Blueprint
Exhibit
99.3
An investment in Fusion’s (as defined below) securities
involves a high degree of risk. You should carefully consider the
risk factors described below in evaluating the Company’s (as
defined below) future prospects. In particular, keep these risk
factors in mind when you read “forward-looking”
statements in the Company’s various reports filed with the
Securities and Exchange Commission (the “SEC”).
Forward-looking statements relate to the Company’s
expectations for future events and time periods. Generally, the
words “believes,” “anticipates,”
“expects,” “intends,” “plans,”
“projects,” “estimates,”
“assumes,” “may,” “should,”
“could,” “shall,” “will,”
“seeks,” “targets,” “future,”
or other similar expressions identify forward-looking statements.
Forward-looking statements involve risks and uncertainties, and
future events and circumstances could differ significantly from
those anticipated in the forward-looking statements. Any of the
following risks could harm the Company’s business, operating
results or financial condition and could result in a complete loss
of your investment. Additional risks and uncertainties that are not
yet identified or that the Company currently thinks are immaterial
may also harm the Company’s business and financial condition
in the future.
As
previously reported, on May 4, 2018, Fusion Connect, Inc.
(“Fusion”) completed a merger (the “Birch
Merger”) with Birch Communications Holding, Inc., a Georgia
corporation (“Birch”), in accordance with the terms of
the Agreement and Plan of Merger, dated as of August 26, 2017, as
amended (the “Birch Merger Agreement”). As a result of
the Birch Merger, each then existing subsidiary of Birch became an
indirect wholly owned subsidiary of Fusion. 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 included the results of operations of the
combined company since the Birch Merger.
In
addition, on June 15, 2018, the Company completed its acquisition
of MegaPath Holding Corp., a Delaware corporation
(“MegaPath”) through a merger (the “MegaPath
Merger”) with MegaPath, in accordance with the terms of the
Agreement and Plan of Merger, dated as of May 4, 2018 (the
“MegaPath Merger Agreement”).
As
previously reported, Fusion and each of its subsidiary debtors
(collectively, the “Debtors” and together with their
non-debtor Canadian subsidiaries, the “Company, “we,
”“us” or “our”) entered into a
Restructuring Support Agreement, dated as of June 3, 2019 (the
“RSA”), with lenders (collectively, the
“Consenting First Lien Lenders”) holding more than 66-
2/3% of the aggregate
outstanding principal amount of the loans under that certain First
Lien Credit and Guaranty Agreement, dated as of May 4, 2018 (as
amended, restated, amended and restated, supplemented, or otherwise
modified from time to time in accordance with the terms thereof),
by and among Fusion, as borrower, certain subsidiaries of Fusion,
as guarantors, Wilmington Trust, National Association
(“Wilmington Trust”), as administrative agent and
collateral agent, and the lenders party thereto. Terms used but not
otherwise defined herein have the meanings ascribed to them in the
Disclosure Statement or the Plan, as applicable (each as defined
below).
As
previously reported, pursuant to the RSA, the Consenting First Lien
Lenders and the Company agreed to the principal terms of a
restructuring of the Company (the “Restructuring”),
which is to be implemented pursuant to the Plan, and provides for
either a standalone reorganization (the “Reorganization
Transaction”) or a sale of all or substantially all of the
Company’s assets or business to a third party. On June 3,
2019, the Company filed voluntary petitions (the “Bankruptcy
Petitions”) (and the cases commenced thereby, the
“Chapter 11 Cases”) under chapter 11 (“Chapter
11”) of title 11 of the U.S. Code (the “Bankruptcy
Code”) in the United States Bankruptcy Court for the Southern
District of New York (the “Bankruptcy
Court”).
In
connection with the Chapter 11 Cases, on June 7, 2019, the Company
entered into the Superpriority Secured Debtor-in-Possession Credit
and Guaranty Agreement, dated as of June 7, 2019 (the “DIP
Credit Agreement”), by and among Fusion, as borrower, certain
subsidiaries of Fusion, as guarantors, the lenders party thereto
(the “DIP Lenders”) and Wilmington Trust, as
administrative agent and collateral agent.
On July
1, 2019, the Company submitted a disclosure statement (the
“Disclosure Statement”) pursuant to Section 1125 of the
Bankruptcy Code in connection with the solicitation of votes with
respect to the Joint Chapter 11
Plan of Fusion Connect, Inc. and Its Subsidiary Debtors, dated July
1, 2019 (the “Plan”).
Risks Related to the Restructuring
We are subject to risks and uncertainties associated with the
Chapter 11 Cases.
Our
operations, our ability to develop and execute our business plan
and our continuation as a going concern are subject to the risks
and uncertainties associated with bankruptcy proceedings,
including, among others: our ability to execute, confirm and
consummate the Plan or another plan of reorganization with respect
to the Chapter 11 Cases. the high costs of bankruptcy proceedings
and related fees. our ability to obtain sufficient financing to
allow us to emerge from bankruptcy and execute our business plan
post-emergence, and our ability to comply with terms and conditions
of that financing arrangement. our ability to maintain our
relationships with our lenders, counterparties, employees and other
third parties. our ability to maintain contracts that are critical
to our operations on reasonably acceptable terms and conditions.
our ability to attract, motivate and retain key employees. the
ability of third parties to seek and obtain court approval to
convert the Chapter 11 Cases to proceedings under chapter 7 of the
Bankruptcy Code (“Chapter 7”). and the actions and
decisions of our creditors and other third parties who have
interests in our Chapter 11 Cases that may be inconsistent with our
operational and strategic plans.
Delays
in our Chapter 11 Cases increase the risks of our being unable to
emerge from bankruptcy and may increase our costs associated with
the bankruptcy process. These risks and uncertainties could affect
our business and operations in various ways. For example, negative
events associated with our Chapter 11 Cases could adversely affect
our relationships with our lenders, counterparties, employees and
other third parties, which in turn could adversely affect our
operations and financial condition. Also, we need the prior
approval of the Bankruptcy Court for transactions outside the
ordinary course of business, which may limit our ability to respond
timely to certain events or take advantage of certain
opportunities. Because of the risks and uncertainties associated
with our Chapter 11 Cases, we cannot accurately predict or quantify
the ultimate impact of events that occur during our Chapter 11
Cases that may be inconsistent with our plans.
The RSA is subject to significant conditions and milestones that
may be beyond our control and may be difficult for us to satisfy.
If the RSA is terminated, our ability to confirm and consummate the
Plan, and our ability to consummate any restructuring of our debt,
could be materially and adversely affected.
The RSA
sets forth certain conditions we must satisfy, including the timely
satisfaction of conditions and milestones to consummate the Plan.
