduction of Participant’s then-existing base salary; or

(3)           The Company’s decision to relocate a Participant’s principal place of work by more than 50 miles.

(u)           “Grant Date” means the date the Committee approves the Award or a date in the future on which the Committee determines the Award will become effective.

(v)           “Incentive Stock Option” means an Option that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto.

(w)           “Non-Employee Director” means a member of the Company’s Board who is not a common-law employee of the Company.

(x)           “Non-Qualified Stock Option” means an Option that is not intended to be an Incentive Stock Option.

(y)           “Option” means a right granted to a Participant under Section 7. An Option may be either an Incentive Stock Option or a Non-Qualified Stock Option.

(z)           “Participant” means a person who has been granted an Award under the Plan.

(aa)           “Performance-Based Awards” means an Award intended to satisfy the requirements of the performance-based compensation exception to the limitations imposed by Section 162(m) of the Code on the tax deductibility of compensation payable to Covered Employees.

(bb)           “Performance Cash” means a right granted to a Participant pursuant to Section 10.

(cc)           “Performance Criteria” means the criteria that the Committee selects for purposes of establishing the Performance Goal or Performance Goals for a Participant for a Performance Period. The Performance Criteria that will be used to establish Performance Goals are limited to the following: net operating income before taxes and extraordinary charges against income; earnings before interest, and taxes; earnings before interest, taxes, depreciation, and amortization; pre- or after-tax net earnings; sales growth; production levels; unit costs; operating earnings; operating cash flow; return on net assets; return on stockholders’ equity; return on assets; return on capital; Stock price growth; stockholder returns; gross or net profit margin; earnings per share; price per share of Stock; market share; revenue; income; safety objectives; environmental objectives; and completion of major projects. The Performance Criteria that will be used to establish Performance Goals with respect to any Award other than a Performance-Based Award that is subject to Article 11 will include the above-listed Performance Criteria and such other criteria as may be set forth in the applicable Award Agreement. Any of the Performance Criteria may be measured either in absolute terms or as compared to any incremental increase or as compared to results of a peer group, indices, or any other basket of companies. Financial Performance Criteria may, but need not, be calculated in accordance with generally accepted accounting principles (“GAAP”) or any successor method to GAAP, including International Financial Reporting Standards. The Committee shall, within the time prescribed by Section 162(m) of the Code, define in an objective fashion the manner of calculating the Performance Criteria it selects to use for a particular Performance Period for a particular Participant.

(dd)           “Performance Goals” means, for a Performance Period, the goals established in writing by the Committee for the Performance Period based upon the Performance Criteria. Depending on the Performance Criteria used to establish such Performance Goals, the Performance Goals may be expressed in terms of overall Company performance or the performance of a division, business unit or an individual. The Performance Goals may be stated in terms of absolute levels or relative to another company or companies or to an index or indices.

18

(ee)           “Performance Period” means the one or more periods of time (but not less than 12 months), which may be of varying and overlapping durations, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to, and the payment of, an Award.

(ff)           “Performance Share” means a right granted to a Participant under Section 10.

(gg)           “Performance Share Unit” means a right granted to a Participant under Section 10.

(hh)           “Plan” means this Fusion Telecommunications International, Inc. 2016 Stock Incentive Plan, as amended from time to time.

(ii)           “2009 Plan” means the Fusion Telecommunications International, Inc. 2009 Stock Option  Plan.

(jj)           “Restricted Stock” means Stock granted to a Participant under Section 9,

(kk)           “Restricted Stock Unit” means a right granted to a Participant under Section 9.

(ll)           “Securities Act” means the Securities Act of 1933, as amended from time to time. All references to the Securities Act shall be interpreted to include a reference to any applicable regulations, rulings or other official guidance promulgated pursuant to such section of the Securities Act.

(mm)           “Separation from Service” is a term that applies only in the context of an Award that the Company concludes is subject to Section 409A of the Code. In that limited context, the term “Separation from Service” means either: (i) the termination of a Participant’s employment with the Company and all Affiliates due to death, retirement or other reasons; or (ii) a permanent reduction in the level of bona fide services the Participant provides to the Company and all Affiliates to an amount that is less than 50% of the average level of bona fide services the Participant provided to the Company and all Affiliates in the immediately preceding 36 months, with the level of bona fide service calculated in accordance with Treasury Regulation Section 1.409A-1(h)(1)(ii). Solely for purposes of determining whether a Participant has a “Separation from Service,” a Participant’s employment relationship is treated as continuing while the Participant is on military leave, medical or sick leave, or other bona fide leave of absence (if the period of such leave does not exceed six (6) months, or if longer, so long as the Participant’s right to reemployment with the Company or an Affiliate is provided either by statute or contract). If the Participant’s period of leave exceeds six (6) months and the Participant’s right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first day immediately following the expiration of such six (6) month period. Whether a Termination of Employment has occurred will be determined based on all of the facts and circumstances and in accordance with Section 409A of the Code.

In the case of a Non-Employee Director, Separation from Service means that such member has ceased to be a member of the Board. Whether an independent contractor consultant has incurred a Separation from Service will be determined in accordance with Treasury Regulation Section 1.409A-1(h).

(nn)           “Specified Employee” means certain officers and highly compensated employees of the Company as defined in Treasury Regulation Section 1.409A-1(i). The identification date for determining whether any employee is a Specified Employee during any calendar year shall be the September 1 preceding the commencement of such calendar year.

(oo)           “Stock” means the common stock of the Company and such other securities of the Company that may be substituted for Stock pursuant to Section 5.

(pp)           “Stock Appreciation Right” or “SAR” means a right granted to a Participant under Section 7.

(qq)            “Stock Grant Award” means a right granted to a Participant under Section 9.

(rr)           “Stock Unit” means a right granted to a Participant under Section 9.

(ss)           “Termination of Employment” or “Termination of Service” means the cessation of performance of services for the Company. For this purpose, the transfer of a Participant among the Company and any Affiliate, or transfer from a position as a member of the Board to Employee, shall not be considered a Termination of Service or a Termination of Employment with the Company. In the context of an Award that is subject to the requirements of Section 409A of the Code, the terms “Termination of Service” and “Termination of Employment” mean a Separation from Service.

19

EX-10.59

EXHIBIT 10.59

CERTIFICATE OF AMENDMENT

TO

CERTIFICATE OF INCORPORATION

OF

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

It is hereby certified that:

1.            

The name of the corporation (hereinafter called the “Corporation”) is FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

2.            

The Certificate of Amendment to the Certificate of Incorporation of the Corporation, recorded by the State of Delaware, Secretary of Corporations on September 17, 1997, as thereafter amended, is hereby amended by striking out the first paragraph of Article “FOURTH” thereof and by substituting in lieu of said first paragraph, the following new first paragraph of "FOURTH" Article:

“FOURTH: The total number of shares of Capital Stock which the Corporation shall have authority to issue is 100,000,000 shares, of which 90,000,000 shares shall be Common Stock, par value $0.01 per share, and 10,000,000 shares shall be Preferred Stock, par value $0.01 per share.”

3.            

This Amendment to the Certificate of Incorporation of the Corporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

4.            

The effective time of this Amendment to the Certificate of Incorporation shall be the date of filing.

IN WITNESS WHEREOF, the undersigned has executed this Amendment to the Certificate of Incorporation of Fusion Telecommunications International, Inc., as of October 28, 2016.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By: /s/ Philip Turits__________________________

Name: Philip Turits, as Secretary

EX-10.60

  EXHIBIT 10.60

EX-10.61

  EXHIBIT 10.61

EX-31.1

EXHIBIT 31.1

Certification of the Chief Executive Officer

I, Matthew D. Rosen, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the "Report") of Fusion Telecommunications International, Inc., a Delaware corporation ("the Registrant");

2.     Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3.     Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4.     The Registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)     Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.     The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors;

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

November 14, 2016

By: / s / MATTHEW D. ROSEN

      Matthew D. Rosen

      Chief Executive Officer

EX-31.2

EXHIBIT 31.2

Certification of the Acting Chief Financial Officer

I, Michael R. Bauer, certify that:

1.     I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the "Report") of Fusion Telecommunications International, Inc., a Delaware corporation ("the Registrant");

2.     Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report;

3.     Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report;

4.     The Registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the Registrant and have:

(a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)     Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)     Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.     The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors;

(a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

November 14, 2016

 By: / s / MICHAEL R. BAUER

       Michael R. Bauer

       Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND

(B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Fusion Telecommunications International, Inc., a Delaware corporation (the "Company"), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

November 14, 2016             By: / s / MATTHEW D. ROSEN

                                              Matthew D. Rosen

                                              Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND

(B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of Fusion Telecommunications International, Inc., a Delaware corporation (the "Company"), does hereby certify that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

November 14, 2016             By:  / s / MICHAEL R. BAUER

                                               Michael R. Bauer

                                               Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the SEC or its staff upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 14, 2016
Document And Entity Information
Entity Registrant Name	FUSION TELECOMMUNICATIONS INTERNATIONAL INC
Entity Central Index Key	0001071411
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		18,062,879
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2016

