FUSION CONNECT, INC.
|
(Exact name of registrant as specified in its charter)
|
Delaware
|
001-32421
|
58-2342021
|
(State or other jurisdiction of incorporation)
|
(Commission File Number)
|
(IRS Employer Identification No.)
|
420 Lexington Avenue, Suite 1718 New York, NY
|
10170
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant’s
telephone number, including area code: (212) 201-2400
|
|
Not Applicable
|
(Former name or former address, if changed since last
report)
|
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
|
The Unaudited Consolidated Financial Statements of Birch as of
March 31, 2018, and for the Three-Month Periods Ended March 31,
2018 and 2017.
|
|
|
|
|
|
Pro
Forma Financial Information.
|
|
FUSION CONNECT, INC.
|
|
|
|
|
|
|
May
25, 2018
|
By:
|
/s/
James P. Prenetta, Jr.
|
|
|
|
James P. Prenetta,
Jr.
|
|
|
|
EVP
and General Counsel
|
|
Consolidated Balance Sheets as of March 31, 2018 (unaudited) and
December 31, 2017
|
1
|
Consolidated Statements of Operations and Comprehensive Income
(Loss) (unaudited) for the Three Months Ended Mach 31, 2018 and
2017
|
2
|
Consolidated Statements of Changes in Stockholders’ Deficit
(unaudited) for the Three Months Ended March 31,
2018
|
3
|
Consolidated Statements of Cash Flows (unaudited) for the Three
Months Ended March 31, 2018 and 2017
|
4
|
Notes to Consolidated Financial Statements
(unaudited)
|
5
|
|
March 31, 2018
|
December 31, 2017
|
Current assets:
|
(unaudited)
|
(audited)
|
Cash
and cash equivalents
|
$5,177
|
$5,757
|
Accounts
receivable, net of allowance for doubtful accounts of $4,241 and
$4,569, respectively
|
29,929
|
34,921
|
Accounts
receivable - stockholders/employees
|
919
|
920
|
Prepaid
expenses
|
10,253
|
7,549
|
Inventory,
net
|
1,052
|
1,179
|
Other
assets
|
1,513
|
2,505
|
Total
current assets
|
48,843
|
52,831
|
Long-term assets:
|
|
|
Property
and equipment, net
|
81,173
|
85,675
|
Goodwill
|
93,356
|
93,356
|
Intangible
assets, net
|
99,135
|
115,359
|
Other
non-current assets
|
4,780
|
877
|
Total
long-term assets
|
278,444
|
295,267
|
Total
assets
|
$327,287
|
$348,098
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
Current liabilities:
|
|
|
Accounts
payable
|
$53,364
|
$48,784
|
Accrued
telecommunications costs
|
7,328
|
11,048
|
Deferred
customer revenue
|
12,287
|
12,601
|
Other
accrued liabilities
|
30,120
|
34,268
|
Current
portion of capital leases
|
2,539
|
3,003
|
Current
portion of long-term debt
|
30,000
|
30,000
|
Total
current liabilities
|
135,638
|
139,704
|
Long-term liabilities:
|
|
|
Non-current
portion of long-term debt
|
417,179
|
420,936
|
Non-current
portion of long-term capital lease
|
3,343
|
3,823
|
Other
non-current liabilities
|
10,389
|
12,847
|
Total
non-current liabilities
|
430,911
|
437,606
|
Stockholders’ deficit:
|
|
|
Common
stock, $0.01 par value; 10,000 shares authorized, 2,564 shares
issued and outstanding
|
26
|
26
|
Additional
paid-in capital
|
6,050
|
6,050
|
Accumulated
deficit
|
(245,731)
|
(236,477)
|
Accumulated
other comprehensive income (loss)
|
393
|
1,189
|
Total
stockholders’ deficit
|
(239,262)
|
(229,212)
|
Total
liabilities and stockholders’ deficit
|
$327,287
|
$348,098
|
|
2018
|
2017
|
Revenue
|
$125,831
|
$141,834
|
Cost
of revenue (exclusive of depreciation and amortization, shown
below)
|
70,573
|
80,269
|
Gross Profit
|
$55,258
|
$61,565
|
Operating expenses:
|
|
|
Selling,
general and administrative (exclusive of
depreciation and amortization, shown separately below)
|
31,752
|
40,300
|
Depreciation
and amortization
|
16,237
|
19,206
|
Impairment
losses on intangible assets
|
7,689
|
-
|
Foreign
currency (gain) loss
|
270
|
(35)
|
Total
operating expenses
|
55,948
|
59,471
|
Operating
income (loss)
|
(690)
|
2,094
|
Other (expense) income:
|
|
|
Interest
expense, net
|
(13,325)
|
(11,209)
|
Other
income
|
39
|
74
|
Total
other expense
|
(13,286)
|
(11,135)
|
Loss
before income taxes
|
(13,976)
|
(9,041)
|
Income
tax expense
|
997
|
(1,398)
|
Net
loss
|
$(12,979)
