UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10–K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
 
Commission File Number 001-32421
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
 
Delaware
 
58-2342021
(State or Other Jurisdiction of Incorporation or Organization)
 
 
(IRS Employer Identification No.)
420 Lexington Avenue, Suite 1718, New York, New York 10170
(Address of principal executive offices) (Zip Code)
 
(212) 201-2400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
 
The Nasdaq Capital Market
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
 
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(do not check if a smaller reporting company)
 
Emerging growth company
 
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant based upon the closing price of the common stock reported by The Nasdaq Capital Market on June 30, 2017 of $1.45 per share, was $19,148,262.
 
Indicate the number of shares outstanding of the registrant’s common stock as of the latest practicable date: 35,579,756 shares of common stock are issued and outstanding as of March 9, 2018.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.
 
 
None.

 
 
 
Table of Contents
 
PART I
 
2
 
 
 
Item 1.
Business.
2
Item 1A.
Risk Factors.
12
Item 1B.
Unresolved Staff Comments.
22
Item 2.
Properties.
23
Item 3.
Legal Proceedings.
23
Item 4.
Mine Safety Disclosures.
23
 
 
 
PART II
 
24
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
24
Item 6.
Selected Financial Data.
24
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
25
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
33
Item 8.
Financial Statements.
33
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
33
Item 9A.
Controls and Procedures.
33
Item 9B.
Other Information.
33
 
 
 
PART III
 
34
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance.
34
Item 11.
Executive Compensation.
40
Item 12.
Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters.
45
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
47
Item 14.
Principal Accounting Fees and Services.
47
 
 
 
PART IV
 
49
 
 
 
Item 15.
Exhibits, Financial Statement Schedules.
49
Item 16.
Form 10K Summary.
53
 
 
 
SIGNATURES
54
 
 
INDEX TO EXHIBITS
55
 
 
1
 
 
PART I
 
This Form 10-K contains forward-looking statements. These statements relate to our expectations for future events and future financial performance. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described in Item 1A of this Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations, except as required by law.
 
ITEM 1. BUSINESS.
 
Overview
 
Fusion Telecommunications International, Inc. (“Fusion”), through its various subsidiaries (collectively, “we,” “us,” “our” or the “Company”), offers a comprehensive suite of cloud communications, cloud connectivity, cloud infrastructure, cloud computing, and managed cloud-based applications solutions to small, medium and large businesses, and offers domestic and international voice services to telecommunications carriers worldwide. Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors. We currently operate our business in two distinct business segments: Business Services and Carrier Services.
 
In the Business Services segment, we are focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud. Our core Business Services products and services include cloud voice and unified communications as a service (“UCaaS”), improving communications and collaboration on virtually any device, virtually anywhere, and cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency. Our cloud computing and infrastructure as a service (“IaaS”) solutions are designed to provide our business customers with a platform on which additional cloud services can be layered. Complemented by our software as a service (“SaaS”) solutions such as security and business continuity, our advanced cloud offerings, including private and hybrid cloud, storage, backup and recovery and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud. Fusion’s cloud-based services are flexible, scalable and can be rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.
 
Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors and sell our voice services to other communications service providers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending voice traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic, thereby increasing profitability and expanding the service delivery capabilities for our Business Services segment. Since July 2017, our Carrier Services business has been operated through Fusion Global Services, LLC (“FGS”), which is currently 60% owned by us and 40% owned by XcomIP, LLC (“XComIP”). In connection with the Merger (as defined below), we have agreed to use reasonable best efforts to effectuate, on or prior to the closing of the Merger, to either (i) divest our 60% ownership interest in FGS, or (ii) dissolve FGS. See “Developments in 2017” below.
 
As a result of the acquisition of a number of cloud services businesses over the past five years, Fusion has expanded its business customer base to over 13,000 customer accounts, increased its distribution network to over 500 active distribution partners and added a significant number of network facilities and points of presence, thus expanding its geographic reach. Through these acquisitions, we acquired advanced systems and infrastructure and augmented our management team and employee base with talented, experienced, well-trained professionals, and further developed a strong platform for further acquisitions.
 