XML

Condensed Consolidated Balance Sheets (Unaudited) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Cash and cash equivalents	$ 882,040	$ 7,540,543
Accounts receivable, net of allowance for doubtful accounts of $366,422 and $308,813, respectively	8,199,522	7,650,141
Prepaid expenses and other current assets	2,457,736	1,618,603
Total current assets	11,539,298	16,809,287
Property and equipment, net	12,929,148	14,055,493
Other assets:
Security deposits	548,288	575,038
Restricted cash	27,153	165,123
Goodwill	28,049,775	27,060,297
Intangible assets, net	42,727,552	45,824,399
Other assets	302,053	281,045
Total other assets	71,654,821	73,905,902
TOTAL ASSETS	96,123,267	104,770,682
Current liabilities:
Notes payable - non-related parties	685,780	685,780
Due to RootAxcess seller	333,334	300,000
Due to TFB seller	100,000
Equipment financing obligations	997,089	959,380
Accounts payable and accrued expenses	12,610,885	13,129,225
Total current liabilities	14,727,088	15,074,385
Long-term liabilities:
Notes payable - non-related parties, net of discount	30,672,580	30,795,745
Term Loan	25,000,000	25,000,000
Indebtedness under revolving credit facility	15,000,000	15,000,000
Due to RootAxcess Seller		333,333
Due to TFB seller	861,606
Notes payable - related parties	1,112,445	1,074,829
Equipment financing obligations	1,492,558	2,085,416
Derivative liabilities	233,934	953,005
Total liabilities	89,100,211	90,316,713
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 17,299 and 23,324 shares issued and outstanding	173	233
Common stock, $0.01 par value, 50,000,000 shares authorized, 15,064,953 and 12,788,971 shares issued and outstanding	150,650	127,889
Capital in excess of par value	185,764,507	184,859,084
Accumulated deficit	(178,892,274)	(170,533,237)
Total stockholders' equity	7,023,056	14,453,969
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 96,123,267	$ 104,770,682

XML

Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current assets:
Allowance for doubtful accounts	$ 366,422	$ 308,813
Stockholders' equity:
Preferred Stock, Par Value	$ 0.01	$ 0.01
Preferred Stock, Shares Authorized	10,000,000	10,000,000
Preferred Stock, Shares Issued	17,299	23,324
Preferred Stock, Shares Outstanding	17,299	23,324
Common Stock, Par Value	$ 0.01	$ 0.01
Common Stock, Shares Authorized	50,000,000	50,000,000
Common Stock, Shares Issued	15,064,953	12,788,971
Common Stock, Shares Outstanding	15,064,953	12,788,971

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income Statement [Abstract]
Revenues	$ 29,497,129	$ 24,530,824	$ 93,101,835	$ 74,857,557
Cost of revenues (exclusive of depreciation and amortization, shown separately below)	16,769,587	13,533,647	53,936,078	41,359,955
Gross profit	12,727,542	10,997,177	39,165,757	33,497,602
Depreciation and amortization	2,998,628	3,140,427	8,946,781	9,183,632
Selling, general and administrative expenses	11,408,048	9,796,483	34,102,847	29,379,196
Total operating expenses	14,406,676	12,936,910	43,049,628	38,562,828
Operating loss	(1,679,134)	(1,939,733)	(3,883,871)	(5,065,226)
Other (expenses) income:
Interest expense	(1,625,195)	(1,434,734)	(4,877,828)	(4,650,286)
Gain on change in fair value of derivative liability	152,057	1,237,730	380,099	2,543,878
Loss on extinguishment of debt		(2,720,355)		(2,720,355)
Other income (expense), net	18,069	(2,399)	33,514	56,369
Total other expenses	(1,455,069)	(2,919,758)	(4,464,215)	(4,770,394)
Loss before income taxes	(3,134,203)	(4,859,491)	(8,348,086)	(9,835,620)
Provision for income taxes	(10,951)		(10,951)
Net loss	(3,145,154)	(4,859,491)	(8,359,037)	(9,835,620)
Preferred stock dividends	(285,646)	(379,740)	(2,102,467)	(1,186,826)
Net loss attributable to common stockholders	$ (3,430,800)	$ (5,239,231)	$ (10,461,504)	$ (11,022,446)
Basic and diluted loss per common share	$ (0.23)	$ (0.72)	$ (0.72)	$ (1.52)
Weighted average common shares outstanding:
Basic and diluted	14,990,816	8,958,815	14,536,893	8,529,642

XML

Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - 9 months ended Sep. 30, 2016 - USD ($)	Preferred Stock	Common Stock	Capital in Excess of Par	Accumulated Deficit	Total
Beginning Balance, Shares at Dec. 31, 2015	23,324	12,788,971
Beginning Balance, Amount at Dec. 31, 2015	$ 233	$ 127,889	$ 184,859,084	$ (170,533,237)	$ 14,453,969
Net loss				(8,359,037)	(8,359,037)
Conversion of preferred stock into common stock, including dividends, Shares	(6,025)	1,871,667
Conversion of preferred stock into common stock, including dividends, Amount	$ (60)	$ 18,717	(18,657)
Dividends on preferred stock, Shares		343,510
Dividends on preferred stock, Amount		$ 3,435	(3,435)
Adjustment for prior issuances and conversion of warrants			338,972		338,972
Adjustment for fractional shares, Shares		685
Adjustment for fractional shares, Amount		$ 8	(8)
Cancellation of common stock issued to PingTone sellers, Shares		(51,380)
Cancellation of common stock issued to PingTone sellers, Amount		$ (514)	(179,830)		(180,344)
Issuance of restricted stock, Shares		55,000
Issuance of restricted stock, Amount		$ 550	99,000		99,550
Issuance of common stock for services rendered, Shares		56,500
Issuance of common stock for services rendered, Amount		$ 565	96,385		96,950
Stock based compensation associated with stock incentive plans			572,996		572,996
Ending Balance, Shares at Sep. 30, 2016	17,299	15,064,953
Ending Balance, Amount at Sep. 30, 2016	$ 173	$ 150,650	$ 185,764,507	$ (178,892,274)	$ 7,023,056

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Cash flows from operating activities:
Net loss	$ (8,359,037)	$ (9,835,620)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	8,946,781	9,183,632
Loss on extinguishment on debt		2,720,355
Loss on accounts receivable settlement exchanged for equipment		111,659
Loss on disposal of property	86,777
Bad debt expense	215,000	373,034
Stock-based compensation	572,996	392,676
Stock based compensation issued for services rendered by third parties	105,256	215,611
Amortization of debt discount and deferred financing fees	477,751	667,191
Gain in the change in fair value of derivative liability	(380,099)	(2,543,878)
Changes in operating assets and liabilities:
Accounts receivable	(625,771)	(565,227)
Prepaid expenses and other current assets	(1,373,378)	(83,205)
Other assets	(317,927)	(203,414)
Accounts payable and accrued expenses	(1,258,968)	(297,079)
Net cash (used in) provided by operating activities	(1,910,619)	135,735
Cash flows from investing activities:
Purchase of property and equipment	(3,782,232)	(2,479,335)
Proceeds from the sale of property and equipment	28,736
Net cash acquired through acqusition	16,895
Payments for acquisitions		(500,000)
Returns of security deposits	26,750
Escrow refund - PingTone acquisition	392,617
Change in restricted cash	137,970	1,000,000
Net cash used in investing activities	(3,179,264)	(1,979,335)
Cash flows from financing activities:
Proceeds from notes payable - non-related parties		9,000,000
Proceeds from revolving debt		12,500,000
Proceeds from accounts receivable factoring arrangement		1,630,045
Repayments of borrowings to accounts receivable factoring arrangement		(1,666,919)
Payments on equipment financing obligations	(743,647)	(592,514)
Repayments of notes payable	(824,973)	(20,835,022)
Payment of financing fees		(680,828)
Net cash used in financing activities	(1,568,620)	(645,238)
Net change in cash and cash equivalents	(6,658,503)	(2,488,838)
Cash and cash equivalents, beginning of period	7,540,543	6,444,683
Cash and cash equivalents, end of period	$ 882,040	$ 3,955,845

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1. Organization and Business

9 Months Ended

Sep. 30, 2016

Organization And Business

1. Organization and Business

Fusion Telecommunications International, Inc. is a Delaware corporation incorporated in September 1997 (“Fusion” and together with its subsidiaries, the “Company,” “we,” “us” and “our”). The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud infrastructure, cloud computing, and managed cloud-based applications to businesses of all sizes, and voice over IP (“VoIP”) - based voice services to carriers. The Company currently operates in two business segments: Business Services and Carrier Services.

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2. Basis of Presentation and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the fiscal year ended December 31, 2015.

Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies

For a detailed discussion of significant accounting policies, please refer to the 2015 Form 10-K. There have been no material changes in our accounting policies during the nine months ended September 30, 2016.

Principles of Consolidation

The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations of the Company taken as a whole, actual results could differ from those estimates, and such differences could be material.

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 on the date of purchase. As of September 30, 2016 and December 31, 2015, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity.

Restricted Cash

Restricted cash consists primarily of cash held in reserve pursuant to the terms of financing arrangements and 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 September 30, 2016 and December 31, 2015, the Company had certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $27,000 and $165,000, respectively. The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.

Fair Value of Financial Instruments

At September 30, 2016 and December 31, 2015, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.

Long-Lived Asset Impairment

The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the nine month periods ended September 30, 2016 or 2015, as there were no indicators of impairment.

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.

Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (see Note 15). The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. At September 30, 2016 and December 31, 2015, goodwill was approximately $28.0 million and $27.0 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. There was no impairment charge recorded for goodwill during the nine months ended September 30, 2016 or 2015, as there were no indicators of impairment.

The following table presents the changes in the carrying amounts of goodwill during the nine months ended September 30, 2016:

Balance at December 31, 2015	$	27,060,297
Adjustment to the preliminary purchase price of Fidelity*		(10,619	)
Increase in goodwill - Technology for Business Corporation (“TFB”) acquisition		1,000,097
Balance at September 30, 2016	$	28,049,775

*Acquisition of Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC and Fidelity Access Networks, Inc., (together with Fidelity Telecom, LLC hereinafter collectively referred to as “Fidelity”)

Advertising and Marketing Costs

Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Our advertising and marketing expense was approximately $154,000 and $145,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $508,000 and $390,000 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2016 and December 31, 2015. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2011 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of September 30, 2016 and December 31, 2015. During the three and nine months ended September 30, 2016 and 2015, the Company recognized no adjustments for uncertain tax positions.

Stock-Based Compensation

The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. 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.

New and Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of the award as equity or as a liability, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016, including interim periods within those reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, 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, FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2015, FASB issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2015, FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance was effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016 and applied the provision

retrospectively for fiscal 2015 (see Note 11). The adoption of this guidance by the Company resulted in an approximately $1.0 million decrease in other assets, and a decrease of $1.0 million in notes payable as of December 31, 2015.

