Document and Entity Information
Document and Entity Information - shares | 3 Months Ended | |
Mar. 31, 2018 | May 07, 2018 | |
Document And Entity Information | ||
Entity Registrant Name | Fusion Connect, Inc. | |
Entity Central Index Key | 1,071,411 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2018 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --12-31 | |
Is Entity a Well-known Seasoned Issuer? | No | |
Is Entity a Voluntary Filer? | No | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Smaller Reporting Company | |
Entity Common Stock, Shares Outstanding | 76,583,701 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2,018 |
Condensed Consolidated Balance
Condensed Consolidated Balance Sheets (Unaudited) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Current assets: | ||
Cash and cash equivalents | $ 30,999,732 | $ 2,472,836 |
Accounts receivable, net of allowance for doubtful accounts of approximately $435,000 and $668,000, respectively | 9,174,993 | 10,634,393 |
Prepaid expenses and other current assets | 1,871,183 | 1,609,518 |
Deferred installation costs - current portion | 798,166 | 0 |
Current assets of discontinued operations | 4,269,653 | 2,867,953 |
Total current assets | 47,113,727 | 17,584,700 |
Property and equipment, net | 11,115,107 | 12,838,840 |
Security deposits | 612,299 | 612,299 |
Restricted cash | 27,153 | 27,153 |
Goodwill | 35,181,698 | 34,773,629 |
Intangible assets, net | 55,687,545 | 56,156,023 |
Deferred installation costs - net of current portion | 1,102,648 | 0 |
Other assets | 35,632 | 43,937 |
Non-current assets of discontinued operations | 19,780 | 20,980 |
TOTAL ASSETS | 150,895,589 | 122,057,561 |
Current liabilities: | ||
Term loan - current portion | 6,500,000 | 6,500,000 |
Obligations under asset purchase agreements - current portion | 723,297 | 227,760 |
Equipment financing obligations - current portion | 1,075,252 | 1,206,773 |
Deferred installation revenue - current portion | 797,332 | 0 |
Accounts payable and accrued expenses | 20,165,445 | 21,995,443 |
Current liabilities from discontinued operations | 4,660,278 | 3,093,602 |
Total current liabilities | 33,921,604 | 33,023,578 |
Long-term liabilities: | ||
Notes payable - non-related parties, net of discount | 32,083,554 | 31,953,163 |
Notes payable - related parties | 928,081 | 928,081 |
Term Loan | 47,663,242 | 54,222,668 |
Indebtedness under revolving credit facility | 0 | 1,500,000 |
Obligations under asset purchase agreements | 477,162 | 222,240 |
Equipment financing obligations - net of current obligations | 407,345 | 590,602 |
Deferred installation revenue - net of current portion | 1,029,445 | 0 |
Derivative liabilities | 586,197 | 872,900 |
Total liabilities | 117,096,630 | 123,313,232 |
Stockholders' equity: | ||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 13,466 and 14,216 shares issued and outstanding | 134 | 142 |
Common stock, $0.01 par value, 150,000,000 shares authorized, 23,847,140 and 14,980,756 shares issued and outstanding | 238,471 | 149,807 |
Capital in excess of par value | 235,027,397 | 195,940,332 |
Accumulated deficit | (201,318,706) | (197,264,083) |
Total Fusion Connectl, Inc. stockholders' equity (deficit) | 33,947,296 | (1,173,804) |
Noncontrolling interest | (148,337) | (81,867) |
Total stockholders' equity (deficit) | 33,798,959 | (1,255,671) |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ 150,895,589 | $ 122,057,561 |
Condensed Consolidated Balance3
Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Current assets: | ||
Allowance for doubtful accounts | $ 435,000 | $ 668,000 |
Stockholders' equity (deficit): | ||
Preferred Stock, Par Value | $ 0.01 | $ 0.01 |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 |
Preferred Stock, Shares Issued | 13,466 | 14,216 |
Preferred Stock, Shares Outstanding | 13,466 | 14,216 |
Common Stock, Par Value | $ 0.01 | $ 0.01 |
Common Stock, Shares Authorized | 150,000,000 | 150,000,000 |
Common Stock, Shares Issued | 23,847,140 | 14,980,756 |
Common Stock, Shares Outstanding | 23,847,140 | 14,980,756 |
Condensed Consolidated Statemen
Condensed Consolidated Statements of Operations (Unaudited) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Income Statement [Abstract] | ||
Revenues | $ 29,038,043 | $ 28,481,039 |
Cost of revenues, exclusive of depreciation and amortization, shown separately below | 12,918,895 | 12,140,707 |
Gross profit | 16,119,148 | 16,340,332 |
Depreciation and amortization | 3,135,779 | 3,835,948 |
Selling, general and administrative expenses | 13,947,995 | 13,613,661 |
Impairment charge | 1,195,837 | 0 |
Total operating expenses | 18,279,611 | 17,449,609 |
Operating loss | (2,160,463) | (1,109,277) |
Other (expenses) income: | ||
Interest expense | (2,147,775) | (2,092,312) |
Change in fair value of derivative liabilities | 194,312 | (40,445) |
Loss on disposal of property and equipment | (3,184) | (26,800) |
Other income, net | 89,558 | 116,520 |
Total other expenses | (1,867,089) | (2,043,037) |
Loss before income taxes | (4,027,552) | (3,152,314) |
Provision for income taxes | (14,050) | (7,811) |
Net loss from continuing operations | (4,041,602) | (3,160,125) |
Net loss from discontinued operations | (166,175) | (321,823) |
Net loss | (4,207,777) | (3,481,948) |
Less: Net loss attributable to non-controlling interest | 66,470 | 0 |
Net loss attributable to Fusion Connect, Inc. | (4,141,307) | (3,481,948) |
Preferred stock dividends | (243,582) | (1,254,109) |
Net loss attributable to common stockholders | $ (4,384,889) | $ (4,736,057) |
Basic and diluted loss per common share from continuing operations: | $ (0.20) | $ (0.32) |
Basic and diluted loss per common share from discontinued operations: | $ (0.01) | $ (0.02) |
Weighted average common shares outstanding: | ||
Basic and diluted | 20,682,262 | 13,805,133 |
Condensed Consolidated Stateme5
Condensed Consolidated Statement of Stockholders' Equity (Unaudited) - 3 months ended Mar. 31, 2018 - USD ($) | Preferred Stock | Common Stock | Capital in Excess of Par Value | Accumulated Deficit | Fusion Connect, Inc. | Noncontrolling Interest | Total |
Beginning Balance, Shares at Dec. 31, 2017 | 14,216 | 14,980,756 | |||||
Beginning Balance, Amount at Dec. 31, 2017 | $ 142 | $ 149,807 | $ 195,940,330 | $ (197,264,083) | $ (1,173,804) | $ (81,867) | $ (1,255,671) |
Cumulative effect of change in accounting principle | 86,684 | 86,684 | 0 | 86,684 | |||
Adjusted Beginning Balance, Shares | 14,216 | 14,980,756 | |||||
Adjusted Beginning Balance, Amount | $ 142 | $ 149,807 | 195,940,330 | (197,177,399) | (1,087,120) | (81,867) | (1,168,987) |
Conversion of preferred stock into common stock, Shares | (750) | 100,000 | |||||
Conversion of preferred stock into common stock, Amount | $ (8) | $ 1,000 | (992) | 0 | 0 | 0 | |
Dividends on preferred stock, Shares | 3,985 | ||||||
Dividends on preferred stock, Amount | $ 40 | (40) | 0 | 0 | 0 | ||
Exercise of common stock purchase warrants, Shares | 5,120 | ||||||
Exercise of common stock purchase warrants, Amount | $ 51 | 11,931 | 11,982 | 0 | 11,982 | ||
Cashless exercise of warrants, Shares | 22,155 | ||||||
Cashless exercise of warrants, Amount | $ 222 | (222) | 0 | 0 | 0 | ||
Reclassification of derivative liability | 92,391 | 92,391 | 0 | 92,391 | |||
Common stock issued in acquisition, Shares | 110,124 | ||||||
Common stock issued in acquisition, Amount | $ 1,101 | 498,889 | 500,000 | 0 | 500,000 | ||
Proceeds from the sale of common stock, less expenses, Shares | 8,625,000 | ||||||
Proceeds from the sale of common stock, less expenses, Amount | $ 86,250 | 38,119,846 | 38,206,096 | 0 | 38,206,096 | ||
Net loss | (4,141,307) | (4,141,307) | (66,470) | (4,207,777) | |||
Stock based compensation | 365,254 | 365,254 | 0 | 365,254 | |||
Ending Balance, Shares at Mar. 31, 2018 | 13,466 | 23,847,140 | |||||
Ending Balance, Amount at Mar. 31, 2018 | $ 134 | $ 238,471 | $ 235,027,397 | $ (201,318,706) | $ 33,947,296 | $ (148,337) | $ 33,798,959 |
Condensed Consolidated Stateme6
Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Cash flows from operating activities: | ||
Net loss from continuing operations | $ (4,041,602) | $ (3,160,125) |
Net loss from discontinued operations | (166,175) | (321,823) |
Net loss | (4,207,777) | (3,481,948) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||
Depreciation and amortization | 3,135,779 | 3,835,948 |
Loss on disposal of property and equipment | 3,184 | 26,800 |
Stock-based compensation | 365,254 | 224,647 |
Impairment charge | 1,195,837 | 0 |
Stock issued for services rendered or in settlement of liabilities | 0 | 164,450 |
Amortization of debt discount and deferred financing fees | 195,963 | 209,628 |
(Gain) loss on the change in fair value of derivative liability | (194,312) | 40,445 |
Changes in operating assets and liabilities: | ||
Accounts receivable | 1,459,401 | 179,518 |
Prepaid expenses and other current assets | (304,442) | (873,401) |
Other assets and liabilities | 20,952 | 8,295 |
Accounts payable and accrued expenses | (1,949,917) | 690,812 |
Cash (used in) provided by operating activities - continuing operations | (113,903) | 1,385,070 |
Cash provided by (used in) operating activities - discontinued operations | 107,612 | (15,826) |
Net cash (used in) provided by operating activities | (6,291) | 1,369,244 |
Cash flows from investing activities: | ||
Purchase of property and equipment | (976,877) | (984,642) |
Proceeds from the sale of property and equipment | 31,533 | 40,680 |
(Payment) for acquisitions, net of cash acquired | 0 | (558,329) |
Cash used in investing activities - continuing operations | (945,344) | (1,502,291) |
Cash used in investing activities - discontinued operations | 0 | 0 |
Net cash used in investing activities | (945,344) | (1,502,291) |
Cash flows from financing activities: | ||
Proceeds from the exercise of common stock purchase warrants | 11,982 | 780,951 |
Repayments of term loan | (6,625,000) | (812,500) |
Repayments of revolving debt, net | (1,500,000) | 0 |
Payments for obligations under asset purchase agreements | (192,157) | (191,668) |
Proceeds from the sale of common stock, net of offering expenses | 38,206,096 | 0 |
Payments on equipment financing obligations | (314,777) | (223,493) |
Cash provided by (used in) financing activities - continuing operations | 29,586,144 | (446,710) |
Cash provided by (used in) financing activities - discontinued operations | 0 | 0 |
Net cash provided by (used in) financing activities | 29,586,144 | (446,710) |
Net change in cash and cash equivalents | 28,634,509 | (579,757) |
Cash and cash equivalents, including restricted cash, beginning of period | 2,557,541 | 7,249,063 |
Less cash and cash equivalents of discontinued operations, end of period | 165,165 | 15,038 |
Cash and cash equivalents, including restricted cash of continuing operations, end of period | $ 31,026,885 | $ 6,654,268 |
1. Organization and Business
1. Organization and Business | 3 Months Ended |
Mar. 31, 2018 | |
Organization And Business | |
Organization and Business | Fusion Connect, Inc. (f/k/a Fusion Telecommunications International, Inc.) is a Delaware corporation incorporated in September 1997 (“Fusion” and together with its subsidiaries, the “Company,” “we,” “us” and “our”). Fusion changed its name to Fusion Connect, Inc. on May 4, 2018. The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud infrastructure, cloud computing, and managed cloud-based applications to businesses of all sizes. |
2. Basis of Presentation and Su
