Delaware
|
|
58-2342021
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(IRS
Employer Identification No.)
|
Large
accelerated filler
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filler
|
☐
|
Smaller
reporting company
|
☑
|
(do not
check if a smaller reporting company)
|
Emerging
growth company
|
☐
|
Title of Each Class
|
Number of Shares Outstanding
|
Common
Stock, $0.01 par value
|
22,412,403
|
Part 1
Financial Information.
|
|
|
|
Item 1.
Financial Statements.
|
3
|
|
|
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
|
20
|
|
|
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk.
|
27
|
|
|
Item 4.
Controls and Procedures.
|
27
|
|
|
Part II
Other Information.
|
|
|
|
Item 1.
Legal Proceedings.
|
28
|
|
|
Item
1A. Risk Factors.
|
28
|
|
|
Item 2.
Unregistered Sales of Equity Securities and Use of
Proceeds.
|
28
|
|
|
Item 3.
Defaults Upon Senior Securities.
|
28
|
|
|
Item 4.
Mine Safety Disclosures.
|
28
|
|
|
Item 5.
Other Information.
|
28
|
|
|
Item 6.
Exhibits.
|
28
|
|
|
Signatures.
|
29
|
|
|
Index
to Exhibits
|
30
|
|
|
|
|
|
March 31,
2017
|
December 31,
2016
|
ASSETS
|
(unaudited)
|
|
Current assets:
|
|
|
Cash
and cash equivalents
|
$6,642,153
|
$7,221,910
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
approximately
$690,000 and $427,000, respectively
|
12,316,401
|
9,359,876
|
Prepaid
expenses and other current assets
|
1,590,928
|
1,084,209
|
Total current assets
|
20,549,482
|
17,665,995
|
Property
and equipment, net
|
13,520,740
|
14,248,915
|
Security
deposits
|
630,373
|
630,373
|
Restricted
cash
|
27,153
|
27,153
|
Goodwill
|
35,286,629
|
35,689,215
|
Intangible
assets, net
|
63,190,659
|
63,617,471
|
Other
assets
|
68,822
|
77,117
|
TOTAL ASSETS
|
$133,273,858
|
$131,956,239
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
Current liabilities:
|
|
|
Term
loan - current portion
|
$4,062,500
|
$2,979,167
|
Obligations
under asset purchase agreements - current portion
|
912,212
|
546,488
|
Equipment
financing obligations
|
1,041,466
|
1,002,578
|
Accounts
payable and accrued expenses
|
23,347,554
|
19,722,838
|
Total current liabilities
|
29,363,732
|
24,251,071
|
Long-term liabilities:
|
|
|
Notes
payable - non-related parties, net of discount
|
31,561,993
|
31,431,602
|
Notes
payable - related parties
|
889,413
|
875,750
|
Term
loan
|
58,900,945
|
60,731,204
|
Indebtedness
under revolving credit facility
|
3,000,000
|
3,000,000
|
Obligations
under asset purchase agreements
|
1,315,811
|
890,811
|
Equipment
financing obligations
|
974,701
|
1,237,083
|
Derivative
liabilities
|
376,321
|
348,650
|
Total liabilities
|
126,382,916
|
122,766,171
|
Commitments and contingencies
|
|
|
Stockholders' equity:
|
|
|
Preferred
stock, $0.01 par value, 10,000,000 shares authorized,
|
|
|
14,341
and 17,299 shares issued and outstanding
|
143
|
174
|
Common stock, $0.01 par value, 90,000,000 and 50,000,000 shares
authorized,
|
|
|
22,412,403
and 20,642,028 shares issued and outstanding
|
224,124
|
206,422
|
Capital
in excess of par value
|
193,398,183
|
192,233,032
|
Accumulated
deficit
|
(186,731,508)
|
(183,249,560)
|
Total stockholders' equity
|
6,890,942
|
9,190,068
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$133,273,858
|
$131,956,239
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
2016
|
Revenues
|
$35,811,876
|
$33,794,249
|
Cost
of revenues, exclusive of depreciation and
|
|
|
amortization,
shown separately below
|
19,270,913
|
20,531,511
|
Gross profit
|
16,540,963
|
13,262,738
|
Depreciation
and amortization
|
3,837,148
|
2,916,263
|
Selling,
general and administrative expenses (including
stock-based
|
|
|
compensation
of $224,647 and $198,884)
|
14,134,875
|
11,424,786
|
Operating loss
|
(1,431,060)
|
(1,078,311)
|
Other (expenses) income:
|
|
|
Interest
expense
|
(2,092,312)
|
(1,627,964)
|
(Loss)
gain on change in fair value of derivative liabilities
|
(40,445)
|
182,400
|
Loss
on disposal of property and equipment
|
(26,800)
|
-
|
Other
income, net
|
116,480
|
(9,670)
|
Total
other expenses
|
(2,043,077)
|
(1,455,234)
|
Loss
before income taxes
|
(3,474,137)
|
(2,533,545)
|
Provision
for income taxes
|
(7,811)
|
-
|
Net loss
|
(3,481,948)
|
(2,533,545)
|
Preferred
stock dividends
|
(1,254,109)
|
(1,531,982)
|
Net loss attributable to common stockholders
|
(4,736,057)
|
(4,065,527)
|
|
|
|
Basic and diluted loss per common share:
|
$(0.23)
|
$(0.30)
|
Weighted average common shares outstanding:
|
|
|
Basic
and diluted
|
20,707,699
|
13,741,366
|
|
Preferred Stock
|
Common Stock
|
Capital in Excess of Par Value
|
Accumulated Deficit
|
Stockholders' Equity
|
||
|
Shares
|
$
|
Shares
|
$
|
|
|
|
Balance
at December 31, 2016
|
17,299
|
$174
|
20,642,028
|
$206,422
|
$192,233,032
|
$(183,249,560)
|
$9,190,068
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,481,948)
|
(3,481,948)
|
Conversion
of preferred stock into common stock
|
(2,958)
|
(31)
|
986,665
|
9,866
|
(9,835)
|
-
|
-
|
Dividends
on preferred stock
|
-
|
-
|
106,876
|
1,069
|
(1,069)
|
-
|
-
|
Proceeds
from the exercise of common stock
|
|
|
|
|
|
|
|
purchase
warrants
|
-
|
-
|
561,834
|
5,617
|
775,334
|
-
|
780,951
|
Issuance
of common stock for services rendered
|
-
|
-
|
115,000
|
1,150
|
163,300
|
-
|
164,450
|
Reclassification
of derivative liability
|
-
|
-
|
0
|
-
|
12,774
|
-
|
12,774
|
Stock-based
compensation associated with
|
|
|
|
|
|
|
|
stock
incentive plans
|
-
|
-
|
-
|
-
|
224,647
|
-
|
224,647
|
Balance
at March 31, 2017
|
14,341
|
$143
|
22,412,403
|
$224,124
|
$193,398,183
|
$(186,731,508)
|
$6,890,942
|
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Cash flows from operating activities:
|
|
|
Net
loss
|
$(3,481,948)
|
$( 2,533,545)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
|
|
|
Depreciation
and amortization
|
3,837,148
|
2,916,263
|
Loss
on disposal of property and equipment
|
26,800
|
60,822
|
Stock-based
compensation
|
224,647
|
198,884
|
Stock
issued for services rendered or in settlement of
liabilities
|
164,450
|
51,900
|
Amortization
of debt discount and deferred financing fees
|
209,628
|
158,878
|
Loss
(gain) on the change in fair value of derivative
liability
|
40,445
|
(182,400)
|
Changes in operating assets and liabilities:
|
|
|
Accounts
receivable
|
(2,403,196)
|
(519,098)
|
Prepaid
expenses and other current assets
|