In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

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3. Loss per share

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

3. Loss per share

Basic and diluted loss per share is computed by dividing (i) loss available to common stockholders, adjusted by an approximately $1.2 million gain on the fair value of the Company’s derivative liability for the three months ended September 30, 2015, and $1.9 million gain on the fair value of the Company’s derivative liability for the nine months ended September 30, 2015, which was attributable to 728,333 outstanding warrants issued by Fusion with a nominal exercise price that were exercised in August 2015 and dividends paid on Fusion’s preferred stock, by (ii) the weighted-average number of common shares outstanding during the period, increased by the number of common shares underlying such warrants as if such exercise had occurred at the beginning of the year.

The following table sets forth the computation for basic and diluted net income per share for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Numerator
Net loss	$	(3,145,154	)	$	(4,859,491	)	$	(8,359,037	)	$	(9,835,620	)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock		(101,729	)		(101,730	)		(302,976	)		(301,871	)
Dividends declared on Series B-2 Convertible Preferred Stock		(183,917	)		(278,010	)		(1,799,491	)		(884,955	)
Gain on nominal warrants		-			(1,187,183	)		-			(1,930,083	)
Adjusted loss attributable to common stockholders	$	(3,430,800	)	$	(6,426,414	)	$	(10,461,504	)	$	(12,952,529	)
Denominator
Basic and diluted weighted average common shares outstanding		14,990,816			8,958,815			14,536,893			8,529,642
Loss per share
Basic and diluted	$	(0.23	)	$	(0.72	)	$	(0.72	)	$	(1.52	)

For the nine months ended September 30, 2016 and 2015, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

	Nine Months Ended September 30,
	2016		2015
Warrants		2,946,948		3,011,760
Convertible preferred stock		2,626,518		3,992,471
Stock options		1,157,512		677,126
		6,730,978		7,681,357

The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’s outstanding Series A-1, A-2 and A-4 preferred stock (the “Series A Preferred Stock”) of approximately $102,000 for the three months ended September 30, 2016 and 2015, and approximately $302,000 for the nine months ended September 30, 2016 and 2015. Through September 30, 2016, the Board of Directors of Fusion has never declared a dividend on any series of the Series A Preferred Stock, resulting in approximately $4.6 million of accumulated preferred stock dividends. The Board of Directors has declared a dividend of $183,917 and $599,491 for the three and nine months ended September 30, 2016, respectively, on the Company’s Series B-2 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 122,601 and 343,510 shares, respectively, of Fusion’s common stock. In addition, during the three months ended March 31, 2016, the Board of Directors paid an additional $1.2 million in dividends 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 their agreement to convert all of their Series B-2 Preferred Stock holdings into shares of Fusion’s common stock.

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4. Intangible Assets

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

4. Intangible Assets

Intangible assets as of September 30, 2016 and December 31, 2015 are as follows:

	September 30,			December 31,
	2016			2015
Trademarks and tradenames	$	1,093,400		$	1,093,400
Proprietary technology		6,670,000			5,781,000
Non-compete agreements		10,711,043			10,703,043
Customer relationships		45,000,181			44,888,181
Favorable lease intangible		218,000			218,000
		63,692,624			62,683,624
Less: accumulated amortization		(20,965,072	)		(16,859,225	)
Intangible assets, net	$	42,727,552		$	45,824,399

Amortization expense was $1.4 million and $1.9 million for the three months ended September 30, 2016 and 2015, respectively, and for the nine months ended September 30, 2016 and 2015 was $4.1 million and $5.6 million, respectively. Estimated future aggregate amortization expense is expected to be as follows:

Year	Estimated Annual Amortization Expense
Remainder of
2016	$	2,038,362
2017		6,065,102
2018		5,318,305
2019		4,293,561
2020		4,500,563
and thereafter	$	20,511,659

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5. Stock-based compensation

9 Months Ended

Sep. 30, 2016

Stock-based Compensation

5. Stock-based compensation

Fusion's stock-based compensation plan provides for the issuance of stock options to the Company’s employees, officers, and directors. The Compensation Committee of Fusion’s Board of Directors (the "Compensation Committee") approves all awards under Fusion's stock-based compensation plan.

The following weighted average assumptions were used to determine the fair value of the stock options granted under Fusion’s stock-based compensation plan using the Black-Scholes option-pricing model:

	Nine months ended September 30,
	2016		2015
Dividend yield (%)*		0.0		0.0
Expected volatility (%)		92.4		125.4
Average Risk-free interest rate (%)		1.56		1.70
Expected life of stock option term (years)		8.0		7.6

*The dividend yield is zero as the Company has never paid and does not expect to pay dividends on its common stock.

The Company recognized compensation expense of approximately $194,000 and $154,000 for the three months ended September 30, 2016 and 2015, respectively, and $573,000 and $393,000 for the nine months ended September 30, 2016 and 2015, respectively. These amounts are included in selling, general and administrative expenses in the condensed consolidated interim statements of operations.

The following table summarizes the stock option activity for the nine months ended September 30, 2016:

	Number of Options			Weighted Average Exercise Price
Balance at December 31, 2015		1,158,251		$	4.96
Shares granted during the period		86,050			1.79
Shares exercised during the period		-			-
Shares forfeited during the period		(67,235	)		2.50
Shares expired during the period		(19,554	)		72.11
Shares outstanding at September 30, 2016		1,157,512			3.73
Shares exercisable at September 30, 2016		421,673		$	5.77

As of September 30, 2016, the Company had approximately $1.0 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plan, which is expected to be recognized over a weighted-average period of 1.56 years.

Restricted Stock

During the nine months ended September 30, 2016, Fusion awarded 55,000 shares of its restricted common stock to its Chief Financial Officer. The restricted stock granted was valued at the closing stock price on the day employment commenced and vests in three equal installments on the first, second and third anniversary of employment. For the three and nine months ended September 30, 2016, the Company recognized compensation expense of approximately $8,300 and $17,000, respectively, and has unamortized compensation of $82,960.

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6. Acquisition

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

6. Acquisition

On March 31, 2016, the Company completed the acquisition of certain assets from TFB, a provider of industry leading contact center solutions for an estimated purchase price of approximately $1.3 million consisting of $277,281 in cash and a royalty fee equal to ten percent of the collected monthly recurring revenues derived from sales of the cloud version of the proprietary call center software and maintenance services. The estimated royalty fee of $1,011,606 was recognized as a “non-current liability” in the condensed consolidated balance sheet and will be paid on a quarterly basis, commencing as of the first full calendar quarter following the second anniversary of the closing date of the TFB acquisition. The aggregate purchase price has been allocated to the fair value of the assets acquired and liabilities assumed as follows:

Covenant not to compete	$	8,000
Customer contracts/relationships		99,000
Proprietary technology		889,000
Accounts receivable		80,845
Prepaid asset		5,535
Line of credit		(100,000	)
Deferred liability		(693,590	)
Goodwill		1,000,097
Purchase price	$	1,288,887

The amount of goodwill recognized is primarily attributable to the expected contributions of TFB to the overall corporate strategy in the cloud based call center solutions and synergies of the acquired business. None of the goodwill recognized is expected to be deductible for income tax purposes. The intangible assets subject to amortization consist of proprietary technology, customer relationships and non-compete agreements, with an estimated useful life of 8, 3 and 2 years, respectively.

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7. Supplemental Disclosure of Cash Flow Information

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

7. Supplemental Disclosure of Cash Flow Information

The following table summarizes the Company’s supplemental cash flows information:

	Nine Months Ended September 30,
Supplemental Cash Flow Information	2016		2015
Cash paid for interest	$	4,233,527	$	3,961,498
Supplemental Non-Cash Investing and Financing Activities
Property and equipment acquired under capital leases		188,497		1,440,816
Dividends on Series B-2 preferred stock paid with the issuance of common stock		599,491		884,955
Due to Seller of RootAxcess		-		700,000
Equipment received in exchange for settlement of accounts receivable		-		105,570
Exercise of lenders warrants		-		364,167
Assets acquired under earn-out liability	$	961,606	$	-

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8. Prepaid Expenses and Other Current Assets

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

8. Prepaid Expenses and Other Current Assets

The following table sets forth the items in prepaid expenses and other current assets:

	September 30,		December 31,
	2016		2015
Insurance	$	380,359	$	93,040
Rent		81,731		101,916
Marketing		140,397		109,455
Software subscriptions		670,614		498,078
Due from seller of Fidelity		-		425,963
Due from factoring party		-		26,018
Commissions		104,273		20,805
Escrow receivable - Fidelity		500,829		50,759
Other		579,533		292,569
	$	2,457,736	$	1,618,603

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9. Accounts Payable and Accrued Expenses

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

9. Accounts Payable and Accrued Expenses

The following table sets forth the items in accounts payable and accrued expenses:

	September 30,		December 31,
	2016		2015
Trade accounts payable	$	3,699,791	$	1,101,393
Accrued bonus		336,259		700,000
Accrued professional and consulting fees		225,878		274,205
Accrued property and other taxes		629,247		534,388
Accrued network costs		1,692,959		3,423,483
Accrued rent		117,252		82,894
Accrued universal service fund fees		730,205		494,852
Customer deposits		384,597		358,227
Accrued credit card		160,596		384,257
Accrued payroll, employee benefits and vacation		349,997		555,493
Accrued sales and federal excise taxes		1,686,636		2,204,098
Accrued sales commissions		789,322		981,121
Accrued interest payable		12,452		32,221
Deferred revenue		1,444,423		1,157,036
Other		351,271		845,557
	$	12,610,885	$	13,129,225

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10. Equipment Financing Obligations

9 Months Ended

Sep. 30, 2016

Equipment Financing Obligations Details 1

10. Equipment Financing Obligations

From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 5.3% and 6.6%. The Company’s equipment financing obligations are as follows:

	September 30,			December 31,
	2016			2015
Equipment financing obligations	$	2,489,647		$	3,044,796
Less: current portion		(997,089	)		(959,380	)
Long-term portion	$	1,492,558		$	2,085,416

The Company’s payment obligations under the capital leases are as follows:

Year	Principal Payments
Remainder of
2016	$	247,693
2017		1,002,084
2018		958,846
2019		268,044
2020	$	12,980

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11. Debt

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

11. Debt

As of September 30, 2016 and December 31, 2015, long-term debt was as follows:

Secured Credit Facility

In August 2015, the Company entered into a $40.0 million credit facility with Opus Bank, which facility was amended and restated on December 8, 2015 (the “Opus Facility”). The Opus Facility consists of a $15.0 million revolving four-year credit facility, and a $25.0 million, five-year term loan. The maturity date of amounts borrowed under the revolving facility is August 28, 2019, and the maturity date of amounts borrowed under the term loan is August 28, 2020.