2. Basis of Presentation and Summary of Significant Accounting Policies | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. On May 4, 2018 (the “Closing Date”), Fusion completed the various transactions contemplated by the Agreement and Plan of Merger, dated August 26, 2017, as amended (the “Birch Merger Agreement”), by and among Fusion, Fusion BCHI Acquisition LLC, a wholly-owned subsidiary of Fusion (“BCHI Merger Sub”), and Birch Communications Holdings, Inc. (“Birch”). As contemplated by the Birch Merger Agreement, on the Closing Date, Birch merged with and into BCHI Merger Sub (the “Birch Merger”), with BCHI Merger Sub surviving the Birch Merger as a wholly-owned subsidiary of Fusion. See “Note 19 – Subsequent Events”. The Company determined that the acquisition of Birch qualified as a reverse acquisition where Fusion was identified as a legal acquirer and Birch was identified as an accounting acquirer. All periodic reports for periods that end on or after the date the reverse acquisition is completed will be filed within the time periods specified by the SEC's rules and forms. The financial statements included in periodic reports filed for periods that end on or after the date the reverse acquisition is completed will be the accounting acquirer's financial statements for all periods presented (reflecting the combined company beginning with the date of the reverse acquisition) since the accounting acquirer is considered to be the successor to the legal issuer's reporting obligation. In the quarter ended March 31, 2018, the Company determined that the assets and liabilities of its Carrier Services reportable segment met the discontinued operations criteria in ASC 205-20-45. Accordingly, all assets, liabilities and results of operations have been classified as discontinued operations for all periods presented in the accompanying Consolidated Balance Sheet, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. See “Note 3 - Discontinued Operations”. During the three months ended March 31, 2018 and 2017, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations. Reverse Stock Split Fusion filed a Certificate of Amendment (the “Charter Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware, to effect a reverse split of the Fusion common stock at an exchange ratio of 1-for-1.5 (the “Reverse Split”), which became effective on May 4, 2018. The number of authorized shares of Fusion common stock was not affected by the Reverse Split. Any fractional shares of Fusion common stock resulting from the Reverse Split were rounded up to the nearest whole share. As a result of the Reverse Stock Split, all share and per share amounts as of December 31, 2017 as well as for the three months ended March 31, 2018 and March 31, 2017, have been restated at the Reverse Split Ratio to give effect to the Reverse Stock Split. Principles of Consolidation The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Effective September 1, 2017, Fusion transferred 40% of its membership interests in Fusion Global Services LLC (“FGS”) to XcomIP, LLC (“XcomIP”), in exchange for which XcomIP contributed assets of its carrier business to FGS. In connection with this transaction, Fusion and XcomIP also executed a shareholder agreement under which Fusion agreed to provide up to $750,000 in working capital to FGS. The Company has determined that, based on the terms of the shareholders agreement, it has a controlling financial interest in FGS under the guidance set forth in Accounting Standards Codification (“ASC”) 810, Consolidation and, therefore, the accounts of FGS are consolidated into Fusion’s consolidated financial statements as of and for the year ended December 31, 2017. Prior to the transfer of membership interests to XcomIP, Fusion transferred its Carrier Services business to FGS. Effective March 31, 2018, the Carrier Business is recorded as discontinued operations for all periods presented. See “Note 19 – Subsequent Events”. Use of Estimates The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue; allowance for doubtful accounts; fair value measurements of its financial instruments; useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates; and accounting for income taxes, contingencies and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates. Cash Equivalents Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less on the date of purchase. As of March 31, 2018 and December 31, 2017, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity. Fair Value of Financial Instruments At March 31, 2018 and December 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates their fair value due to the short-term nature of these financial instruments. Impairment of Long-Lived Assets The Company periodically reviews long-lived assets, including intangible assets, for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. During the three-month period ended March 31, 2018, the Company recorded an impairment charge of $1.2 million. The Company did not record any impairment charges during the three months ended March 31, 2017. Goodwill Goodwill is the excess of the acquisition cost of a business combination over the fair value of the identifiable net assets acquired. Goodwill at March 31, 2018 and December 31, 2017 was $35.2 million and $34.8 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. The following table presents the changes in the carrying amounts of goodwill during the three months ended March 31, 2018: Balance at December 31, 2017 $ 34,773,629 Increase in goodwill associated with a business acquisition 408,069 Balance at March 31, 2018 $ 35,181,698 Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances indicate that it is more likely than not that fair value of a reporting unit is below its carrying amount. The Company has the option to perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill and other intangible assets. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test by comparing the fair value of the reporting unit to its carrying value. An impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value, however, the impairment loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. The Company did not record any impairment charges related to goodwill during the three months ended March 31, 2018 and 2017. Advertising and Marketing Costs Advertising and marketing expenses includes cost for promotional materials and trade show expenses for the marketing of the Company’s products and services. Advertising and marketing expenses were $0.1 million for each of the three months ended March 31, 2018 and 2017. Advertising and marketing expenses are reflected in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. Income Taxes The accounting and reporting requirements with respect to accounting for income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2018 and December 31, 2017. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2013 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of March 31, 2018 and December 31, 2017. During the three months ended March 31, 2018 and 2017, the Company recognized no adjustments for uncertain tax positions. Stock-Based Compensation The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards on the date of grant. The fair values of stock options are estimated on the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable. New and Recently Adopted Accounting Pronouncements In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) In February 2016, the FASB issued ASU No. 2016-02, Leases |
3. Discontinued Operations
3. Discontinued Operations | 3 Months Ended |
Mar. 31, 2018 | |
Discontinued Operations and Disposal Groups [Abstract] | |
Discontinued Operations | On August 26, 2017, the Company and its wholly owned subsidiary, Fusion BCHI Acquisition LLC, a Delaware limited liability company (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Birch Communications Holdings, Inc., a Georgia corporation (“Birch”). As part of this Merger Agreement, the Company is required to spin-off or otherwise exit its Carrier Services business segment prior to the closing of the Merger. See Note 19 - Subsequent Events. Accordingly, the Company determined that the assets and liabilities of its Carrier Services reportable segment met the discontinued operations criteria in ASC 205-20-45 in the quarter ended March 31, 2018. As such, assets, liabilities and results of operations have been classified as discontinued operations for all periods presented in the accompanying Consolidated Balance Sheet, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. Summarized operating results for discontinued operations, for the periods ended March 31, 2018 and 2017, respectively, are as follows: For the Three Months Ended March 31, 2018 2017 Revenues $ 9,955,558 $ 7,330,836 Cost of revenues, exclusive of depreciation and amortization, shown separately below 9,659,011 7,130,207 Gross profit 296,547 200,629 Depreciation and amortization 1,201 1,200 Selling, general and administrative expenses 461,521 521,213 Total operating expenses 462,722 522,413 Operating loss (166,175 ) (321,784 ) Other (expenses) income: Other (expenses) income, net - (39 ) Total other expenses - (39 ) Loss before income taxes (166,175 ) (321,823 ) Provision for income taxes - - Net loss (166,175 ) (321,823 ) The carrying amounts of assets and liabilities for discontinued operations for the periods ended March 31, 2018 and December 31, 2017 are as follows: March 31, 2018 December 31, 2017 Cash and cash equivalents $ 165,165 $ 57,552 Accounts receivable, net of allowance for doubtful accounts of approximately $42,000 and $32,000, respectively 4,099,748 2,328,674 Prepaid expenses and other current assets 4,740 481,727 Total current assets of discontinued operations 4,269,653 2,867,953 Property and equipment, net 16,494 17,695 Security deposits 3,286 3,285 Total non-current assets of discontinued operations 19,780 20,980 Accounts payable and accrued expenses 3,991,463 2,303,122 Related party payable 668,815 790,480 Total current liabilities of discontinued operations 4,660,278 3,093,602 Non-current liabilities - - Total non-current liabilities of discontinued operations - - Operating segments are defined under U.S. GAAP as components of an enterprise for which discrete financial information is available and evaluated regularly by a company's chief operating decision maker in deciding how to allocate resources and assess performance. Prior to the spin-off, the Company had two reportable segments – Business Services and Carrier Services. These segments were organized by the products and services that were sold and the customers that were served. The Company measured and evaluated its reportable segments based on revenues and gross profit margins. Because of a spin-off, Carrier Services are reported as Discontinued Operations and Business Services is the only remaining segment. As a result, segment information is no longer presented in a separate footnote. |
4. Acquisitions
4. Acquisitions | 3 Months Ended |
Mar. 31, 2018 | |
Acquisitions | |
Acquisitions | In January 2018, the Company acquired substantially all of the assets of IQMax, a Charlotte, N.C.-based provider of secure messaging, enterprise data integration and advanced cloud communications solutions. The total consideration for this transaction was $1.0 million, $0.5 million of which was paid with 110,124 shares of Fusion common stock, with the remaining portion of the purchase price, also payable in shares of common stock, due six months from the closing date of the transaction. These shares will remain in escrow until 12 months following the closing of the transaction. The Company also agreed to pay a royalty fee to the seller based on the net revenue in excess of $1.75 million from the annual sales of acquired assets. The estimated present value of the contingent royalty fee of $0.4 million was recognized as a non-current liability in the condensed consolidated balance sheet as of March 31, 2018. The allocation of the purchase price as of the acquisition date is as follows: Useful life (in years) Covenant not to compete $ 125,000 Trademark 16,125 3 Intellectual property 1,017,805 10 Goodwill 408,069 17 Deferred revenue (119,921 ) Total purchase price $ 1,447,078 |
5. Loss per share
5. Loss per share | 3 Months Ended |
Mar. 31, 2018 | |
Earnings Per Share [Abstract] | |
Loss per share | Basic and diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The following table sets forth the computation of basic and diluted net loss per share for the three months ended March 31, 2018 and 2017: Three Months Ended March 31, 2018 2017 Numerator Net loss from continuing operations $ (4,041,602 ) $ (3,160,125 ) Net loss from discontinued operations (166,175 ) (321,823 ) Net loss (4,207,777 ) (3,481,948 ) Less Net loss attributable to non-controlling interest 66,470 - Net loss attributable to Fusion Connect, Inc. (4,141,307 ) (3,481,948 ) Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock (99,518 ) (99,518 ) Conversion price reduction on Series B-2 Preferred Stock (see note 14) - (623,574 ) Series B-2 warrant exchange (see note 14) - (347,190 ) Dividends declared on Series B-2 Convertible Preferred Stock (144,064 ) (183,827 ) Net loss attributable to common stockholders $ (4,384,889 ) $ (4,736,057 ) Denominator Basic and diluted weighted average common shares outstanding 20,682,262 13,805,133 Loss per share basic and diluted From continuing operations $ (0.20 ) $ (0.32 ) From discontinued operations $ (0.01 ) $ (0.02 ) For the three months ended March 31, 2018 and 2017, the following dilutive securities were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects: For the Three Months Ended March 31, 2018 2017 Warrants 1,274,126 1,798,453 Convertible preferred stock 1,265,398 1,375,417 Stock options 1,997,288 1,434,049 4,536,812 4,607,919 The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’s outstanding Series A-1, A-2 and A-4 preferred stock (collectively, the “Series A Preferred Stock”) for the three months ended March 31, 2018 and 2017 of $0.1 million in each period. Through March 31, 2018, the Board of Directors of Fusion has never declared a dividend on any Series A Preferred Stock, resulting in approximately $5.2 million of accumulated preferred stock dividends. The Fusion Board declared dividends on Fusion Series B-2 Cumulative Convertible Preferred Stock (the “Series B-2 Preferred Stock”) of $0.1 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. As permitted by the terms of the Series B-2 Preferred Stock, dividends were paid in the form of 3,985 and 71,251 shares of Fusion’s common stock for the three months ended March 31, 2018 and 2017, respectively. See “Note 19 – Subsequent Events”. |
6. Intangible Assets