Our ability to timely satisfy such conditions and milestones is
subject to risks and uncertainties that, in certain instances, are
beyond our control. If the Plan is not consummated, there can be no
assurance that any new plan would be as favorable to holders of
claims or interests as the Plan, and our Chapter 11 Cases could
become protracted, which could significantly and detrimentally
impact our relationships with regulators, government agencies,
vendors, suppliers, agents, employees and customers. The RSA gives
the Consenting First Lien Lenders the ability to terminate the RSA
under certain circumstances, including our failure to meet certain
conditions or achieve specified milestones. Should the RSA be
terminated, all obligations of the parties to the RSA will
terminate (except as expressly provided in the RSA). A termination
of the RSA may result in the loss of support for the Plan, which
could adversely affect our ability to confirm and consummate the
Plan and our ability to emerge from Chapter 11. In addition,
termination of the RSA is an “Event of Default” under
the DIP Credit Agreement. If we are unable to access funds under
the DIP Credit Agreement, we may be forced to
liquidate.
There can be no assurance that the solicited class of claims will
vote to accept the Plan.
There
can be no assurance that the Plan will receive the necessary level
of support to be implemented or will be approved by the Bankruptcy
Court. The success of the Restructuring will depend on the
willingness of certain existing creditors to agree to the exchange
or modification of their claims and approval by the Bankruptcy
Court, and there can be no guarantee of success with respect to
those matters. The Consenting First Lien Lenders are impaired under
the Plan and entitled to vote to accept or reject the Plan. If the
RSA is terminated, each vote or any consent given by any Consenting
First Lien Lender prior to such termination will be deemed null and
void ab initio. If the termination of the RSA
takes place when Bankruptcy Court approval is required for a
Consenting First Lien Lender to change or withdraw its vote to
accept the Plan, the Company has agreed to support and not oppose
any such attempt to change or withdraw a vote.
We may
receive objections to the terms of the transactions contemplated by
the RSA, including objections to confirmation of the Plan from the
various stakeholders in the Chapter 11 Cases, including the
appointed statutory committee of unsecured creditors. We cannot
predict the impact that any objection or third party motion may
have on the Bankruptcy Court’s decision to confirm the Plan
or our ability to complete an in-court restructuring as
contemplated by the RSA or otherwise. Any objection may cause us to
devote significant additional resources in response which could
materially and adversely affect our business, financial condition
and results of operations.
If we
do not receive sufficient support for the Plan, or if the Plan is
not confirmed by the Bankruptcy Court, it is unclear what, if any,
distributions holders of claims or interests would ultimately
receive. There can be no assurance as to whether or when we will
emerge from Chapter 11. If a plan of reorganization cannot be
confirmed, or if the Bankruptcy Court otherwise finds that it would
be in the best interest of holders of claims and interests, the
Chapter 11 Cases may be converted to a case under Chapter 7,
pursuant to which a trustee would be appointed or elected to
liquidate our assets for distribution in accordance with the
priorities established by the Bankruptcy Code.
There can be no assurance that our Marketing Process will result in
any bids representing higher or better value of Fusion’s
assets. and speculation and uncertainty regarding the outcome of
the Sale Transaction may adversely impact our
business.
In
support of the Marketing Process, Fusion and its advisors have
developed bidding and auction procedures for the marketing and sale
of Fusion’s assets in these Chapter 11 Cases in an orderly
and value maximizing manner, hereinafter referred to as the Bidding
Procedures. Under the Bidding Procedures, parties may submit bids
for the purchase and sale of any and all of the U.S. Business, the
Canadian Business or the U.S. Business and the Canadian Business in
accordance with the terms of the Bidding Procedures. The Bidding
Procedures are designed to promote a competitive and expedient
bidding process, and are intended to generate the greatest level of
interest in the Company’s assets. The Bidding Procedures are
intended to provide the Debtors with flexibility to solicit
proposals, negotiate transactions, provide stalking horse
protections (if necessary and appropriate), hold an auction (if
necessary and appropriate) and consummate a Sale Transaction for
the highest and best value, all while protecting the due process
rights of all stakeholders and ensuring that there is a full and
fair opportunity to review and consider proposed transactions.
There can be no assurance that any such bids will be received or
pursued, and speculation and uncertainty regarding the outcome of
the Sale Transaction may adversely impact our
business.
The pursuit of the Restructuring will consume a substantial portion
of the time and attention of our management, which may have an
adverse effect on our business and results of
operations.
It is
impossible to predict with certainty the amount of time and
resources necessary to successfully implement the Restructuring.
Compliance with the terms of the RSA and the Plan will involve
additional expense and our management will be required to spend a
significant amount of time and effort focusing on the proposed
transactions. This diversion of attention may materially adversely
affect the conduct of our business, and, as a result, our financial
condition and results of operations.
Furthermore,
potential loss of key personnel, significant employee attrition or
material erosion of employee morale could have a material adverse
effect on our ability to effectively conduct our business, and
could impair our ability to execute our strategy and implement
operational initiatives, thereby having a material adverse effect
on our business and on our financial condition and results of
operations.
Trading in our securities is highly speculative and poses
substantial risks.
Trading
in our securities is highly speculative and the market price of
Fusion’s common stock has been and may continue to be
volatile. Any such volatility may affect the ability to sell our
common stock at an advantageous price or at all.
The
Nasdaq Global Market (“NASDAQ”) filed a Form 25-NSE
with the SEC on May 2, 2019, which removed Fusion’s common
stock from listing and trading on NASDAQ effective May 13, 2019.
Fusion’s common stock now trades over-the-counter. Trading in
Fusion’s common stock is limited, and holders of such
securities may not be able to resell their securities for their
purchase price or at all. Accordingly, trading in Fusion’s
common stock during the pendency of the Chapter 11 Cases is highly
speculative and poses substantial risks to purchasers of such
securities. Trading prices for Fusion’s common stock may bear
little or no relationship to the actual recovery, if any, by
holders thereof in our Chapter 11 Cases.
Under
the Reorganization Transaction, we will be a privately held company
after emergence from Chapter 11, which will result in less
disclosure about us and may negatively affect our ability to raise
additional funds, the ability of our stockholders to sell
securities and the liquidity and trading pries of our
securities.
There
is currently no market for the New Equity Interests proposed to be
issued pursuant to the Plan and there can be no assurance as to the
development or liquidity of any market for any such securities. The
Reorganized Debtors will be under no obligation to list the New
Equity Interests or any other securities on any national securities
exchange. Therefore, there can be no assurance that the New Equity
Interests will be tradable or liquid at any time after the
Effective Date. If a trading market does not develop or is not
maintained, holders of New Equity Interests may experience
difficulty in reselling such securities or may be unable to sell
them at all. Even if such a market were to exist, such securities
could trade at prices higher or lower than the estimated value set
forth in the Disclosure Statement depending upon many factors
including, without limitation, markets for similar securities,
industry conditions, and the performance of, and investor
expectations for, the Reorganized Debtors.
The composition of our Board of Directors is expected to change
significantly upon emergence from the Chapter 11
Cases.
The
Plan contemplates that if a Reorganization Transaction is
consummated, the composition of Fusion’s Board of Directors
will change at the time of emergence. The New Board will consist of
seven (7) directors. Six (6) directors will be selected by the
First Lien Lender Group (at least one of whom must be independent)
and the chief executive officer of Reorganized FCI. Any new
directors may have different views on the issues that will
determine our future, and, as a result, the future strategy and
plans of the Company upon emergence from the Chapter 11 Cases may
differ materially from those of the past.