At September 30, 2016, the Company had borrowed $15.0 million under the revolver and $25.0 million under the term loan. For the three and nine months ended September 30, 2016, under the Opus Facility the Company recognized interest expense of approximately $0.5 million and $1.5 million, respectively, at a monthly interest rate of 4.75%. The interest rate is calculated as the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by the Wall Street Journal as its “prime rate” (or the average prime rate if a high and a low prime rate are therein reported) plus the Applicable Margin (as defined in the Opus Facility) in effect at such time, or (b) 3.25% plus the Applicable Margin.

Pursuant to the Opus Facility, the Company must satisfy various customary financial covenants such as borrower leverage ratio, fixed charge coverage ratio, capital expenditures annual limit, minimum adjusted EBITDA, and maximum senior leverage ratio. For the three and nine months ended September 30, 2016, the Company exceeded its leverage and senior leverage ratio covenants. On November 7, 2016, Opus Bank waived these covenants breaches. As a result of this waiver, we were in compliance with our obligations under this facility as of September 30, 2016.

Praesidian Facility

On December 8, 2015, the Company entered into the Fourth Amended and Restated Securities Purchase Agreement and Security Agreement (the “Fourth Amended SPA”) with the Company’s subordinated lenders (which, collectively with its prior versions is hereinafter referred to as the “Praesidian Facility”). Under the Praesidian Facility, the Company is required to satisfy financial covenants similar to those required under the Opus Facility. For the three and nine months ended September 30, 2016, the Company was not in compliance with the leverage ratio covenant under this facility. On November 7, 2016, Praesidian waived our events of default with respect to non-compliance with the leverage ratio. As a result of this waiver, we were in compliance with our obligations under the Fourth Amended SPA as of September 30, 2016.

During the three and nine months ended September 30, 2016, the Company paid interest expense of approximately $0.9 million and $2.8 million, at an annual interest rate of 10.8%.

	September 30,			December 31,
	2016			2015
Subordinated Notes	$	33,645,865		$	34,160,200
Unamortized discount on Subordinated Notes		(1,450,745	)		(1,697,091	)
Unamortized debt issuance costs		(836,760	)		(981,584	)
Total notes payable - non-related parties		31,358,360			31,481,525
Less: current portion		(685,780	)		(685,780	)
Long-term portion	$	30,672,580		$	30,795,745

The note payable to Marvin Rosen, the Chairman of Fusion’s Board is subordinated to borrowings under the Opus Facility and the Fourth Amended SPA. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after amounts borrowed under the Opus Facility and the Fourth Amended SPA are paid in full.

	September 30,			December 31,
	2016			2015
Notes payable to Marvin Rosen	$	1,178,082		$	1,178,082
Discount on note		(65,637	)		(103,253	)
Total notes payable - related parties	$	1,112,445		$	1,074,829

For the nine months ended September 30, 2016, the Company recognized interest expense on the Rosen note of approximately $64,000 and amortization discount of approximately $38,000.

Note Payable to RootAxcess Seller

In connection with its purchase of the assets of RootAxcess, LLC (“RootAxcess”) in September 2015, the Company held back $0.7 million against potential claims arising from breaches of representation and warranties. Of such amount, $0.4 million is to be paid to the seller in six equal installments of $66,667 on each of the three, six, nine, twelve, fifteen and eighteen month anniversary of the closing date. The remaining $0.3 million to be paid in three equal installments of $100,000 on each of the twelve, fifteen, and eighteen month anniversary of the closing date. To the extent there is a unresolved claim notice pending (as defined in the RootAxcess asset purchase agreement), the monthly installment payable to seller immediately following the delivery of such claim notice may, at the Company’s reasonable discretion, be reduced by the amount in dispute under the claim notice and such amount will continue to be held by the Company until resolved, at which point, the Company will disburse the withheld amount in accordance with such resolution.

On September 30, 2016, the Company made a payment of $127,306 net of an adjustment of $39,360 to the seller in connection with the terms of the asset purchase agreement. At September 30, 2016, the remaining balance due is $333,334.

Note Due to TFB Seller

In connection with the purchase of the assets of TFB in March 2016, the Company recorded a contingent liability of $1,011,606 (see Note 6). The contingent liability was based on a royalty fee payable to the sellers equal to ten percent of the collected monthly recurring revenues to be derived from the sale of the cloud version of the proprietary call center software and maintenance services. In accordance with the terms of the asset purchase agreement, the royalty fees will be paid on a quarterly basis, commencing as of the first full calendar quarter following the second anniversary of the closing date of the TFB acquisition or March 31, 2018 and will continue for a period of 31 calendar quarters. In addition, a portion of the salary paid to the sellers for a period of two years following the acquisition date constitutes an advancement against any royalty fee owed to the sellers.

At September 30, 2016, the outstanding balance is $961,606, net of a salary advance of $50,000. There were no changes to the contingent liability based on the Company’s evaluation of the factors used to determine the fair value of the purchase price.

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12. Derivative Liability

9 Months Ended

Sep. 30, 2016

Derivative Liability

12. Derivative Liability

Fusion has issued warrants to purchase shares of its common stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”). For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies such instruments as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrant is exercised or expires, and any change in fair value is recognized in the Company’s statement of operations. In this regard, Fusion has 584,834 outstanding warrants which provide for a downward adjustment of the exercise price if Fusion were to issue

common stock at an issuance price, or issue convertible debt or equity securities with an exercise price, that is less than the exercise price of these warrants. In addition, in connection with the sale of certain notes under the original Praesidian Facility, Fusion issued nominal warrants to the original lenders to purchase an aggregate of 728,333 shares of Fusion’s common stock. The nominal warrants were exercised in August 2015. The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock.

The following assumptions were used to determine the fair value of the warrants for the nine months ended September 30, 2016 and 2015:

	Nine months ended September 30,
	2016		2015
Stock price ($)		1.65		1.88
Exercise price ($)		6.25		0 - 6.25
Risk-free interest rate (%)		1.56		1.75 - 2.06
Expected volatility (%)		92.4		125.4
Time to maturity (years)		2.25		7.08 - 8.25

At September 30, 2016 and December 31, 2015, the fair value of the derivative was $233,934 and $953,005, respectively. For the three months ended September 30, 2016 and 2015, the Company recognized a gain on the change in the fair value of this derivative of approximately $152,000 and $1.2 million, respectively, and a gain of approximately $380,000 and $2.5 million for the nine months ended September 30, 2016 and 2015, respectively.

During the nine months ended September 30, 2016, the Company adjusted the valuation of its derivative liability for warrants issued in December 2013 and January 2014 and its valuation of certain warrants exercised during 2015. The amount of the adjustment was a net $772,022 impact on the condensed consolidated statements of operations resulting from the loss on the change in the fair value of the derivative and an additional $338,972 impact to capital in excess of par and $433,050 increase in derivative liability in the condensed consolidated balance sheets (see Note 17). 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.

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13. Equity Transactions

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

13. Equity Transactions

Common Stock

Fusion is authorized to issue 50,000,000 shares of its common stock. As of September 30, 2016 and December 31, 2015, 15,064,953 and 12,788,971 shares of its common stock, respectively, were issued and outstanding, respectively.

During the nine months ended September 30, 2016, Fusion issued 26,500 shares of its common stock to a third party consultant for services rendered, and 30,000 shares of common stock to an employee in lieu of a cash bonus valued of $96,950. In addition, the Fusion Board declared aggregate dividends of $599,491 on Fusion’s Series B-2 Preferred Stock, which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 343,510 shares of common stock. In addition, during the nine months ended September 30, 2016, certain holders of the Series B-2 Preferred Stock elected to convert 6,025 shares into an aggregate of 1,871,667 shares of Fusion’s common stock, including 666,667 shares of common stock which were issued as a payment of additional dividends for the conversion of these Series B-2 Preferred shares into Fusion’s common stock. The additional shares issued were valued at the closing market price at the date of issuance of $1.80 per share or $1.2 million.

On May 9, 2016, the Company received a staff determination letter from Nasdaq stating that the Company was not in compliance with its rules for continued listing, Rule 5635(b), because it violated the shareholder approval requirement. The technical violation resulted from the purchase of 1,834,862 shares of the Company’s common stock by Unterberg Technology Partners, L.P. (“Unterberg”) in December 2015, which when aggregated with the common shares underlying the Company’s Series B Preferred Stock held by an affiliate of Unterberg in February 2016, caused the amount owned by Unterberg affiliates to exceed the level allowed by Nasdaq without a prior shareholder vote. The Nasdaq letter indicated that the Company had forty-five (45) calendar days to submit a plan to regain compliance.

On July 19, 2016, Fusion entered into a Standstill Agreement with Unterberg, and notified Nasdaq of it plans to hold an annual stockholders meeting to obtain the requisite approval for the transactions. Consequently, Nasdaq granted the Company an extension of time to regain compliance with the Rule 5635(b). On October 28, 2016, Fusion’s shareholders approved the transaction with Unterberg and its affiliates and on November 2, 2016, Nasdaq notified Fusion that it has regained compliance with Rule 5635(b).

Restricted Stock

During the nine months ended September 30, 2016, the Company awarded 55,000 shares of restricted common stock to its Chief Financial Officer.