6. Intangible Assets | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Intangible Assets | Intangible assets as of March 31, 2018 and December 31, 2017 are as follows: March 31, 2018 December 31, 2017 Gross Carrying Amount Accumulated Amortization Total Gross Carrying Amount Accumulated Amortization Total Trademarks and tradename $ 1,109,525 $ (715,166 ) $ 394,359 $ 1,093,400 $ (672,314 ) $ 421,086 Proprietary technology 6,798,805 (5,209,277 ) 1,589,528 5,781,000 (5,005,400 ) 775,600 Non-compete agreement 12,245,043 (11,758,563 ) 486,480 12,120,043 (11,701,307 ) 418,736 Customer relationships 67,614,181 (14,397,003 ) 53,217,178 67,614,181 (13,073,580 ) 54,540,601 Favorable lease intangible - - - 218,000 (218,000 ) - Total acquired intangibles $ 87,767,554 $ (32,080,009 ) $ 55,687,545 $ 86,826,624 $ (30,670,601 ) $ 56,156,023 Amortization expense was $1.6 million and $2.2 million for the three months ended March 31, 2018 and 2017, respectively. Estimated future aggregate amortization expense is expected to be as follows: Year Amortization Expense remainder of 2018 $ 4,751,306 2019 5,469,042 2020 5,458,742 2021 5,284,375 2022 4,612,642 |
7. Supplemental Disclosure of C
7. Supplemental Disclosure of Cash Flow Information | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Supplemental Disclosure of Cash Flow Information | Supplemental cash flow information for the three months ended March 31, 2018 and 2017 is as follows: Three Months Ended March 31, Supplemental Cash Flow Information 2018 2017 Cash paid for interest $ 1,961,727 $ 2,186,314 Supplemental Non-Cash Investing and Financing Activities Conversion of preferred stock into common stock $ 750,000 $ 2,958,000 Dividend on Series B-2 preferred stock paid with the issuance of Fusion common stock $ 19,479 $ 183,827 Obligations under acquisition $ 500,000 $ 1,350,000 Common stock issued in acquisition $ 500,000 $ - Contingent royalty fee $ 447,079 - Reconciliation of Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents of continuing operations $ 30,999,732 $ 6,627,115 Restricted cash of continuing operations 27,153 27,153 Total cash, cash equivalents and restricted cash of continuing operations $ 31,026,885 $ 6,654,268 Cash and cash equivalents of discontinued operations 165,165 15,038 Total cash, cash equivalents and restricted cash 31,192,050 6,669,306 |
8. Prepaid Expenses and Other C
8. Prepaid Expenses and Other Current Assets | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Prepaid Expenses and Other Current Assets | Prepaid expenses and other current assets at March 31, 2018 and December 31, 2017 are as follows: March 31, 2018 December 31, 2017 Insurance $ 69,355 $ 18,639 Rent 16,326 16,326 Marketing 157,162 55,801 Software subscriptions 646,495 610,191 Commissions 58,833 46,755 Line costs 391,211 335,978 Other 531,801 525,828 Total $ 1,871,183 $ 1,609,518 |
9. Accounts Payable and Accrued
9. Accounts Payable and Accrued Expenses | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Accounts Payable and Accrued Expenses | Accounts payable and accrued expenses at March 31 2018 and December 31, 2017 are as follows: March 31, 2018 December 31, 2017 Trade accounts payable $ 6,060,192 $ 7,434,257 Accrued license fees 2,673,648 2,881,331 Accrued sales and federal excise taxes 3,598,141 3,496,697 Deferred revenue 1,517,100 1,283,969 Accrued network costs 1,808,853 1,796,302 Accrued sales commissions 956,150 911,192 Property and other taxes 746,309 759,770 Accrued payroll and vacation 487,711 422,097 Customer deposits 393,868 383,032 Interest payable 7,263 7,263 Credit card payable 135,433 114,209 Accrued USF fees 1,195,512 728,826 Accrued bonus 131,593 333,337 Professional and consulting fees 204,081 171,163 Rent 217,036 163,030 Other 32,555 1,108,968 Total $ 20,165,445 $ 21,995,443 |
10. Equipment Financing Obligat
10. Equipment Financing Obligations | 3 Months Ended |
Mar. 31, 2018 | |
Equipment Financing Obligations Details 1 | |
Equipment Financing Obligations | From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 5.3% and 6.6% per annum. The Company’s equipment financing obligations are as follows: March 31, December 31, 2018 2017 Equipment financing obligations $ 1,482,597 $ 1,797,374 Less current portion (1,075,252 ) (1,206,773 ) Long-term portion $ 407,345 $ 590,601 The Company’s payment obligations under its capital leases are as follows: Year ending December 31: Principal remainder of 2018 $ 891,996 2019 502,589 2020 88,012 $ 1,482,597 |
11. Long-Term Debt
11. Long-Term Debt | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Long-Term Debt | Secured Credit Facilities As of March 31, 2018 and December 31, 2017, secured credit facilities consists of the following: March 31, December 31, 2018 2017 Term loan $ 55,125,000 $ 61,750,000 Less: Deferred financing fees (961,758 ) (1,027,332 ) Current portion (6,500,000 ) (6,500,000 ) Term loan - long-term portion $ 47,663,242 $ 54,222,668 Indebtedness under revolving credit facility $ - $ 1,500,000 On November 14, 2016, Fusion NBS Acquisition Corp. (“FNAC”), a wholly-owned subsidiary of Fusion, entered into a credit agreement (the “East West Credit Agreement”) with East West Bank (“EWB”), as administrative agent and the lenders identified therein (collectively the “East West Lenders”). Under the East West Credit Agreement, the East West Lenders extended FNAC (i) a $65.0 million term loan and (ii) a $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis). Borrowings under the East West Credit Agreement are evidenced by notes bearing interest at rates computed based upon either the then current “prime” rate of interest or “LIBOR” rate of interest, as selected by FNAC. Interest on borrowings that FNAC designates as “base rate” loans bear interest at the greater of the prime rate published by the Wall Street Journal or 3.25% per annum, in each case plus 2% per annum. Interest on borrowings that FNAC designates as “LIBOR rate” loans bear interest at the LIBOR rate of interest published by the Wall Street Journal, plus 5% per annum. The current interest rate is 6.75% per annum. Effective January 1, 2018, the Company is required to make monthly principal payments in the amount of $541,667 until the November 12, 2021 maturity date of the term loan, when the remaining $36.8 million of principal is due. Borrowings under the revolving credit facility are also payable on the November 12, 2021 maturity date of the facility. At March 31, 2018 and December 31, 2017, $0 and $1.5 million, respectively, was outstanding under the revolving credit facility. Under the East West Credit Agreement: ● The Company is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to its obligations to the East West Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries. ● The Company is required to comply with various financial covenants, including leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization; and its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of amounts outstanding. ● The Company granted the lenders security interests on all of its assets, as well as its membership interest in FGS and the capital stock of FNAC and each of its subsidiaries. ● Fusion and its subsidiaries (and future subsidiaries of both) other than FNAC and FGS have guaranteed FNAC’s obligations, including FNAC’s repayment obligations thereunder. At March 31, 2018 and December 31, 2017, the Company was in compliance with all of the financial covenants contained in the East West Credit Agreement. See “Note 19 – Subsequent Events”. Notes Payable – Non-Related Parties At March 31, 2018 and December 31, 2017, notes payable – non-related parties consists of the following: March 31, December 31, 2018 2017 Subordinated notes $ 33,588,717 $ 33,588,717 Discount on subordinated notes (958,052 ) (1,040,167 ) Deferred financing fees (547,111 ) (595,387 ) Total notes payable - non-related parties 32,083,554 31,953,163 Less: current portion - - Long-term portion $ 32,083,554 $ 31,953,163 On November 14, 2016, FNAC, Fusion and Fusion’s other subsidiaries entered into the Fifth Amended and Restated Securities Purchase Agreement (the “Praesidian Facility”) with Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United Insurance Company of America (collectively, the “Praesidian Lenders”). The Praesidian Facility amends and restates a prior facility, pursuant to which FNAC previously sold its Series A, Series B, Series C, Series D, Series E and Series F senior notes in an aggregate principal amount of $33.6 million (the “SPA Notes”). These notes require interest payments in the amount of $0.3 million per month. The current interest rate is 10.8% per annum. Under the terms of the Praesidian Facility, the maturity date of the SPA Notes is May 12, 2022, no payments of principal are due until the maturity date, and the financial covenants contained in the Praesidian Facility are substantially similar to those contained in the East West Credit Agreement. In connection with the execution of the Praesidian Facility, the Praesidian Lenders entered into a subordination agreement with the East West Lenders pursuant to which the Praesidian Lenders have subordinated their right to payment under the Praesidian Facility and the SPA Notes to repayment of the Company’s obligations under the East West Credit Agreement. At March 31, 2018 and December 31, 2017, the Company was in compliance with all of the financial covenants contained in the Praesidian Facility. See “Note 19 – Subsequent Events”. Notes Payable – Related Parties At March 31, 2018 and December 31, 2017, the Company had $0.9 million of outstanding notes payable due to Marvin Rosen, the Chairman of Fusion’s Board of Directors. These notes are subordinated to borrowings under the East West Credit Agreement and the Praesidian Facility. The notes are unsecured, pay interest monthly at an annual rate of 7%, and mature 120 days after the Company’s obligations under the East West Credit Agreement and the Praesidian Facility are paid in full. See “Note 19 – Subsequent Events”. |
12. Obligations Under Asset Pur
12. Obligations Under Asset Purchase Agreements | 3 Months Ended |
Mar. 31, 2018 | |
Obligations Under Asset Purchase Agreements | |
Obligations Under Asset Purchase Agreements | In connection with certain acquisitions and asset purchases completed by the Company during 2016, 2017 and 2018, the Company has various obligations to the sellers, mainly for payments of portions of the purchase price that have been deferred under the terms of the respective asset purchase agreements. Such obligations to sellers or other parties associated with these transactions as of March 31, 2018 and December 31, 2017 are as follows: March 31, December 31, 2018 2017 Customer base acquisitions $ 253,380 $ 450,000 IQMax 947,079 - 1,200,459 450,000 Less current portion (723,297 ) (227,760 ) Long-term portion $ 477,162 $ 222,240 |
13. Derivative Liability
13. Derivative Liability | 3 Months Ended |
Mar. 31, 2018 | |
Derivative Liability | |
Derivative Liability | Fusion has issued warrants to purchase shares of its common stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815 Derivatives and Hedging The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion common stock. Three months ended March 31, 2018 2017 Stock price ($) 4.85 2.37 Adjusted Exercise price ($) 2.34 2.34 Risk-free interest rate (%) 2.09 2.23 Expected volatility (%) 86.90 74.40 Time to maturity (years) 1.00 1.75 At March 31, 2018 and December 31, 2017, the fair value of the derivative was $0.6 million and $0.9 million, respectively. For the three months ended March 31, 2018, the Company recognized a gain on the change in fair value of the derivative of $0.2 million, and for the three months ended March 31, 2017, the Company recognized a loss on the change in fair value of the derivative in the amount of $40,000. |
14. Revenues from Contracts wit
14. Revenues from Contracts with Customers | 3 Months Ended |
Mar. 31, 2018 | |
Revenues From Contracts With Customers | |