2
 
 
Fusion is seeking to capitalize on the rapid growth of the worldwide cloud services market, which is expected to grow at a three-year compound annual growth rate (CAGR) of 16.5% to total $411.4 billion, up from $260.2 billion in 2017, according to Gartner, Inc. The highest growth is expected to come from cloud system infrastructure as a service, which is projected to grow at a 27.7% CAGR from 2017 to 2020 to reach $72.0 billion, while cloud application services (SaaS) is expected to grow at a 19.4% CAGR from 2017 to 2020 to reach $100.0 billion. We are pursuing a three-tiered growth strategy, consisting of (i) developing specialized solutions for key vertical markets (such as legal and healthcare); (ii) targeting and acquiring additional cloud services companies; and (iii) implementing measures to accelerate organic growth. Our continuing effort to deliver advanced cloud solutions to larger companies with more complex requirements is supported by our proprietary cloud solutions platform that allows us to rapidly respond to large enterprise needs for customized or enhanced solutions. We intend to continue to develop vertically oriented solutions to expand our revenue opportunities and further differentiate our service suite, with current efforts directed primarily on the healthcare, legal, hospitality and real estate verticals. We also intend to acquire additional cloud services companies that can further expand our customer base, allow us to provide additional cloud products and services to our portfolio and gain scale. Our growth strategy for the Business Services segment includes securing large strategic distribution partners, increasing our direct as well as indirect channel sales efforts and upselling solutions to our existing customer base.
 
Fusion’s management team has extensive experience in the technology, services and communications industry, with demonstrated leadership in middle market, entrepreneurial, small company, distressed and M&A environments. We believe that our executive team has the experience and expertise to drive high value opportunities to the Company and execute on our acquisition and organic growth strategies.
 
Fusion was incorporated in Delaware and commenced operations in September 1997. We currently have offices in: New York, NY; Fairfield, NJ; Fort Lauderdale, FL; Atlanta, GA; Redondo Beach, CA; Austin, TX; Herndon, VA; and Beachwood, OH.
 
Developments in 2017
 
On August 26, 2017, Fusion and its wholly-owned subsidiary, Fusion BCHI Acquisition LLC, a Delaware limited liability company (“Merger Sub”), entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Birch Communications Holdings, Inc., a Georgia corporation (“Birch”). The Merger Agreement provides, among other things, that upon the terms and conditions set forth therein, Birch will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger. Birch, through its subsidiaries, provides IP-based communications, cloud and managed services to businesses in all 50 states, the District of Columbia and Canada under the Birch and Primus brands. Birch provides voice, broadband, Internet access, hosted services, managed services, wireless voice, wireless data and other communications, cloud and managed services to its customer base comprised of small, midsized, and enterprise businesses.
 
On the effective date of the Merger, 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) will be cancelled and converted into the right to receive, in the aggregate, that number of shares of our common stock equal to three times the number of shares of (i) our common stock issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement) (but excluding the shares of our common stock issued by us in a public offering of our shares of common stock completed in February 2018 as well as certain other issued and outstanding shares of our common stock (see “Recent Amendments to Merger Agreement and East West Bank Waiver” below)), plus (ii) our common stock issued or issuable upon the conversion of all classes or series of our preferred stock outstanding immediately prior to the closing of the Merger, plus (iii) our common stock issuable upon the exercise of all in-the-money Fusion warrants (collectively, the “Merger Shares”). Pursuant to subscription agreements executed by each of the stockholders of Birch, the Merger Shares will be issued in the name of, and held by BCHI Holdings, LLC (“BCHI”), a limited liability company owned by the stockholders of Birch. On the closing date of the Merger, BCHI and Fusion will enter into a Registration Rights Agreement governing the registration rights of BCHI in respect of the Merger Shares and pursuant to which we will agree, among other things, to use our reasonable best efforts to cause a shelf registration statement covering the resale of the Merger Shares to be declared effective by the SEC within 120 days of the closing of the Merger.
 