Preferred Stock

Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of September 30, 2016 and December 31, 2015 there was 5,045 shares of Series A Preferred Stock issued and outstanding. In addition, there were 12,254 and 18,279 shares of Series B-2 Preferred Stock issued and outstanding as of September 30, 2016 and December 31, 2015, 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 the Fusion’s Board, on January 1 of each year. As of September 30, 2016, no dividend had been declared by Fusion’s Board with respect to the Series A Preferred Stock, and the Company had accumulated approximately $4.6 million of preferred stock dividends. 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, in cash or shares of Fusion common stock, at the option of the Company.

Since 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.

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14. Commitments and Contingencies

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

14. Commitments and Contingencies

Legal Matters

From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. Defending such proceedings can be costly and can impose a significant burden on management and employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of September 30, 2016, the Company did not have any ongoing legal matters.

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15. Segment Information

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

15. Segment Information

Operating segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance.

The Company has two reportable segments – “Business Services” and “Carrier Services.” These segments are organized by the products and services that are sold and the customers that are served. The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company’s measurement of segment profit exclude the Company’s executive, administrative and support costs. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the 2015 Form 10-K. The Company’s segments and their principal activities consist of the following:

Business Services

Through this operating segment, the Company provides cloud voice, cloud connectivity, cloud infrastructure, cloud computing and managed cloud-based applications to businesses of all sizes. These services are sold through the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party agents to sell the Company’s products and services. The Business Services segment includes the business acquired from RootAxcess in September 2015, its acquisition of the stock of various Fidelity companies in December, 2015, and its acquisition of assets from TFB completed in March 2016.

Carrier Services

Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily VoIP technology. The Company currently interconnects with approximately 370 carriers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.

Operating segment information for the three and nine months ended September 30, 2016 and 2015 is summarized in the following tables:

	Three months ended September 30, 2016
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	8,864,791		$	20,632,338		$	-		$	29,497,129
Cost of revenues (exclusive of depreciation and amortization)			8,487,912			8,281,675			-			16,769,587
Gross profit			376,879			12,350,663			-			12,727,542
Depreciation and amortization			38,094			2,747,822			212,712			2,998,628
Selling, general and administrative expenses			653,462			9,547,547			1,207,039			11,408,048
Interest expense			-			1,551,534			73,661			1,625,195
Gain on change in fair value of derivative liability			-			-			(152,057	)		(152,057	)
Other expenses (income)			-			247,070			(265,139	)		(18,069	)
Provision for income taxes			-			10,951			-			10,951
Net loss		$	(314,677	)	$	(1,754,261	)	$	(1,076,216	)	$	(3,145,154	)
Total assets		$	3,783,321		$	90,027,291		$	2,312,655		$	96,123,267

	Nine months ended September 30, 2016
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	30,711,086			62,390,749		$	-		$	93,101,835
Cost of revenues (exclusive of depreciation and amortization)			29,341,982			24,594,096			-			53,936,078
Gross profit			1,369,104			37,796,653			-			39,165,757
Depreciation and amortization			116,102			8,128,378			702,301			8,946,781
Selling, general and administrative expenses			2,119,119			28,052,965			3,930,763			34,102,847
Interest expense			-			4,647,847			229,981			4,877,828
Gain on change in fair value of derivative liability			-			-			(380,099	)		(380,099	)
Other expenses (income)			-			764,308			(797,822	)		(33,514	)
Provision for income taxes						10,951						10,951
Net loss		$	(866,117	)	$	(3,807,796	)	$	(3,685,124	)	$	(8,359,037	)
Capital expenditures		$	41,584		$	3,740,648		$	-		$	3,782,232

	Three months ended September 30, 2015
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	8,269,529		$	16,261,295		$	-		$	24,530,824
Cost of revenues (exclusive of depreciation and amortization)			7,642,008			5,891,639			-			13,533,647
Gross profit			627,521			10,369,656			-			10,997,177
Depreciation and amortization			48,022			2,898,068			194,337			3,140,427
Selling, general and administrative expenses			885,769			7,953,958			956,756			9,796,483
Interest expense			-			1,332,719			102,015			1,434,734
Gain on change in fair value of derivative liability			-			-			(1,237,730	)		(1,237,730	)
Loss on extinguishment of debt			-			2,538,272			182,083			2,720,355
Other expenses (income)			-			243,420			(241,021	)		2,399
Net (loss) income		$	(306,270	)	$	(4,596,781	)	$	43,560		$	(4,859,491	)
Total assets		$	4,639,835		$	59,128,769		$	3,128,866		$	66,897,470

	Nine months ended September 30, 2015
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	25,767,099		$	49,090,458		$	-		$	74,857,557
Cost of revenues (exclusive of depreciation and amortization)			23,540,573			17,819,382			-			41,359,955
Gross profit			2,226,526			31,271,076			-			33,497,602
Depreciation and amortization			138,944			8,809,670			235,018			9,183,632
Selling, general and administrative expenses			2,619,818			23,684,671			3,074,707			29,379,196
Interest expense			-			4,457,080			193,206			4,650,286
Gain on change in fair value of derivative liability			-			-			(2,543,878	)		(2,543,878	)
Loss on extinguishment of debt			-			2,538,272			182,083			2,720,355
Other expenses (income)			-			591,691			(648,060	)		(56,369	)
Net loss		$	(532,236	)	$	(8,810,308	)	$	(493,076	)	$	(9,835,620	)
Capital expenditures		$	69,905		$	2,409,430		$	-		$	2,479,335

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16. Related Party Transactions

9 Months Ended

Sep. 30, 2016

Related Party Transaction, Due from (to) Related Party [Abstract]

16. Related Party Transactions

Since March 6, 2014, the Company has engaged a third party to prepare its tax returns and to provide related tax advisory services. Larry Blum, a member of Fusion’s Board, is a Senior Advisor and a former partner of that company.

Since 2015, the Company has an operating agreement with XcomIP, LLC a telecommunications carrier in Hoboken, New Jersey, whose CEO Jay Adams is the brother of John Adams Vice President of our Carrier Services division. For the three and nine months ended September 30, 2016, we recognized revenues of approximately $0.5 million and $2.0 million, respectively. For the nine months ended September 30, 2016, the outstanding balance of accounts receivable from XcomIP and accounts payable owed to XcomIP was approximately $98,000 and $14,000, respectively.

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17. Fair Value Disclosures

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

17. Fair Value Disclosures

Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3—No observable pricing inputs in the market

The following table represents the fair value of the liability measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3		Total
As of September 30, 2016
Current liabilities:
Contingent liability (see note 11)	$	-	$	-	$	100,000		100,000
Non-current liabilities:
Contingent liability (see note 11)				-		861,606		861,606
Derivative liability (see note 12)		-		-		233,934		233,934
Total non-current liabilities	$	0	$	-	$	1,095,540	$	1,095,540
As of December 31, 2015
Non-current liabilities:
Derivative liability (see note 12)	$	-	$	-	$	953,005	$	953,005

Changes in the derivative warrant liability for the nine months ended September 30, 2016 are as follows:

Balance at December 31, 2015	$	953,005
Gain for the period:
Included in net loss		(1,152,121	)
Adjustment for prior issuances and conversion of warrants (see note 12)		433,050
Balance at September 30, 2016	$	233,934

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18.Subsequent Events

9 Months Ended

Sep. 30, 2016

Subsequent Events [Abstract]

18. Subsequent Events

On November 14, 2016, the Company entered into a $70.0 million senior secured credit facility with East West Bank consisting of a $65.0 million, five-year term loan and a $5.0 million five-year revolver. The proceeds from the term loan were used to fund the acquisition of Apptix, Inc., pay in full the Opus Facility, and for general corporate purposes.  

On November 14, 2016, the Company completed the acquisition of Apptix, Inc. a cloud solutions provider based in Herndon, Virginia for a total purchase price of $28.0 million, consisting of approximately $23.0 million in cash and $5.0 million in Fusion’s restricted common stock.

On November 14, 2016, the Company completed an offering of $2.0 million of Fusion common stock in a private placement offering which is expected to fund on November 16, 2016. The proceeds will be used for general corporate purposes including working capital and capital expenditures.

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2. Basis of Presentation and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the fiscal year ended December 31, 2015.

Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year.

Principles of Consolidation

The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations of the Company taken as a whole, actual results could differ from those estimates, and such differences could be material.

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 on the date of purchase. As of September 30, 2016 and December 31, 2015, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity.

Restricted Cash

Restricted cash consists primarily of cash held in reserve pursuant to the terms of financing arrangements and 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 September 30, 2016 and December 31, 2015, the Company had certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $27,000 and $165,000, respectively. The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.

Fair value of Financial Instruments

At September 30, 2016 and December 31, 2015, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.

Long-Lived Asset Impairment

The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the nine month periods ended September 30, 2016 or 2015, as there were no indicators of impairment.

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.

Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (see Note 15). The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. At September 30, 2016 and December 31, 2015, goodwill was approximately $28.0 million and $27.0 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. There was no impairment charge recorded for goodwill during the nine months ended September 30, 2016 or 2015, as there were no indicators of impairment.

The following table presents the changes in the carrying amounts of goodwill during the nine months ended September 30, 2016:

Balance at December 31, 2015	$	27,060,297
Adjustment to the preliminary purchase price of Fidelity*		(10,619	)
Increase in goodwill - Technology for Business Corporation (“TFB”) acquisition		1,000,097
Balance at September 30, 2016	$	28,049,775

*Acquisition of Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC and Fidelity Access Networks, Inc., (together with Fidelity Telecom, LLC hereinafter collectively referred to as “Fidelity”)

Advertising and Marketing Costs

Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Our advertising and marketing expense was approximately $154,000 and $145,000 for the three months ended September 30, 2016 and 2015, respectively, and approximately $508,000 and $390,000 for the nine months ended September 30, 2016 and 2015, respectively.

Income Taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2016 and December 31, 2015. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2011 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of September 30, 2016 and December 31, 2015. During the three and nine months ended September 30, 2016 and 2015, the Company recognized no adjustments for uncertain tax positions.