Revenues from Contracts with Customers | In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606) Revenue From Contracts with Customers Principal Versus Agent Considerations Revenue From Contracts with Customers Identifying Performance Obligations and Licensing Technical Corrections and Improvements to Topic 606 Revenue From Contracts with Customers Revenue from Contracts with Customers, narrow-scope improvements and practical expedients The Company adopted ASC 606 using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders’ equity at January 1, 2018. The historical periods have not been adjusted and continue to be reported under ASC 605 “Revenue Recognition”. The following table includes information for the transition adjustment recorded as of January 1, 2018 to record the cumulative impact of adoption of ASC 606: Balance as of ASC 606 Balance as of December 31, 2017 Transition Adjustment January 1, 2018 Assets Deferred installation costs, current $ - $ 783,667 $ 783,667 Deferred installation costs, non-current - 1,125,414 1,125,414 - 1,909,081 1,909,081 Liabilities Deferred installation revenue, current - (785,740 ) (785,740 ) Deferred installation revenue, non-current - (1,036,657 ) (1,036,657 ) - (1,822,397 ) (1,822,397 ) Stockholders' Equity Accumulated deficit $ - $ 86,684 $ 86,684 Under this new guidance, the Company recognizes revenue when its customer obtains control of promised services, in an amount that reflects the consideration which the Company expects to receive in exchange for those services. To determine whether arrangements are within the scope of this new guidance, the Company performs the following five steps: (i) identifies the contract with a customer; (ii) identifies the performance obligations in the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when (or as) the Company satisfies its performance obligation. The details of changes under the new guidance are as follow: Contract Acquisition Costs Under ASC 606, certain costs to acquire customers must be deferred and amortized over the related contract period of expected customer life. For the Company, this includes certain commissions paid to acquire new customers. Beginning January 1, 2018, commissions attributable to new customer contracts are being deferred and amortized into expense. Historically, these acquisition costs were expensed as incurred. The Company determined that incremental commissions paid as a result of acquiring customers are recoverable and, therefore, as part of the transition adjustment above, current deferred installation costs of $784,000 and non-current deferred installation costs of $1,125,000 were capitalized. For the three months ended March 31, 2018, the Company capitalized a total of $209,000 and amortized $217,000 of commissions. As of March 31, 2018, the Company recorded a total of $798,000 of current deferred installation costs and $1,103,000 of non-current deferred installation costs in its consolidated balance sheet. Installation Revenues Under ASC 606, certain installation fees charged to the customers did not represent separate performance obligations and, as a result, these fees must be deferred and recognized over the related contract period of expected customer life. Beginning January 1, 2018, installation revenues attributable to the customer contracts are being deferred and amortized into revenue. Historically, these revenues were recognized when completed. As part of the transition adjustment above, the Company recorded a total of $786,000 of current deferred installation revenue and $1,036,000 of non-current deferred installation revenue at January 1, 2018. For the three months ended March 31, 2018, the Company deferred a total of $225,000 and recognized $221,000 of installation revenue. As of March 31, 2018, the Company recorded a total of $797,000 of current deferred installation revenue and $1,029,000 of non-current deferred installation revenue on our consolidated balance sheet. The following table summarize the impacts of adopting ASC 606 on Company’s consolidated balance sheet and statement of operations as of and for the three months ended March 31, 2018: March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 Assets Deferred installation costs, current $ 798,166 $ - $ 798,166 Deferred installation costs, non-current 1,102,648 - 1,102,648 1,900,814 - 1,900,814 Liabilities Deferred installation revenue, current (797,332 ) - (797,332 ) Deferred installation revenue, non-current (1,029,445 ) - (1,029,445 ) (1,826,777 ) - (1,826,777 ) Stockholders' Equity Accumulated deficit $ (201,318,706 ) $ (201,244,669 ) (74,037 ) For the three months ended March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 Revenues $ 29,038,043 $ 29,042,422 $ (4,379 ) Selling, general and administrative (13,947,995 ) (13,939,728 ) (8,267 ) Net Impact $ 15,090,048 $ 15,102,694 $ (12,646 ) The impact of adoption of ASC 606 on net income, basic and diluted net loss per share, consolidated statement of operations and the consolidated statement of cash flows were not material for the three months ended March 31, 2018. The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period: Deferred installation Deferred installation revenue costs Net 2018 (remaining nine months) $ 616,688 $ (614,571 ) $ 2,117 2019 634,105 (663,614 ) (29,509 ) 2020 405,576 (459,859 ) (54,283 ) 2021 and thereafter 170,408 (162,770 ) 7,638 $ 1,826,777 $ (1,900,814 ) $ (74,037 ) Summary of disaggregated revenue for the three months periods ended March 31, 2018 and 2017 is as follows: Revenue category For the three months ended March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 For the three months ended March 31, 2017 Monthly recurring $ 24,313,686 $ 24,313,686 $ — 24,721,490 Usage and other 4,473,467 4,473,467 — 3,444,654 Installation 250,890 255,269 (4,379 ) 314,895 Total revenue $ 29,038,043 $ 29,042,422 $ (4,379 ) $ 28,481,039 |
15. Equity Transactions
15. Equity Transactions | 3 Months Ended |
Mar. 31, 2018 | |
Equity Transactions | |
Equity Transactions | Common Stock Fusion is authorized to issue 150,000,000 shares of common stock. As of March 31, 2018 and December 31, 2017, 23,847,140 and 14,980,756 shares of its common stock, respectively, were issued and outstanding. In February 2018, the Company completed an underwritten public offering whereby Fusion issued 8,625,000 shares of its common stock and received net proceeds of $38.2 million. The proceeds from this offering are being used to pay down certain indebtedness and for general corporate purposes. During the three months ended March 31, 2018, Fusion issued 27,275 shares of common stock upon the exercise of outstanding warrants, and declared dividends of $144,000 on the Series B-2 Preferred Stock, which was paid in the form of 3,985 shares of Fusion common stock. In March 2017, the Company entered into exchange agreements with certain holders of its outstanding warrants whereby the outstanding warrants were exchanged for new warrants (the “2017 Warrants”), which warrants permitted the holders to exercise and purchase, for a limited period of 60 days, unregistered shares of Fusion common stock at a discount of up to 10% below the closing bid price of the common stock at the time of exercise but in no event at a price of less than $1.95 per share. In connection with these exchange agreements, the warrant holders exercised warrants to purchase 374,556 shares of common stock on March 31, 2017 at an exercise price of $2.09 per share. The Company received proceeds from the exercise of the 2017 Warrants in the amount of $0.8 million, which will be used for general corporate purposes. All of the 2017 Warrants were immediately exercised and none remained outstanding as of March 31, 2017. As a result of the exchange, the Company recorded a preferred stock dividend in the amount of $0.3 million for the difference in fair value of the warrants that were exchanged (see note 5). Preferred Stock Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of March 31, 2018 and December 31, 2017, there were 5,045 shares of Series A Preferred Stock issued and outstanding. In addition, there were 8,421 and 9,171 shares of Series B-2 Preferred Stock issued and outstanding as of March 31, 2018 and December 31, 2017, respectively. See “Note 19 – Subsequent Events”. During the three months ended March 31, 2018, 750 shares of Series B-2 Preferred stock were converted into 100,000 shares of Fusion common stock. On March 31, 2017, the Company agreed with certain holders of its Series B-2 Preferred Stock to convert their shares of Series B-2 Preferred Stock into shares of Fusion common stock at a conversion price of $4.50 per share (a three dollar reduction from the specified conversion price). As a result, 2,958 shares of Series B-2 Preferred Stock were converted into a total of 657,777 shares of Fusion common stock, and the Company recorded a preferred stock dividend of $0.6 million for the value of the incremental number of common shares issued in connection with the reduction in the conversion price of the Series B-2 Preferred Stock (see note 5). The holders of the Series A Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and if declared by Fusion’s Board, on January 1 of each year. As of March 31, 2018, no dividends have been declared with respect to the Series A Preferred Stock (see note 5). The holders of the Series B-2 Preferred Stock are entitled to receive cumulative dividend of 6% per annum payable quarterly in arrears when and if declared by Fusion’s Board, in cash or shares of Fusion common stock, at the option of the Company (see note 5). Stock Options Fusion's The following assumptions were used to determine the fair value of the stock options granted under Fusion’s stock-based compensation plans using the Black-Scholes option-pricing model: Three Months Ended March 31, 2018 2017 Dividend yield 0.0 % 0.0 % Expected volatility 92.40 % 92.40 % Average Risk-free interest rate 2.56 % 2.27 % Expected life of stock option term (years) 8.00 8.00 The Company recognized compensation expense of $0.4 million and $0.2 million for the three months ended March 31, 2018 and 2017, respectively. These amounts are included in selling, general and administrative expenses in the condensed consolidated interim statements of operations. The following table summarizes stock option activity for the three months ended March 31, 2018: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contract Term Outstanding at December 31, 2017 2,011,952 $ 3.57 Granted 4,800 5.48 Exercised - - Forfeited (1,500 ) 2.55 Expired (17,964 ) 14.57 Outstanding at March 31, 2018 1,997,288 3.48 8.09 Exercisable at March 31, 2018 1,416,765 4.04 7.92 As of March 31, 2018, the Company had approximately $0.9 million of unrecognized compensation expense related to stock options granted under the Company’s stock-based compensation plans, which is expected to be recognized over a weighted-average period of 1.7 years. |
16. Commitments and Contingenci
16. Commitments and Contingencies | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Commitments and Contingencies | From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business. Defending such proceedings can be costly and can impose a significant burden on management and employees. As of March 31, 2018, the Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. The Company underwent a compliance audit for the use of certain software licenses by one of the Company’s recently acquired businesses. The Company is negotiating with the software vendor with regard to a settlement and based upon correspondence and conversations with the vendor, the Company has recorded an accrual in accounts payable and accrued expenses in the accompanying consolidated balance sheet. There can be no assurances that this matter will be settled and, if settled, the amount that we would pay in any such settlement. |
17. Related Party Transactions
17. Related Party Transactions | 3 Months Ended |
Mar. 31, 2018 | |
Related Party Transaction, Due from (to) Related Party [Abstract] | |
Related Party Transactions | Since March 6, 2014, the Company has engaged a tax advisor to prepare its tax returns and to provide related tax advisory services. The Company was billed $0 and $0.1 million for the three months ended March 31, 2018 and 2017, respectively, by this firm. Larry Blum, a member of Fusion’s Board of Directors, is a Senior Advisor to, and a former partner of, this firm. The Company has also issued notes payable to Marvin Rosen (see note 10). See “Note 19 – Subsequent Events”. |
18. Fair Value Disclosures
18. Fair Value Disclosures | 3 Months Ended |
Mar. 31, 2018 | |
Fair Value Disclosures [Abstract] | |
Fair Value Disclosures | Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows: Level 1—Quoted prices in active markets for identical assets or liabilities Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities Level 3—No observable pricing inputs in the market The following table represents the liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 Total As of March 31, 2018 Current liabilities: Contingent purchase price liability - - $ 223,297 $ 223,297 Non-current liabilities: Contingent purchase price liability - - $ 477,162 $ 477,162 Derivative liability (see note 13) - - $ 586,197 $ 586,197 As of December 31, 2017 Current liabilities: Contingent purchase price liability - - $ 227,760 $ 227,760 Non-current liabilities: Contingent purchase price liability - - $ 222,240 $ 222,240 Derivative liability (see note 13) - - $ 872,900 $ 872,900 Changes in the derivative warrant liability for the three months ended March 31, 2018 are as follows: Balance at December 31, 2017 $ 872,900 Change for the period: Change in fair value included in net loss (194,312 ) Warrant exercises (see note 13) (92,391 ) Balance at March 31, 2018 $ 586,197 |
19. Subsequent Events
19. Subsequent Events | 3 Months Ended |
Mar. 31, 2018 | |
Subsequent Events [Abstract] | |