Closing of the Merger is subject to numerous conditions, including (i) receipt of the requisite approval of Fusion’s voting shares, which approval was secured by the Company on February 21, 2018, (ii) Fusion obtaining financing for the transaction, which will be used to retire existing senior debt facilities at Birch and Fusion, (iii) all existing shares of our preferred stock being converted into shares of our common stock, and (iii) Fusion using its reasonable best efforts to cause the Merger Shares to be approved for listing on The Nasdaq Stock Market, LLC (“Nasdaq”), including, if necessary, in order to comply with Nasdaq listing requirements, amending Fusion’s existing certificate of incorporation prior to the effective time of the Merger to effect a reverse stock split of our common stock to satisfy Nasdaq’s minimum pricing requirements (the “Reverse Stock Split”). If the Reverse Stock Split must be completed prior to the closing of the Merger, it will be in a range of up to 5:1, with the final ratio to be determined by our existing board.
 
In addition, prior to the closing of the Merger, Birch is required to spin-off to the existing Birch shareholders, its US-based consumer business, which consists of (i) the residential customer base, life line and consumer wireless business in the United States, and (ii) its single-line business customer base in the United States. In addition, as discussed above, we have agreed that on or prior to the consummation of the Merger, we will use our reasonable best efforts, on or prior to the closing of the Merger, to either (i) divest our 60% ownership interest in FGS, or (ii) dissolve FGS.
 
 
3
 
 
On the effective date of the Merger, our certificate of incorporation will be amended and restated, which amendments will, among other things, (i) increase the number of authorized shares of our common stock to 150 million and (ii) change our name to “Fusion Connect, Inc.” From and after the effective time of the Merger, the size of our Board will be fixed at seven directors. Three directors, including at least one director who satisfies the Nasdaq listing standard’s independence requirements, will be nominated by a nominating committee comprised of our directors serving on the Board on the date of the nomination and three directors, including at least one that satisfies the Nasdaq listing standard’s independence requirements, will be nominated by BCHI. The seventh director, who must satisfy the Nasdaq listing standard’s independence requirements, will be nominated by BCHI, subject to the reasonable consent of the Fusion committee. Our Chief Executive Officer, Matthew D. Rosen will serve as the post-Merger Chairman of the Board, and Holcombe T. Green, Jr., a principal stockholder of Birch, will serve as the post-Merger Vice Chairman of the Board. Information relating to the post-Merger Fusion Board and its executive officers will be included in a Form 14F-1 to be filed and mailed to all stockholders of the Company no less than 10 days prior to consummation of the Merger. The Merger is currently expected to be completed by mid-April 2018.
 
The terms of the Merger Agreement are such that the Merger, if consummated, will result in a change in control. As a result, the transaction will be accounted for as a reverse acquisition and recapitalization, with Birch as the acquirer for accounting purposes, and the historical financial statements of Birch (other than the Statements of Stockholders’ Equity) will become the historical financial statements of the Company.
 
Recent Amendments to the Merger Agreement and East West Bank Waiver
 
On January 24 and January 25, 2018, the parties to the Merger Agreement entered into a Fourth and Fifth Amendment to the Merger Agreement, respectively. The primary purpose of the Fourth Amendment was to further extend that date by which either Fusion or Birch may terminate the Merger Agreement due to an inability to secure commitments for the required financing from 120 days from the date of the Merger Agreement to 220 days from the date thereof (i.e., April 3, 2018). Under the Fourth Amendment, the parties also agreed to exclude up to 300,000 shares of our common stock to be issued in connection with the IQmax, Inc. asset acquisition (as described below) from the calculation of the number of Merger Shares to be issued to BCHI at the closing of the Merger. In addition, the Fourth Amendment also revised Exhibit D to the Merger Agreement (which exhibit described the proposed spin-off of the Birch consumer business required as a condition precedent to the closing) to exclude references to the Canadian business of Birch as the parties have agreed that such assets and customers will transfer to Fusion at the closing of the Merger.
 
Under the Fifth Amendment to the Merger Agreement, the parties agreed to increase the dollar amount of cash that Fusion could raise by issuing equity or debt securities in connection with capital raising activities prior to the closing of the Merger from $10.0 million to $40.0 million net proceeds) and also agreed that any shares of common stock issued by us in this offering in an amount up to $40.0 million (net proceeds) would be excluded in determining the number of Merger Shares to be issued to BCHI at the closing of the Merger.
 