Our businesses could suffer from a long and protracted
restructuring.
Our
future results are dependent upon the successful confirmation and
implementation of the Plan. Failure to obtain confirmation of the
Plan or approval and consummation of an alternative restructuring
transaction in a timely manner may have a material adverse effect
on our business, financial condition, results of operations and
liquidity.
For as
long as the Chapter 11 Cases continue, we will be required to incur
substantial costs for professional fees and other expenses
associated with the administration of the Chapter 11 Cases. The DIP
Credit Agreement is intended to provide us with liquidity during
the pendency of the Chapter 11 Cases. If we are unable to obtain
the necessary waivers and/or amendments or timely Bankruptcy Court
approval for the Plan or alternative financing during the pendency
of the Chapter 11 Cases, our chances of successfully reorganizing
our business may be seriously jeopardized, the likelihood that we
instead will be required to liquidate our assets may be enhanced,
and, as a result, our outstanding securities could become further
devalued or become worthless.
In certain instances, a Chapter 11 case may be converted to a case
under Chapter 7 of the Bankruptcy Code.
If no
plan of reorganization can be confirmed, if the Bankruptcy Court
otherwise finds that it would be in the best interest of holders of
claims and interests or upon the showing of cause, the Bankruptcy
Court may convert our Chapter 11 Cases to cases under Chapter 7. In
such event, a Chapter 7 trustee would be appointed or elected to
liquidate our assets for distribution in accordance with the
priorities established by the Bankruptcy Code. Liquidation under
Chapter 7 would likely result in significantly smaller
distributions being made to our creditors than those provided for
in the Plan because of (i) the likelihood that the assets would
have to be sold or otherwise disposed of in a distressed fashion
over a short period of time rather than in a controlled manner and
as a going concern, (ii) additional administrative expenses
involved in the appointment of a Chapter 7 trustee, and (iii)
additional expenses and claims, some of which would be entitled to
priority, that would be generated during the liquidation and from
the rejection of leases and other executory contracts in connection
with a cessation of operations.
We may be subject to claims that will not be discharged in the
Chapter 11 proceedings, which could have a material adverse effect
on our financial condition and results of operations.
The
Bankruptcy Code provides that the confirmation of a plan of
reorganization discharges a debtor from substantially all debts
arising prior to confirmation. With certain exceptions, all claims
that arose prior to the filing for Chapter 11 protection (i) would
be subject to compromise and/or treatment under the plan of
reorganization and/or (ii) would be discharged in accordance with
the Bankruptcy Code and the terms of the plan of reorganization.
Any claims not ultimately discharged through a plan of
reorganization could be asserted against the Reorganized Debtors
and may have an adverse effect on our financial condition and
results of operations on a post-reorganization basis.
The Plan and any other plan of reorganization that we may implement
will be based in large part upon assumptions, projections and
analyses developed by us. If these assumptions, projections and
analyses prove to be incorrect in any material respect, the Plan
may not be successfully implemented.
The
Plan or any other plan of reorganization that we may implement will
have been based in important part on assumptions and analyses based
on our experience and perception of historical trends, current
conditions and expected future developments, as well as other
factors that we have considered appropriate under the
circumstances. Whether actual future results and developments will
be consistent with our expectations and assumptions depends on a
number of factors, including but not limited to (i) our ability to
compete in the marketplace for cloud communications services and
business services. (ii) our ability to continue to identify and
contract with local, regional and national entities that will
assist in the distribution of our products and services. (iii) our
ability to retain key employees. and (iv) our ability to obtain
licenses or other government approvals to operate in new markets.
The failure of any of these factors could materially adversely
affect the successful reorganization of our
businesses.
The restatement of our financial statements may lead to additional
risks and uncertainties, including regulatory, stockholder or other
actions, loss of investor and counterparty confidence and negative
impacts on our stock price.
As
previously disclosed in the Current Report on Form 8-K filed with
the SEC on April 2, 2019, our audit committee, after consultation
with management and discussion with our independent registered
public accounting firm, concluded that our previously issued
financial statements for the fiscal years ended December 31, 2017
and for the periods ended June 30, 2018 and September 30, 2018
(collectively, the “Restated Periods”) should no longer
be relied upon and should be restated for certain accounting
errors. These errors were discovered in connection with the first
audit of the Company’s financial statements after the Birch
Merger, when 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, anticipated
to be material to the impacted periods. As previously reported,
although the Company has not determined the precise amount of the
required restatements, it estimated 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.
While
all actions and claims interposed against us are stayed pursuant to
section 362 of the Bankruptcy Code during the pendency of the
Chapter 11 Cases as a result of the required restatements, officers
and directors of the Company could be subject to regulatory,
stockholder or other actions in connection with the restatement,
which would, regardless of the outcome, consume their time and
attention and may result in additional legal, accounting, and other
costs. If the Company’s officers and directors do not prevail
in any such proceedings, the Company could be required to pay
damages or settlement costs. In addition, the restatement and
related matters could impair the Company’s reputation or
could cause our customers, stockholders, or other counterparties to
lose confidence in us. Any of these occurrences could have a
material adverse effect on our business, results of operations,
financial condition, and could further affect our stock
price.
Information contained in our historical financial statements may
not be comparable to the information contained in our financial
statements after the application of fresh start accounting
associated with the Chapter 11 Cases.
If we
emerge from Chapter 11 in the form of a recapitalized company, we
may apply fresh start accounting to the assets and liabilities on
our consolidated balance sheets. Our financial condition and
results of operations from and after our emergence, if any, may not
be comparable to the financial condition or results of operations
in our historical financial statements. In the application of fresh
start accounting, an allocation of the reorganization value is made
to the fair value of assets and liabilities in conformity with the
guidance for the acquisition method of accounting for business
combinations. Adjustments to the carrying amounts could be material
and could affect prospective results of operations as balance sheet
items are settled, depreciated, amortized or impaired. This will
make it difficult for our stockholders and others to assess our
performance in relation to prior periods.
Our ability to utilize our tax losses and other tax attributes to
reduce future tax liabilities is subject to substantial limitations
and may be subject to additional limitations and reduction as a
result of future transactions, including the consummation of the
Plan.
Pursuant
to Sections 382 and 383 of the U.S. tax law, if a corporation
undergoes an ownership change (generally defined as a greater than
50% change (by value) in its equity ownership over a three-year
period), the corporation’s ability to use its pre-change net
operating loss (“NOL”) carryforwards and certain other
tax attributes to offset its post-change income may be subject to
an annual limitation. We experienced an ownership change as a
result of the Birch Merger. Accordingly, our ability to utilize our
NOL carryforwards and certain other tax attributes is subject to
substantial limitations, and as a result of such limitations most
of our NOL carryforwards are not available to offset future income.
This amount, and any applicable limitations, are subject to
examination and challenge by the applicable taxing authorities, and
further adjustment based on operating results. Similar rules may
apply under state tax laws with respect to state NOL
carryforwards.