Subsequent Events | Completion of the Acquisition of Birch Communications On May 4, 2018 (the “Closing Date”), Fusion completed the various transactions contemplated by the Merger Agreement. As contemplated by the Merger Agreement, on the Closing Date, Birch merged with and into Merger Sub, with Merger Sub surviving the merger as a wholly-owned subsidiary of Fusion. On the Closing Date, all of the outstanding shares of common stock, par value $0.01 per share, of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) were cancelled and converted into the right to receive, in the aggregate, 49,896,310 shares (the “Merger Shares”) of Fusion Common Stock. Pursuant to subscription agreements executed by each of the shareholders of Birch, the Merger Shares were issued in the name of, and are now held by, BCHI Holdings, LLC, a Georgia limited liability company owned by the former shareholders of Birch. Carrier Spin-Off On the Closing Date, Fusion entered into a Membership Interest Purchase and Sale Agreement (the “Membership Sale Agreement”) with XComIP pursuant to which Fusion transferred its sixty percent (60%) membership interest in FGS to XComIP in exchange for a right to receive: (i) sixty percent (60%) of the Net Profits (as defined in the Membership Sale Agreement) of FGS; (ii) sixty percent (60%) of any distributions being made by Fusion Global to its members only to the extent such amounts are not distributed as part of the distribution of Net Profits; and (iii) sixty percent (60%) of the net proceeds received by the members from a sale of FGS to a third party. Senior Secured Credit Facilities On the Closing Date, Fusion entered into a First Lien Credit and Guaranty Agreement (the “First Lien Credit Agreement”) with Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (in such capacities, the “First Lien Agent”), the lenders party thereto (the “First Lien Lenders”), and all of the U.S.-based subsidiaries of Fusion, as guarantors thereunder (the “Guarantors”), pursuant to which the First Lien Lenders extended (a) term loans to Fusion in an aggregate principal amount of $555,000,000, consisting of the “Tranche A Term Loan” and “Tranche B Term Loan,” in an aggregate principal amount of $45,000,000 and $510,000,000, respectively (collectively, the “First Lien Term Loan”), and (b) a revolving facility in an aggregate principal amount of $40,000,000 (the “Revolving Facility”, and together with the First Lien Term Loan, the “First Lien Facility”). Borrowings under the First Lien Credit Agreement are computed based upon either the then current “base rate” of interest or “LIBOR” rate of interest, as selected by Fusion at the time of its borrowings. The Tranche A Term Loan has an original issue discount of 0.5%. The Tranche B Term Loan has an original issue discount of 4%, except for the $170 million portion of the Tranche B Term Loan made by one lender and certain of its affiliates, which has an original issue discount of 9%, for a blended original issue discount of approximately 5.67%. The Tranche A Term Loan and the Revolving Facility mature on the fourth anniversary of the Closing Date and the Tranche B Term Loan matures on the fifth anniversary of the Closing Date. The Guarantors guaranty the obligations of Fusion under the First Lien Credit Agreement. In addition, Fusion simultaneously entered into a Second Lien Credit and Guaranty Agreement (the “Second Lien Credit Agreement”, and with the First Lien Credit Agreement, the “Credit Agreements”), by and among Fusion, the Guarantors, Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (in such capacities, the “Second Lien Agent”, and together with the First Lien Agent, collectively the “Agents”), and the lenders party thereto (the “Second Lien Lenders”, and together with the First Lien Lenders, the “Lenders”), pursuant to which the Second Lien Lenders extended a term loan in the aggregate principal amount of $85,000,000 (the “Second Lien Term Loan”, and collectively with the First Lien Term Loan, the “Term Loans”, and collectively with the First Lien Facility, the “Credit Facilities”). Borrowings under the Second Lien Credit Agreement are computed based upon either the then current “base” rate of interest or “LIBOR” rate of interest, as selected by Fusion at the time of its borrowings. The Second Lien Term Loan has an original issue discount of 4.00%, and it matures 5.5 years from the Closing Date. The Guarantors guaranty the obligations of Fusion under the Second Lien Credit Agreement. The Credit Facilities may be prepaid, in whole or in part, subject to specified prepayment premiums. Under the Credit Agreements, Fusion is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to its obligations to the Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries. Furthermore, Fusion is required to comply with various financial covenants, including net leverage ratio, fixed charge coverage ratio and maximum levels of consolidated capital expenditures; and its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of its indebtedness. The proceeds of the Term Loans have been used, in part, to refinance all of the existing indebtedness of Fusion and its subsidiaries (including Birch), under (i) the East West Bank Credit Agreement; (ii) the Praesidian Facility; and (iii) the Credit Agreement, dated as of July 18, 2014, among Birch Communications Holdings, Inc., Birch Communications, Inc., Cbeyond, Inc., the other guarantors party thereto, the lenders party thereto and PNC Bank, National Association, as Administrative Agent. In addition, the Term Loans were used to repay, in full, approximately $929,000 of indebtedness under that certain Second Amended and Restated Unsecured Promissory Note, dated November 14, 2016, payable by Fusion to Marvin Rosen. The proceeds were also be used to pay the fees and expenses associated with the Birch Merger and related transactions, including in connection with the Credit Facilities. The Term Loans were also used to make a prepayment of an aggregate of approximately $3.0 million of indebtedness of Birch under the subordinated notes each dated October 28, 2016, in favor of Holcombe T. Green, Jr., R. Kirby Godsey and the Holcombe T. Green, Jr. 2013 Five-Year Annuity Trust. The remaining indebtedness thereunder is evidenced after the closing of the Birch Merger by Amended and Restated Subordinated Notes, dated as of the Closing Date, made by BCHI Merger Sub (as successor in interest to Birch pursuant to the Birch Merger) with an aggregate principal amount of $3.3 million (the “Bircan Notes”). The Bircan Notes each have an interest rate of 12% per annum, and are amortized in three equal installments, to be paid off completely in March 2019, with interest due in quarterly installments. The indebtedness under the Bircan Notes is unsecured, and obligations thereunder are subordinated to the Credit Facilities. In addition, $62,000,000 of the Tranche B Term Loan under the First Lien Credit Agreement has been deposited in a deposit account with EWB, which account is subject to the terms of a deposit account control agreement by and among Fusion, EWB, and the First Lien Agent. The amounts deposited in this account will be used by Fusion to pay the Purchase Price (as defined below) for MegaPath Holdings Corporation (“MegaPath”). If the MegaPath Merger (as defined below) is not completed by August 4, 2018, such funds must be used to prepay the Tranche B Term Loan under the First Lien Credit Agreement. Green Subordinated Note At Closing, Holcombe T. Green, Jr. made an additional loan to Fusion in the principal amount of $10,000,000, which is evidenced by a Subordinated Promissory Note, dated the Closing Date (the “Green Note”), that Fusion delivered to Mr. Green. The Green Note has an interest rate of 13% per annum and an original issue discount of 4%, and it matures on the date which is 91 days after the maturity date of the Second Lien Term Loan. Until the maturity date of the Green Note, only interest is due thereunder, in quarterly payments. The indebtedness under the Green Note is unsecured, and obligations thereunder are subordinated to the Credit Facilities. Vector Subordinated Note In connection with its participation in the Tranche B Term Loan under the First Lien Credit Agreement, Vector Fusion Holdings (Cayman), Ltd. (“Vector”) entered into a separate credit agreement (the “Vector Credit Agreement”) with Goldman Sachs & Co., as administrative agent and lender, and U.S. Bank National Association, as collateral agent and collateral custodian, pursuant to which Vector borrowed funds from Goldman Sachs, the proceeds of which were used to purchase Tranche B Term Loans under the First Lien Credit Agreement. In connection therewith, Vector issued to Fusion, and Fusion bought from Vector using proceeds of the various financing transactions consummated on the Closing Date, a $25,000,000 unsecured subordinated note (the “Vector Note”). The Vector Note bears interest at the rate earned by the bank account in which the proceeds of the Vector Note will be deposited and matures on May 3, 2024. The Vector Note is subordinate in right of payment to Vector’s loan from Goldman Sachs& Co. Other than payments permitted under certain limited circumstances set forth in the Vector Credit Agreement, Fusion is not entitled to any distribution on account of the principal, premium or interest or any other amount in respect of the Vector Note until all amounts owed by Vector under the Vector Credit Agreement are paid in full. Similarly, while Fusion has the right to declare obligations due under the Vector Note to be immediately due and payable upon the occurrence of an event of default (including, without limitation, in the event of any insolvency, bankruptcy or liquidation or Vector), Fusion will not be entitled to receive any payment on account of the Vector Note until Vector’s obligations under the Senior Credit Agreement are paid in full. Fusion pledged the Vector Note as security for its obligations under the Credit Agreements. Private Placements of Common Stock On the Closing Date, Fusion entered into and consummated the sale of shares of Fusion common stock under three separate common stock purchase agreements. Specifically, Fusion issued and sold (i) 952,382 shares of Fusion common stock, for an aggregate purchase price of approximately $5,000,000, to North Haven Credit Partners II L.P., one of the First Lien Lenders under the Tranche B Term Loan, which is managed by Morgan Stanley Credit Partners; (ii) 380,953 shares of Fusion common stock, for an aggregate purchase price of approximately $2,000,000, to Aetna Life Insurance Company; and (iii) 190,477 shares of Fusion common stock, for an aggregate purchase price of approximately $1,000,000, to Backcast Credit Opportunities Fund I, L.P. These shares of common stock were sold in reliance upon the exemption from the registration requirements under the Securities Act of 1933, as amended (“Securities Act”) pursuant to Section 4(a)(2) thereunder. Private Placement of Series D Preferred Stock On the Closing Date, Fusion entered into a preferred stock purchase agreement with Holcombe T. Green, Jr. pursuant to which it issued and sold to Mr. Green 15,000 shares of Series D Cumulative Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”) of Fusion, for an aggregate purchase price of $14,700,000. The Series D Preferred Stock has a stated value of $15,000,000. The Series D Preferred Shares were sold in reliance upon the exemptions from the registration requirements under the Securities Act pursuant to Section 4(a)(2) thereunder. The Series D Preferred Stock accrues dividends when, as and if declared by the Fusion Board at an annual rate of twelve percent (12%) per annum, payable monthly in arrears on a cumulative basis. MegaPath Merger Agreement On May 4, 2018, Fusion, and its wholly owned subsidiary, Fusion MPHC Acquisition Corp., a Delaware corporation (“MPHC Merger Sub”), entered into an Agreement and Plan of Merger (the “MegaPath Merger Agreement”), with MegaPath and Shareholder Representative Services LLC, a Colorado limited liability company, solely in its capacity as the representative of the stockholders and optionholders of MegaPath. The MegaPath Merger Agreement, provides, among other things, that upon the terms and conditions set forth therein, MPHC Merger Sub will merge with and into MPHC Merger Sub, with MegaPath surviving the MegaPath Merger and continuing as a wholly-owned subsidiary of Fusion. The purchase price for MegaPath is $71,500,000 (the “Purchase Price”), up to $10,000,000 of which may be paid by Fusion, at its option, in shares of Fusion’s common stock. The Purchase Price is subject to a working capital adjustment as well as a reduction for certain transaction expenses and any outstanding indebtedness of MegaPath as of the closing of the MegaPath Merger, in each case, as provided in the MegaPath Merger Agreement. At closing, $2,500,000 of the Purchase Price will be deposited in an escrow account held by Citibank, N.A., as escrow agent, for one (1) year, to secure indemnification obligations in favor of Fusion under the MegaPath Merger Agreement. A full description of each of the foregoing events is contained in our Current Report on Form 8-K which was filed with the Securities and Exchange Commission on May 10, 2018. |
2. Basis of Presentation and 26