On January 26, 2018, we obtained a waiver under our senior secured credit facility with East West Bank (the “East West Bank Credit Facility”) permitting us to sell up to approximately $30.0 million (net proceeds) of our common stock without having to use any of those proceeds to prepay amounts outstanding under that facility (the "January 2018 EWB Waiver"). Prior to receiving the January 2018 EWB Waiver, we were obligated under the East West Bank Credit Facility to use any net proceeds for any sale of our equity securities that are in excess of $4.0 million to pay down outstanding borrowings thereunder. In addition, on February 23, 2018 we obtained an additional waiver under the East West Bank Credit Facility permitting us to retain the entire amount of the net proceeds from the recently completed equity offering.
 
On March 12, 2018, the parties to the Merger Agreement entered into a Sixth Amendment to the Merger Agreement, the sole purpose of which was to amend the Merger Agreement and the associated form of stockholders agreement to reduce the number of directors that will initially serve on the post-Merger Board from nine to seven.
 
February 2018 Public Offering of shares of Our Common Stock
 
On February 5, 2018, we closed an offering of 12,937,500 shares of our common stock, including 1,687,500 shares for which the underwriters exercised their over-allotment option in full, at a price to the public of $3.20 per share for gross proceeds of $41.4 million. The net proceeds, after underwriting discounts and commissions, but before estimated expenses of the offering payable by Fusion, were $38.7 million. As noted above, the shares sold in this offering will not be counted as issued and outstanding for purposes of calculating the number of shares of Fusion common stock to be issued as consideration to BCHI in connection with the closing of the Merger. As a result, on a post-closing basis, the dilutive effect of this offering will be shared pro rata by current Fusion and Birch shareholders with current Fusion shareholders bearing approximately 25% of the dilution and current Birch shareholders bearing approximately 75% of the dilution from this offering. Craig-Hallum Capital Group LLC acted as the sole book-running manager and B. Riley FBR, Inc. acted as a co-manager for the offering
 
 
4
 
 
IQMax Asset Acquisition
 
On January 24, 2018, Fusion completed the acquisition of substantially all of the assets of IQMax, Inc. (“IQMax”), a Charlotte, N.C.-based provider of secure messaging, enterprise data integration and advanced cloud communications solutions. The total consideration for this transaction is $1.0 million, which will be paid in shares of our common stock. These shares will remain in escrow until 12 months following the closing of the transaction.
 
Historical Acquisitions
 
The cloud services marketplace continues to be fragmented, with many providers challenged by a limited product portfolio, a lack of financial and operational resources and a regional focus. Fusion believes this market segment offers strong opportunities for consolidation. We believe that the cross-marketing opportunities and economies of scale made possible through consolidation make such acquisitions an attractive vehicle to enhance our growth profile.
 
Fusion integrates the businesses it acquires and organizes the employees under one management team. Products and services and processes and procedures are rapidly integrated as well, while sales and support staff and distribution partners are trained to cross and up-sell our solutions to our existing and acquired customer bases. We believe that our integration strategy, in combination with our increasing expertise and our scalable, robust systems and infrastructure, will enable us to continue to efficiently integrate Birch and additional acquisitions in the future.
 
Since 2012, we have made the following acquisitions:
 
NBS
 
In October 2012, we acquired Network Billing Systems, LLC, and certain assets and liabilities of its affiliate, Interconnect Services Group II LLC (collectively, “NBS”), a cloud services provider delivering cloud voice and UCaaS, cloud connectivity and managed network services to small, medium and large businesses nationwide.
 
Broadvox Cloud Services Business
 
In December 2013, we acquired certain assets of Broadvox LLC’s cloud services business, which delivered cloud-based voice, UCaaS and cloud connectivity services to small, medium and large businesses.
 
PingTone
 
In October 2014, we acquired PingTone Communications, Inc. (“PingTone”), a provider of integrated cloud-based communications services headquartered in Herndon, VA. This acquisition added to our customer base, augmented the Company’s management team and added a direct sales force.
 
RootAxcess
 
In September 2015, we acquired the customer base, technology platform, infrastructure and other assets of Chicago-based RootAxcess. RootAxcess delivered a broad range of cloud solutions, including IaaS, cloud computing, cloud storage, cloud hosting, virtual data center, backup and recovery and virtual servers, using both private and hybrid cloud infrastructure.
 