(874,327)
|
(930,554)
|
Other
assets
|
8,295
|
9,807
|
Accounts
payable and accrued expenses
|
3,617,302
|
390,727
|
Net cash provided by (used in) operating activities
|
1,369,244
|
(378,316)
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase
of property and equipment
|
(984,642)
|
(988,768)
|
Proceeds
from the sale of property and equipment
|
40,680
|
23,961
|
Payment
for acquisitions, net of cash acquired
|
(558,329)
|
16,895
|
Net cash used in investing activities
|
(1,502,291)
|
(947,912)
|
|
|
|
Cash flows from financing activities:
|
|
|
Proceeds
from the exercise of common stock purchase warrants
|
780,951
|
-
|
Repayments
of term loan
|
(812,500)
|
|
Payments
for obligations under asset purchase agreements
|
(191,668)
|
|
Repayments of notes payable-related
parties
|
-
|
(238,111)
|
Payments
on equipment financing obligations
|
(223,493)
|
(241,099)
|
Net cash used in financing activities
|
(446,710)
|
(479,210)
|
Net change in cash and cash equivalents
|
(579,757)
|
(1,805,438)
|
Cash and cash equivalents, including restricted cash, beginning of
period
|
7,249,063
|
7,705,666
|
Cash and cash equivalents, including restricted cash, end of
period
|
$6,669,306
|
$5,900,228
|
Balance
at December 31, 2016
|
$35,689,215
|
Increase
in goodwill associated with a 2016 acquisition
|
7,414
|
Adjustment
to goodwill associated with acquisition of customer bases (see note
3)
|
(410,000)
|
Balance
at March 31, 2017
|
$35,286,629
|
|
Three
Months Ended March 31,
|
|
|
2017
|
2016
|
Numerator
|
|
|
Net
loss
|
$(3,481,948)
|
$(2,533,545)
|
Undeclared
dividends on Series A-1, A-2 and A-4 Convertible Preferred
Stock
|
( 99,518)
|
( 100,623)
|
Conversion
price reduction on Series B-2 Preferred Stock (see note
13)
|
( 623,574)
|
-
|
Series
B-2 warrant exchange (see note 13)
|
( 347,190)
|
-
|
Dividends
declared on Series B-2 Convertible Preferred Stock
|
( 183,827)
|
( 1,431,359)
|
Net
loss attributable to common stockholders
|
$(4,736,057)
|
$(4,065,527)
|
|
|
|
Denominator
|
|
|
Basic
and diluted weighted average common shares outstanding
|
20,707,699
|
13,741,366
|
|
|
|
Loss per share
|
|
|
Basic
and diluted
|
$(0.23)
|
$(0.30)
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
2016
|
Warrants
|
2,697,679
|
3,005,337
|
Convertible
preferred stock
|
2,063,125
|
2,627,795
|
Stock
options
|
2,151,073
|
1,123,508
|
|
6,911,877
|
6,756,640
|
|
March 31, 2017
|
December 31, 2016
|
||||
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
Gross Carrying Amount
|
Accumulated Amortization
|
Total
|
|
|
|
|
|
|
|
Trademarks
and tradename
|
$1,093,400
|
$(544,565)
|
$548,835
|
$1,093,400
|
$(501,982)
|
$591,418
|
Proprietary
technology
|
6,670,000
|
(4,367,392)
|
2,302,608
|
6,670,000
|
(4,036,915)
|
2,633,085
|
Non-compete
agreement
|
12,128,043
|
(10,391,130)
|
1,736,913
|
12,128,043
|
(9,891,892)
|
2,236,151
|
Customer
relationships
|
67,713,181
|
(9,136,312)
|
58,576,869
|
65,948,181
|
(7,827,697)
|
58,120,484
|
Favorable
lease intangible
|
218,000
|
(192,566)
|
25,434
|
218,000
|
(181,667)
|
36,333
|
Total
acquired intangibles
|
$87,822,624
|
$(24,631,965)
|
$63,190,659
|
$86,057,624
|
$(22,440,153)
|
$63,617,471
|
Year
|
Amortization Expense
|
remainder
of 2017
|
$8,583,253
|
2018
|
6,559,942
|
2019
|
5,576,211
|
2020
|
5,535,827
|
2021
|
5,361,460
|
|
Three Months Ended March 31,
|
|
Supplemental Cash Flow Information
|
2017
|
2016
|
Cash paid for interest
|
$2,186,314
|
$1,460,306
|
Cash paid for income taxes
|
$-
|
$-
|
|
|
|
Supplemental Non-Cash Investing and Financing
Activities
|
|
|
Property and equipment acquired under capital leases
|
$-
|
$141,240
|
Conversion
of preferred stock into common stock
|
$2,958,000
|
$-
|
Dividend on Series B-2 preferred stock paid with the issuance of
Fusion common stock
|
$183,827
|
$1,431,359
|
Obligations under asset purchase agreements
|
$1,350,000
|
$1,011,607
|
|
March 31,
2017
|
December 31,
2016
|
Insurance
|
$180,523
|
$160,262
|
Rent
|
-
|
5,389
|
Marketing
|
189,905
|
74,665
|
Software
subscriptions
|
786,018
|
419,431
|
Comisssions
|
132,097
|
159,146
|
Other
|
302,385
|
265,316
|
Total
|
$1,590,928
|
$1,084,209
|
|
March 31,
2017
|
December 31,
2016
|
Trade
accounts payable
|
$5,068,040
|
$6,358,548
|
Accrued
license fees
|
2,881,331
|
2,881,331
|
Accrued
sales and federal excise taxes
|
2,647,773
|
2,863,363
|
Deferred
revenue
|
1,923,870
|
1,874,641
|
Accrued
network costs
|
6,362,545
|
1,416,000
|
Accrued
sales commissions
|
841,928
|
819,106
|
Property
and other taxes
|
814,236
|
581,956
|
Accrued
payroll and vacation
|
379,683
|
421,733
|
Customer
deposits
|
368,285
|
365,249
|
Interest
payable
|
12,025
|
304,409
|
Credit
card payable
|
53,890
|
265,985
|
Accrued
USF fees
|
244,121
|
249,825
|
Accrued
bonus
|
657,282
|
249,361
|
Professional
and consulting fees
|
128,777
|
164,878
|
Rent
|
129,164
|
127,781
|
Other
|
834,603
|
778,672
|
Total
|
$23,347,553
|
$19,722,838
|
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Equipment
financing obligations
|
$2,016,167
|
$2,239,661
|
Less:
current portion
|
(1,041,466)
|
(1,002,578)
|
Long-term
portion
|
$974,701
|
$1,237,083
|
Year ending December 31:
|
Principal
|
2017
|
$779,084
|
2018
|
958,845
|
2019
|
268,044
|
2020
|
10,194
|
|
$2,016,167
|
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Term
loan
|
$64,187,500
|
$65,000,000
|
Less:
|
|
|
Deferred
financing fees
|
(1,224,055)
|
(1,289,629)
|
Current
portion
|
(4,062,500)
|
(2,979,167)
|
Term
loan - long-term portion
|
$58,900,945
|
$60,731,204
|
|
|
|
Indebtedness
under revolving credit facility
|
$3,000,000
|
$3,000,000
|
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Subordinated
notes
|
$33,588,717
|
$33,588,717
|
Discount
on subordinated notes
|
(1,286,514)
|
(1,368,629)
|
Deferred
financing fees
|
(740,210)
|
(788,486)
|
Total
notes payable - non-related parties
|
31,561,993
|
31,431,602
|
Less:
current portion
|
-
|
-
|
Long-term
portion
|
$31,561,993
|
$31,431,602
|
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Notes
payable to Marvin Rosen
|
$928,081
|
$928,081
|
Discount
on notes
|
(38,668)
|
(52,331)
|
Total
notes payable - related parties
|
$889,413
|
$875,750
|
|
March 31,
|
December 31,
|
|
2017
|
2016
|
Root
Axcess
|
$-
|
$166,668
|
Customer
base acquisitions
|
1,316,417
|
334,025
|
Technology
For Business, Inc.