|
$(10,439)
|
Other
comprehensive income (loss):
|
|
|
Cumulative
translation adjustment
|
(796)
|
(498)
|
Comprehensive
income (loss)
|
$(13,775)
|
$(10,937)
|
Net
loss per common share
|
|
|
Basic
|
$(5.06)
|
$(4.07)
|
Diluted
|
$(5.06)
|
$(4.07)
|
Weighted
average common shares outstanding
|
|
|
Basic
|
2,564
|
2,564
|
Diluted
|
2,564
|
2,564
|
|
Common
Stock
|
|
|
|
|
|
|
Shares
|
Par value
|
Additional paid-in capital
|
Accumulatedother comprehensive income
|
Accumulated deficit
|
Total
|
Balance
as of December 31, 2017
|
2,564
|
$26
|
$6,050
|
$1,189
|
$(236,477)
|
$(229,212)
|
Adoption
of ASU 2014-09 (see Note 1)
|
|
|
-
|
(796)
|
3,725
|
3,725
|
Cumulative
translation adjustment
|
|
|
|
|
(12,979)
|
(796)
|
Net
loss
|
|
|
|
|
|
(12,979)
|
Balance
as of March 31, 2018
|
2,564
|
$26
|
$6,050
|
$393
|
$(245,731)
|
$(239,262)
|
|
For The Three Months Ended March 31,
|
|
|
2018
|
2017
|
Cash Flows from
Operating Activities:
|
|
|
Net
Loss
|
$(12,979)
|
$(10,439)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities
|
|
|
Depreciation
and amortization
|
16,237
|
19,206
|
Deferred
financing amortization
|
1,166
|
941
|
OID
Interest
|
486
|
394
|
Deferred
taxes
|
(948)
|
-
|
Gain
on disposal of fixed assets
|
(4)
|
(58)
|
Loss
on impairment of intangible assets
|
7,689
|
-
|
Non-cash
share-based compensation
|
-
|
15
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
4,823
|
3,839
|
Inventory,
net
|
115
|
360
|
Prepaid
expenses and other current assets
|
5,642
|
(1,336)
|
Other
assets
|
(3,908)
|
(73)
|
Accounts
payable
|
4,850
|
8,327
|
Other
liabilities
|
(9,065)
|
(717)
|
Net
cash provided by operating activities
|
14,102
|
20,459
|
Cash Flows from Investing Activities:
|
|
|
Purchases
of property and equipment
|
(1,734)
|
(3,130)
|
Capitalization
of customer installation costs and commissions
|
(6,193)
|
(7,791)
|
Proceeds
from disposal of fixed assets
|
4
|
58
|
Net
cash used in investing activities
|
(7,923)
|
(10,863)
|
Cash Flows from Financing Activities:
|
|
|
Proceeds
from notes payable and long-term debt
|
-
|
5,000
|
Repayment
of debt obligation
|
(5,750)
|
(5,625)
|
Payment
of capital lease obligations
|
(940)
|
(1,134)
|
Net
cash used in financing activities
|
(6,690)
|
(1,759)
|
Net increase (decrease) in cash and cash equivalents
|
(511)
|
7,837
|
Cash
and cash equivalents at beginning of period
|
5,757
|
8,208
|
Foreign
currency translation effect on cash
|
(69)
|
(54)
|
Cash
and cash equivalents at end of period
|
$5,177
|
$15,991
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
Interest
paid
|
$15,428
|
$8,363
|
Income
tax paid
|
$-
|
$6
|
Non-cash
purchases of property and equipment
|
$-
|
$-
|
|
December 31,
2017
|
ASU 2014-09 Adjustments
|
January 1,
2018
|
Assets
|
|
|
|
Prepaid
expenses
|
$7,549
|
$2,203
|
$9,752
|
Intangible
assets, net
|
115,359
|
(3,304)
|
112,055
|
Other
non-current assets
|
877
|
4,826
|
5,703
|
Accumulated
deficit
|
$(236,477)
|
$3,725
|
$(232,752)
|
|
For
the Three Months Ended March 31, 2018
|
||
|
Under
ASC
605
|
Effect
of Adoption of
ASU
2014-09
|
As
Reported
|
Revenue
|
$125,831
|
$-
|
$125,831
|
Cost
of revenue
|
70,573
|
-
|
70,573
|
Selling,
general and administrative expense
|
31,357
|
395
|
31,752
|
Depreciation
and amortization
|
16,956
|
(719)
|
16,237
|
Net
income (loss)
|
$(13,303)
|
$324
|
$(12,979)
|
|
As of March 31, 2018
|
||
|
Under
ASC 605
|
Effect of Adoption of
ASU 2014-09
|
As Reported
|
Assets
|
|
|
|
Prepaid
expenses
|
$6,183
|
$4,070
|
$10,253
|
Intangible
assets, net
|
103,075
|
(3,940)
|
99,135
|
Other
non-current assets
|
$870
|
$3,910
|
$4,780
|
|
2018
|
2017
|
Voice
|
$62,720
|
$70,127
|
Network
|
45,202
|
51,811
|
Cloud
|
7,544
|
9,237
|
IT
Services
|
1,057
|
1,237
|
Other
|
9,308
|
9,422
|
Total
Revenue
|
$125,831
|
$141,834
|
|
For the Three Months Ended March 31,
|
|
|
2018
|
2017
|
Net
income (loss)
|
$(12,979)
|
$(10,439)
|
Basic
weighted average common shares outstanding
|
2,564
|
2,564
|
Effect
of dilutive securities
|
-
|