In the
event of a further ownership change as a result of our emergence
from Chapter 11 or other future transactions, our ability to
utilize our otherwise available NOL carryforwards and other tax
attributes may be subject to additional limitations. Also, in
connection with our emergence from Chapter 11, we expect to have a
substantial amount of cancellation of debt (“COD”) as a
result of the discharge in bankruptcy which will be excludable from
income for U.S. federal income tax purposes. Nevertheless, we will
be required to reduce our NOL carryforwards and other tax
attributes by an amount equivalent to the excluded COD income
(regardless of whether the NOL carryforwards or other tax
attributes would have been available to offset current or future
taxable income). Accordingly, as a result of the Chapter 11 Cases,
our NOL carryforwards and other tax attributes may be significantly
reduced and potentially subject to additional severe
restrictions.
Risks Relating to Our Business
The amount of debt that we have outstanding could restrict our
activities or have a negative impact on our ability to raise
additional capital to fund our operations, limit our ability to
react to changes in the economy or our industry, and prevent us
from meeting our obligations.
Prior
to filing the Bankruptcy Petitions, our liquidity position exposed
the Company to default risk under both the First Lien Credit
Agreement and Second Lien Credit Agreement. The Company entered
into a forbearance agreement, dated as of April 15, 2019 (as
amended, amended and restated, supplemented or otherwise modified
from time to time, the “Forbearance Agreement”), with
substantially all of the lenders under the First Lien Credit
Agreement (collectively, the “Forbearing Lenders”).
Pursuant to the Forbearance Agreement, the Forbearing Lenders
agreed not to exercise any remedies under the First Lien Credit
Agreement with respect to the Company’s then existing
defaults until June 3, 2019. Although the Company was unable to
reach an agreement with the lenders under the Second Lien Credit
Agreement as to a similar forbearance, such lenders were
nonetheless barred from exercising remedies under the Second Lien
Credit Agreement due to a 150-day standstill provision set forth in
the Intercreditor Agreement governing the secured parties under the
First Lien Credit Agreement and Second Lien Credit
Agreement.
To pay
our ordinary course operating expenses, finance the Chapter 11
Cases, and, ultimately, provide the Company with the flexibility to
consummate the transactions contemplated by the RSA, we entered
into the DIP Credit Agreement, which provides the Company with a
DIP Facility comprising (i) up to $39.5 million in new money term
loans and (ii) up to $20.0 million in roll-up term loans
representing the roll-up, on a dollar-for-dollar basis, of the
aggregate outstanding principal amount of loans under the Super
Senior Loan Agreement.
Our
overall leverage and the terms of our financing
arrangements:
●
make it more
difficult to satisfy our obligations under the terms of our
indebtedness;
●
limit our ability
to refinance our indebtedness on terms acceptable to us or at
all;
●
limit our
flexibility to plan for and adjust to changing business and market
conditions in the industries in which we operate and increase our
vulnerability to general adverse economic and industry
conditions;
●
limit our ability
to pursue strategic and operational goals;
●
require us to
dedicate a substantial portion of our cash flow to make interest
and principal payments on our debt, thereby limiting the
availability of our cash flow to fund future acquisitions, working
capital, business activities, and other general corporate
requirements;
●
limit our ability
to obtain additional financing for working capital, to fund growth
or for general corporate purposes, even when necessary to maintain
adequate liquidity, particularly if any ratings assigned to our
debt securities by rating organizations were revised downward;
and
●
subject us to
higher levels of indebtedness than certain of our competitors,
which may cause a competitive disadvantage and may reduce our
flexibility in responding to increased competition.
Currently,
substantially all of the assets of the Debtors are pledged as
collateral under the DIP Facility. The DIP Credit Agreement
contains a number of affirmative and negative covenants, including,
but not limited to, the requirement to provide periodic financial
reporting and restrictions on incurring additional indebtedness and
liens, making dividend payments and cash distributions, and
purchasing or acquiring any investments. Furthermore, the Company
is required to comply with certain financial covenants, including,
but not limited to, compliance with certain limitations on the
Debtors’ variance from the approved budgets established under
the DIP Facility. Our failure to comply with any such covenants
could result in an event of default and accelerated demand for
repayment of our indebtedness.
There may exist material weaknesses in our internal controls on
financial reporting, which, if not remediated promptly and
appropriately, could result in loss of investor
confidence.
Due to
its acquisitions during 2018, with effect from January 1, 2019
Fusion became subject to additional financial reporting and system
obligations under the Sarbanes-Oxley Act of 2002. Despite its
retention of a third-party consultant to assist the Company in
implementing additional controls and procedures to ensure
compliance with these additional obligations, management was
advised by its independent public accounting firm that they have
identified a number of material weaknesses in the Company’s
internal controls related to ineffective information technology
general controls (ITGCs) in the areas of user access and program
change- management over certain information technology (IT) systems
that support the Company’s financial reporting processes. As
a result, management concluded that the Company’s internal
controls over financial reporting was not effective as of December
31, 2018. In connection with restatement of the Company’s
financial statements discussed above, the Company has reassessed
its internal control over financial reporting and disclosure
controls and procedures and has determined that a material weakness
exists 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, and therefore the Company’s internal controls over
financial reporting and disclosure controls and procedures were
ineffective.
While
all actions and claims interposed against us are stayed pursuant to
section 362 of the Bankruptcy Code during the pendency of the
Chapter 11 Cases, if we are unable to remediate the material
weaknesses, or are otherwise unable to maintain effective internal
control over financial reporting or disclosure controls and
procedures, our ability to record, process and report financial
information accurately, and to prepare financial statements within
required time periods, could be adversely affected, which could,
subject us to litigation or investigations requiring management
resources and payment of legal and other expenses, and negatively
affect investor confidence in our financial
statements.
We have a history of operating losses and net losses. There can be
no assurance that we will ever achieve profitability or have
sufficient funds to execute our business strategy.
We
recorded significant net losses in the year ended December 31, 2017
and December 31, 2018. During those periods, despite our efforts to
reduce our expenses, and improve operations, we were not successful
in meeting key business goals and generating profits and on June 3,
2019 commenced the Chapter 11 Cases. We may not be able to generate
profits in the future and may not be able to support our operations
or otherwise establish a return on invested capital. In addition,
we may not have sufficient funds to execute our business
strategy.
Changes in technology and service offerings could affect our
ability to compete in the marketplace for cloud communications
services and business services.
Our
business is subject to rapid and significant changes in technology,
particularly in the emerging areas of cloud voice, UCaaS, cloud
connectivity, cloud storage and cloud computing. Our industry has
evolved significantly in these areas over the past few years, and
is expected to continue to evolve. Emerging technologies could lead
to the development of newer, more convenient, more cost-effective
or otherwise more attractive services than those we offer. In
addition, the preferences and requirements of business customers
are changing rapidly. Our ability to retain current customers and
attract new customers may be highly dependent on whether we choose
the technologies that will ultimately have the greatest customer
acceptance, are able to adopt these new technologies and offer
competitive new services when appropriate, or can compete
successfully against other service providers that use these new
technologies, many of whom are larger or possess greater financial
or technical resources than we do. The development, introduction
and marketing of such new services in response to new technologies
or new customer demands may require us to increase our capital
expenditures significantly. In addition, new technologies may be
protected by patents or other intellectual property laws and
therefore may only be available to our competitors and not to
us.