|
911,606
|
936,606
|
|
2,228,023
|
1,437,299
|
Less:
current portion
|
(912,212)
|
(546,488)
|
Long-term
portion
|
$1,315,811
|
$890,811
|
|
Three months ended March 31,
|
|
|
2017
|
2016
|
Stock
price ($)
|
1.58
|
1.79
|
Adjusted
Exercise price ($)
|
1.54
|
6.25
|
Risk-free
interest rate (%)
|
2.23
|
1.78
|
Expected
volatility (%)
|
74.40
|
96.70
|
Time
to maturity (years)
|
1.75
|
3.0
|
|
Three Months Ended March 31,
|
|
|
2017
|
2016
|
Dividend
yield
|
0.0%
|
0.0%
|
Expected
volatility
|
92.40%
|
96.70%
|
Average
Risk-free interest rate (%)
|
2.27
|
1.78
|
Expected
life of stock option term (years)
|
8.00
|
8.00
|
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contract Term
|
Outstanding
at December 31, 2016
|
2,183,723
|
$2.56
|
8.56
years
|
Granted
|
14,000
|
1.48
|
|
Exercised
|
-
|
-
|
|
Forfeited
|
( 33,700)
|
1.73
|
|
Expired
|
( 12,950)
|
33.72
|
|
Outstanding
at March 31, 2017
|
2,151,073
|
2.38
|
8.33 years
|
Exercisable
at March 31, 2017
|
698,821
|
3.97
|
6.66
years
|
|
Three Months Ended March 31, 2017
|
|||
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
Revenues
|
$7,330,836
|
$28,481,040
|
$-
|
$35,811,876
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
7,130,207
|
12,140,706
|
-
|
19,270,913
|
Gross
profit
|
200,629
|
16,340,334
|
-
|
16,540,963
|
Depreciation
and amortization
|
39,253
|
3,586,979
|
210,916
|
3,837,148
|
Selling,
general and administrative expenses
|
521,213
|
12,191,174
|
1,422,488
|
14,134,875
|
Interest
expense
|
-
|
(2,023,552)
|
(68,760)
|
(2,092,312)
|
Loss
on change in fair value of derivative liability
|
-
|
-
|
(40,445)
|
(40,445)
|
Other
(expenses) income
|
(39)
|
170,322
|
(80,603)
|
89,680
|
Income
tax provision
|
-
|
(7,811)
|
-
|
(7,811)
|
Net
loss
|
$(359,876)
|
$(1,298,860)
|
$(1,823,212)
|
$(3,481,948)
|
Total
assets
|
$6,367,811
|
$125,088,903
|
$1,817,144
|
$133,273,858
|
Capital
expenditures
|
$21,443
|
$963,199
|
$-
|
$984,642
|
|
Three Months Ended March 31, 2016
|
|||
|
Carrier Services
|
Business Services
|
Corporate and Unallocated
|
Consolidated
|
Revenues
|
$12,231,665
|
$21,562,584
|
$-
|
$33,794,249
|
Cost
of revenues (exclusive of depreciation and
amortization)
|
11,699,547
|
8,831,964
|
-
|
20,531,511
|
Gross
profit
|
532,118
|
12,730,620
|
-
|
13,262,738
|
Depreciation
and amortization
|
31,310
|
2,675,521
|
209,432
|
2,916,263
|
Selling,
general and administrative expenses
|
1,381,688
|
9,011,989
|
1,031,109
|
11,424,786
|
Interest
expense
|
(1,566)
|
(1,551,141)
|
(75,257)
|
(1,627,964)
|
Gain
on change in fair value of derivative liability
|
-
|
-
|
182,400
|
182,400
|
Other
income (expenses)
|
13
|
(289,018)
|
279,335
|
(9,670)
|
Net
loss
|
$(882,433)
|
$(797,049)
|
$(854,063)
|
$(2,533,545)
|
Total
assets
|
$7,740,286
|
$93,789,887
|
$2,179,070
|
$103,709,243
|
Capital
expenditures
|
$16,244
|
$972,524
|
$-
|
$988,768
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
As of March 31, 2017
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$912,212
|
$912,212
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$1,315,811
|
$1,315,811
|
Derivative
liability (see note 12)
|
-
|
-
|
$376,321
|
$376,321
|
As of December 31, 2016
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$546,488
|
$546,488
|
Non-current
liabilities:
|
|
|
|
|
Contingent
purchase price liability
|
-
|
-
|
$890,811
|
$890,811
|
Derivative
liability (see note 12)
|
-
|
-
|
$348,650
|
$348,650
|
Balance
at December 31, 2016
|
$348,650
|
Change
for the period:
|
|
Change
in fair value included in net loss
|
40,445
|
Warrant
exchange (see note 12)
|
(12,774)
|
Balance
at March 31, 2017
|
$376,321
|
Balance
at December 31, 2016
|
$1,437,299
|
Change
for the period:
|
|
Acquired
customer base
|
1,350,000
|
Increase
in amounts due from Technology Opportunity Group
|
(367,608)
|
Payments
made
|
(191,668)
|
Balance
at March 31, 2017
|
$2,228,023
|
|
2017
|
2016
|
||
|
$
|
%
|
$
|
%
|
Revenues
|
$35,811,876
|
100.0
|
$33,794,249
|
100.0
|
Cost
of revenues *
|
19,270,913
|
53.8
|
20,531,511
|
60.8
|
Gross profit
|
16,540,963
|
46.2
|
13,262,738
|
39.2
|
Depreciation
and amortization
|
3,837,148
|
10.7
|
2,916,263
|
8.6
|
Selling,
general and administrative expenses
|
14,134,875
|
39.5
|
11,424,786
|
33.8
|
Total
operating expenses
|
17,972,023
|
50.2
|
14,341,049
|
42.4
|
Operating loss
|
( 1,431,060)
|
(4.0)
|
( 1,078,311)
|
(3.2)
|
Other (expenses) income:
|
|
|
|
|
Interest
expense
|
( 2,092,312)
|
(5.8)
|
( 1,627,964)
|
(4.8)
|
(Loss)
gain on change in fair value of derivative liability
|
( 40,445)
|
(0.1)
|
182,400
|
0.5
|
Loss
on disposal of property and equipment
|
( 26,800)
|
(0.1)
|
-
|
-
|
Other
income, net
|
116,480
|
0.3
|
( 9,670)
|
(0.0)
|
Total
other expenses
|
( 2,043,077)
|
(5.7)
|
( 1,455,234)
|
(4.3)
|
Loss before income taxes
|
( 3,474,137)
|
(9.7)
|
( 2,533,545)
|
(7.5)
|
Provision
for income taxes
|
(7,811)
|
(0.0)
|
-
|
-
|
Net loss
|
$(3,481,948)
|
(9.7)
|
$(2,533,545)
|
(7.5)
|
|
Three Months ended March 31,
|
|
|
2017
|
2016
|
Net
cash provided by (used in) operating activities
|
$1,445,219
|
$(378,316)
|
Net
cash used in investing activities
|
(1,502,291)
|
(947,912)
|
Net
cash used in financing activities
|
(522,685)
|
(479,210)
|
Net
(decrease) increase in cash and cash equivalents
|
(579,757)
|
(1,805,438)
|
Cash
and cash equivalents, including restricted cash, beginning of
period
|
7,249,063
|
7,705,666
|
Cash
and cash equivalents, including restricted cash, end of
period
|
$6,669,306
|
$5,900,228
|
|
Three Months ended March 31,
|
|
|
2017
|
2016
|
Net
loss
|
$(3,481,948)
|
$(2,533,545)
|
Non-cash
expenses, gains and losses
|
4,503,118
|
3,269,347
|
Changes
in accounts receivable
|
(2,403,196)
|
(584,098)
|
Changes
in accounts payable and accrued expenses
|
3,617,302
|
390,727
|
Other
|
(790,057)
|
(920,747)
|
Cash
provided by (used in) operating activities
|
$1,445,219
|
$(378,316)
|
EXHIBIT NO.