-
|
Diluted
weighted average common shares outstanding
|
2,564
|
2,564
|
Basic
income (loss) per common share
|
$(5.06)
|
$(4.07)
|
Diluted
income (loss) per common share
|
$(5.06)
|
$(4.07)
|
|
|
Fair Value
Measurements at the End of the Reporting Period Using
|
|
||
|
Fair
Value
|
Quoted Prices in Active Markets for Identical Assets (Level
1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total
Losses
|
Nonrecurring
fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets
|
$5,808
|
$-
|
$-
|
$5,808
|
$(7,689)
|
|
Intangible
Assets
|
|
|
Opening Balance
– December 31, 2017
|
$13,413
|
|
|
Impairment
(1)
|
(7,605)
|
|
|
Closing Balance
– March 31, 2018
|
$5,808
|
|
Quantitative
Information about Level 3 Fair Value Measurements
|
||||
|
Fair Value at
March 31, 2018
|
Valuation
Techniques
|
|
Unobservable
Input
|
Range
(Weighted Average)
|
|
|
|
|
|
|
Intangible
assets
|
$ 5,808
|
Discounted cash
flow
|
|
Discount
rate
|
4.5%
|
|
Estimated Life
Range (years)
|
March 31,
2018
|
December 31, 2017
|
Owned
Assets:
|
|
|
|
Telecommunications
Equipment
|
5 -7
|
$88,410
|
$88,031
|
Leasehold
Improvements
|
Life of
Lease
|
10,682
|
10,637
|
Office
Equipment
|
3 - 5
|
1,846
|
1,857
|
Buildings
and Building Improvements
|
30 - 40
|
1,540
|
1,540
|
Furniture
and Fixtures
|
3 – 7
|
5,395
|
5,387
|
Computer
Software
|
3 – 5
|
32,726
|
32,794
|
Land
|
N/A
|
470
|
470
|
Automobiles
|
2 - 5
|
47
|
56
|
Construction-In-Process
|
N/A
|
4,806
|
3,813
|
|
|
|
|
Total
Owned Assets
|
|
145,923
|
144,585
|
Accumulated
Depreciation
|
|
(88,233)
|
(83,275)
|
Total
Owned Assets, Net
|
|
57,690
|
61,310
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
38,118
|
38,123
|
Accumulated
Depreciation
|
Life of Lease
|
(14,635)
|
(13,758)
|
Total
Assets Under Capital Lease, Net
|
|
23,483
|
24,365
|
|
|
|
|
Property
and Equipment, Net
|
|
$81,173
|
$85,675
|
|
Operating
Lease
|
Capital
Lease
|
|
|
|
2018
|
$5,115
|
$2,174
|
2019
|
5,490
|
1,690
|
2020
|
2,826
|
723
|
2021
|
1,147
|
443
|
2022
|
667
|
245
|
Thereafter
|
396
|
1,432
|
|
|
|
|
$15,641
|
$6,707
|
|
|
|
Amounts
Representing Interest
|
|
(825)
|
|
|
|
Present
Value of Minimum Lease Payments
|
|
5,882
|
|
|
|
Current
Portion
|
|
(2,539)
|
|
|
|
Obligations
Under Capital Lease-Net of Current Portion
|
|
$3,343
|
|
|
March 31, 2018
|
December 31, 2017
|
Assets
Under Capital Lease
|
|
|
|
Telecommunications
and Office Equipment
|
Life
of Lease
|
$10,845
|
$10,850
|
IRU
(1)
|
20
Years
|
25,326
|
25,326
|
Computer
Software
|
5
Years
|
1,947
|
1,947
|
|
|
|
|
Total
Assets Under Capital Lease
|
|
38,118
|
38,123
|
|
|
|
|
Accumulated
Depreciation
|
|
(14,635)
|
(13,758)
|
Total
Assets Under Capital Lease, Net
|
|
$23,483
|
$24,365
|
|
March 31,
2018
|
December 31,
2017
|
|
|
|
Subscriber
Acquisition Costs
|
$106,635
|
$107,351
|
Network
Transition Costs
|
59,165
|
50,939
|
Tradenames
and Trademarks
|
10,246
|
13,146
|
Noncompete
Agreement
|
-
|
3,000
|
Installation
Costs
|
29,971
|
25,658
|
Commissions
|
-
|
44,609
|
|
|
|
Total
Intangible Assets
|
206,017
|
244,703
|
Accumulated
Amortization
|
(106,882)
|
(129,344)
|
|
|
|
Intangible
Assets, Net
|
$99,135
|
$115,359
|
Year
|
Amount
|
|
|
2018
|
$25,016
|
2019
|
21,345
|
2020
|
14,743
|
2021
|
9,671
|
2022
|
9,527
|
Thereafter
|
14,293
|
Total
|
$94,595
|
|
March 31,
2018
|
December 31,
2017
|
Accrued
other compensation and benefits
|
$3,473
|
$2,462
|
Accrued
bonus
|
9,442
|
10,942
|
Accrued
interest
|
8,591
|
8,326
|
Accrued
facility restructuring liability
|
2,361
|
3,131
|
Accrued
legal settlements
|
12,360
|
13,360
|
Accrued
professional fees
|
1,629
|
1,389
|
Deferred
tax liability
|
1,986
|
2,934
|
Other
accrued expenses
|
667
|
4,571
|
|
|
|
Current
and non-current other accrued liabilities
|
40,509
|
47,115
|
|
|
|
Non-current
portion of deferred taxes
|
(1,986)
|
(2,934)
|
Non-current
portion of accrued legal settlements
|
(7,520)
|
(8,520)
|
Non-current
other
|
(883)
|
(1,393)
|
|
(10,389)
|
(12,847)
|
|
|
|
Current