The cloud services and business services sectors are highly
competitive and we may be unable to compete
effectively.
The
cloud and business services sectors are highly competitive, rapidly
evolving and subject to constant technological change. In addition,
many of our current cloud and business services competitors are
significantly larger than us and have substantially greater market
presence than we do; and greater financial, technical, operational
and marketing resources than us. In the event that any competitor
expends significant sales and marketing resources in one or several
markets where we compete with them, we may not be able to compete
successfully in those markets. We also believe that competition
will continue to increase, placing downward pressure on prices.
Such pressure could adversely affect our gross margins if we are
unable to reduce our costs commensurate with the price reductions
of our competitors. In addition, the pace of technological change
makes it impossible for us to predict whether we will face new
competitors using different technologies to provide the same or
similar services offered or proposed to be offered by us. If our
competitors were to provide better and more cost effective services
than we do, we may not be able to increase our revenues or capture
any significant market share.
There has been turnover in our senior management. If we do not
retain our executive officers and senior management, or if we do
not continue to attract and retain qualified personnel, our ability
to execute our business plan could be adversely
affected.
Our
existing executive officers and senior management have extensive
experience in the cloud services and communications industry, as
well as many years of working together as an integrated management
team directing our day-to-day operations. As a result, we are
dependent on those individuals and the loss of the services of one
or more of these individuals could impair our ability to execute
our strategy or achieve our business and financial
objectives.
We do
not have written employment agreements with any of our executive
officers or other members of our senior management team except for
Matthew D. Rosen, our Chief Executive Officer. In addition, there
has been turnover among our senior executives, including the
departures of our President, Gordon Hutchins, Jr., in November
2018, the departure of Kevin Dotts, our Executive Vice President,
Chief Financial Officer and Principal Accounting Officer in August
2018, and the departure of our prior Chief Financial Officer,
Michael Bauer, and our prior Principal Accounting Officer, Lisa
Taranto, in May 2018.
We face
competition for qualified personnel, including management,
technical, financial and sales personnel. If we are unable to
attract and retain experienced and motivated personnel, the growth
of our business or the effectiveness of our day-to-day operations
may be negatively impacted and we may not be able to further grow
our customer base or achieve our business or financial
objectives.
Our revenue growth is dependent upon our ability to build new
distribution relationships and to acquire new
customers.
Our
ability to grow through efficient and cost effective deployment of
our cloud and business services is, in part, dependent upon our
ability to continue to identify and contract with local, regional
and national entities that will assist in the distribution of our
products and services. If we are unable to identify, contract with
or maintain such distribution relationships, or if the efforts of
these agents are not successful, we may not grow the customer base
or achieve the revenue level currently envisioned and our results
of operations will be adversely impacted.
Our ability to grow our business is dependent upon market
developments, which may lead us to make expenditures that do not
result in increased revenue.
Our
purchase of network equipment and software will be based, in part,
upon our expectations concerning future revenue growth and market
developments. As we expand our network, we will be required to make
significant capital expenditures, including the purchase of
additional network equipment and software. To a lesser extent, our
fixed costs will also increase from the ownership and maintenance
of a greater amount of network equipment including our switching
systems, gateways, routers and other related systems. If our
volumes were to decrease, or fail to increase to the extent
expected or necessary to make efficient use of our network, our
costs as a percentage of revenue would increase
significantly.
We rely upon certain proprietary rights in our technology, systems
and business processes. If our protection of these rights were to
be compromised, it could negatively affect our ability to compete
or to achieve our projected business and financial
results.
Our
ability to compete depends, in part, upon our proprietary rights in
our technology, systems and business processes. In general, our
technology is based on the integration and use of publicly
available hardware components, and is therefore afforded little
protection under existing patent law. Some of our software and
systems, while developed by us, are generally not unique in such a
manner as to allow protection under existing patent law. As a
result, we generally rely on a combination of contractual
restrictions and the general protection afforded by copyright,
trademark and trade secret laws to establish and protect our
proprietary rights. Such limited protection could prove
insufficient and thereby subject us to increased competition or
impact the business or financial results of our
operations.
It is
the Company’s policy to require employees, consultants and,
when warranted, certain customers and vendors to execute
confidentiality agreements with us. These agreements provide that
confidential information developed or made known during the course
of the relationship must be kept confidential and not disclosed to
third parties except under certain limited circumstances. If such
arrangements were to prove ineffective in protecting our
confidential information, our business or financial performance
could be negatively impacted.
The
U.S. Patent and Trademark Office has granted Fusion federal
registration for in excess of fifty trademarks and one patent.
Federal registration of those trademarks will be effective for as
long as we continue to use them and renew their registrations.
Federal registration for the patent will continue for 20 years from
the date of application, or until 2028, so long as the maintenance
fees are paid. The Canadian Intellectual Property Office has
granted Fusion registration of one patent. Such registration will
be effective for 20 years from the date of application, or until
2028, so long as the maintenance fees are paid. We may register
additional trademarks, patents and other intellectual property
rights in the future, although there can be no assurance that our
effort to register these trademarks, patents or other intellectual
property rights will be successful. Fusion generally does not
register any of its copyrights with the U.S. Copyright Office, but
relies on the protection afforded to such copyrights by the U.S.
Copyright Act, which provides protection to authors of original
works whether published or unpublished and whether registered or
unregistered.
We earn revenue, incur costs and maintain cash balances in multiple
currencies, and currency fluctuations could adversely affect our
financial results.
We have
operations in Canada, where we earn revenue and incur costs in
Canadian Dollars. Doing business in Canada exposes us to foreign
currency risks in numerous areas, including revenue, purchases and
payroll. Certain of these currency exposures are naturally offset
because revenue and costs are both denominated in the same
currency, and certain cash balances are held in U.S. Dollar
denominated accounts. However, fluctuations in foreign currency
exchange rates could materially impact our results in the future.
Any fluctuations in foreign currency exchange rates could
materially impact the availability and amount of these funds
available for transfer.
We are dependent upon our ability to obtain the necessary
regulatory approvals and licenses to enter new markets in which
such approvals are required. Such approvals may or may not occur as
planned and could be delayed.
Our
ability to enter into new markets may, in certain cases, rely upon
our ability to obtain licenses or other government approvals to
operate in those markets, our ability to establish good working
relationships with the relevant regulatory authorities in those
jurisdictions and/or our ability to interconnect to the networks of
other carriers and providers in those markets. If we are not able
to obtain or are delayed in obtaining any necessary licenses,
approvals or interconnections, our ability to enter these new
markets may be prevented or delayed.
We rely on third party equipment suppliers who may not be able to
provide us the equipment necessary to deliver the services that we
seek to provide.
We are
dependent on third party equipment suppliers, including Cisco and
BroadSoft, for equipment, software and hardware components. If
these suppliers fail to continue product development and research
and development or fail to deliver quality products or support
services on a timely basis, or if we are unable to develop
alternative sources of supply if and as required, such a failure
could result in an inability to deliver the services that we
currently provide or intend to provide, and our financial condition
and results of operations may be adversely affected.
