Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________
FORM 8-K
____________________________
Current Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 1,
2019
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Fusion Connect, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware
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001- 32421
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58-2342021
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(State or other jurisdiction of incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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420 Lexington Avenue, Suite 1718, New York, NY 10170
(Address of principal executive offices, including zip
code)
(212) 201-2400
(Registrant’s telephone number, including area
code)
Not applicable
(Former name or former address, if changed since last
report)
Check the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the
registrant under any of the following provisions:
☐ Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
☐
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
☐
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
☐
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth
company as defined in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the Securities
Exchange Act of 1934 (§240.12b-2 of this
chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Item 4.02. Non-Reliance on Previously Issued
Financial Statements or a Related Audit Report or Completed Interim
Review.
As previously disclosed, on May 4, 2018, Fusion Connect,
Inc. (the “Company”) completed the merger (the
“Birch
Merger”) of its
wholly-owned subsidiary, Fusion BCHI Acquisition LLC, with and
into Birch Communication Holdings, Inc. (“Birch”),
in accordance with the terms of the Agreement and Plan of Merger,
dated as of August 26, 2017, as amended. As a result of
the Birch Merger, each then existing subsidiary of Birch became an
indirect wholly-owned subsidiary of the Company. For accounting
purposes, the Birch Merger has been treated as a “reverse
acquisition” under U.S. generally accepted accounting
principles and Birch has been treated as the accounting acquirer.
Accordingly, Birch’s historical results of operations have
replaced the Company’s historical results of operations for
all periods prior to the Birch Merger and, the Company’s
Quarterly Reports on Form 10-Q for the periods ended June 30, 2018
and September 30, 2018 (the “Original
Filings”) included the
results of operations of the combined company since the Birch
Merger.
In connection with the first audit of the Company’s financial
statements post Birch Merger, the Company determined that
the process used by certain of its Birch subsidiaries for
capitalizing costs associated with the
customer on-boarding process and the related judgments and
estimates were not designed with sufficient precision. As a result,
the Company identified accounting errors which resulted in an
understatement of expenses for the applicable periods (the
“Accounting
Errors”), which are currently anticipated to be
material to the impacted periods. The
Company is correcting the Accounting Errors and will be restating
its interim financial statements included in the Original Filings
and its annual financial statements for the fiscal year ended
December 31, 2017 to be included in the Annual Report on Form 10-K
for the fiscal year ended December 31, 2018 (the
“2018 Form
10-K”).
On April 1, 2019, the Audit Committee of the Company (the
“Audit
Committee”) concluded,
acting upon the recommendation of management and following
discussions with EisnerAmper LLP, the Company’s independent
public accountants (“Eisner”),
that due to the Accounting Errors, the previously issued financial
statements of the Company for the year ended December 31,
2017, and for the periods contained in the Original Filings and
other financial communications for those periods should no longer
be relied upon.
On April 2, 2019, the Company also filed an amendment to its Form
12b-25 filed with the U.S. Securities and Commission on March 15,
2019 to indicate that the Company will not be able to file the 2018
Form 10-K by the April 2, 2019 extension deadline. This further
delay in filing the 2018 Form 10-K is due to the Company requiring
additional time to gather information and complete its analysis of
the impact of the Accounting Errors. In addition, McNair, McLemore,
Middlebrooks & Co., LLC, Birch’s public accounting firm
prior to the completion of the Birch Merger, has not completed its
audit procedures related to the restatement of Birch’s 2017
financial statements resulting from the Accounting
Errors.
Although the Company has not determined the precise amount of the
required restatements, it currently estimates such amounts to range
between $2.3 million and $3.0 million with respect to the year ended
December 31, 2017 and ranging from $3.4 million and $4.1
million and $1.7 million and $2.3 million with respect to the quarters ended September 30,
2018 and June 30, 2018, respectively. The actual amount of the
restatements will not be known until all audit work is completed.
The Company can provide no assurances that the estimates provided
above will not change. These adjustments will have no cash impact
but will reduce the Company’s EBTIDA for the applicable
periods by an amount equal to the required
restatements.