portion of other accrued liabilities
|
$30,120
|
$34,268
|
|
March 31,
2018
|
December 31,
2017
|
Term
Loan Payable
|
$395,858
|
$401,608
|
Revolver
Loan Payable
|
45,000
|
45,000
|
Promissory
Notes (1)
|
7,116
|
6,774
|
Notes
Payable (1)
|
500
|
500
|
Stock
Repurchase Agreement (2)
|
13,700
|
13,700
|
Deferred
Financing, Net
|
(10,518)
|
(11,683)
|
Debt
Origination Discounts (3)
|
(4,477)
|
(4,963)
|
|
|
|
|
447,179
|
450,936
|
Current
Maturities
|
(30,000)
|
(30,000)
|
|
|
|
Total
Long-Term Debt
|
$417,179
|
420,936
|
Year
|
Amount
|
|
|
2018
|
$24,250
|
2019
|
30,200
|
2020
|
407,724
|
2021
|
-
|
2022
|
-
|
Thereafter
|
-
|
Total
|
$462,174
|
|
March
31,
2018
|
December
31,
2017
|
Deferred
tax assets:
|
|
|
Net
operating loss (federal and state)
|
$30,527
|
$35,294
|
Deferred
rent
|
959
|
959
|
Share-based
compensation expense
|
2,659
|
2,659
|
Voice
regulated revenue transfer to Birch
|
12,600
|
12,600
|
Other
|
701
|
297
|
Gross deferred tax
assets
|
47,446
|
51,809
|
Deferred
tax liabilities:
|
|
|
Allowance
for doubtful accounts
|
(931)
|
(766)
|
Depreciation
|
(4,316)
|
(4,566)
|
Intangible
assets
|
(7,376)
|
(7,376)
|
Goodwill
|
(1,986)
|
(2,934)
|
Gross deferred tax
liabilities
|
(14,609)
|
(15,642)
|
Net deferred tax
assets
|
32,837
|
36,167
|
Valuation
allowance
|
(30,851)
|
(33,233)
|
Net deferred tax
liabilities
|
1,986
|
2,934
|
Less non-current
net deferred tax liabilities
|
1,986
|
2,934
|
Current net
deferred tax liabilities
|
$-
|
$-
|
|
|
|
Primus net deferred
tax assets
|
$256
|
$256
|
|
For the Three Months Ended
March 31,
|
|
|
2018
|
2017
|
United
States
|
$(11,802)
|
$(12,595)
|
Foreign
|
(2,174)
|
3,554
|
Total
|
$(13,976)
|
$(9,041)
|
|
March 31, 2018
|
December 31, 2017
|
||
|
Shares
|
Weighted Average Exercise Price
|
Shares
|
Weighted Average Exercise Price
|
|
|
|
|
|
Outstanding,
Beginning
|
-
|
$-
|
37,000
|
$22.58
|
Granted
|
-
|
-
|
-
|
-
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
(37,000)
|
22.58
|
Cancelled
|
-
|
|
-
|
|
Outstanding,
Ending
|
-
|
$-
|
-
|
$-
|
|
|
|
|
|
Options
Exercisable
|
-
|
$-
|
-
|
$-
|
|
Employee
Costs
(1)
|
Facility
Exit
Costs
(2)
|
Other
Costs
|
Total
|
Expenses
|
$2,184
|
$5,032
|
$286
|
$7,502
|
Payments
|
(2,077)
|
(1,901)
|
(262)
|
(4,240)
|
Accrued Liability
as of December 31, 2017
|
$107
|
$3,131
|
$24
|
$3,262
|
|
|
|
|
|
Expenses
|
996
|
329
|
43
|
1,368
|
Payments
|
(847)
|
(1,099)
|
(67)
|
(2,013)
|
Accrued Liability
as of March 31, 2018
|
$256
|
$2,361
|
$-
|
$2,617
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
||||||||||
|
|
Fusion
|
|
Birch
|
|
New Debt Financing
|
|
Repayment of existing indebtedness
|
|
Consumer Spin-Off
|
|
Additional Equity
|
|
Merger Adjustments
|
|
Pro Forma Combined
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
$
31,000
|
|
$
5,177
|
|
$
596,003
|
(a)
|
$
(533,930)
|
(e,f)
|
$
(177)
|
|
19,158
|
(h)
|
$
-
|
|
$
117,231
|
|
|
Accounts
receivable, net of allowance for doubtful
accounts
|
9,175
|
|
29,929
|
|
-
|
|
-
|
|
(6,365)
|
|
|
|
|
|
32,739
|
|
|
Inventory
|
|
|
1,052
|
|
|
|
|
|
(414)
|
|
|
|
|
|
638
|
|
|
Prepaid
expenses and other current assets
|
1,871
|
|
11,766
|
|
-
|
|
-
|
|
(2,454)
|
|
|
|
|
|
11,183
|
|
|
Deferred
installation costs - current portion
|
798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
798
|
|
|
Current
assetes of discontinued operations
|
4,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,270
|
|
|
Accounts
receivable - employees/stockholders
|
-
|
|
919
|
|
-
|
|
(919)
|
|
-
|
|
|
|
-
|
|
-
|
|
|
Total current assets
|
47,114
|
|
48,843
|
|
596,003
|
|
(534,849)
|
|
(9,410)
|
|
19,158
|
|
-
|
|
166,859
|
|
|
Property and equipment, net
|
11,115
|
|
81,173
|
|
-
|
|
-
|
|
(1,619)
|
|
|
|
5,753
|
(c,d)
|
96,422
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Security
deposits
|
612
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
612
|
|
|
Restricted
cash
|
27
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
27
|
|
|
Goodwill
|
35,182
|
|
93,356
|
|
-
|
|
-