|
DESCRIPTION
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
|
|
|
|
|
May 12,
2017
|
By:
|
/s/
Michael R. Bauer
|
|
|
Michael
R. Bauer
|
|
|
Chief
Financial Officer
|
|
|
|
May 12,
2017
|
By:
|
/s/
Lisa Taranto
|
|
|
Lisa
Taranto
|
|
|
Principal
Accounting Officer
|
|
|
|
EXHIBIT NO.
|
DESCRIPTION
|
Certification
of the Chief Executive Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
101.INS
|
XBRL
Instance Document
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
Document and Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
May 08, 2017 |
|
Document And Entity Information | ||
Entity Registrant Name | FUSION TELECOMMUNICATIONS INTERNATIONAL INC | |
Entity Central Index Key | 0001071411 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2017 | |
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 | 22,412,403 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2017 |
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Current assets: | ||
Allowance for doubtful accounts | $ 690,000 | $ 427,000 |
Stockholders' equity: | ||
Preferred Stock, Par Value | $ 0.01 | $ 0.01 |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 |
Preferred Stock, Shares Issued | 14,341 | 17,299 |
Preferred Stock, Shares Outstanding | 14,341 | 17,299 |
Common Stock, Par Value | $ 0.01 | $ 0.01 |
Common Stock, Shares Authorized | 90,000,000 | 50,000,000 |
Common Stock, Shares Issued | 22,412,403 | 20,642,028 |
Common Stock, Shares Outstanding | 22,412,403 | 20,642,028 |
Condensed Consolidated Statements of Operations (Parenthetical) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Income Statement [Abstract] | ||
Stock based compensation | $ 224,647 | $ 198,884 |
1. Organization and Business |
3 Months Ended |
---|---|
Mar. 31, 2017 | |
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 other carriers. The Company currently operates in two business segments, Business Services and Carrier Services. |
2. Basis of Presentation and Summary of Significant Accounting Policies |
3 Months Ended | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2017 | |||||||||||||||||||||
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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as amended (the “2016 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Effective January 1, 2017, the Company changed the manner in which it accounts for federal and state universal service fees and surcharges in its consolidated statement of operations. The Company now includes the amounts collected in revenues, and reports the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented. As a result, both the Company’s revenues and cost of revenues for the three months ended March 31, 2017 and 2016 include $0.7 million and $0.6 million, respectively, of governmental fees and surcharges.
During the three months ended March 31, 2017 and 2016, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations. Also, as discussed further below, effective January 1, 2017 the Company early adopted Accounting Standards Update (“ASU”) 2016-18, Restricted Cash.
Liquidity
Since inception, the Company has incurred significant net losses. At March 31, 2017, the Company had a working capital deficit of $8.8 million and stockholders’ equity of $6.9 million. At December 31, 2016, the Company had a working capital deficit of $6.6 million and stockholders’ equity of $9.2 million. The Company’s consolidated cash balance at March 31, 2017 was $6.6 million. While the Company believes it has sufficient cash to fund its operations and meet its operating and debt obligations for the next twelve months, it may be required to either raise additional capital, limit its discretionary capital expenditures or borrow amounts available under its revolving credit facility to support its business plan. There is currently no commitment for any additional funding and there can be no assurances that funds will be available on terms that are acceptable to the Company, or at all.
Principles of Consolidation
The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue, allowance for doubtful accounts; fair value measurements of its financial instruments; useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates, accounting for income taxes, contingencies and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates.
Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less on the date of purchase. As of March 31, 2017 and December 31, 2016, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity.
Fair Value of Financial Instruments
At March 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.
Impairment of Long-Lived Assets
The Company periodically reviews long-lived assets, including intangible assets, for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company did not record any impairment charges during the three months ended March 31, 2017 and 2016, as there were no indicators of impairment.
Goodwill
Goodwill is the excess of the acquisition cost of a business combination over the fair value of the identifiable net assets acquired. Goodwill at March 31, 2017 and December 31, 2016 was $35.3 million and $35.7 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment.
The following table presents the changes in the carrying amounts of goodwill during the three months ended March 31, 2017:
Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. The Company has determined that its reporting units are its operating segments (see note 15) since that is the lowest level at which discrete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value, which is the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying amount, an impairment is recognized.
In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The Company did not record any impairment charges related to goodwill during the three months ended March 31, 2017 and 2016.
Advertising and Marketing Costs
Advertising and marketing expense includes cost for promotional materials and trade show expenses for the marketing of the Company’s products and services. Advertising and marketing expenses were $0.1 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively, and are reflected in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.
Income Taxes
The accounting and reporting requirements with respect to accounting for income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2017 and December 31, 2016. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2013 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of March 31, 2017 and December 31, 2016. During the three months ended March 31, 2017 and 2016, the Company recognized no adjustments for uncertain tax positions.
Stock-Based Compensation
The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards at the date of grant. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable.
New and Recently Adopted Accounting Pronouncements
In November 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The Company early adopted ASU 2016-18 effective January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right –to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective as of January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards are to be recognized as income tax expense or income tax benefit in the statement of operations. In addition, the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur and excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.
|
3. Acquisitions |
3 Months Ended |
---|---|
Mar. 31, 2017 | |
Acquisitions | |
3. Acquisitions | On November 18, 2016, the Company entered into an asset purchase agreement pursuant to which the Company assumed obligations to provide services to a customer base. In connection with that transaction, the Company recognized goodwill and a corresponding obligation to the seller in the amount of $0.4 million. In such agreement, the Company also agreed to pay additional consideration to the seller if it was able to facilitate the assignment of certain additional customers to the Company.
On March 1, 2017, the Company entered into an additional asset purchase agreement with another party pursuant to which the Company assumed obligations to provide services to a customer base and also purchased the outstanding accounts receivables associated with that customer base of approximately $0.6 million. As this customer base was included in the November 2016 agreement, the Company is required to pay consideration to the counterparty to that agreement the estimated aggregate amount of $1.7 million (included in customer base acquisitions in note 11). The March 2017 agreement also provides for a management period during which the Company will be responsible for all aspects of the customer relationship with respect to the acquired customer base until such time as all regulatory approvals have been obtained, and the Company’s consolidated statement of operations includes the revenue associated with the customer base acquisition effective March 1, 2017. The March 2017 agreement also provides for a transition period during which the seller thereunder will provide certain services and assistance to the Company.
The aggregate amount for the November 2016 and March 2017 agreements totaled $2.3 million, comprised of the $0.6 million paid for the accounts receivable and the $1.7 million of contingent consideration related to the customer base which was valued at a multiple of monthly revenue and that will be paid over a period of 18 months. These agreements did not have a material effect on the Company’s results of operations or financial condition. |
4. Loss per share |
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4. Loss per share | Basic and diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period.