A significant amount of our revenue is derived from a limited
number of customers, and any reduction in revenue from any of these
customers could have a material adverse effect on our
business.
Our
twenty largest customers by revenue accounted for approximately
6.7% of our pro forma consolidated revenue during the twelve months
ended December 31, 2018. During the twelve months ended December
31, 2018, no single customer accounted for more than 5% of our pro
forma consolidated revenue or accounts receivable. If any of our
key customers decides not to renew its contracts with us, or to
renew on less favorable terms, our business, revenue, reputation,
and our ability to obtain new customers could be adversely
affected.
Our rights to the use of fiber that is part of our network may be
affected by the ability to continue long term contracts and the
financial stability of our IRU fiber providers.
A
portion of our services are provided on network fiber facilities
licensed or leased from other network service providers through
indefeasible rights of use (“IRUs”) or similar
arrangements. The facilities under these agreements have remaining
terms generally ranging from less than 1 year to 24 years. In these
agreements, the network owner is responsible for network
maintenance for which we pay such network owners. If our network
provider under IRU agreements has financial troubles, it could
adversely affect our costs, especially maintenance costs and
ability to deliver service. Also, if our network providers under
IRU agreements are unable to obtain and maintain necessary
rights-of-way and access to pole attachments for their fiber
networks or if they fail to renew or extend our IRUs, our
operations may be interrupted and/or we could incur material
expenses if we were required to relocate to alternative network
assets.
Our ability to provide services is often dependent on our suppliers
and other service providers who may not prove to be
reliable.
A
majority of the voice calls made by our customers are connected
through other service providers, which provide us with transmission
capacity through a variety of arrangements. Our ability to
terminate voice traffic in our targeted markets is an essential
component of our ongoing operations. If we do not secure or
maintain operating and termination arrangements, our ability to
increase services to our existing markets and gain entry into new
markets will be limited. Therefore, our ability to maintain and
expand our business is dependent, in part, upon our ability to
maintain satisfactory relationships with other domestic service
providers, Internet service providers, international service
providers, fiber optic cable providers and other service providers,
many of which are our competitors, and upon our ability to obtain
the services on a cost effective basis. In addition, if a service
provider with whom we interconnect does not carry the traffic
routed to it, or does not provide the required bandwidth, we may be
forced to route our voice traffic to, or buy capacity from, a
different service provider on less advantageous terms, which could
reduce our profit margins or degrade our network service quality.
In the event network service quality is degraded, it may result in
a loss of customers. To the extent that any of these service
providers with whom we interconnect raises its rates, changes its
pricing structure or reduces the amount of bandwidth it will make
available to us, our revenues and profitability may be adversely
affected. Also, our revenues and profits may be adversely affected
if our suppliers experience financial difficulties that prevent or
impair their provision of the services we need.
Some of our services are dependent upon multiple service platforms,
network elements, and back-office systems that are reliant on third
party providers.
We have
deployed back-office systems and services platforms that enable us
to offer our customers a wide-array of services and features.
Sophisticated back office information and processing systems are
vital to our future growth and our ability to continue to monitor
costs, invoice customers, provision customer orders, and achieve
operating efficiencies. Some of these systems are dependent upon
license agreements with third party vendors. These third party
vendors may cancel or refuse to renew some of these agreements, and
the cancellation or non-renewal of these agreements may harm our
ability to invoice customers and provide services
efficiently.
Our business could be materially and adversely affected in the
event of accusations of infringement of third-party intellectual
rights.
There
has been substantial litigation in the areas in which we operate
regarding intellectual property rights. Regardless of the merits,
accusations and lawsuits concerning claims of infringement or
misuse of another party’s proprietary rights may negatively
affect customer relationships, may divert management’s
attention away from other aspects of our operations and, upon
resolution may have a material adverse effect on our business,
results of operations, financial condition and cash
flows.
If we
were found to be infringing on the intellectual property rights of
a third party, we could be subject to liability for such
infringement, which could be material. We could also be prohibited
from selling certain services or required to redesign certain
services, each of which could have a material adverse effect on our
business and results of operations. These and other outcomes may
result in the loss of a substantial number of existing customers or
prevent our acquisition of new customers; cause us to pay license
fees for intellectual property we are found to have infringed;
cause our costs to increase; materially and adversely affect our
brand in the marketplace and cause a substantial loss of goodwill;
and cause us to cease certain services or offering certain
features.
Vulnerabilities to security breaches, cyber intrusions and other
malicious acts could adversely impact our business.
In the
current environment, there are numerous and evolving risks to
cybersecurity and privacy, including criminal hackers,
state-sponsored intrusions, industrial espionage, employee
malfeasance, and human or technological error. Computer hackers and
others routinely attempt to breach the security of technology
products, services, and systems such as ours, and those of
customers, third-party contractors and vendors.
Our
operations depend on our ability to protect our network from
interruption by damage from unauthorized entry, computer viruses or
other events beyond our control. In the past, we may have been
subject to malicious attacks including denial or disruption of
service (“DDOS”), and we may be subject to DDOS or
other malicious attacks in the future. We cannot assure you that
our backup systems, regular data backups, security protocols, DDOS
mitigation and other procedures that are currently in place, or
that may be in place in the future, will be adequate to prevent
significant damage, system failure or data loss. Critical to our
provision of service is the storage, processing, and transmission
of confidential and sensitive data. We store, process and transmit
a wide variety of confidential and sensitive information including
credit card, bank account and other financial information,
proprietary, trade secret or other data that may be protected by
intellectual property laws, customers' and employees' personally
identifiable information, as well as other sensitive information.
We, along with others in our industry, will be subject to cyber
threats and security breaches, given the nature of the information
we store, process and transmit.
Depending
on the evolving nature of cyber threats and the measures we may
have to implement to continue to maintain the security of our
networks and data, our profitability may be adversely impacted or
we may have to increase the price of our services which may make
our offerings less competitive with those of other service
providers.
If an
individual obtains unauthorized access to our network, or if our
network is penetrated, our service could be disrupted and sensitive
information could be lost, stolen or disclosed which could have a
variety of negative impacts, including legal liability,
investigations by law enforcement and regulatory agencies, and
exposure to fines or penalties, any of which could harm our
business reputation and have a material negative impact on our
business. In addition, to the extent we market our services as
compliant with particular laws governing data privacy and security,
such as HIPAA (Health Insurance Portability and Accountability
Act), GDPR (General Data Protection Regulation) and the
Gramm-Leach-Bliley Act, any security breach that exposes protected
information may make us susceptible to a number of claims related
to our marketing.
Many
governments have enacted laws requiring companies to notify
individuals of data security incidents involving certain types of
personal data. In addition, some of our customers contractually
require notification of any data security compromise. Security
compromises experienced by our competitors, by our customers or by
us may lead to public disclosures, which may lead to widespread
negative publicity. Any security compromise in our industry,
whether actual or perceived, could harm our reputation, erode
customer confidence in the effectiveness of our security measures,
negatively impact our ability to attract new customers, cause
existing customers to elect not to renew their contracts with us or
subject us to third-party lawsuits, regulatory fines or other
action or liability, which could materially and adversely affect
our business and operating results.