|
|
(3,547)
|
|
|
|
46,780
|
(c)
|
171,771
|
|
|
Intangible
assets, net
|
55,688
|
|
99,135
|
|
-
|
|
-
|
|
(14,041)
|
|
|
|
36,422
|
(c,d)
|
177,204
|
|
|
Deferred
installation costs - net of current portion
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
|
Non-current
assets of discontinued operations
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
Other
assets
|
36
|
|
4,780
|
|
-
|
|
-
|
|
(2,272)
|
|
|
|
-
|
|
2,544
|
|
|
Total other assets
|
92,668
|
|
197,271
|
|
-
|
|
-
|
|
(19,860)
|
|
-
|
|
83,202
|
|
353,281
|
|
|
TOTAL ASSETS
|
$
150,897
|
|
$
327,287
|
|
$
596,003
|
|
$
(534,849)
|
|
$
(30,889)
|
|
$
19,158
|
|
$
88,955
|
|
$
616,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
6,500
|
|
30,000
|
|
27,750
|
(a)
|
(36,500)
|
(e)
|
-
|
|
|
|
-
|
|
27,750
|
|
|
Obligations
under asset purchase agreements - current
portion
|
723
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
723
|
|
|
Equipment
financing obligation
|
1,075
|
|
2,539
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
3,614
|
|
|
Accounts
payable and accrued expenses
|
20,165
|
|
90,812
|
|
-
|
|
-
|
|
(7,240)
|
|
|
|
-
|
|
103,737
|
|
|
Deferred
install revenue - current portion
|
797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
797
|
|
|
Current
liabilities from discontinued operations
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,661
|
|
|
Deferred
Revenue
|
-
|
|
12,287
|
|
-
|
|
-
|
|
(2,170)
|
|
|
|
-
|
|
10,117
|
|
|
Line of
credit
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
Total Current liabilities
|
33,921
|
|
135,638
|
|
27,750
|
|
(36,500)
|
|
(9,410)
|
|
-
|
|
-
|
|
151,399
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable - non-related parties, net of discount
|
32,084
|
|
-
|
|
-
|
|
(32,084)
|
(e)
|
-
|
|
|
|
-
|
|
-
|
|
|
Long-term
debt
|
|
|
417,179
|
|
-
|
|
(413,913)
|
(e)
|
-
|
|
|
|
|
|
3,266
|
|
|
Term
loan
|
47,663
|
|
-
|
|
568,253
|
(a)
|
(47,663)
|
(e)
|
-
|
|
|
|
-
|
|
568,253
|
|
|
Indebtedness
under revolving credit facility
|
-
|
|
-
|
|
|
|
-
|
|
-
|
|
|
|
|
|
-
|
|
|
Obligations
under asset purchase agreements
|
477
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
477
|
|
|
Other
non-current liabilities
|
-
|
|
10,389
|
|
-
|
|
-
|
|
(303)
|
|
|
|
-
|
|
10,086
|
|
|
Notes
payable - related parties
|
928
|
|
-
|
|
-
|
|
(928)
|
(e)
|
-
|
|
|
|
-
|
|
-
|
|
|
Deferred
installation revenue - net of current portion
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030
|
|
|
Equipment
financing obligations
|
409
|
|
3,343
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
3,752
|
|
|
Derivative
liabilities
|
586
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
-
|
|
586
|
|
|
Total liabilities
|
117,098
|
|
566,549
|
|
596,003
|
|
(531,088)
|
|
(9,713)
|
|
|
|
-
|
|
738,849
|
|
|
Total stockholders' equity
|
33,799
|
|
(239,262)
|
|
-
|
(a)
|
(3,761)
|
(e,f)
|
(21,175)
|
|
19,158
|
(h)
|
88,955
|
(b)
|
(122,286)
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
150,897
|
|
$
327,287
|
|
$
596,003
|
|
$
(534,849)
|
|
$
(30,889)
|
|
$
19,158
|
|
$
88,955
|
|
$
616,562
|
|
(a)
|
Record estimated net proceeds from anticipated
financing:
|
|||||||||||||||
|
Net proceeds comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loan
|
$ 650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility fee
|
(53,998)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 596,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The proposed term note will include $555M First Lien an $85M Second
Lien and a $10M subordinated Seller Note. It will also include a
$40M revolver (undrawn at close). The term loan will bear a blended
interest at LIBOR rate plus margin for a total of
9.7% per annum payable according to the terms of the payment
schedule.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
To adjust for the fair value of Fusion shares issued in the
transaction, as adjusted for the Fusion stockholders' deficit at
the date of the transaction, as follows:
|
|||||||||||||||
|
Fair value of Fusion shares acquired (post-split) - 25,336,313
shares (including shares issuable upon conversion of preferred
stock and in-the-money warrants)
|
|||||||||||||||
|
|
Shares O/S
at 3/31/18
|
|
|
|
23,847,138
|
|
|
|
|
|
Shares
O/S
|
|
1,285,529
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-the-money stock warrants at 3/31/18
|
|
203,647
|
|
|
|
|
|
|
|
|
||||
|
|
Share Issuable upon conversion of PS at 3/31/18
|
1,285,529
|
|
|
|
|
|
|
|
|
|||||
|
|
Total
|
|
|
|
|
|
25,336,313
|
|
|
|
|
|
|
|
|
|
|
Stock price at 3/31/18
|
|
$ 4.85
|
|
$ 122,754
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding represent a number of shares issued and
outstanding at 3/31/18. In-the-money warrants represents warrants
with an exercise price of $4.85 or less at 3/31/18. Shares issuable
upon conversion of
preferred stock as of 3/31/18 were based upon a conversion
calculation as listed in the preferred stock
agreements.
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
(c)
|
To assign fair values to Fusion assets acquired and record
goodwill
76,008,940
|
|||||||||||||||
|
Fair value of consideration effectively transferred
|
$ 122,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets (less goodwill) acquired
|
157,890
|
|
|
|
|
|
76,008,940
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
(117,098)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
40,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$ 81,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of consideration was calculated by multiplying stock
price of $4.85 per share by a total of 25,336,313 shares
(post-split) at 3/31/18. The number of shares included shares
outstanding, in-the money stock warrant sand
shares issuable upon conversion of preferred stock as of 3/31/18.
Assets acquired excluded carrier services assets and included a
step up in value based upon a third party valuation.
Liability
acquired excluded carrier services liabilities.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Reflects adjustments to recognize the estimated fair value of
Fusion assets as follows:
|
|||||||||||||||
|
Customer relationships
|
53,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed technology
|
4,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
16,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The company engaged a third party to complete the analysis of
purchase consideration and fair value of assets acquired. The
analysis has been completed in accordance with ASC 805, business
combinations, to
arrive at estimated fair value of Fusion assets.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
Retire existing Fusion and Birch debt, including write-off of
unamortized debt discount of $17.5M. Fusion debt consists of
$62M and $34M of subordinated notes. It also includes
approximately $1M of related party debt. Fusion’s
portion of debt discount is $2.5M. Birch debt consists of $417M of
term loan and $45M revolver. The Birch debt discount is $15M.
The remaining $3.3M of related party notes will be paid over three
quarters.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
Denotes payment of stock repurchase obligation by Birch
shareholders in the amount of $13.7 million. In 2016, Birch entered
into an installment purchase agreement to repurchase 148 shares of
common stock
from a former employee for $13.7M. Installments were scheduled as
follows: $1M on 12/31/16, $1.5M on 5/1/17, $1M on 12/31/17, $3M on
5/1/18, and $7.2M on 5/1/19. No payment had been made due
to covenant restrictions. Unpaid balance will accrete interest at
4% per year.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(h)
|
Represents additional equity that consist of (1) $5M of common
stock and (2) series D preferred stock with a face value of $15M,
net of fees which ammounted to $542 and a discount of $300K on the
Series D preferred. Does not include an additional $3M of common
sotck that was also sold at the closing of the merger.