Stock-Based Compensation

The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. 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.

New and Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Compensation-Stock Compensation (Topic 718). The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification of the award as equity or as a liability, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years and interim periods beginning after December 15, 2016, including interim periods within those reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In February 2016, 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, FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2015, FASB issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2015, FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance was effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016 and applied the provision

retrospectively for fiscal 2015 (see Note 11). The adoption of this guidance by the Company resulted in an approximately $1.0 million decrease in other assets, and a decrease of $1.0 million in notes payable as of December 31, 2015.

In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018. The Company is currently assessing the impact of this guidance on its consolidated financial statements.

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2. Basis of Presentation and Summary of Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Business acquisition cost for goodwill

Balance at December 31, 2015	$	27,060,297
Adjustment to the preliminary purchase price of Fidelity*		(10,619	)
Increase in goodwill - Technology for Business Corporation (“TFB”) acquisition		1,000,097
Balance at September 30, 2016	$	28,049,775

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3. Loss per share (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Computation for basic and diluted net income per share

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Numerator
Net loss	$	(3,145,154	)	$	(4,859,491	)	$	(8,359,037	)	$	(9,835,620	)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock		(101,729	)		(101,730	)		(302,976	)		(301,871	)
Dividends declared on Series B-2 Convertible Preferred Stock		(183,917	)		(278,010	)		(1,799,491	)		(884,955	)
Gain on nominal warrants		-			(1,187,183	)		-			(1,930,083	)
Adjusted loss attributable to common stockholders	$	(3,430,800	)	$	(6,426,414	)	$	(10,461,504	)	$	(12,952,529	)
Denominator
Basic and diluted weighted average common shares outstanding		14,990,816			8,958,815			14,536,893			8,529,642
Loss per share
Basic and diluted	$	(0.23	)	$	(0.72	)	$	(0.72	)	$	(1.52	)

Excluded from calculation of diluted earnings per common share

	Nine Months Ended September 30,
	2016		2015
Warrants		2,946,948		3,011,760
Convertible preferred stock		2,626,518		3,992,471
Stock options		1,157,512		677,126
		6,730,978		7,681,357

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4. Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Identifiable intangible assets

	September 30,			December 31,
	2016			2015
Trademarks and tradenames	$	1,093,400		$	1,093,400
Proprietary technology		6,670,000			5,781,000
Non-compete agreements		10,711,043			10,703,043
Customer relationships		45,000,181			44,888,181
Favorable lease intangible		218,000			218,000
		63,692,624			62,683,624
Less: accumulated amortization		(20,965,072	)		(16,859,225	)
Intangible assets, net	$	42,727,552		$	45,824,399

Estimated future aggregate amortization expense

Year	Estimated Annual Amortization Expense
Remainder of
2016	$	2,038,362
2017		6,065,102
2018		5,318,305
2019		4,293,561
2020		4,500,563
and thereafter	$	20,511,659

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5. Stock-based compensation (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Fair value of stock options granted

	Nine months ended September 30,
	2016		2015
Dividend yield (%)*		0.0		0.0
Expected volatility (%)		92.4		125.4
Average Risk-free interest rate (%)		1.56		1.70
Expected life of stock option term (years)		8.0		7.6

Stock option activity

	Number of Options			Weighted Average Exercise Price
Balance at December 31, 2015		1,158,251		$	4.96
Shares granted during the period		86,050			1.79
Shares exercised during the period		-			-
Shares forfeited during the period		(67,235	)		2.50
Shares expired during the period		(19,554	)		72.11
Shares outstanding at September 30, 2016		1,157,512			3.73
Shares exercisable at September 30, 2016		421,673		$	5.77

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6. Acquisition (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Purchase price allocated to the fair value of the net assets

The aggregate purchase price has been allocated to the fair value of the assets acquired and liabilities assumed as follows:

Covenant not to compete	$	8,000
Customer contracts/relationships		99,000
Proprietary technology		889,000
Accounts receivable		80,845
Prepaid asset		5,535
Line of credit		(100,000	)
Deferred liability		(693,590	)
Goodwill		1,000,097
Purchase price	$	1,288,887

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7. Supplemental Disclosure of Cash Flow Information (Tables)

9 Months Ended

Sep. 30, 2016

Supplemental Disclosure Of Cash Flow Information Tables

Supplemental Disclosure of Cash Flow Information

	Nine Months Ended September 30,
Supplemental Cash Flow Information	2016		2015
Cash paid for interest	$	4,233,527	$	3,961,498
Supplemental Non-Cash Investing and Financing Activities
Property and equipment acquired under capital leases		188,497		1,440,816
Dividends on Series B-2 preferred stock paid with the issuance of common stock		599,491		884,955
Due to Seller of RootAxcess		-		700,000
Equipment received in exchange for settlement of accounts receivable		-		105,570
Exercise of lenders warrants		-		364,167
Assets acquired under earn-out liability	$	961,606	$	-

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8. Prepaid Expenses and Other Current Assets (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Prepaid expenses and other current assets

	September 30,		December 31,
	2016		2015
Insurance	$	380,359	$	93,040
Rent		81,731		101,916
Marketing		140,397		109,455
Software subscriptions		670,614		498,078
Due from seller of Fidelity		-		425,963
Due from factoring party		-		26,018
Commissions		104,273		20,805
Escrow receivable - Fidelity		500,829		50,759
Other		579,533		292,569
	$	2,457,736	$	1,618,603

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9. Accounts Payable and Accrued Expenses (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Accounts payable and accrued expenses

	September 30,		December 31,
	2016		2015
Trade accounts payable	$	3,699,791	$	1,101,393
Accrued bonus		336,259		700,000
Accrued professional and consulting fees		225,878		274,205
Accrued property and other taxes		629,247		534,388
Accrued network costs		1,692,959		3,423,483
Accrued rent		117,252		82,894
Accrued universal service fund fees		730,205		494,852
Customer deposits		384,597		358,227
Accrued credit card		160,596		384,257
Accrued payroll, employee benefits and vacation		349,997		555,493
Accrued sales and federal excise taxes		1,686,636		2,204,098
Accrued sales commissions		789,322		981,121
Accrued interest payable		12,452		32,221
Deferred revenue		1,444,423		1,157,036
Other		351,271		845,557
	$	12,610,885	$	13,129,225

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10. Equipment Financing Obligations (Tables)

9 Months Ended

Sep. 30, 2016

Equipment Financing Obligations Details 1

Equipment financing obligations

	September 30,			December 31,
	2016			2015
Equipment financing obligations	$	2,489,647		$	3,044,796
Less: current portion		(997,089	)		(959,380	)
Long-term portion	$	1,492,558		$	2,085,416

Principal payment under the capital lease agreements

Year	Principal Payments
Remainder of
2016	$	247,693
2017		1,002,084
2018		958,846
2019		268,044
2020	$	12,980

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11. Debt (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Components of notes payable non-related parties

	September 30,			December 31,
	2016			2015
Subordinated Notes	$	33,645,865		$	34,160,200
Unamortized discount on Subordinated Notes		(1,450,745	)		(1,697,091	)
Unamortized debt issuance costs		(836,760	)		(981,584	)
Total notes payable - non-related parties		31,358,360			31,481,525
Less: current portion		(685,780	)		(685,780	)
Long-term portion	$	30,672,580		$	30,795,745

Related Party Note Payable

	September 30,			December 31,
	2016			2015
Notes payable to Marvin Rosen	$	1,178,082		$	1,178,082
Discount on note		(65,637	)		(103,253	)
Total notes payable - related parties	$	1,112,445		$	1,074,829

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12. Derivative Liability (Tables)

9 Months Ended

Sep. 30, 2016

Derivative Liability Tables

Assumptions used to determine the fair value of the warrants

	Nine months ended September 30,
	2016		2015
Stock price ($)		1.65		1.88
Exercise price ($)		6.25		0 - 6.25
Risk-free interest rate (%)		1.56		1.75 - 2.06
Expected volatility (%)		92.4		125.4
Time to maturity (years)		2.25		7.08 - 8.25

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15. Segment Information (Tables)

9 Months Ended

Sep. 30, 2016

Notes to Financial Statements

Operating segment information

	Three months ended September 30, 2016
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	8,864,791		$	20,632,338		$	-		$	29,497,129
Cost of revenues (exclusive of depreciation and amortization)			8,487,912			8,281,675			-			16,769,587
Gross profit			376,879			12,350,663			-			12,727,542
Depreciation and amortization			38,094			2,747,822			212,712			2,998,628
Selling, general and administrative expenses			653,462			9,547,547			1,207,039			11,408,048
Interest expense			-			1,551,534			73,661			1,625,195
Gain on change in fair value of derivative liability			-			-			(152,057	)		(152,057	)
Other expenses (income)			-			247,070			(265,139	)		(18,069	)
Provision for income taxes			-			10,951			-			10,951
Net loss		$	(314,677	)	$	(1,754,261	)	$	(1,076,216	)	$	(3,145,154	)
Total assets		$	3,783,321		$	90,027,291		$	2,312,655		$	96,123,267

	Nine months ended September 30, 2016
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	30,711,086			62,390,749		$	-		$	93,101,835
Cost of revenues (exclusive of depreciation and amortization)			29,341,982			24,594,096			-			53,936,078
Gross profit			1,369,104			37,796,653			-			39,165,757
Depreciation and amortization			116,102			8,128,378			702,301			8,946,781
Selling, general and administrative expenses			2,119,119			28,052,965			3,930,763			34,102,847
Interest expense			-			4,647,847			229,981			4,877,828
Gain on change in fair value of derivative liability			-			-			(380,099	)		(380,099	)
Other expenses (income)			-			764,308			(797,822	)		(33,514	)
Provision for income taxes						10,951						10,951
Net loss		$	(866,117	)	$	(3,807,796	)	$	(3,685,124	)	$	(8,359,037	)
Capital expenditures		$	41,584		$	3,740,648		$	-		$	3,782,232