The following table sets forth the computation for basic and diluted net income per share for the three months ended March 31, 2017 and 2016:
For the three months ended March 31, 2017 and 2016, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:
The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’s outstanding Series A-1, A-2 and A-4 preferred stock (the “Series A Preferred Stock”) of $0.1 million for the three months ended March 31, 2017 and 2016. Through March 31, 2017, the Board of Directors of Fusion has never declared a dividend on any series of the Series A Preferred Stock, resulting in approximately $4.8 million of accumulated preferred stock dividends. The Fusion Board declared dividends on the Company’s Series B-2 Convertible Preferred Stock (the “Series B-2 Preferred Stock”) of $0.2 million and $1.4 million for the three months ended March 31, 2017 and 2016, respectively, which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 106,876 and 791,946 shares of Fusion’s common stock for the three months ended March 31, 2017 and 2016, respectively.
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5. Intangible Assets |
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5. Intangible Assets | Intangible assets as of March 31, 2017 and December 31, 2016 are as follows:
Amortization expense was $2.2 million and $1.4 million for the three months ended March 31, 2017 and 2016, respectively. Estimated future aggregate amortization expense is expected to be as follows:
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6. Supplemental Disclosure of Cash Flow Information |
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6. Supplemental Disclosure of Cash Flow Information | Supplemental cash flow information for the three months ended March 31, 2017 and 2016 is as follows:
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7. Prepaid Expenses and Other Current Assets |
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7. Prepaid Expenses and Other Current Assets | Prepaid expenses and other current assets at March 31, 2017 and December 31, 2016 are as follows:
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8. Accounts Payable and Accrued Expenses |
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8. Accounts Payable and Accrued Expenses | Accounts payable and accrued expenses at March 31, 2017 and December 31, 2016 are as follows:
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9. Equipment Financing Obligations |
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9. Equipment Financing Obligations | From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 5.3% and 6.6%. The Company’s equipment financing obligations are as follows:
The Company’s payment obligations under its capital leases are as follows:
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10. Long-Term Debt |
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10. Long-Term Debt | Secured Credit Facilities
As of March 31, 2017 and December 31, 2016, secured credit facilities consists of the following:
On November 14, 2016, Fusion NBS Acquisition Corp. (“FNAC”), a wholly-owned subsidiary of Fusion, entered into a new credit agreement (the “East West Credit Agreement”) with East West Bank, as administrative agent and the lenders identified therein (collectively with East West Bank, the “East West Lenders”). Under the East West Credit Agreement, the East West Lenders extended FNAC (i) a $65.0 million term loan and (ii) a $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis). The proceeds of the term loan were used to retire the $40 million outstanding under a previously existing credit facility, and to fund the cash portion of the purchase price of the Company’s acquisition of Apptix, Inc. (“Apptix”).
Borrowings under the East West Credit Agreement are evidenced by notes bearing interest at rates computed based upon either the then current “prime” rate of interest or “LIBOR” rate of interest, as selected by FNAC. Interest on borrowings that FNAC designates as “base rate” loans bear interest at the greater of the prime rate published by the Wall Street Journal or 3.25% per annum, in each case plus 2% per annum. Interest on borrowings that FNAC designates as “LIBOR rate” loans bear interest at the LIBOR rate of interest published by the Wall Street Journal, plus 5% per annum.
The Company is required to repay the term loan in equal monthly payments of $270,833 from January 1, 2017 through January 1, 2018, when monthly payments increase to $541,667, until the maturity date of the term loan on November 12, 2021, when the remaining $36.8 million of principal is due. Borrowings under the revolving credit facility are also payable on the November 12, 2021 maturity date of the facility. At March 31, 2017 and December 31, 2016, $3.0 million was outstanding under the revolving credit facility.
In conjunction with the execution of the East West Credit Agreement, the Company and the East West Lenders also entered into (i) an IP security agreement under which the Company has pledged intellectual property to the East West Lenders to secure payment of the East West Credit Agreement, (ii) subordination agreements under which certain creditors of the Company and the East West Lenders have established priorities among them and reached certain agreements as to enforcing their respective rights against the Company, and (iii) a pledge and security agreement under which Fusion and FNAC have each pledged its equity interest in its subsidiaries to the East West Lenders.
Under the East West Credit Agreement:
At March 31, 2017 and December 31, 2016, the Company was in compliance with all of the financial covenants contained in the East West Credit Agreement.
Notes Payable – Non-Related Parties
At March 31, 2017 and December 31, 2016, notes payable – non-related parties consists of the following:
On November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries other than FNAC entered into the Fifth Amended and Restated Securities Purchase Agreement (the “Praesidian Facility”) with Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United Insurance Company of America (collectively, the “Praesidian Lenders”). The Praesidian Facility amends and restates a prior facility, pursuant to which FNAC previously sold its Series A, Series B, Series C, Series D, Series E and Series F senior notes in an aggregate principal amount of $33.6 million (the “SPA Notes”).
Under the terms of the Praesidian Facility, the maturity date of the SPA Notes is May 12, 2022, no payments of principal are due until the maturity date, and the financial covenants contained in the Restated Purchase Agreement are substantially similar to those contained in the East West Credit Agreement. In connection with the execution of the Praesidian Facility, the Praesidian Lenders entered into a subordination agreement with the East West Lenders pursuant to which the Praesidian Lenders have subordinated their right to payment under the Restated Purchase Agreement and the SPA Notes to repayment of the Company’s obligations under the East West Credit Agreement. At March 31, 2017 and December 31, 2016, the Company was in compliance with all of the financial covenants contained in the Praesidian Facility.
Notes Payable – Related Parties
At March 31, 2017 and December 31, 2016, notes payable – related parties consists of the following:
The notes payable to Marvin Rosen, Fusion’s Chairman of the Board, are subordinated to borrowings under the East West Credit Agreement and the Restated Purchase Agreement. This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after the Company’s obligations under the East West Credit Agreement and the Restated Purchase Agreement are paid in full.
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11. Obligations Under Asset Purchase Agreements |
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11. Obligations Under Asset Purchase Agreements | In connection with certain acquisitions and asset purchases completed by the Company during 2015, 2016 and 2017, the Company has various obligations to the sellers, mainly for payments of portions of the purchase price that have been deferred under the terms of the respective purchase and sale agreements. Such obligations to sellers or other parties associated with these transactions as of March 31, 2017 and December 31, 2016 are as follows:
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12. Derivative Liability |
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12. Derivative Liability | Fusion has issued warrants to purchase shares of its common stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging (“ASC 815”). For warrant instruments that are not deemed to be indexed to Fusion’s own stock, the Company classifies such instruments as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrant is exercised or expires, and any change in fair value is recognized in the Company’s statement of operations. At March 31, 2017, Fusion had 565,634 warrants outstanding which provide for a downward adjustment of the exercise price if Fusion were to issue common stock at an issuance price, or issue convertible debt or warrants with a conversion or exercise price, that is less than the exercise price of these warrants. During the three months ended March 31, 2017, 19,200 of such warrants were exercised, and as a result approximately $13,000 was reclassified from the Company’s derivative liability into equity.
The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock. The following assumptions were used to determine the fair value of the warrants for the three months ended March 31, 2017 and 2016:
At March 31, 2017 and December 31, 2016, the fair value of the derivative was $0.4 million and $0.3 million, respectively. For the three months ended March 31, 2017, the Company recognized a loss on the change in fair value of the derivative of approximately $28,000, and for the three months ended March 31, 2016, the Company recognized a gain on the change in the fair value of this derivative of $0.2 million.