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|||||||
|
|
Fusion
|
|
Birch
|
|
Refinancing of Existing Indebtedness
|
|
|
Consumer Spin-Off
|
|
Merger Adjustments
|
|
Pro Forma Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
29,038
|
|
$
125,831
|
|
$
-
|
|
|
$
(23,040)
|
|
$
-
|
|
$
131,829
|
|
|
Cost of
revenues (exclusive of depreciation and amortization shown
separately below)
|
12,919
|
|
70,573
|
|
-
|
|
|
(14,225)
|
|
-
|
|
69,267
|
|
|
Gross Profit
|
16,118
|
|
55,258
|
|
-
|
|
|
(8,815)
|
|
-
|
|
62,562
|
|
|
Depreciation
and amortization
|
3,136
|
|
16,237
|
|
|
|
|
(1,370)
|
|
1,588
|
(e)
|
19,591
|
|
|
Impairment
charges
|
1,196
|
|
7,689
|
|
-
|
|
|
(5,374)
|
|
-
|
|
3,511
|
|
|
Restructuring
charges
|
|
|
-
|
|
|
|
|
|
|
|
|
-
|
|
|
Selling,
general and administration expenses, including stock-based
compensation
|
13,948
|
|
31,752
|
|
|
|
|
(6,996)
|
|
(1,002)
|
(f)
|
37,702
|
|
|
Total
operating expenses
|
18,280
|
|
55,678
|
|
-
|
|
|
(13,740)
|
|
586
|
|
60,804
|
|
|
Operating loss
|
(2,162)
|
|
(420)
|
|
-
|
|
|
4,925
|
|
(586)
|
|
1,758
|
|
|
Other (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
(2,148)
|
|
(13,325)
|
|
(2,942)
|
(b)
|
|
3
|
|
|
|
(18,412)
|
|
|
Gain on
change in fair value of derivative liability
|
194
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
194
|
|
|
Loss on
extinguishment of debt
|
-
|
|
-
|
|
|
|
|
-
|
|
-
|
|
-
|
|
|
Loss on
extinguishment of property and equipment
|
(3)
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
Gain on
change in fair value of contingent liability
|
-
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
Other
income, net of other expenses
|
91
|
|
(231)
|
|
|
|
|
(8)
|
|
|
|
(148)
|
|
|
Total other
(expenses) income
|
(1,866)
|
|
(13,556)
|
|
(2,942)
|
|
|
(5)
|
|
-
|
|
(18,369)
|
|
|
(Loss) income before income taxes
|
(4,028)
|
|
(13,976)
|
|
(2,942)
|
|
|
4,920
|
|
(586)
|
|
(16,611)
|
|
|
Benefit
(provision) for income taxes
|
(14)
|
|
997
|
|
|
|
|
(225)
|
|
|
|
758
|
|
|
Net (loss) income
|
(4,042)
|
|
(12,979)
|
|
(2,942)
|
|
|
4,695
|
|
(586)
|
|
(15,853)
|
|
|
|
Less: Net
income attributable to noncontrolling interest
|
(166)
|
|
|
|
|
|
|
|
|
|
|
(166)
|
|
Net loss attributable to Fusion Connect, Inc.
|
(4,208)
|
|
(12,979)
|
|
(2,942)
|
|
|
4,695
|
|
(586)
|
|
(16,019)
|
|
|
Less: Net
loss attributable to non-controlling interest
|
66
|
|
|
|
|
|
|
|
|
(66)
|
|
-
|
|
|
Net loss
attributable to Fusion Connect, Inc.
|
(4,142)
|
|
(12,979)
|
|
(2,942)
|
|
|
4,695
|
|
(652)
|
|
(16,019)
|
|
|
Preferred
stock dividends in arrears
|
(244)
|
|
-
|
|
-
|
|
|
-
|
|
244
|
(c)
|
-
|
|
|
Net (loss) income attributable to common
stockholders
|
$
(4,386)
|
|
$
(12,979)
|
|
$
(2,942)
|
|
|
$
4,695
|
|
$
(408)
|
|
$
(16,019)
|
|
|
Basic and
diluted loss per common share
|
$
(0.21)
|
|
|
|
|
|
|
|
|
|
|
$
(0.16)
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted
|
20,682,262
|
|
|
|
|
|
|
|
|
81,615,373
|
(d)
|
102,297,635
|
|
(a)
|
Denotes redemption premium and write off of unamortized debt
discount for indebtedness being refinanced
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Increase in interest rate based on refinancing, including discount
amortization resulting from facility fee and deferred loan costs of
$54 million related to the refinancing
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Remove preferred dividends as all preferred stock is converted
prior to merger
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Shares (post-split) issued to Birch in merger transaction include
23,847,138 of Fusion shares issued and outstanding, 203,647 of
Fusion in-the-money warrants, 1,285.529 of Fusion shares issuable
upon conversion of preferred
stock and 76,008,940 of new shares to be issued as part of the
transaction, and additional shares of 952,382 related to the
additional equity.
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
To record amortization expense for additional $36 million of
intangibles acquired based on a 7 year useful life and the
increased book basis of property and equipment
of $5.7 million based on a 5 year expected
life.
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
To remove merger-related transaction fees incurred in 2018 and
accounted for in the December 2017 pro forma statement of
operations which include $.2M for Fusion and $.8M
for BCHI.