2. Basis of Presentation and Summary of Significant Accounting Policies (Policies) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Basis of Presentation | The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (the “2017 Form 10-K”) as filed with the SEC. In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire year. On May 4, 2018 (the “Closing Date”), Fusion completed the various transactions contemplated by the Agreement and Plan of Merger, dated August 26, 2017, as amended (the “Birch Merger Agreement”), by and among Fusion, Fusion BCHI Acquisition LLC, a wholly-owned subsidiary of Fusion (“BCHI Merger Sub”), and Birch Communications Holdings, Inc. (“Birch”). As contemplated by the Birch Merger Agreement, on the Closing Date, Birch merged with and into BCHI Merger Sub (the “Birch Merger”), with BCHI Merger Sub surviving the Birch Merger as a wholly-owned subsidiary of Fusion. See “Note 19 – Subsequent Events”. The Company determined that the acquisition of Birch qualified as a reverse acquisition where Fusion was identified as a legal acquirer and Birch was identified as an accounting acquirer. All periodic reports for periods that end on or after the date the reverse acquisition is completed will be filed within the time periods specified by the SEC's rules and forms. The financial statements included in periodic reports filed for periods that end on or after the date the reverse acquisition is completed will be the accounting acquirer's financial statements for all periods presented (reflecting the combined company beginning with the date of the reverse acquisition) since the accounting acquirer is considered to be the successor to the legal issuer's reporting obligation. In the quarter ended March 31, 2018, the Company determined that the assets and liabilities of its Carrier Services reportable segment met the discontinued operations criteria in ASC 205-20-45. Accordingly, all assets, liabilities and results of operations have been classified as discontinued operations for all periods presented in the accompanying Consolidated Balance Sheet, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. See “Note 3 - Discontinued Operations”. During the three months ended March 31, 2018 and 2017, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations. |
Reverse Stock Split | Fusion filed a Certificate of Amendment (the “Charter Amendment”) to its Certificate of Incorporation with the Secretary of State of the State of Delaware, to effect a reverse split of the Fusion common stock at an exchange ratio of 1-for-1.5 (the “Reverse Split”), which became effective on May 4, 2018. The number of authorized shares of Fusion common stock was not affected by the Reverse Split. Any fractional shares of Fusion common stock resulting from the Reverse Split were rounded up to the nearest whole share. As a result of the Reverse Stock Split, all share and per share amounts as of December 31, 2017 as well as for the three months ended March 31, 2018 and March 31, 2017, have been restated at the Reverse Split Ratio to give effect to the Reverse Stock Split. |
Principles of Consolidation | The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Effective September 1, 2017, Fusion transferred 40% of its membership interests in Fusion Global Services LLC (“FGS”) to XcomIP, LLC (“XcomIP”), in exchange for which XcomIP contributed assets of its carrier business to FGS. In connection with this transaction, Fusion and XcomIP also executed a shareholder agreement under which Fusion agreed to provide up to $750,000 in working capital to FGS. The Company has determined that, based on the terms of the shareholders agreement, it has a controlling financial interest in FGS under the guidance set forth in Accounting Standards Codification (“ASC”) 810, Consolidation and, therefore, the accounts of FGS are consolidated into Fusion’s consolidated financial statements as of and for the year ended December 31, 2017. Prior to the transfer of membership interests to XcomIP, Fusion transferred its Carrier Services business to FGS. Effective March 31, 2018, the Carrier Business is recorded as discontinued operations for all periods presented. See “Note 19 – Subsequent Events”. |
Use of Estimates | The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue; allowance for doubtful accounts; fair value measurements of its financial instruments; useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates; and accounting for income taxes, contingencies and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates. |
Cash Equivalents | Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less on the date of purchase. As of March 31, 2018 and December 31, 2017, the carrying value of cash and cash equivalents approximates fair value due to the short period to maturity. |
Fair Value of Financial Instruments | At March 31, 2018 and December 31, 2017, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates their fair value due to the short-term nature of these financial instruments. |
Impairment of Long-Lived Assets | The Company periodically reviews long-lived assets, including intangible assets, for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. During the three-month period ended March 31, 2018, the Company recorded an impairment charge of $1.2 million. The Company did not record any impairment charges during the three months ended March 31, 2017. |
Goodwill | Goodwill is the excess of the acquisition cost of a business combination over the fair value of the identifiable net assets acquired. Goodwill at March 31, 2018 and December 31, 2017 was $35.2 million and $34.8 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. The following table presents the changes in the carrying amounts of goodwill during the three months ended March 31, 2018: Balance at December 31, 2017 $ 34,773,629 Increase in goodwill associated with a business acquisition 408,069 Balance at March 31, 2018 $ 35,181,698 Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances indicate that it is more likely than not that fair value of a reporting unit is below its carrying amount. The Company has the option to perform a qualitative assessment of goodwill to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill and other intangible assets. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test by comparing the fair value of the reporting unit to its carrying value. An impairment charge is recorded to the extent the reporting unit’s carrying value exceeds its fair value, however, the impairment loss recognized would not exceed the total amount of goodwill allocated to that reporting unit. The Company did not record any impairment charges related to goodwill during the three months ended March 31, 2018 and 2017. |
Advertising and Marketing Costs | Advertising and marketing expenses includes cost for promotional materials and trade show expenses for the marketing of the Company’s products and services. Advertising and marketing expenses were $0.1 million for each of the three months ended March 31, 2018 and 2017. Advertising and marketing expenses are reflected in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. |
Income Taxes | The accounting and reporting requirements with respect to accounting for income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of March 31, 2018 and December 31, 2017. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2013 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of March 31, 2018 and December 31, 2017. During the three months ended March 31, 2018 and 2017, the Company recognized no adjustments for uncertain tax positions. |
Stock-Based Compensation | The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards on the date of grant. The fair values of stock options are estimated on the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable. |
New and Recently Adopted Accounting Pronouncements | In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) In February 2016, the FASB issued ASU No. 2016-02, Leases |
2. Basis of Presentation and 27
2. Basis of Presentation and Summary of Significant Accounting Policies (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Goodwill | Balance at December 31, 2017 $ 34,773,629 Increase in goodwill associated with a business acquisition 408,069 Balance at March 31, 2018 $ 35,181,698 |
3. Discontinued Operations (Tab
3. Discontinued Operations (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Discontinued Operations and Disposal Groups [Abstract] | |
Summarized operating results for discontinued operations | For the Three Months Ended March 31, 2018 2017 Revenues $ 9,955,558 $ 7,330,836 Cost of revenues, exclusive of depreciation and amortization, shown separately below 9,659,011 7,130,207 Gross profit 296,547 200,629 Depreciation and amortization 1,201 1,200 Selling, general and administrative expenses 461,521 521,213 Total operating expenses 462,722 522,413 Operating loss (166,175 ) (321,784 ) Other (expenses) income: Other (expenses) income, net - (39 ) Total other expenses - (39 ) Loss before income taxes (166,175 ) (321,823 ) Provision for income taxes - - Net loss (166,175 ) (321,823 ) March 31, 2018 December 31, 2017 Cash and cash equivalents $ 165,165 $ 57,552 Accounts receivable, net of allowance for doubtful accounts of approximately $42,000 and $32,000, respectively 4,099,748 2,328,674 Prepaid expenses and other current assets 4,740 481,727 Total current assets of discontinued operations 4,269,653 2,867,953 Property and equipment, net 16,494 17,695 Security deposits 3,286 3,285 Total non-current assets of discontinued operations 19,780 20,980 Accounts payable and accrued expenses 3,991,463 2,303,122 Related party payable 668,815 790,480 Total current liabilities of discontinued operations 4,660,278 3,093,602 Non-current liabilities - - Total non-current liabilities of discontinued operations - - |
4. Acquisitions (Tables)
4. Acquisitions (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Acquisitions Tables | |
Purchase price allocation | Useful life (in years) Covenant not to compete $ 125,000 Trademark 16,125 3 Intellectual property 1,017,805 10 Goodwill 408,069 17 Deferred revenue (119,921 ) Total purchase price $ 1,447,078 |
5. Loss per share (Tables)
5. Loss per share (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Computation for basic and diluted net income per share | Three Months Ended March 31, 2018 2017 Numerator Net loss from continuing operations $ (4,041,602 ) $ (3,160,125 ) Net loss from discontinued operations (166,175 ) (321,823 ) Net loss (4,207,777 ) (3,481,948 ) Less Net loss attributable to non-controlling interest 66,470 - Net loss attributable to Fusion Connect, Inc. (4,141,307 ) (3,481,948 ) Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock (99,518 ) (99,518 ) Conversion price reduction on Series B-2 Preferred Stock (see note 14) - (623,574 ) Series B-2 warrant exchange (see note 14) - (347,190 ) Dividends declared on Series B-2 Convertible Preferred Stock (144,064 ) (183,827 ) Net loss attributable to common stockholders $ (4,384,889 ) $ (4,736,057 ) Denominator Basic and diluted weighted average common shares outstanding 20,682,262 13,805,133 Loss per share basic and diluted From continuing operations $ (0.20 ) $ (0.32 ) From discontinued operations $ (0.01 ) $ (0.02 ) |
Excluded from calculation of diluted earnings per common share | For the Three Months Ended March 31, 2018 2017 Warrants 1,274,126 1,798,453 Convertible preferred stock 1,265,398 1,375,417 Stock options 1,997,288 1,434,049 4,536,812 4,607,919 |
6. Intangible Assets (Tables)
6. Intangible Assets (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Identifiable intangible assets | March 31, 2018 December 31, 2017 Gross Carrying Amount Accumulated Amortization Total Gross Carrying Amount Accumulated Amortization Total Trademarks and tradename $ 1,109,525 $ (715,166 ) $ 394,359 $ 1,093,400 $ (672,314 ) $ 421,086 Proprietary technology 6,798,805 (5,209,277 ) 1,589,528 5,781,000 (5,005,400 ) 775,600 Non-compete agreement 12,245,043 (11,758,563 ) 486,480 12,120,043 (11,701,307 ) 418,736 Customer relationships 67,614,181 (14,397,003 ) 53,217,178 67,614,181 (13,073,580 ) 54,540,601 Favorable lease intangible - - - 218,000 (218,000 ) - Total acquired intangibles $ 87,767,554 $ (32,080,009 ) $ 55,687,545 $ 86,826,624 $ (30,670,601 ) $ 56,156,023 |
Estimated future aggregate amortization expense | Year Amortization Expense remainder of 2018 $ 4,751,306 2019 5,469,042 2020 5,458,742 2021 5,284,375 2022 4,612,642 |
7. Supplemental Disclosure of32
7. Supplemental Disclosure of Cash Flow Information (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Supplemental Disclosure Of Cash Flow Information Tables | |
Supplemental disclosure of cash flow information | Three Months Ended March 31, Supplemental Cash Flow Information 2018 2017 Cash paid for interest $ 1,961,727 $ 2,186,314 Supplemental Non-Cash Investing and Financing Activities Conversion of preferred stock into common stock $ 750,000 $ 2,958,000 Dividend on Series B-2 preferred stock paid with the issuance of Fusion common stock $ 19,479 $ 183,827 Obligations under acquisition $ 500,000 $ 1,350,000 Common stock issued in acquisition $ 500,000 $ - Contingent royalty fee $ 447,079 - Reconciliation of Cash, Cash Equivalents and Restricted Cash Cash and cash equivalents of continuing operations $ 30,999,732 $ 6,627,115 Restricted cash of continuing operations 27,153 27,153 Total cash, cash equivalents and restricted cash of continuing operations $ 31,026,885 $ 6,654,268 Cash and cash equivalents of discontinued operations 165,165 15,038 Total cash, cash equivalents and restricted cash 31,192,050 6,669,306 |
8. Prepaid Expenses and Other33
8. Prepaid Expenses and Other Current Assets (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Prepaid expenses and other current assets | March 31, 2018 December 31, 2017 Insurance $ 69,355 $ 18,639 Rent 16,326 16,326 Marketing 157,162 55,801 Software subscriptions 646,495 610,191 Commissions 58,833 46,755 Line costs 391,211 335,978 Other 531,801 525,828 Total $ 1,871,183 $ 1,609,518 |
9. Accounts Payable and Accru34