	Three months ended September 30, 2015
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	8,269,529		$	16,261,295		$	-		$	24,530,824
Cost of revenues (exclusive of depreciation and amortization)			7,642,008			5,891,639			-			13,533,647
Gross profit			627,521			10,369,656			-			10,997,177
Depreciation and amortization			48,022			2,898,068			194,337			3,140,427
Selling, general and administrative expenses			885,769			7,953,958			956,756			9,796,483
Interest expense			-			1,332,719			102,015			1,434,734
Gain on change in fair value of derivative liability			-			-			(1,237,730	)		(1,237,730	)
Loss on extinguishment of debt			-			2,538,272			182,083			2,720,355
Other expenses (income)			-			243,420			(241,021	)		2,399
Net (loss) income		$	(306,270	)	$	(4,596,781	)	$	43,560		$	(4,859,491	)
Total assets		$	4,639,835		$	59,128,769		$	3,128,866		$	66,897,470

	Nine months ended September 30, 2015
		Carrier Services			Business Services			Corporate			Consolidated
Revenues		$	25,767,099		$	49,090,458		$	-		$	74,857,557
Cost of revenues (exclusive of depreciation and amortization)			23,540,573			17,819,382			-			41,359,955
Gross profit			2,226,526			31,271,076			-			33,497,602
Depreciation and amortization			138,944			8,809,670			235,018			9,183,632
Selling, general and administrative expenses			2,619,818			23,684,671			3,074,707			29,379,196
Interest expense			-			4,457,080			193,206			4,650,286
Gain on change in fair value of derivative liability			-			-			(2,543,878	)		(2,543,878	)
Loss on extinguishment of debt			-			2,538,272			182,083			2,720,355
Other expenses (income)			-			591,691			(648,060	)		(56,369	)
Net loss		$	(532,236	)	$	(8,810,308	)	$	(493,076	)	$	(9,835,620	)
Capital expenditures		$	69,905		$	2,409,430		$	-		$	2,479,335

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17. Fair Value Disclosures (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair value of the liability measured at fair value on a recurring basis

	Level 1		Level 2		Level 3		Total
As of September 30, 2016
Current liabilities:
Contingent liability (see note 11)	$	-	$	-	$	100,000		100,000
Non-current liabilities:
Contingent liability (see note 11)				-		861,606		861,606
Derivative liability (see note 12)		-		-		233,934		233,934
Total non-current liabilities	$	0	$	-	$	1,095,540	$	1,095,540
As of December 31, 2015
Non-current liabilities:
Derivative liability (see note 12)	$	-	$	-	$	953,005	$	953,005

Changes in the derivative liability

Balance at December 31, 2015	$	953,005
Gain for the period:
Included in net loss		(1,152,121	)
Adjustment for prior issuances and conversion of warrants (see note 12)		433,050
Balance at September 30, 2016	$	233,934

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2. Basis of Presentation and Summary of Significant Accounting Policies (Details)	9 Months Ended
	Sep. 30, 2016 USD ($)
Basis Of Presentation And Summary Of Significant Accounting Policies Details
Balance at December 31, 2015	$ 27,060,297
Adjustment to the preliminary purchase price of Fidelity	(10,619)	[1]
Increase in goodwill - Technology for Business Corporation (“TFB”) acquisition	1,000,097
Balance at September 30, 2016	$ 28,049,775

[1] Acquisition of Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC and Fidelity Access Networks, Inc., (together with Fidelity Telecom, LLC hereinafter collectively referred to as "Fidelity")

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2. Basis of Presentation and Summary of Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Notes to Financial Statements
Certificate of deposit collateralizing a letter of credit	$ 27,000		$ 27,000		$ 165,000
Goodwill	28,049,775		28,049,775		27,060,297
Advertising and marketing expenses	$ 154,000	$ 145,000	$ 508,000	$ 390,000
Decrease in Notes payable - non-related parties					1,000,000
Decrease in Other assets					$ 1,000,000

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3. Loss per share (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Numerator
Net loss	$ (3,145,154)	$ (4,859,491)	$ (8,359,037)	$ (9,835,620)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock	(101,729)	(101,730)	(302,976)	(301,871)
Dividends declared on Series B-2 Convertible Preferred Stock	(183,917)	(278,010)	(1,799,491)	(884,955)
Gain on nominal warrants		(1,187,183)		(1,930,083)
Adjusted loss attributable to common stockholders	$ (3,430,800)	$ (6,426,414)	$ (10,461,504)	$ (12,952,529)
Denominator
Basic and diluted weighted average common shares outstanding	14,990,816	8,958,815	14,536,893	8,529,642
Loss per share
Basic and diluted	$ (0.23)	$ (0.72)	$ (0.72)	$ (1.52)

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3. Loss per share (Details 1) - shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Antidilutive securities excluded from the calculation of diluted earnings per common share	6,730,978	7,681,357
Warrants [Member]
Antidilutive securities excluded from the calculation of diluted earnings per common share	2,946,948	3,011,760
Convertible preferred stock [Member]
Antidilutive securities excluded from the calculation of diluted earnings per common share	2,626,518	3,992,471
Stock options [Member]
Antidilutive securities excluded from the calculation of diluted earnings per common share	1,157,512	677,126

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3. Loss Per Share (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Income (loss) available to common stockholders		$ 1,200,000		$ 1,900,000
Outstanding warrants		728,333		728,333
Preferred stock dividends accumulated	$ 4,600,000		$ 4,600,000
Series B-2 Preferred Stock [Member]
Preferred stock dividends	$ 183,917		$ 599,491
Preferred stock dividends paid	122,601		343,510
Series A Preferred Stock [Member]
Preferred stock dividends	$ 102,000	$ 102,000	$ 302,000	$ 302,000

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4. Intangible Assets (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Gross intangible assets	$ 63,692,624	$ 62,683,624
Less: accumulated amortization	(20,965,072)	(16,859,225)
Intangible assets, net	42,727,552	45,824,399
Trademarks and tradename [Member]
Gross intangible assets	1,093,400	1,093,400
Proprietary technology [Member]
Gross intangible assets	6,670,000	5,781,000
Non-compete agreement [Member]
Gross intangible assets	10,711,043	10,703,043
Customer relationships [Member]
Gross intangible assets	45,000,181	44,888,181
Favorable lease intangible [Member]
Gross intangible assets	$ 218,000	$ 218,000

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4. Intangible Assets (Details 1)	Sep. 30, 2016 USD ($)
Notes to Financial Statements
Remainder of 2016	$ 2,038,362
2017	6,065,102
2018	5,318,305
2019	4,293,561
2020	4,500,563
And thereafter	$ 20,511,659

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4. Intangible Assets (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Notes to Financial Statements
Amortization expense	$ 1,400,000	$ 1,900,000	$ 4,100,000	$ 5,600,000

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5. Stock-based compensation (Details)		9 Months Ended
		Sep. 30, 2016	Sep. 30, 2015
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Dividend yield (%)	[1]	0.00%	0.00%
Expected volatility (%)		92.40%	125.40%
Average Risk-free interest rate (%)		1.56%	1.70%
Expected life of stock option term (years)		8 years	7 years 7 months 6 days

[1] The dividend yield is zero as the Company has never paid and does not expect to pay dividends on its common stock.

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5. Stock-based compensation (Details 1)	9 Months Ended
	Sep. 30, 2016 $ / shares shares
Number of Options
Balance at December 31, 2015 | shares	1,158,251
Shares granted during the period | shares	86,050
Shares exercised during the period | shares
Shares forfeited during the period | shares	(67,235)
Shares expired during the period | shares	(19,554)
Shares outstanding at September 30, 2016 | shares	1,157,512
Shares exercisable at September 30, 2016 | shares	421,673
Weighted Average Exercise Price
Balance at December 31, 2015 | $ / shares	$ 4.96
Shares granted during the period | $ / shares	1.79
Shares exercised during the period | $ / shares
Shares forfeited during the period | $ / shares	2.50
Shares expired during the period | $ / shares	72.11
Shares outstanding at September 30, 2016 | $ / shares	3.73
Shares exercisable at September 30, 2016 | $ / shares	$ 5.77

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5. Stock-based compensation (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Compensation expense	$ 194,000	$ 154,000	$ 573,000	$ 393,000
Unrecognized compensation expense, net of estimated forfeitures	1,000,000		$ 1,000,000
Weighted-average period recognized			1 year 6 months 22 days
Restricted Stock [Member]
Compensation expense	8,300		$ 17,000
Unamortized compensation	$ 82,960		$ 82,960

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6. Acquisition (Details)	Sep. 30, 2016 USD ($)
Acquisition Details
Covenant not to compete	$ 8,000
Customer contracts/relationships	99,000
Proprietary technology	889,000
Accounts receivable	80,845
Prepaid asset	5,535
Line of credit	(100,000)
Deferred liability	(693,590)
Goodwill	1,000,097
Purchase Price	$ 1,288,887

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7. Supplemental Disclosure of Cash Flow Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Supplemental Cash Flow Information
Cash paid for interest	$ 4,233,527	$ 3,961,498
Supplemental Non-Cash Investing and Financing Activities
Property and equipment acquired under capital leases	188,497	1,440,816
Dividends on Series B-2 preferred stock paid with the issuance of common stock	599,491	884,955
Due to Seller of RootAxcess		700,000
Equipment received in exchange for settlement of accounts receivable		105,570
Exercise of lenders warrants		364,167
Assets acquired under earn-out liability	$ 961,606

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8. Prepaid Expenses and Other Current Assets (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Prepaid expenses and other current assets
Insurance	$ 380,359	$ 93,040
Rent	81,731	101,916
Marketing	140,397	109,455
Software subscriptions	670,614	498,078
Due from seller of Fidelity		425,963
Due from factoring party		26,018
Commissions	104,273	20,805
Escrow receivable - Fidelity	500,829	50,759
Other	579,533	292,569
Total	$ 2,457,736	$ 1,618,603