|
Fusion Connect, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited Pro Forma Condensed Combined Statement of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Adjustments
|
|
|
||||||||||
|
|
Fusion
|
|
Birch
|
|
Refinancing of Existing Indebtedness
|
|
Carrier Services Spin-Off
|
|
Consumer Spin-Off
|
|
Merger Adjustments
|
|
Asset Impairment
|
|
Pro Forma Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
150,531
|
|
$
550,324
|
|
$
-
|
|
$
(33,189)
|
|
$
(100,357)
|
|
$
-
|
|
$
-
|
|
$
567,309
|
|
|
|
Cost of revenues (exclusive of depreciation and amortization shown
separately below)
|
83,033
|
|
307,959
|
|
-
|
|
(31,982)
|
|
(62,372)
|
|
-
|
|
|
|
296,638
|
|
|
|
Gross Profit
|
67,497
|
|
242,365
|
|
-
|
|
(1,207)
|
|
(37,985)
|
|
-
|
|
|
|
270,671
|
|
|
|
Depreciation and amortization
|
14,521
|
|
83,793
|
|
|
|
(341)
|
|
(13,582)
|
|
5,942
|
(e)
|
5,371
|
(g)
|
95,704
|
|
|
|
Impairment charges
|
641
|
|
52,783
|
|
-
|
|
|
|
(1,328)
|
|
-
|
|
1,780
|
(g)
|
53,876
|
|
|
|
Restructuring charges
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
Selling, general and administration expenses, including stock-based
compensation
|
57,724
|
|
139,595
|
|
|
|
(2,315)
|
|
(29,857)
|
|
14,725
|
(f)
|
|
|
179,872
|
|
|
|
Total operating expenses
|
72,886
|
|
276,171
|
|
-
|
|
(2,656)
|
|
(44,767)
|
|
20,667
|
|
7,151
|
|
329,452
|
|
|
|
Operating loss
|
(5,389)
|
|
(33,806)
|
|
-
|
|
1,449
|
|
6,782
|
|
(20,667)
|
|
(7,151)
|
|
(58,781)
|
|
|
|
Other (expenses) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(8,649)
|
|
(50,920)
|
|
(14,344)
|
(b)
|
-
|
|
|
|
|
|
|
|
(73,913)
|
|
|
|
Gain on change in fair value of derivative liability
|
(909)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
|
|
(909)
|
|
|
|
Loss on extinguishment of debt
|
-
|
|
-
|
|
(21,771)
|
(a)
|
-
|
|
-
|
|
-
|
|
|
|
(21,771)
|
|
|
|
Loss on extinguishment of property and equipment
|
(312)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(312)
|
|
|
|
Gain on change in fair value of contingent liability
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,012
|
|
|
|
Other income, net of other expenses
|
209
|
|
1,658
|
|
|
|
-
|
|
(9)
|
|
|
|
|
|
1,858
|
|
|
|
Total other (expenses) income
|
(8,649)
|
|
(49,262)
|
|
(36,115)
|
|
-
|
|
(6)
|
|
-
|
|
-
|
|
(94,035)
|
|
|
|
(Loss) income before income taxes
|
(14,038)
|
|
(83,068)
|
|
(36,115)
|
|
1,449
|
|
6,776
|
|
(20,667)
|
|
(7,151)
|
|
(152,817)
|
|
|
|
Benefit (provision) for income taxes
|
(62)
|
|
(2,543)
|
|
|
|
-
|
|
96
|
|
|
|
|
|
(2,509)
|
|
|
|
Net (loss) income
|
(14,100)
|
|
(85,611)
|
|
(36,115)
|
|
1,449
|
|
6,872
|
|
(20,667)
|
|
(7,151)
|
|
(155,326)
|
|
|
|
|
Less: Net
income attributable to noncontrolling interest
|
86
|
|
|
|
|
|
(86)
|
|
|
|
|
|
|
|
-
|
|
|
Net loss attributable to Fusion Connect, Inc.
|
(14,014)
|
|
(85,611)
|
|
(36,115)
|
|
1,363
|
|
6,872
|
|
(20,667)
|
|
(7,151)
|
|
(155,326)
|
|
|
|
Preferred stock dividends in arrears
|
(1,838)
|
|
-
|
|
-
|
|
-
|
|
-
|
|
1,838
|
(c)
|
|
|
-
|
|
|
|
Net (loss) income attributable to common stockholders
|
$
(15,852)
|
|
$
(85,611)
|
|
$
(36,115)
|
|
$
1,363
|
|
$
6,872
|
|
$
(18,829)
|
|
$
(7,151)
|
|
$
(155,326)
|
|
|
|
Basic and diluted loss per common share
|
$
(0.72)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
(2.31)
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
21,969,601
|
|
|
|
|
|
|
|
|
|
45,391,480
|
(d)
|
|
|
67,361,081
|
|
|
(a)
|
Denotes redemption premium and write off of unamortized debt
discount for indebtedness being refinanced
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Increase in interest rate based on refinancing, including discount
amortization resulting from facility fee and deferred loan costs of
$54 million related to the refinancing
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
Remove preferred dividends as all preferred stock is converted
prior to merger
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d)
|
Shares (post-split) issued to Birch in merger transaction include
14,980,755 of Fusion shares issued and outstanding, 257,433 of
Fusion in-the-money warrants, 1,363,986 of Fusion shares issuable
upon conversion of preferred stock
and 49,806,524 of new shares to be issued as part of the
transaction, and additioanl shares of 952,382 related to the
additional equity.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(e)
|
To record amortization expense for additional $36 million of
intangibles acquired based on a 7 year useful life and the
increased book basis of property and equipment of
$4.0 million based on a 5 year expected life.
|
|
|
|
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(f)
|
To record merger-related transaction fees of $14.7M consisting of
bonus awards, and other deal related expenses.
|
|||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(g)
|
To record impairment of a Fusion back-office platform which will no
longer be in use post acquisition. Reflects accelerated Amorization
of trade names, Birch Communications $1.2M and Cbeyond $4.6M, for
BCHI that will be phased out over the balance of the year.
|