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13. Equity Transactions |
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13. Equity Transactions | Common Stock
Fusion is authorized to issue 90,000,000 shares of its common stock. As of March 31, 2017 and December 31, 2016, 22,412,403 and 20,642,028 shares of its common stock, respectively, were issued and outstanding.
Effective as of March 31, 2017, the Company entered into exchange agreements with certain holders of Fusion’s outstanding warrants whereby the outstanding warrants were exchanged for new warrants (the “2017 Warrants”), which warrants permitted the holders to exercise and purchase, for a limited period of 60 days, unregistered shares of Fusion’s common stock at a discount of up to 10% below the closing bid price of the common stock at the time of exercise but in no event at a price of less than $1.30 per share. In connection with these exchange agreements, the warrant holders exercised warrants to purchase 561,834 shares of common stock on March 31, 2017 at an exercise price of $1.39 per share. The Company received proceeds from the exercise of the 2017 Warrants in the amount of $0.8 million, which will be used for general corporate purposes. All of the 2017 Warrants were immediately exercised and none remained outstanding as of March 31, 2017. As a result of the exchange, the Company recorded a preferred stock dividend in the amount of $0.3 million for the difference in fair value of the warrants that were exchanged (see note 4).
On February 23, 2017, Fusion issued 115,000 shares of its common stock valued at approximately $0.2 million for services rendered. During the three months ended March 31, 2017, Fusion’s Board of Directors declared a dividend on the Series B-2 Preferred Stock that was paid in the form of 106,876 shares of Fusion common stock (see note 4).
Preferred Stock
Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of March 31, 2017 and December 31, 2016 there were 5,045 shares of Series A Preferred Stock issued and outstanding. In addition, there were 9,296 and 12,254 shares of Series B-2 Preferred Stock issued and outstanding as of March 31, 2017 and December 31, 2016, respectively.
On March 31, 2017, the Company agreed with certain holders of its Series B-2 Preferred Stock to convert their shares of Series B-2 Preferred Stock into shares of Fusion common stock at a conversion price of $3.00 per share (the conversion price for such preferred stock otherwise being $5.00 per share). As a result, 2,958 shares of Series B-2 Preferred Stock were converted into a total of 986,665 shares of common stock, and the Company recorded a preferred stock dividend of $0.6 million for the value of the incremental number of common shares issued in connection with the reduction in the Series B-2 conversion price (see note 4).
The holders of the Series A Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and if declared by the Fusion’s Board, on January 1 of each year. As of March 31, 2017, no dividend had been declared with respect to the Series A Preferred Stock (see note 4). The holders of the Series B-2 Preferred Stock are entitled to receive a cumulative 6% annual dividend payable quarterly in arrears when and if declared by the Fusion Board, in cash or shares of Fusion common stock, at the option of the Company (see note 4).
Stock Options
Fusion's 2016 Equity Incentive Plan reserves a number of shares of common stock equal to 10% of Fusion’s shares outstanding from time to time on a fully diluted basis, adjusted upward for the number of shares not granted under Fusion’s 2009 Stock Option plan and for shares covered by options granted thereunder that expire without being exercised. The 2016 Equity Incentive Plan provides for the grant of incentive stock options, stock appreciation rights, restricted stock, restricted stock units, stock grants, stock units, performance shares and performance share units to employees, officers, non-employee directors of, and consultants to the Company. Options issued under the various Fusion plans typically vest in annual increments over a three or four year period, expire ten years from the date of grant and are issued at exercise prices no less than 100% of the fair market value at the time of grant.
The following assumptions were used to determine the fair value of the stock options granted under Fusion’s stock-based compensation plans using the Black-Scholes option-pricing model:
The Company recognized compensation expense of $0.2 million for the three months ended March 31, 2017 and 2016. These amounts are included in selling, general and administrative expenses in the condensed consolidated interim statements of operations.
The following table summarizes stock option activity for the three months ended March 31, 2017:
As of March 31, 2017, the Company had approximately $1.6 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plans, which is expected to be recognized over a weighted-average period of 2.1 years.
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14. Commitments and Contingencies |
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Notes to Financial Statements | |
14. Commitments and Contingencies | From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. Defending such proceedings can be costly and can impose a significant burden on management and employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of March 31, 2017, the Company did not have any ongoing legal matters that would have a material adverse effect on its liquidity, results of operations or financial condition.
Recently, Apptix underwent a compliance audit relating to its resale of certain software licenses. The audit covers periods prior to November 14, 2016, the date on which the Company acquired Apptix. Based on preliminary findings from this audit, as of March 31, 2017 the Company has accrued approximately $2.9 million as part of the Apptix purchase price allocation. On May 3, 2017, FNAC commenced a lawsuit against the seller and certain of its and Apptix’s officers seeking to recover all amounts that it may be required to pay to the software vendor as well as to recoup a portion of the purchase price paid. This suit, which was filed in the United States District Court for the Southern District of New York, currently seeks a total of approximately $18.0 million in damages. There can be no assurances, however, that the Company will be able to recover all or any portion of the amount it seeks to recover. On May 9, 2017, the Company received formal notification from the software vendor asserting that the total amount owed is approximately $3.7 million. The Company is reviewing the materials provided and is evaluating whether a further accrual may be required. FNAC intends to amend its suit to increase the amount of damages claimed by an additional $1.0 million. |
15. Segment Information |
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15. Segment Information | Operating segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and evaluated regularly by a company's chief operating decision maker in deciding how to allocate resources and assess performance.
The Company has two reportable segments – “Business Services” and “Carrier Services.” These segments are organized by the products and services that are sold and the customers that are served. The Company measures and evaluates its reportable segments based on revenues and gross profit margins. The Company’s measurement of segment profit exclude the Company’s executive, administrative and support costs. The accounting policies of the segments are the same as those described in Note 2, Summary of Significant Accounting Policies, of the audited consolidated financial statements included in the 2016 Form 10-K. The Company’s segments and their principal activities consist of the following:
Business Services
Through this operating segment, the Company provides a comprehensive suite of cloud communications, cloud connectivity, cloud computing and managed cloud-based applications to small, medium and large businesses. These services are sold through both the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party distributors to sell the Company’s products and services.
Carrier Services
Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily VoIP technology. VoIP permits a less costly and more rapid interconnection between the Company and international telecommunications carriers, and generally provides better profit margins for the Company than other technologies. The Company currently interconnects with approximately 370 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.
Operating segment information for the three months ended March 31, 2017 and 2016 is summarized in the following tables:
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16. Related Party Transactions |
3 Months Ended |
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Mar. 31, 2017 | |
Related Party Transaction, Due from (to) Related Party [Abstract] | |
16. Related Party Transactions | Since March 6, 2014, the Company has engaged a tax advisor to prepare its tax returns and to provide related tax advisory services. The Company was billed approximately $30,000 and $34,000 for the three months ended March 31, 2017 and 2016, respectively, by this firm. Larry Blum, a member of Fusion’s Board of Directors, is a Senior Advisor and a former partner of this firm.
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17. Fair Value Disclosures |
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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 liabilities measured at fair value on a recurring basis:
Changes in the derivative warrant liability for the three months ended March 31, 2017 are as follows:
Changes in the contingent purchase price liability for the three months ended March 31, 2017 are as follows:
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2. Basis of Presentation and Summary of Significant Accounting Policies (Policies) |
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Basis of Presentation | The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.
Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as amended (the “2016 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year.
Effective January 1, 2017, the Company changed the manner in which it accounts for federal and state universal service fees and surcharges in its consolidated statement of operations. The Company now includes the amounts collected in revenues, and reports the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented. As a result, both the Company’s revenues and cost of revenues for the three months ended March 31, 2017 and 2016 include $0.7 million and $0.6 million, respectively, of governmental fees and surcharges.