The 2018 Form 10-K will include a material weakness relating to the
Accounting Errors and material weakness relating to (a) the design
and implementation of policies that define internal control
expectations, (b) insufficient personnel with the knowledge and
training in information technology, (c) ineffective information
technology general controls in the areas of user access and program
change management over certain information technology (IT) systems,
(d) insufficient documentation to support the effective operation
of controls placed in service that support the Company’s
financial reporting processes, and (e) ineffective monitoring and
review and communicating deficiencies in a timely manner for
corrective action (collectively, the “Material
Weaknesses”).
Management continues to assess the nature and extent of the
Material Weaknesses and their impact on the Company’s reports
on the effectiveness of internal controls over financial reporting
and its disclosure controls and procedures. The Company is
in the process of remediating the identified deficiencies and
implementing new controls that management believes will remediate
the Material Weaknesses. Further details concerning the Material
Weaknesses and the Company’s proposed remediation plans will
be reflected in the 2018 Form 10-K. Management and the Audit
Committee have discussed these matters with Eisner. The Company intends to file the 2018 Form 10-K as
soon as practicable.
Management
currently expects that Eisner’s audit report with respect to
the Company’s 2018 financial statements will include an
explanatory paragraph expressing uncertainty as to the
Company’s ability to continue as a going concern. The failure
of the Company to timely deliver the financial statements for the
fiscal year ended December 31, 2018 and/or the delivery of
such financial statements with a going concern qualification could
give rise to a default or event of default under the Credit
Agreements (as defined below).
The
Company anticipates that it will receive a notification letter from
the Listing Qualifications Department of The Nasdaq Stock Market
LLC (“Nasdaq”) stating that the
Company is no longer in compliance with applicable Nasdaq rules
based on its inability to file the 2018 Form 10-K. The Company will
have 60 calendar days from receipt of such notice to submit to
Nasdaq an acceptable plan setting forth the steps to be taken by
the Company to regain compliance with these requirements. The
Company intends to file such a plan.
Item 7.01. Regulation FD Disclosure
The Company is party to (i) that certain First Lien Credit and
Guaranty Agreement, dated as of May 4, 2018 (the
“First Lien Credit
Agreement”), by and among
the Company, as borrower, certain subsidiaries of the Company, as
guarantor subsidiaries, the lenders party thereto, and Wilmington
Trust, National Association (“Wilmington
Trust”), as
administrative agent and collateral agent (the
“First Lien
Administrative Agent”),
and (ii) that certain Second Lien Credit and Guaranty Agreement,
dated as of May 4, 2018 (the “Second Lien Credit
Agreement” and, together
with the First Lien Credit Agreement, the
“Credit
Agreements”), by and
among the Company, as borrower, certain subsidiaries of the
Company, as guarantor subsidiaries, the lenders party thereto, and
Wilmington Trust, as administrative agent and collateral agent (the
“Second Lien
Administrative Agent” and
together with the First Lien Administrative Agent, the
“Administrative
Agent”).
On
April 1, 2019, the Company failed to make an approximately $7
million in aggregate principal payments with respect to the Tranche
A Term Borrowings and the Tranche B Term Borrowings (each as
defined in the First Lien Credit Agreement), that was due on April
1, 2019 (the “Installments”).
Non-payment of the Installments constitutes an immediate event of
default under the First Lien Credit Agreement pursuant to which the
lenders may accelerate the loans thereunder (and will constitute a
cross-default or cross-acceleration event under certain of the
Company’s other indebtedness or contractual obligations). We
have been informed by certain of our lenders that they intend to
instruct the Administrative Agent to declare all amounts borrowed
thereunder to be immediately due and payable. Should such
acceleration occur, this would also result in the occurrence of an
event of default under the Second Lien Credit
Agreement.
The
Company also anticipates that it will not be in compliance with
certain covenants set forth in the First Lien Credit Agreement as
of the December 31, 2018 and March 31, 2019 testing dates. The
December 31, 2018 non-compliance resulted from the Accounting
Errors. Noncompliance with these covenants can become an additional
event of default under the Credit Agreements.