In
contracts with larger customers, we sometimes agree to assume
liability for security breaches in excess of the amount of
committed revenue from the contract. In addition, there can be no
assurance that any limitations of liability provisions in our
customer contracts for a security breach would be enforceable or
adequate or would otherwise protect us from any such liabilities or
damages with respect to any particular claim. We also cannot be
sure that our existing general liability insurance coverage and
coverage for errors or omissions will continue to be available on
acceptable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not deny
coverage as to any future claim. The successful assertion of one or
more large claims against us that exceed available insurance
coverage, or the occurrence of changes in our insurance policies,
including premium increases or the imposition of large deductible
or co-insurance requirements, could have a material adverse effect
on our business, financial condition and operating
results.
Industry consolidation could make it more difficult for us to
compete.
Companies
offering cloud voice, UCaaS, cloud connectivity, SaaS, IaaS and
other cloud services, as well as more traditional business
services, are, in some circumstances, consolidating. This
consolidation strengthens our competitors and poses increased
competitive challenges for us. In addition, there has been, and
continues to be, combinations between incumbent local exchange
carriers (“ILECs”)/interexchange carriers which
provides the ILECs with national and international networks and
eliminates the two most effective and well-financed opponents of
the ILECs in federal and state legislative and regulatory forums,
potentially reducing the availability of non-ILEC network
facilities.
We may
not be able to compete successfully with businesses that have
combined, or will combine, to produce companies with substantially
greater financial, technical, sales and marketing resources, or
with larger client bases, more extended networks or more
established relationships with vendors and distributors. If we were
to experience such heightened competitive pressures, there is a
risk that our revenues may not grow as expected and the value of
our common stock and other equity securities could
decline.
Our ability to provide certain of our services and systems at
competitive prices is dependent on our ability to negotiate and
enforce favorable interconnection and other agreements with
ILECs.
Our
ability to continue to obtain favorable interconnection,
unbundling, service provisioning and pricing terms is dependent, in
part, on maintenance of interconnection agreements with the ILEC.
We are party to one or more interconnection agreements in each
state and service territory in which we require such agreements.
The initial terms of many of our interconnection agreements have
expired, however, our interconnection agreements generally contain
an “evergreen” provision that allows the agreement to
continue in effect until terminated. ILECs also are making
available some facilities and services to competitors under
unregulated “commercial agreements” that are not
subject to the same requirements as interconnection agreements. The
largest ILECs are also attempting to eliminate mandatory
interconnection through Federal Communications Commission
(“FCC”) rulemaking, and replace regulated
interconnection arrangements with commercial negotiations. If we
were to receive a termination notice from an ILEC, we could
negotiate a new agreement or initiate an arbitration proceeding at
the relevant state commission before the agreement expired. In
addition, the Federal Communications Act of 1934, as amended (the
“Communications Act”), gives us the right to opt into
interconnection agreements which have been entered into by other
carriers, provided the agreement is still in effect and provided
that we adopt the entire agreement. We cannot assure you that we
will be able to successfully renegotiate these agreements or any
other interconnection agreement on terms favorable to us or at all.
Local telephone service competition depends on cost based and
nondiscriminatory interconnection with, and use of, ILEC networks
and facilities. Failure to achieve and maintain such arrangements
could have a material adverse effect on our ability to provide
competitive local telephone services. If we are unable to
renegotiate or enter into new agreements on acceptable terms, our
cost of doing business could increase and our ability to compete
could be impeded.
Due to their control of “last-mile” access to many of
our customers, if we experience difficulties in working with ILECs,
our ability to offer services on a timely and cost-effective basis
could be materially and adversely affected.
Our
business depends on our ability to interconnect with ILEC networks
and to lease from the ILECs certain essential network elements. We
obtain access to these network elements and services under terms
established in interconnection agreements, contract tariffs and
commercial arrangements that we have entered into with ILECs. Like
many competitive communications services providers, from time to
time, we may experience difficulties in working with ILECs with
respect to obtaining information about network facilities, ordering
and maintaining network elements and services, interconnecting with
ILEC networks and settling financial disputes. These difficulties
can impair our ability to provide service to our customers on a
timely and competitive basis. If an ILEC refuses to cooperate or
otherwise fails to support our business needs for any other reason,
including labor shortages, work stoppages, cost-cutting initiatives
or disruption caused by mergers, other organizational changes or
terrorist attacks, our ability to offer services on a timely and
cost-effective basis can be materially and adversely
affected.
Additional taxation and government regulation of the cloud
communications industry may slow our growth, resulting in decreased
demand for our products and services and increased costs of doing
business.
As a
result of changes in regulatory policy, we could be forced to pay
additional taxes on the products and services we provide. We
structure our operations and our pricing based on assumptions about
various domestic and international tax laws, tax treaties and other
relevant laws. Taxation authorities or other regulatory authorities
might not reach the same conclusions about taxation that we have
reached in formulating our assumptions. We could suffer adverse tax
and other financial consequences if our assumptions about these
matters are incorrect or the relevant laws are changed or modified.
In the U.S., our products and services are subject to varying
degrees of federal, state and local regulation, including
regulation by the FCC and various state public utility commissions.
In Canada, our products and services are subject to varying degrees
of federal, provincial and local regulation, including regulation
by The Canadian Radio-television and Telecommunications Commission.
We may also be subject to similar regulation by other foreign
governments and their telecommunications and/or regulatory
agencies. While these regulatory agencies grant us the authority to
operate our business, they typically exercise minimal control over
the cloud services that we offer. However, they do require the
filing of various reports, compliance with public safety and
consumer protection standards and the payment of certain regulatory
fees and assessments.
We also
hold various U.S. federal and state licenses authorizing us to
provide regulated interstate and intrastate telecommunications
services to our carrier and end-user customers, and we comply with
federal and state reporting, fee payment, tariffing and other
obligations with respect to these services. In contrast to the
typically lighter regulation of cloud services, described above,
telecommunications services in the U.S. are often subject to a more
formalized and aggressive regulatory regime. Even in jurisdictions
where we are primarily providing cloud or lightly regulated VoIP
services, we are regulated more pro-actively based upon the holding
of a license to provide telecommunications services. It is possible
that at some point we may be found not to have fully complied with
applicable federal and/or state licensing or compliance
requirements and, as a result, we may be subject to fines,
penalties or other enforcement consequences. In addition, following
the Birch Merger, our operations are subject to the requirements of
a Consent Decree established in 2016 between Birch Communications,
Inc. and the FCC to settle allegations of noncompliance by BCI and
its operating subsidiaries. We may face heightened regulatory
scrutiny going forward as a result of the Consent Decree and in the
event that we are found to have violated any of the specific laws
and regulations implicated in the consent decree, it is possible
that we will face escalated penalties. Over time, it is possible
that U.S. federal and/or state regulation of telecommunications
services may change and become more burdensome, resulting in
increased labor costs for compliance management and/or increases in
direct costs of operations, including, for example, increased
federal/state Universal Service Fund contributions or increased FCC
and state public utility commission regulatory assessments. In the
event that federal and/or state telecommunications regulation
becomes more robust in the future, it could provide the basis for
an increase in complaints filed against companies such as the
Company pursuant to the Communications Act, and/or state laws and
regulations.