During the three months ended March 31, 2017 and 2016, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations. Also, as discussed further below, effective January 1, 2017 the Company early adopted Accounting Standards Update (“ASU”) 2016-18, Restricted Cash. |
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Liquidity | Since inception, the Company has incurred significant net losses. At March 31, 2017, the Company had a working capital deficit of $8.8 million and stockholders’ equity of $6.9 million. At December 31, 2016, the Company had a working capital deficit of $6.6 million and stockholders’ equity of $9.2 million. The Company’s consolidated cash balance at March 31, 2017 was $6.6 million. While the Company believes it has sufficient cash to fund its operations and meet its operating and debt obligations for the next twelve months, it may be required to either raise additional capital, limit its discretionary capital expenditures or borrow amounts available under its revolving credit facility to support its business plan. There is currently no commitment for any additional funding and there can be no assurances that funds will be available on terms that are acceptable to the Company, or at all. |
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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. |
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Use of Estimates | The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue, allowance for doubtful accounts; fair value measurements of its financial instruments; useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates, accounting for income taxes, contingencies and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates. |
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Cash Equivalents | Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less on the date of purchase. As of March 31, 2017 and December 31, 2016, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity. |
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Fair Value of Financial Instruments | At March 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments. |
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Impairment of Long-Lived Assets | The Company periodically reviews long-lived assets, including intangible assets, for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company did not record any impairment charges during the three months ended March 31, 2017 and 2016, as there were no indicators of impairment. |
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Goodwill | Goodwill is the excess of the acquisition cost of a business combination over the fair value of the identifiable net assets acquired. Goodwill at March 31, 2017 and December 31, 2016 was $35.3 million and $35.7 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment.
The following table presents the changes in the carrying amounts of goodwill during the three months ended March 31, 2017:
Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. The Company has determined that its reporting units are its operating segments (see note 15) since that is the lowest level at which discrete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value, which is the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying amount, an impairment is recognized.
In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The Company did not record any impairment charges related to goodwill during the three months ended March 31, 2017 and 2016. |
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Advertising and Marketing Costs | Advertising and marketing expense includes cost for promotional materials and trade show expenses for the marketing of the Company’s products and services. Advertising and marketing expenses were $0.1 million and $0.7 million for the three months ended March 31, 2017 and 2016, respectively, and are reflected in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. |
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Income Taxes | The accounting and reporting requirements with respect to accounting for income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2017 and December 31, 2016. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2013 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of March 31, 2017 and December 31, 2016. During the three months ended March 31, 2017 and 2016, the Company recognized no adjustments for uncertain tax positions. |
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Stock-Based Compensation | The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards at the date of grant. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable. |
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New and Recently Adopted Accounting Pronouncements | In November 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The Company early adopted ASU 2016-18 effective January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-2, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right –to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective as of January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards are to be recognized as income tax expense or income tax benefit in the statement of operations. In addition, the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur and excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements. |
2. Basis of Presentation and Summary of Significant Accounting Policies (Tables) |
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4. Loss per share (Tables) |
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5. Intangible Assets (Tables) |
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6. Supplemental Disclosure of Cash Flow Information (Tables) |
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7. Prepaid Expenses and Other Current Assets (Tables) |
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8. Accounts Payable and Accrued Expenses (Tables) |
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9. Equipment Financing Obligations (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||
Equipment Financing Obligations Details 1 | ||||||||||||||||||||||||||||||||||||||||||||||
Equipment financing obligations |
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Principal payment under the capital lease agreements |
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10. Long-Term Debt (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Secured credit facilities |
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Components of notes payable non-related parties |
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Related Party Note Payable |
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11. Obligations Under Asset Purchase Agreements (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations Under Asset Purchase Agreements Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Obligations Under Asset Purchase Agreements |
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12. Derivative Liability (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivative Liability Tables | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assumptions used to determine the fair value of the warrants |
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13. Equity Transactions (Tables) |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity Transactions Tables | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Black-Scholes option-pricing model |
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Stock option activity |
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15. Segment Information (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating segment information |
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17. Fair Value Disclosures (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair Value Disclosures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value of the liability measured at fair value on a recurring basis |
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Changes in the derivative liability |
|
2. Basis of Presentation and Summary of Significant Accounting Policies (Details) |
3 Months Ended |
---|---|
Mar. 31, 2017
USD ($)
| |
Basis Of Presentation And Summary Of Significant Accounting Policies Details | |
Balance at December 31, 2016 | $ 35,689,215 |
Increase in goodwill associated with a 2016 acquisition | 7,414 |
Adjustment to goodwill associated with acquisition of customer bases (see note 3) | (410,000) |
Balance at March 31, 2017 | $ 35,286,629 |
2. Basis of Presentation and Summary of Significant Accounting Policies (Details Narrative) - USD ($) |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
Dec. 31, 2016 |
|
Notes to Financial Statements | |||
Working capital deficit | $ 8,800,000 | ||
Stockholders' equity | 6,890,942 | $ 9,190,068 | |
Cash | 6,642,153 | 7,221,910 | |
Goodwill | 35,286,629 | $ 35,689,215 | |
Advertising and marketing expenses | $ 100,000 | $ 700,000 |
4. Loss per share (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Numerator | ||
Net Loss | $ (3,481,948) | $ (2,533,545) |
Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock | (99,518) | (100,623) |
Conversion price reduction on Series B-2 Preferred Stock (see note 13) | (623,574) | 0 |
Series B-2 warrant exchange (see note 13) | (347,190) | 0 |
Dividends declared on Series B-2 Convertible Preferred Stock | (183,827) | (1,431,359) |
Net loss attributable to common stockholders | $ (4,736,057) | $ (4,065,527) |
Denominator | ||
Basic and diluted weighted average common shares outstanding | 20,707,699 | 13,741,366 |
Loss per share | ||
Basic and diluted | $ (0.23) | $ (0.30) |
4. Loss per share (Details 1) - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Antidilutive securities excluded from the calculation of diluted earnings per common share | 6,911,877 | 6,756,640 |
Warrants [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 2,697,679 | 3,005,337 |
Convertible preferred stock [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 2,063,125 | 2,627,795 |
Stock options [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 2,151,073 | 1,123,508 |
4. Loss Per Share (Details Narrative) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Preferred stock dividends accumulated | $ 4,800,000 | |
Series B-2 Preferred Stock [Member] | ||
Preferred stock dividends declared | $ 200,000 | $ 1,400,000 |
Preferred stock dividends paid | 106,876 | 791,946 |
5. Intangible Assets (Details 1) |
Mar. 31, 2017
USD ($)
|
---|---|
Notes to Financial Statements | |
Remainder of 2017 | $ 8,583,253 |
2018 | 6,559,942 |
2019 | 5,576,211 |
2020 | 5,535,827 |
2021 | $ 5,361,460 |
5. Intangible Assets (Details Narrative) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Notes to Financial Statements | ||
Amortization expense | $ 2,200,000 | $ 1,400,000 |
6. Supplemental Disclosure of Cash Flow Information (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Supplemental Cash Flow Information | ||
Cash paid for interest | $ 2,186,314 | $ 1,460,306 |
Cash paid for income taxes | 0 | 0 |
Supplemental Non-Cash Investing and Financing Activities | ||
Property and equipment acquired under capital leases | 0 | 141,240 |
Conversion of preferred stock into common stock | 2,958,000 | 0 |
Dividend on Series B-2 preferred stock paid with the issuance of Fusion common stock | 183,827 | 1,431,359 |
Obligations under asset purchase agreements | $ 1,350,000 | $ 1,011,607 |
7. Prepaid Expenses and Other Current Assets (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Prepaid expenses and other current assets | ||
Insurance | $ 180,523 | $ 160,262 |
Rent | 0 | 5,389 |
Marketing | 189,905 | 74,665 |
Software subscriptions | 786,018 | 419,431 |
Commissions | 132,097 | 159,146 |
Other | 302,385 | 265,316 |
Total | $ 1,590,928 | $ 1,084,209 |
8. Accounts Payable and Accrued Expenses (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Notes to Financial Statements | ||
Trade accounts payable | $ 5,068,040 | $ 6,358,548 |
Accrued license fees | 2,881,331 | 2,881,331 |
Accrued sales and federal excise taxes | 2,647,773 | 2,863,363 |
Deferred revenue | 1,923,870 | 1,874,641 |
Accrued network costs | 6,362,545 | 1,416,000 |
Accrued sales commissions | 841,928 | 819,106 |
Property and other taxes | 814,236 | 581,956 |
Accrued payroll and vacation | 379,683 | 421,733 |
Customer deposits | 368,285 | 365,249 |
Interest payable | 12,025 | 304,409 |
Credit card payable | 53,890 | 265,985 |
Accrued USF fees | 244,121 | 249,825 |
Accrued bonus | 657,282 | 249,361 |
Professional and consulting fees | 128,777 | 164,878 |
Rent | 129,164 | 127,781 |
Other | 834,603 | 778,672 |
Total accounts payable and accrued expenses | $ 23,347,553 | $ 19,722,838 |
9. Equipment Financing Obligations (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Equipment Financing Obligations Details 1 | ||
Equipment financing obligations | $ 2,016,167 | $ 2,239,661 |
Less: current portion | (1,041,466) | (1,002,578) |
Long-term portion | $ 974,701 | $ 1,237,083 |
9. Equipment Financing Obligations (Details 1) |
Mar. 31, 2017
USD ($)
|
---|---|
Equipment Financing Obligations Details 1 | |
2017 | $ 779,084 |
2018 | 958,845 |
2019 | 268,044 |
2020 | 10,194 |
Total | $ 2,016,167 |
10. Long-Term Debt (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Long-term Debt Details | ||
Term loan | $ 64,187,500 | $ 65,000,000 |
Less: Deferred financing fees | (1,224,055) | (1,289,629) |
Less: Current Portion | (4,062,500) | (2,979,167) |
Term loan - long-term portion | 58,900,945 | 60,731,204 |
Indebtedness under revolving credit facility | $ 3,000,000 | $ 3,000,000 |
10. Long-Term Debt (Details 1) - Non Related Party [Member] - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Subordinated Notes | $ 33,588,717 | $ 33,588,717 |
Discount on subordinated notes | (1,286,514) | (1,368,629) |
Deferred financing fees | (740,210) | (788,486) |
Total notes payable - non-related parties | 31,561,993 | 31,431,602 |
Less: current portion | 0 | 0 |
Long-term portion | $ 31,561,993 | $ 31,431,602 |
10. Long-Term Debt (Details 2) - RelatedParty - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Notes payable to Marvin Rosen | $ 928,081 | $ 928,081 |
Discount on note | (38,668) | (52,331) |
Total notes payable - related parties | $ 889,413 | $ 875,750 |
10. Long-Term Debt (Details Narrative) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Long-term Debt Details Narrative | ||
Revolver credit facility | $ 3,000,000 | $ 3,000,000 |
11. Obligations Under Asset Purchase Agreements (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Obligations Under Asset Purchase Agreements Details | ||
Root Axcess | $ 0 | $ 166,668 |
Customer base acquisitions | 1,316,417 | 334,025 |
Technology For Business, Inc. | 911,606 | 936,606 |
Total | 2,228,023 | 1,437,299 |
Less: current portion | 912,212 | 546,488 |
Long-term portion | $ 1,315,811 | $ 890,811 |
12. Derivative Liability (Details) - $ / shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Derivative Liability Tables | ||
Stock price ($) | $ 1.58 | $ 1.79 |
Exercise price ($) | $ 1.54 | $ 6.25 |
Risk-free interest rate (%) | 2.23% | 1.78% |
Expected volatility (%) | 74.40% | 96.70% |
Time to maturity (years) | 1 year 9 months | 3 years |
12. Derivative Liability (Details Narrative) - USD ($) |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
Dec. 31, 2016 |
|
Derivative Liability [Abstract] | |||
Fair value derivative liability | $ 400,000 | $ 300,000 | |
Gain (loss) on fair value of derivative | $ (28,000) | $ 200,000 |
13. Equity Transactions (Details) |
3 Months Ended | |
---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
|
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||
Dividend yield (%) | 0.00% | 0.00% |
Expected volatility (%) | 92.40% | 96.70% |
Average Risk-free interest rate (%) | 2.27% | 1.78% |
Expected life of stock option term (years) | 8 years | 8 years |
13. Equity Transactions (Details Narrative) - USD ($) |
3 Months Ended | ||
---|---|---|---|
Mar. 31, 2017 |
Mar. 31, 2016 |
Dec. 31, 2016 |
|
Common Stock, Shares Authorized | 90,000,000 | 50,000,000 | |
Common Stock, Shares Issued | 22,412,403 | 20,642,028 | |
Common Stock, Shares Outstanding | 22,412,403 | 20,642,028 | |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 | |
Preferred Stock, Shares Issued | 14,341 | 17,299 | |
Preferred Stock, Shares Outstanding | 14,341 | 17,299 | |
Stock based compensation | $ 224,647 | $ 198,884 | |
Unrecognized compensation expense | $ 1,600,000 | ||
Series A Preferred Stock [Member] | |||
Preferred Stock, Shares Issued | 5,045 | 5,045 | |
Preferred Stock, Shares Outstanding | 5,045 | 5,045 | |
Series B-2 Preferred Stock [Member] | |||
Preferred Stock, Shares Issued | 9,296 | 12,254 | |
Preferred Stock, Shares Outstanding | 9,296 | 12,254 |
17. Fair Value Disclosures (Details) - USD ($) |
Mar. 31, 2017 |
Dec. 31, 2016 |
---|---|---|
Current liabilities: | ||
Contingent purchase price liability | $ 912,212 | $ 546,488 |
Non-current liabilities: | ||
Contingent purchase price liability | 1,315,811 | 890,811 |
Derivative liability (see note 12) | 376,321 | 348,650 |
Level 1 | ||
Current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Non-current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Derivative liability (see note 12) | 0 | 0 |
Level 2 | ||
Current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Non-current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Derivative liability (see note 12) | 0 | 0 |
Level 3 | ||
Current liabilities: | ||
Contingent purchase price liability | 912,212 | 546,488 |
Non-current liabilities: | ||
Contingent purchase price liability | 1,315,811 | 890,811 |
Derivative liability (see note 12) | $ 376,321 | $ 348,650 |
17. Fair Value Disclosures (Details 1) |
3 Months Ended |
---|---|
Mar. 31, 2017
USD ($)
| |
Derivative Warrant Liability | |
Beginning Balance | $ 348,650 |
Change in fair value included in net loss | 40,445 |
Warrant exchange (see note 12) | (12,774) |
Ending Balance | 376,321 |
Contingent Purchase Price Liability | |
Beginning Balance | 1,437,299 |
Acquired customer base | 1,350,000 |
Increase in amounts due from Technology Opportunity Group | (367,608) |
Payments made | (191,668) |
Ending Balance | $ 2,228,023 |