9. Accounts Payable and Accrued Expenses (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Accounts payable and accrued expenses | March 31, 2018 December 31, 2017 Trade accounts payable $ 6,060,192 $ 7,434,257 Accrued license fees 2,673,648 2,881,331 Accrued sales and federal excise taxes 3,598,141 3,496,697 Deferred revenue 1,517,100 1,283,969 Accrued network costs 1,808,853 1,796,302 Accrued sales commissions 956,150 911,192 Property and other taxes 746,309 759,770 Accrued payroll and vacation 487,711 422,097 Customer deposits 393,868 383,032 Interest payable 7,263 7,263 Credit card payable 135,433 114,209 Accrued USF fees 1,195,512 728,826 Accrued bonus 131,593 333,337 Professional and consulting fees 204,081 171,163 Rent 217,036 163,030 Other 32,555 1,108,968 Total $ 20,165,445 $ 21,995,443 |
10. Equipment Financing Oblig35
10. Equipment Financing Obligations (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Equipment Financing Obligations Details 1 | |
Equipment financing obligations | March 31, December 31, 2018 2017 Equipment financing obligations $ 1,482,597 $ 1,797,374 Less current portion (1,075,252 ) (1,206,773 ) Long-term portion $ 407,345 $ 590,601 |
Principal payment under the capital lease agreements | Year ending December 31: Principal remainder of 2018 $ 891,996 2019 502,589 2020 88,012 $ 1,482,597 |
11. Long-Term Debt (Tables)
11. Long-Term Debt (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Notes to Financial Statements | |
Secured credit facilities | March 31, December 31, 2018 2017 Term loan $ 55,125,000 $ 61,750,000 Less: Deferred financing fees (961,758 ) (1,027,332 ) Current portion (6,500,000 ) (6,500,000 ) Term loan - long-term portion $ 47,663,242 $ 54,222,668 Indebtedness under revolving credit facility $ - $ 1,500,000 |
Components of notes payable non-related parties | March 31, December 31, 2018 2017 Subordinated notes $ 33,588,717 $ 33,588,717 Discount on subordinated notes (958,052 ) (1,040,167 ) Deferred financing fees (547,111 ) (595,387 ) Total notes payable - non-related parties 32,083,554 31,953,163 Less: current portion - - Long-term portion $ 32,083,554 $ 31,953,163 |
12. Obligations Under Asset P37
12. Obligations Under Asset Purchase Agreements (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Obligations Under Asset Purchase Agreements Tables | |
Obligations under asset purchase agreements | March 31, December 31, 2018 2017 Customer base acquisitions $ 253,380 $ 450,000 IQMax 947,079 - 1,200,459 450,000 Less current portion (723,297 ) (227,760 ) Long-term portion $ 477,162 $ 222,240 |
13. Derivative Liability (Table
13. Derivative Liability (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Derivative Liability Tables | |
Assumptions used to determine the fair value of the warrants | Three months ended March 31, 2018 2017 Stock price ($) 4.85 2.37 Adjusted Exercise price ($) 2.34 2.34 Risk-free interest rate (%) 2.09 2.23 Expected volatility (%) 86.90 74.40 Time to maturity (years) 1.00 1.75 |
14. Revenues from Contracts w39
14. Revenues from Contracts with Customers (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Revenues From Contracts With Customers Tables | |
Impact of adoption of new accounting principle | Balance as of ASC 606 Balance as of December 31, 2017 Transition Adjustment January 1, 2018 Assets Deferred installation costs, current $ - $ 783,667 $ 783,667 Deferred installation costs, non-current - 1,125,414 1,125,414 - 1,909,081 1,909,081 Liabilities Deferred installation revenue, current - (785,740 ) (785,740 ) Deferred installation revenue, non-current - (1,036,657 ) (1,036,657 ) - (1,822,397 ) (1,822,397 ) Stockholders' Equity Accumulated deficit $ - $ 86,684 $ 86,684 March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 Assets Deferred installation costs, current $ 798,166 $ - $ 798,166 Deferred installation costs, non-current 1,102,648 - 1,102,648 1,900,814 - 1,900,814 Liabilities Deferred installation revenue, current (797,332 ) - (797,332 ) Deferred installation revenue, non-current (1,029,445 ) - (1,029,445 ) (1,826,777 ) - (1,826,777 ) Stockholders' Equity Accumulated deficit $ (201,318,706 ) $ (201,244,669 ) (74,037 ) For the three months ended March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 Revenues $ 29,038,043 $ 29,042,422 $ (4,379 ) Selling, general and administrative (13,947,995 ) (13,939,728 ) (8,267 ) Net Impact $ 15,090,048 $ 15,102,694 $ (12,646 ) |
Estimated revenue expected to be recognized in the future related to performance obligations | Deferred installation Deferred installation revenue costs Net 2018 (remaining nine months) $ 616,688 $ (614,571 ) $ 2,117 2019 634,105 (663,614 ) (29,509 ) 2020 405,576 (459,859 ) (54,283 ) 2021 and thereafter 170,408 (162,770 ) 7,638 $ 1,826,777 $ (1,900,814 ) $ (74,037 ) |
Disaggregation of revenue | Revenue category For the three months ended March 31, 2018 As reported Previous guidance Impact of Adoption of ASC 606 For the three months ended March 31, 2017 Monthly recurring $ 24,313,686 $ 24,313,686 $ — 24,721,490 Usage and other 4,473,467 4,473,467 — 3,444,654 Installation 250,890 255,269 (4,379 ) 314,895 Total revenue $ 29,038,043 $ 29,042,422 $ (4,379 ) $ 28,481,039 |
15. Equity Transactions (Tables
15. Equity Transactions (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Equity Transactions Tables | |
Black-Scholes option-pricing model | Three Months Ended March 31, 2018 2017 Dividend yield 0.0 % 0.0 % Expected volatility 92.40 % 92.40 % Average Risk-free interest rate 2.56 % 2.27 % Expected life of stock option term (years) 8.00 8.00 |
Stock option activity | Number of Options Weighted Average Exercise Price Weighted Average Remaining Contract Term Outstanding at December 31, 2017 2,011,952 $ 3.57 Granted 4,800 5.48 Exercised - - Forfeited (1,500 ) 2.55 Expired (17,964 ) 14.57 Outstanding at March 31, 2018 1,997,288 3.48 8.09 Exercisable at March 31, 2018 1,416,765 4.04 7.92 |
18. Fair Value Disclosures (Tab
18. Fair Value Disclosures (Tables) | 3 Months Ended |
Mar. 31, 2018 | |
Fair Value Disclosures [Abstract] | |
Fair value of the liability measured at fair value on a recurring basis | Level 1 Level 2 Level 3 Total As of March 31, 2018 Current liabilities: Contingent purchase price liability - - $ 223,297 $ 223,297 Non-current liabilities: Contingent purchase price liability - - $ 477,162 $ 477,162 Derivative liability (see note 13) - - $ 586,197 $ 586,197 As of December 31, 2017 Current liabilities: Contingent purchase price liability - - $ 227,760 $ 227,760 Non-current liabilities: Contingent purchase price liability - - $ 222,240 $ 222,240 Derivative liability (see note 13) - - $ 872,900 $ 872,900 |
Changes in derivative liability and contingent purchase price liability | Balance at December 31, 2017 $ 872,900 Change for the period: Change in fair value included in net loss (194,312 ) Warrant exercises (see note 13) (92,391 ) Balance at March 31, 2018 $ 586,197 |
2. Basis of Presentation and 42
2. Basis of Presentation and Summary of Significant Accounting Policies (Details) | 3 Months Ended |
Mar. 31, 2018USD ($) | |
Basis Of Presentation And Summary Of Significant Accounting Policies Details | |
Balance at December 31, 2017 | $ 34,773,629 |
Increase in goodwill associated with a business acquisition | 408,069 |
Balance at March 31, 2018 | $ 35,181,698 |
2. Basis of Presentation and 43
2. Basis of Presentation and Summary of Significant Accounting Policies (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2018 | Mar. 31, 2017 | Dec. 31, 2017 | |
Notes to Financial Statements | |||
Stockholders' equity | $ 33,798,959 | $ (1,255,671) | |
Cash | 30,999,732 | $ 6,627,115 | 2,472,836 |
Impairment charge | 1,195,837 | 0 | |
Goodwill | 35,181,698 | $ 34,773,629 | |
Advertising and marketing expenses | $ 100,000 | $ 100,000 |
3. Discontinued Operations (Det
3. Discontinued Operations (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Discontinued Operations and Disposal Groups [Abstract] | ||
Revenues | $ 9,955,558 | $ 7,330,836 |
Cost of revenues, exclusive of depreciation and amortization, shown separately below | 9,659,011 | 7,130,207 |
Gross profit | 296,547 | 200,629 |
Depreciation and amortization | 1,201 | 1,200 |
Selling, general and administrative expenses | 461,521 | 521,213 |
Total operating expenses | 462,722 | 522,413 |
Operating loss | (166,175) | (321,784) |
Other (expenses) income: | ||
Other (expenses) income, net | 0 | (39) |
Total other expenses | 0 | (39) |
Loss before income taxes | (166,175) | (321,823) |
Provision for income taxes | 0 | 0 |
Net loss | $ (166,175) | $ (321,823) |
3. Discontinued Operations (D45
3. Discontinued Operations (Details 1) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 | Mar. 31, 2017 |
Discontinued Operations and Disposal Groups [Abstract] | |||
Cash and cash equivalents | $ 165,165 | $ 57,552 | $ 15,038 |
Accounts receivable, net of allowance for doubtful accounts of approximately $42,000 and $32,000, respectively | 4,099,748 | 2,328,674 | |
Prepaid expenses and other current assets | 4,740 | 481,727 | |
Total current assets of discontinued operations | 4,269,653 | 2,867,953 | |
Property and equipment, net | 16,494 | 17,695 | |
Security deposits | 3,286 | 3,285 | |
Total non-current assets of discontinued operations | 19,780 | 20,980 | |
Accounts payable and accrued expenses | 3,991,463 | 2,303,122 | |
Related party payable | 668,815 | 790,480 | |
Total current liabilities of discontinued operations | 4,660,278 | 3,093,602 | |
Non-current liabilities | 0 | 0 | |
Total non-current liabilities of discontinued operations | $ 0 | $ 0 |
4. Acquisitions (Details)
4. Acquisitions (Details) | 3 Months Ended |
Mar. 31, 2018USD ($) | |
Total purchase price | $ 1,447,078 |
Covenant not to compete | |
Total purchase price | $ 125,000 |
Useful life | 3 years |
Trademark | |
Total purchase price | $ 16,125 |
Useful life | 10 years |
Intellectual property | |
Total purchase price | $ 1,017,805 |
Useful life | 17 years |
Goodwill | |
Total purchase price | $ 408,069 |
Deferred revenue | |
Total purchase price | $ (119,921) |
5. Loss per share (Details)
5. Loss per share (Details) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Numerator | ||
Net loss from continuing operations | $ (4,041,602) | $ (3,160,125) |
Net loss from discontinued operations | (166,175) | (321,823) |
Net loss | (4,207,777) | (3,481,948) |
Less: Net loss attributable to non-controlling interest | 66,470 | 0 |
Net loss attributable to Fusion Connect, Inc. | (4,141,307) | (3,481,948) |
Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock | (99,518) | (99,518) |
Conversion price reduction on Series B-2 Preferred Stock (see note 13) | 0 | (623,574) |
Series B-2 warrant exchange (see note 13) | 0 | (347,190) |
Dividends declared on Series B-2 Convertible Preferred Stock | (144,064) | (183,827) |
Net loss attributable to common stockholders | $ (4,384,889) | $ (4,736,057) |
Denominator | ||
Basic and diluted weighted average common shares outstanding | 20,682,262 | 13,805,133 |
Loss per share basic and diluted | ||
From continuing operations | $ (0.20) | $ (0.32) |
From discontinued operations | $ (0.01) | $ (0.02) |
5. Loss per share (Details 1)
5. Loss per share (Details 1) - shares | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Antidilutive securities excluded from the calculation of diluted earnings per common share | 4,536,812 | 4,607,919 |
Warrants [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 1,274,126 | 1,798,453 |
Convertible preferred stock [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 1,265,398 | 1,375,417 |
Stock options [Member] | ||
Antidilutive securities excluded from the calculation of diluted earnings per common share | 1,997,288 | 1,434,049 |
5. Loss Per Share (Details Narr
5. Loss Per Share (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Preferred stock dividends accumulated | $ 5,200,000 | |
Series B-2 Preferred Stock [Member] | ||
Preferred stock dividends declared | $ 144,000 | $ 200,000 |
Preferred stock dividends paid | 3,985 | 71,251 |
6. Intangible Assets (Details)
6. Intangible Assets (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Gross intangible assets | $ 87,767,554 | $ 86,826,624 |
Less: accumulated amortization | (32,080,009) | (30,670,601) |
Intangible assets, net | 55,687,545 | 56,156,023 |
Trademarks and tradename [Member] | ||
Gross intangible assets | 1,109,525 | 1,093,400 |
Less: accumulated amortization | (715,166) | (672,314) |
Intangible assets, net | 394,359 | 421,086 |
Proprietary technology [Member] | ||
Gross intangible assets | 6,798,805 | 5,781,000 |
Less: accumulated amortization | (5,209,277) | (5,005,400) |
Intangible assets, net | 1,589,528 | 775,600 |
Non-compete agreement [Member] | ||
Gross intangible assets | 12,245,043 | 12,120,043 |
Less: accumulated amortization | (11,758,563) | (11,701,307) |
Intangible assets, net | 486,480 | 418,736 |
Customer relationships [Member] | ||
Gross intangible assets | 67,614,181 | 67,614,181 |
Less: accumulated amortization | (14,397,003) | (13,073,580) |
Intangible assets, net | 53,217,178 | 54,540,601 |
Favorable lease intangible [Member] | ||
Gross intangible assets | 0 | 218,000 |
Less: accumulated amortization | 0 | (218,000) |
Intangible assets, net | $ 0 | $ 0 |
6. Intangible Assets (Details 1
6. Intangible Assets (Details 1) | Mar. 31, 2018USD ($) |
Notes to Financial Statements | |
Remainder of 2018 | $ 4,751,306 |
2,019 | 5,469,042 |
2,020 | 5,458,742 |
2,021 | 5,284,375 |
2,022 | $ 4,612,642 |