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9. Accounts Payable and Accrued Expenses (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Notes to Financial Statements
Trade accounts payable	$ 3,699,791	$ 1,101,393
Accrued bonus	336,259	700,000
Accrued professional and consulting fees	225,878	274,205
Accrued property and other taxes	629,247	534,388
Accrued network costs	1,692,959	3,423,483
Accrued rent	117,252	82,894
Accrued universal service fund fees	730,205	494,852
Customer deposits	384,597	358,227
Accrued credit card	160,596	384,257
Accrued payroll, employee benefits and vacation	349,997	555,493
Accrued sales and federal excise taxes	1,686,636	2,204,098
Accrued sales commissions	789,322	981,121
Accrued interest payable	12,452	32,221
Deferred revenue	1,444,423	1,157,036
Other	351,271	845,557
Total accounts payable and accrued expenses	$ 12,610,885	$ 13,129,225

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10. Equipment Financing Obligations (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Equipment Financing Obligations Details 1
Equipment financing obligations	$ 2,489,647	$ 3,044,796
Less: current portion	(997,089)	(959,380)
Long-term portion	$ 1,492,558	$ 2,085,416

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10. Equipment Financing Obligations (Details 1)	Sep. 30, 2016 USD ($)
Equipment Financing Obligations Details 1
Remainder of 2016	$ 247,693
2017	1,002,084
2018	958,846
2019	268,044
2020	$ 12,980

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11. Debt (Details) - Non Related Party [Member] - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Subordinated Notes	$ 33,645,865	$ 34,160,200
Unamortized discount on Subordinated Notes	(1,450,745)	(1,697,091)
Unamortized debt issuance costs	(836,760)	(981,584)
Total notes payable - non-related parties	31,358,360	31,481,525
Less: current portion	(685,780)	(685,780)
Long-term portion	$ 30,672,580	$ 30,795,745

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11. Debt (Details 1) - RelatedParty - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Notes payable to Marvin Rosen	$ 1,178,082	$ 1,178,082
Discount on note	(65,637)	(103,253)
Total notes payable - related parties	$ 1,112,445	$ 1,074,829

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11. Debt (Details Narrative) - USD ($)	3 Months Ended	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Revolver credit facility	$ 15,000,000	$ 15,000,000		$ 15,000,000
Term Loan	$ 25,000,000	$ 25,000,000		25,000,000
Interest rate	4.75%	4.75%
Interest expense	$ 500,000	$ 1,500,000
Payment to the sellers in connection with the terms of the holdback agreement	127,306	127,306
Due to RootAxcess seller	$ 100,000	100,000
Due to seller of TFB			$ 700,000
Interest expense		64,000
Amortization discount		38,000
Fourth Amended SPA [Member]
Interest rate	10.80%
Interest expense	$ 900,000	$ 2,800,000

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12. Derivative Liability (Details) - $ / shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Stock price ($)	$ 1.65	$ 1.88
Exercise price ($)	$ 6.25
Risk-free interest rate (%)	1.56%
Expected volatility (%)	92.40%	125.40%
Time to maturity (years)	2 years 3 months
Minimum
Exercise price ($)		$ 0
Risk-free interest rate (%)		1.75%
Time to maturity (years)		7 years 29 days
Maximum
Exercise price ($)		$ 6.25
Risk-free interest rate (%)		2.06%
Time to maturity (years)		8 years 3 months

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12. Derivative Liability (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Derivative Liability [Abstract]
Fair value derivative liability	$ 233,934		$ 233,934		$ 953,005
Change In fair value of derivative	$ 152,000	$ 1,200,000
Gain on fair value of derivative			$ 380,000	$ 2,500,000

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13. Equity Transactions (Details Narrative) - USD ($)	9 Months Ended
	Sep. 30, 2016	Dec. 31, 2015
Common Stock, Shares Issued	15,064,953	12,788,971
Common Stock, Shares Outstanding	15,064,953	12,788,971
Preferred Stock, Shares Authorized	10,000,000	10,000,000
Preferred Stock, Shares Issued	17,299	23,324
Preferred Stock, Shares Outstanding	17,299	23,324
Preferred stock dividends accumulated	$ 4,600,000
Common stock issued for services	26,500
Common stock issued for services value	$ 96,950
Series B-2 Preferred Stock [Member]
Preferred Stock, Shares Issued	12,254	18,279
Preferred Stock, Shares Outstanding	12,254	18,279
Series A Preferred Stock [Member]
Preferred Stock, Shares Issued	5,045	5,045
Preferred Stock, Shares Outstanding	5,045	5,045

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15. Segment Information (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Segment Reporting Information [Line Items]
Revenues	$ 29,497,129	$ 24,530,824	$ 93,101,835	$ 74,857,557
Cost of revenues (exclusive of depreciation and amortization)	16,769,587	13,533,647	53,936,078	41,359,955
Gross profit	12,727,542	10,997,177	39,165,757	33,497,602
Selling, general and administrative expenses	11,408,048	9,796,483	34,102,847	29,379,196
Interest expense	1,625,195	1,434,734	4,877,828	4,650,286
Gain (loss) on change in fair value of derivative liability			380,099	2,543,878
Loss on extinguishment of debt		(2,720,355)		(2,720,355)
Provision for income taxes	10,951		10,951
Carrier Services
Segment Reporting Information [Line Items]
Revenues	8,864,791	8,269,529	30,711,086	25,767,099
Cost of revenues (exclusive of depreciation and amortization)	8,487,912	7,642,008	29,341,982	23,540,573
Gross profit	376,879	627,521	1,369,104	2,226,526
Depreciation and amortization	38,094	48,022	116,102	138,944
Selling, general and administrative expenses	653,462	885,769	2,119,119	2,619,818
Interest expense
Gain (loss) on change in fair value of derivative liability
Loss on extinguishment of debt
Other income (expenses)
Provision for income taxes
Net loss	(314,677)	(306,270)	(866,117)	(532,236)
Total assets	3,783,321	4,639,835
Capital expenditures			41,584	69,905
Business Services
Segment Reporting Information [Line Items]
Revenues	20,632,338	16,261,295	62,390,749	49,090,458
Cost of revenues (exclusive of depreciation and amortization)	8,281,675	5,891,639	24,594,096	17,819,382
Gross profit	12,350,663	10,369,656	37,796,653	31,271,076
Depreciation and amortization	2,747,822	2,898,068	8,128,378	8,809,670
Selling, general and administrative expenses	9,547,547	7,953,958	28,052,965	23,684,671
Interest expense	1,551,534	1,332,719	4,647,847	4,457,080
Gain (loss) on change in fair value of derivative liability
Loss on extinguishment of debt		2,538,272		2,538,272
Other income (expenses)	247,070	243,420	764,308	591,691
Provision for income taxes	10,951		10,951
Net loss	(1,754,261)	(4,596,781)	(3,807,796)	(8,810,308)
Total assets	90,027,291	59,128,769
Capital expenditures			3,740,648	2,409,430
Corporate and Unallocated
Segment Reporting Information [Line Items]
Revenues
Cost of revenues (exclusive of depreciation and amortization)
Gross profit
Depreciation and amortization	212,712	194,337	702,301	235,018
Selling, general and administrative expenses	1,207,039	956,756	3,930,763	3,074,707
Interest expense	73,661	102,015	229,981	193,206
Gain (loss) on change in fair value of derivative liability	(152,057)	(1,237,730)	(380,099)	(2,543,878)
Loss on extinguishment of debt		182,083		182,083
Other income (expenses)	(265,139)	(241,021)	(797,822)	(648,060)
Provision for income taxes
Net loss	(1,076,216)	43,560	(3,685,124)	(493,076)
Total assets	2,312,655	3,128,866
Capital expenditures
Consolidated
Segment Reporting Information [Line Items]
Revenues	29,497,129	24,530,824	93,101,835	74,857,557
Cost of revenues (exclusive of depreciation and amortization)	16,769,587	13,533,647	53,936,078	41,359,955
Gross profit	12,727,542	10,997,177	39,165,757	33,497,602
Depreciation and amortization	2,998,628	3,140,427	8,946,781	9,183,632
Selling, general and administrative expenses	11,408,048	9,796,483	34,102,847	29,379,196
Interest expense	1,625,195	1,434,734	4,877,828	4,650,286
Gain (loss) on change in fair value of derivative liability	(152,057)	(1,237,730)	(380,099)	(2,543,878)
Loss on extinguishment of debt		2,720,355		2,720,355
Other income (expenses)	(18,069)	2,399	(33,514)	(56,369)
Provision for income taxes	10,951		10,951
Net loss	(3,145,154)	(4,859,491)	(8,359,037)	(9,835,620)
Total assets	$ 96,123,267	$ 66,897,470
Capital expenditures			$ 3,782,232	$ 2,479,335

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17. Fair Value Disclosures (Details) - USD ($)	Sep. 30, 2016	Dec. 31, 2015
Current liabilities:
Contingent liability (see note 11)	$ 100,000
Non-current liabilities:
Contingent liability (see note 11)	861,606
Derivative liability (see note 12)	233,934	$ 953,005
Total non-current liabilities	1,095,540
Level 1
Current liabilities:
Contingent liability (see note 11)
Non-current liabilities:
Derivative liability (see note 12)
Total non-current liabilities	0
Level 2
Current liabilities:
Contingent liability (see note 11)
Non-current liabilities:
Contingent liability (see note 11)
Derivative liability (see note 12)
Total non-current liabilities
Level 3
Current liabilities:
Contingent liability (see note 11)	100,000
Non-current liabilities:
Contingent liability (see note 11)	861,606
Derivative liability (see note 12)	233,934	$ 953,005
Total non-current liabilities	$ 1,095,540

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17. Fair Value Disclosures (Details 1)	9 Months Ended
	Sep. 30, 2016 USD ($)
Fair Value Disclosures [Abstract]
Balance at December 31, 2015	$ 953,005
Gain for the period:
Included in net loss	(1,152,121)
Adjustment for prior issuances and conversion of warrants (see note 12)	433,050
Balance at September 30, 2016	$ 233,934