In addition to new regulations being adopted, existing laws may be
applied to the Internet and other services which are not regulated
today, which could hinder our future growth.
New
laws and regulations may be adopted that apply to the Internet and
new and existing laws and regulations may cover issues that
include: sales and other taxes; user privacy; pricing controls;
characteristics and quality of products and services; consumer
protection; cross-border commerce; copyright, trademark and patent
infringement; and other claims based on the nature and content of
Internet materials. Changes to existing laws or regulations or the
adoption of new laws or regulations could delay growth in demand
for our products and services or increase our costs and limit the
growth of our revenue.
Additional taxation and government regulation of fiber assets and
right of way may increase our cost of doing business.
The
provision of certain of our services relies upon our 100% Internet
Protocol-based network that includes 31,000 route miles of fiber.
These fiber assets occupy rights-of-way and other easements, many
of which are controlled by local and state governments. There may
be adoption of, or changes to, local and state laws and regulations
that affect these fiber assets in public rights-of-way and
easements and the effect of those new or revised laws and
regulations could be a greater regulatory burden upon the fiber
networks, resulting in higher costs for our operations and delays
in our ability to effectively manage and make modifications to,
including expansions of our networks.
In
addition, local governments may require us to obtain licenses,
permits, or franchises to use the public rightsofway
necessary to install and operate our network. We may be subject to
numerous local regulations such as building codes, municipal
franchise requirements, and licensing. Such regulations vary on a
city-by-city and county-by-county basis and can affect our
provision of services. We also may be required to pay license or
franchise fees based on a percentage of gross revenues or a per
linear foot basis in various localities. In many markets, ILECs are
not required to pay these franchise fees or are permitted to pay
fees that are substantially lower than those required to be paid by
us. To the extent that our competitors do not pay the same level of
fees that we do, we could be at a competitive
disadvantage.
Risks Related to Ownership of our Common Stock
The elimination of monetary liability against our directors,
officers and employees under our amended and restated certificate
of incorporation and the existence of indemnification rights in
favor of our directors, officers and employees may result in
substantial expenditures by us and may discourage lawsuits against
our directors, officers and employees.
Fusion’s
amended and restated certificate of incorporation contains
provisions that eliminate the liability of our directors for
monetary damages to us and our stockholders to the maximum extent
permitted under the Delaware General Corporation Law.
Fusion’s amended and restated bylaws also require us to
indemnify our directors to the maximum extent permitted by Delaware
law. We also have contractual indemnification obligations with our
directors and certain of our executive officers. These
indemnification obligations could result in us incurring
substantial expenditures to cover the cost of settlement or damage
awards against directors, officers and employees, which we may be
unable to recoup. These provisions and the associated costs may
also discourage us from bringing a lawsuit against directors,
officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our
stockholders against our directors, officers and employees even
though such actions, if successful, might otherwise benefit the
Company and our stockholders.
Risks Relating to Our Prior Acquisition
The diversion of resources and management’s attention to the
integration of Birch and MegaPath could adversely affect our
day-to-day business.
While the integration of each of Birch and MegaPath is well
underway, it places a significant burden on our management and
internal resources and will continue to do so for some time. The
diversion of management’s attention away from day-to-day
business concerns and any difficulties we encounter as the
integration process progresses could adversely affect our financial
results.
Birch previously has been the subject of litigation and could be
the subject of additional legal actions and possible liabilities in
the future.
In the
course of normal business activities, Birch and its subsidiaries
have been the subject of civil litigation concerning various types
of matters including, for example, customer complaints, breach of
contract, billing and collection, employee claims, and intellectual
property. While all actions and claims interposed against the
Company are stayed pursuant to section 362 of the Bankruptcy Code
during the pendency of the Chapter 11 Cases, it is possible that
our directors and officers could be the subject of additional
litigation involving similar or different matters in the future.
For example, an individual or business could initiate litigation
against a director or officer of the Company involving similar
actions or behavior for which Birch previously was found liable, in
the hopes of achieving a similarly favorable outcome. Due to the
inherently uncertain nature of litigation, it is not possible to
predict the likelihood, scope, or outcome of any future litigation.
If litigation is initiated and the outcome is unfavorable to one or
more directors or officers of the Company, the Company may be
liable for such financial or other penalties. Any such liabilities
are not predictable and, individually, or in the aggregate, could
have a material adverse impact on our financial
results.
We are unlikely to be able to recover amounts from BCHI Holdings
LLC (“BCHI Holdings”) under various indemnifications
provided in connection with the Birch Merger.
In connection with the Birch Merger, we secured indemnification
from BCHI Holdings with respect to various litigation matters and
pending regulatory proceedings and with respect to certain state
tax matters. Under the terms of the indemnitee letters, at the
option of BCHI Holdings, subject to certain exceptions amounts owed
to us by BCHI Holdings could be paid in cash or shares of Fusion
common stock. As the shares of Fusion common stock currently have
little value and will be extinguished in the event that the Plan or
another plan of restructuring is approved, we do not believe that
we will be successful in recovering any amounts under these
arrangements.
Birch and MegaPath may have additional liabilities that are not
known, probable or estimable at this time.
There could be unasserted claims or assessments, including failure
to comply with applicable communications laws, regulations, orders
and consent decrees that we failed or were unable to discover or
identify in the course of performing our due diligence
investigation of Birch and MegaPath and that are not stayed by the
Chapter 11 Cases. Any such liabilities, individually or in the
aggregate, could have a material adverse effect on our financial
results.
Lingo’s failure to perform under the Transition Services
Agreement and the Carrier Services Agreement entered into as part
of the Birch Merger has affect our profitability and business and
may continue to do so in the future.
In
connection with the Birch Merger, Birch spun off its residential
and small business customer segment through a dividend of its
membership interests in Lingo Management, LLC (“Lingo”)
and Lingo and the Company entered into a transition services
agreement, dated as of May 4, 2018 (the “Transition Services
Agreement”), pursuant to which each of the Company and Lingo
agreed perform certain services for the benefit of the other for
specified periods after the closing of the Birch Merger. In
addition, in connection with the spin-off Lingo and the Company
also entered into a carrier solutions wholesale master service
agreement, dated as of May 4, 2018 (the “Carrier Services
Agreement”), pursuant to which each of the Company and Lingo
agreed to sell POTS (plain old telephone service) and various other
telecommunications and information services to each other. Since
the execution of the Transition Services Agreement and the Carrier
Services Agreement, a number of disputes have arisen between the
parties. The Company currently asserts that Lingo owes it in excess
of $6.2 million for services provided under these agreement and an
additional $8.8 million under the terms of the Birch Merger
Agreement. The failure by Lingo to pay amounts that Fusion believes
are owed has had an adverse effect on the Company’s
profitability and business and may continue to do so in the
future.