6. Intangible Assets (Details N
6. Intangible Assets (Details Narrative) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Notes to Financial Statements | ||
Amortization expense | $ 1,600,000 | $ 2,200,000 |
7. Supplemental Disclosure of53
7. Supplemental Disclosure of Cash Flow Information (Details) - USD ($) | 3 Months Ended | ||
Mar. 31, 2018 | Mar. 31, 2017 | Dec. 31, 2017 | |
Supplemental Cash Flow Information | |||
Cash paid for interest | $ 1,961,727 | $ 2,186,314 | |
Supplemental Non-Cash Investing and Financing Activities | |||
Conversion of preferred stock into common stock | 750,000 | 2,958,000 | |
Dividend on Series B-2 preferred stock paid with the issuance of Fusion common stock | 19,479 | 183,827 | |
Obligations under acquisition | 500,000 | 1,350,000 | |
Common stock issued in acquisition | 500,000 | 0 | |
Contingent royalty fee | 447,079 | 0 | |
Reconciliation of Cash, Cash Equivalents and Restricted Cash | |||
Cash and cash equivalents of continuing operations | 30,999,732 | 6,627,115 | $ 2,472,836 |
Restricted cash of continuing operations | 27,153 | 27,153 | |
Total cash, cash equivalents and restricted cash of continuing operations | 31,026,885 | 6,654,268 | |
Cash and cash equivalents of discontinued operations | 165,165 | 15,038 | $ 57,552 |
Total cash, cash equivalents and restricted cash | $ 31,192,050 | $ 6,669,306 |
8. Prepaid Expenses and Other54
8. Prepaid Expenses and Other Current Assets (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Prepaid expenses and other current assets | ||
Insurance | $ 69,355 | $ 18,639 |
Rent | 16,326 | 16,326 |
Marketing | 157,162 | 55,801 |
Software subscriptions | 646,495 | 610,191 |
Commissions | 58,833 | 46,755 |
Line costs | 391,211 | 335,978 |
Other | 531,801 | 525,828 |
Total | $ 1,871,183 | $ 1,609,518 |
9. Accounts Payable and Accru55
9. Accounts Payable and Accrued Expenses (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Notes to Financial Statements | ||
Trade accounts payable | $ 6,060,192 | $ 7,434,257 |
Accrued license fees | 2,673,648 | 2,881,331 |
Accrued sales and federal excise taxes | 3,598,141 | 3,496,697 |
Deferred revenue | 1,517,100 | 1,283,969 |
Accrued network costs | 1,808,853 | 1,796,302 |
Accrued sales commissions | 956,150 | 911,192 |
Property and other taxes | 746,309 | 759,770 |
Accrued payroll and vacation | 487,711 | 422,097 |
Customer deposits | 393,868 | 383,032 |
Interest payable | 7,263 | 7,263 |
Credit card payable | 135,433 | 114,209 |
Accrued USF fees | 1,195,512 | 728,826 |
Accrued bonus | 131,593 | 333,337 |
Professional and consulting fees | 204,081 | 171,163 |
Rent | 217,036 | 163,030 |
Other | 32,555 | 1,108,968 |
Total accounts payable and accrued expenses | $ 20,165,445 | $ 21,995,443 |
10. Equipment Financing Oblig56
10. Equipment Financing Obligations (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Equipment Financing Obligations Details 1 | ||
Equipment financing obligations | $ 1,482,597 | $ 1,797,374 |
Less: current portion | (1,075,252) | (1,206,773) |
Long-term portion | $ 407,345 | $ 590,601 |
10. Equipment Financing Oblig57
10. Equipment Financing Obligations (Details 1) | Mar. 31, 2018USD ($) |
Equipment Financing Obligations Details 1 | |
Remainder of 2018 | $ 891,996 |
2,019 | 502,589 |
2,020 | 88,012 |
Total | $ 1,482,597 |
11. Long-Term Debt (Details)
11. Long-Term Debt (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Long-term Debt Details | ||
Term loan | $ 55,125,000 | $ 61,750,000 |
Less: Deferred financing fees | (961,758) | (1,027,332) |
Less: Current Portion | (6,500,000) | (6,500,000) |
Term loan - long-term portion | 47,663,242 | 54,222,668 |
Indebtedness under revolving credit facility | $ 0 | $ 1,500,000 |
11. Long-Term Debt (Details 1)
11. Long-Term Debt (Details 1) - Non Related Party [Member] - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Subordinated Notes | $ 33,588,717 | $ 33,588,717 |
Discount on subordinated notes | (958,052) | (1,040,167) |
Deferred financing fees | (547,111) | (595,387) |
Total notes payable - non-related parties | 32,083,554 | 31,953,163 |
Less: current portion | 0 | 0 |
Long-term portion | $ 32,083,554 | $ 31,953,163 |
11. Long-Term Debt (Details Nar
11. Long-Term Debt (Details Narrative) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Long-term Debt Details Narrative | ||
Revolver credit facility | $ 0 | $ 1,500,000 |
Notes payable - related parties | $ 928,081 | $ 928,081 |
12. Obligations Under Asset P61
12. Obligations Under Asset Purchase Agreements (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Obligations Under Asset Purchase Agreements Details | ||
Customer base acquisitions | $ 253,380 | $ 450,000 |
IQMax | 947,079 | 0 |
Total | 1,200,459 | 450,000 |
Less: current portion | 723,297 | 227,760 |
Long-term portion | $ 477,162 | $ 222,240 |
13. Derivative Liability (Detai
13. Derivative Liability (Details) - $ / shares | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Derivative Liability Tables | ||
Stock price ($) | $ 4.85 | $ 2.37 |
Exercise price ($) | $ 2.34 | $ 2.34 |
Risk-free interest rate (%) | 2.09% | 2.23% |
Expected volatility (%) | 86.90% | 74.40% |
Time to maturity (years) | 1 year | 1 year 9 months |
13. Derivative Liability (Det63
13. Derivative Liability (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2018 | Mar. 31, 2017 | Dec. 31, 2017 | |
Derivative Liability [Abstract] | |||
Fair value derivative liability | $ 600,000 | $ 900,000 | |
Gain (loss) on fair value of derivative | $ 200,000 | $ (40,000) |
14. Revenues from Contracts w64
14. Revenues from Contracts with Customers (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Assets | ||
Deferred installation costs, current | $ 798,166 | $ 0 |
Deferred installation costs, non-current | 1,102,648 | 0 |
Deferred installation costs | 1,900,814 | 0 |
Liabilities | ||
Deferred installation revenue, current | (797,332) | 0 |
Deferred installation revenue, non-current | (1,029,445) | 0 |
Deferred installation revenue | (1,826,777) | 0 |
Stockholders' Equity | ||
Accumulated deficit | $ (201,318,706) | 0 |
ASC 606 Transition Adjustment | ||
Assets | ||
Deferred installation costs, current | 783,667 | |
Deferred installation costs, non-current | 1,125,414 | |
Deferred installation costs | 1,909,081 | |
Liabilities | ||
Deferred installation revenue, current | (785,740) | |
Deferred installation revenue, non-current | (1,036,657) | |
Deferred installation revenue | (1,822,397) | |
Stockholders' Equity | ||
Accumulated deficit | 86,684 | |
Balance After Adjustment | ||
Assets | ||
Deferred installation costs, current | 783,667 | |
Deferred installation costs, non-current | 1,125,414 | |
Deferred installation costs | 1,909,081 | |
Liabilities | ||
Deferred installation revenue, current | (785,740) | |
Deferred installation revenue, non-current | (1,036,657) | |
Deferred installation revenue | (1,822,397) | |
Stockholders' Equity | ||
Accumulated deficit | 86,684 | |
Previous guidance | ||
Assets | ||
Deferred installation costs, current | 0 | |
Deferred installation costs, non-current | 0 | |
Deferred installation costs | 0 | |
Liabilities | ||
Deferred installation revenue, current | 0 | |
Deferred installation revenue, non-current | 0 | |
Deferred installation revenue | 0 | |
Stockholders' Equity | ||
Accumulated deficit | (201,244,669) | |
Impact of Adoption of ASC 606 | ||
Assets | ||
Deferred installation costs, current | 798,166 | |
Deferred installation costs, non-current | 1,102,648 | |
Deferred installation costs | 1,900,814 | |
Liabilities | ||
Deferred installation revenue, current | (797,332) | |
Deferred installation revenue, non-current | (1,029,445) | |
Deferred installation revenue | (1,826,777) | |
Stockholders' Equity | ||
Accumulated deficit | $ (74,037) |
14. Revenues from Contracts w65
14. Revenues from Contracts with Customers (Details 1) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Revenues | $ 29,038,043 | $ 28,481,039 |
Selling, general and administrative | (13,947,995) | $ (13,613,661) |
Net Impact | 15,090,048 | |
Previous guidance | ||
Revenues | 29,042,422 | |
Selling, general and administrative | (13,939,728) | |
Net Impact | 15,102,694 | |
Impact of Adoption of ASC 606 | ||
Revenues | (4,379) | |
Selling, general and administrative | (8,267) | |
Net Impact | $ (12,646) |
14. Revenues from Contracts w66
14. Revenues from Contracts with Customers (Details 2) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Deferred installation revenue | $ 1,826,777 | $ 0 |
Deferred instalation costs | (1,900,814) | $ 0 |
Net | (74,037) | |
2,018 | ||
Deferred installation revenue | 616,688 | |
Deferred instalation costs | (614,571) | |
Net | 2,117 | |
2,019 | ||
Deferred installation revenue | 634,105 | |
Deferred instalation costs | (663,614) | |
Net | (29,509) | |
2,020 | ||
Deferred installation revenue | 405,576 | |
Deferred instalation costs | (459,859) | |
Net | (54,283) | |
2021 and Thereafter | ||
Deferred installation revenue | 170,408 | |
Deferred instalation costs | (162,770) | |
Net | $ 7,638 |
14. Revenues from Contracts w67
14. Revenues from Contracts with Customers (Details 3) - USD ($) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Monthly recurring | $ 24,313,686 | $ 24,721,490 |
Usage and other | 4,473,467 | 3,444,654 |
Installation | 250,890 | 314,895 |
Total revenue | 29,038,043 | $ 28,481,039 |
Previous guidance | ||
Monthly recurring | 24,313,686 | |
Usage and other | 4,473,467 | |
Installation | 255,269 | |
Total revenue | 29,042,422 | |
Impact of Adoption of ASC 606 | ||
Monthly recurring | 0 | |
Usage and other | 0 | |
Installation | (4,379) | |
Total revenue | $ (4,379) |
15. Equity Transactions (Detail
15. Equity Transactions (Details) | 3 Months Ended | |
Mar. 31, 2018 | Mar. 31, 2017 | |
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||
Dividend yield (%) | 0.00% | 0.00% |
Expected volatility (%) | 92.40% | 92.40% |
Average Risk-free interest rate (%) | 2.56% | 2.27% |
Expected life of stock option term (years) | 8 years | 8 years |
15. Equity Transactions (Deta69
15. Equity Transactions (Details 1) | 3 Months Ended |
Mar. 31, 2018$ / sharesshares | |
Number of Options | |
Balance at December 31, 2017 | shares | 2,011,952 |
Shares granted during the period | shares | 4,800 |
Shares exercised during the period | shares | 0 |
Shares forfeited during the period | shares | (1,500) |
Shares expired during the period | shares | (17,964) |
Shares outstanding at March 31, 2018 | shares | 1,997,288 |
Shares exercisable at March 31, 2018 | shares | 1,416,765 |
Weighted Average Exercise Price | |
Balance at December 31, 2017 | $ / shares | $ 3.57 |
Shares granted during the period | $ / shares | 5.48 |
Shares exercised during the period | $ / shares | 0 |
Shares forfeited during the period | $ / shares | 2.55 |
Shares expired during the period | $ / shares | 14.57 |
Shares outstanding at March 31, 2018 | $ / shares | 3.48 |
Shares exercisable at March 31, 2018 | $ / shares | $ 4.04 |
Weighted Average Remaining Contract Term | |
Outstanding at March 31, 2018 | 8 years 1 month 2 days |
Exercisable at March 31, 2018 | 7 years 11 months 1 day |
15. Equity Transactions (Deta70
15. Equity Transactions (Details Narrative) - USD ($) | 3 Months Ended | ||
Mar. 31, 2018 | Mar. 31, 2017 | Dec. 31, 2017 | |
Common Stock, Shares Authorized | 150,000,000 | 150,000,000 | |
Common Stock, Shares Issued | 23,847,140 | 14,980,756 | |
Common Stock, Shares Outstanding | 23,847,140 | 14,980,756 | |
Preferred Stock, Shares Authorized | 10,000,000 | 10,000,000 | |
Preferred Stock, Shares Issued | 13,466 | 14,216 | |
Preferred Stock, Shares Outstanding | 13,466 | 14,216 | |
Stock based compensation | $ 400,000 | $ 200,000 | |
Unrecognized compensation expense | $ 900,000 | ||
Series A Preferred Stock [Member] | |||
Preferred Stock, Shares Issued | 5,045 | 5,045 | |
Preferred Stock, Shares Outstanding | 5,045 | 5,045 | |
Series B-2 Preferred Stock [Member] | |||
Preferred Stock, Shares Issued | 8,421 | 9,171 | |
Preferred Stock, Shares Outstanding | 8,421 | 9,171 |
18. Fair Value Disclosures (Det
18. Fair Value Disclosures (Details) - USD ($) | Mar. 31, 2018 | Dec. 31, 2017 |
Current liabilities: | ||
Contingent purchase price liability | $ 223,297 | $ 227,760 |
Non-current liabilities: | ||
Contingent purchase price liability | 477,162 | 222,240 |
Derivative liability (see note 13) | 586,197 | 872,900 |
Level 1 | ||
Current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Non-current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Derivative liability (see note 13) | 0 | 0 |
Level 2 | ||
Current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Non-current liabilities: | ||
Contingent purchase price liability | 0 | 0 |
Derivative liability (see note 13) | 0 | 0 |
Level 3 | ||
Current liabilities: | ||
Contingent purchase price liability | 223,297 | 227,760 |
Non-current liabilities: | ||
Contingent purchase price liability | 477,162 | 222,240 |
Derivative liability (see note 13) | $ 586,197 | $ 872,900 |
18. Fair Value Disclosures (D72
18. Fair Value Disclosures (Details 1) - Derivative Warrant Liability | 3 Months Ended |
Mar. 31, 2018USD ($) | |
Beginning Balance | $ 872,900 |
Change in fair value included in net loss | (194,312) |
Warrant exercises (see note 13) | (92,391) |
Ending Balance | $ 586,197 |