As
discussed above, the Company also expects that it will be unable to
deliver its 2018 audited financial statements without a going
concern qualification in the time-frame required by the Credit
Agreements. Non-compliance with these requirements can also become
an additional default or event of default under the Credit
Agreements.
The
Company has been engaged in discussions with lenders under the
Tranche A Term Loans, the Tranche B Term Loans, and the Revolving
Loans (each as defined in the First Lien Credit Agreement) and the
lenders under Loans (as defined the Second Lien Credit Facility) to
secure, among other things, waivers of, and amendments related to,
the various defaults and events of defaults described in this Form
8-K and other defaults or events of default that may arise as a
result of its non-compliance with the requirements of the Credit
Agreements. In addition to its lender discussions, the Company was
engaged in discussions with Mr. Holcombe T. Green, Jr., the
Company’s majority stockholder and Vice Chairman of the
Company’s Board of Directors, to secure additional liquidity
for the Company through a capital infusion. However, the Company
has been unable to secure such capital infusion from the
stockholder.
As a
result of the foregoing, the Company intends to seek forbearances
from its lenders and intends to enter into discussions with its
lenders regarding a restructuring of its debt obligations through
an out-of-court agreement. If such discussions are unsuccessful,
the Company may seek protection under Chapter 11 of the U.S.
Bankruptcy Code and, in the case of certain of the Company’s
subsidiaries, the Canadian Companies’ Creditors Arrangement
Act.
The Company has retained Weil Gotshal & Manges LLC, FTI
Consulting, and Macquarie Capital (USA) Inc., to assist the Company
with its review of various strategic options.
Cautionary Statements Regarding Forward-Looking
Information
This
Current Report includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995,
which are subject to risks and uncertainties. All statements, other
than statements of historical facts, are forward-looking
statements. When used in this report, the words “will,”
“believe,” “intend,” “expect,”
“may,” “should,” “anticipate,”
“could,” “estimate,” “plan,”
“predict,” “project,”
“potential” or their negatives, other similar
expressions or the statements that include those words, are
intended to identify forward-looking statements, although not all
forward-looking statements contain such identifying words. Readers
are cautioned not to place undue reliance on forward-looking
statements. Forward-looking statements include, but are not limited
to: statements relating to the Company’s ability to obtain
forbearances from its lenders; statements about the Company’s
ability to negotiate restructuring of its debt obligations;
statements relating to the timing of the completion of the audit
procedures for the 2018 Form 10-K, the final assessment of the
amount of the required restatement arising from the Accounting
Errors and the related impact on the Company’s financial
statements; statements relating to the timing of the filing of the
2018 Form 10-K; statements about the Company’s compliance
with Nasdaq rules; and statements relating to the Company’s
ability to remediate control deficiencies and material
weaknesses.
Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors, and the Company’s
actual results, performance or achievements could differ materially
from future results, performance or achievements expressed in these
forward-looking statements. These forward-looking statements are
based on the Company’s current beliefs, intentions and
expectations. These statements are not guarantees or indicative of
future performance, nor should any conclusions be drawn or
assumptions be made as to any potential outcome of Company’s
discussions with its lenders or with respect to the Capital
Infusion.
Although
the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot
guarantee future results, levels of activity, performance or
achievements. Moreover, neither the Company nor any other person
assume responsibility for the accuracy and completeness of the
forward-looking statements. The Company undertakes no obligation to
update any of the forward-looking statements after the date of this
Current Report on Form 8-K to conform such statements to actual
results or to changes in Company’s expectations, except as
required by law. Please also refer to the “Risk
Factors” in Company’s Annual Report on Form 10-K and
Quarterly Reports on Form 10-Q filed with the SEC.
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
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Fusion
Connect, Inc.
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Date: April
2, 2019
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By:
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/s/ James P. Prenetta,
Jr.
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Name:
James
P. Prenetta, Jr.
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Title:
EVP and
General Counsel
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