Fidelity
 
In a two-step transaction completed in December 2015 and February 2016, we acquired Fidelity Access Networks, Inc. and its various subsidiaries (collectively, "Fidelity"). Fidelity provided cloud voice, cloud connectivity, security, data center and cloud storage services to small, medium, and large businesses, primarily in the Midwest.
 
TFB
 
In April 2016, we acquired the intellectual property and assets of Technology for Business Corporation (“TFB”), a provider of industry leading contact center solutions with a fully integrated advanced cloud voice platform.
 
Apptix
 
In November 2016, we acquired Herndon, Virginia-based Apptix, Inc. (“Apptix”), a wholly-owned subsidiary of Apptix ASA (OSE: APP). Apptix provided cloud-based communications, collaboration, virtual desktop, compliance, security and cloud computing solutions to approximately 1,500 business customers across the U.S.
 
 
5
 
 
IQMax
 
In January 2018, we acquired substantially all of the assets of IQMax. The total consideration for this transaction is $1.0 million, which will be paid in shares of our common stock. These shares will remain in escrow until 12 months following the closing of the transaction.
 
Business Services
 
Our cloud-based services are designed to meet the communications, network and computing requirements of growing businesses, while maximizing the price-performance ratio. We believe that giving our customers access to the cloud provides a more cost-effective, reliable and secure communications and IT experience, and relieves them of the capital and support burdens associated with more traditional premise-based services. Additionally, customers can reduce costs while adding features and functionality and improving productivity across their company. Fusion is increasingly focused on providing specialized, market-based solutions to targeted verticals and larger enterprises, matching our advanced solutions to key industry-specific customer requirements.
 
We currently have over 13,000 business customer accounts. We offer a suite of advanced cloud-based services, including cloud communications, which encompasses cloud voice and UCaaS, and cloud connectivity that provides diverse and redundant access to the cloud. The Company’s managed network services converge voice and data applications, which include Internet access, Ethernet over Copper transmission facilities and Multi-Protocol Level Switching (“MPLS”) services at speeds ranging from 1.5 Mbps to 100 Gbps. Our cloud computing solutions include private and hybrid cloud, storage, backup and recovery and secure file sharing. Security and business continuity are offered as part of every solution.
 
Fusion’s services are designed to provide significant benefits to businesses of all sizes, with single or multiple locations. The integration of cloud solutions on our advanced services platforms allow customers to seamlessly connect people with the information they need to collaborate effectively, regardless of the device they use.
 
Our cloud solutions are also designed to minimize upfront capital costs, increase the scalability and flexibility of the customer’s communications network and service environment, provide robust features and functionality to increase productivity and reduce the overall cost of communications.
 
Our proprietary cloud communications service platform allows us to rapidly respond to market requirements for new or enhanced products and services, as well as customize customer solutions as required for maximum flexibility, avoiding costly licensing fees and increasing our control over the service environment. Fusion’s growing suite of business services includes:
 
Cloud Voice
 
Fusion’s cloud voice service allows a customer to replace its owned or leased premise-based office telephone system with a state-of-the-art cloud-based digital telephone system. This feature-rich solution eliminates the need to own and operate a costly, complex telephone system, reduces upfront capital costs, and eliminates the cost of calls between customer locations. The service provides efficiencies for companies with multiple offices or a highly mobile workforce, and for companies that are opening a new office or need to expand or replace existing legacy telephone systems. All business service options can be configured by the user in real time using a powerful administrative portal, virtually eliminating the costs associated with the labor-intensive reconfiguration of on-site telephone systems. Our contact center solutions provide advanced call center features and functionality that can be seamlessly integrated with our cloud voice solutions, reducing operational costs and increasing cost savings and efficiency. CRM integration, call recording and real-time monitoring are built into the contact center solution, increasing productivity without increasing costs.
 
Unified Communications
 
Our UCaaS offering complements our cloud voice solutions with integrated service features that seamlessly combine audio, video, messaging and web services, immediately connecting people with the information they need to communicate effectively. Our integrated cloud-based UCaaS collaboration suite is device and location agnostic, allowing businesses of all sizes to increase productivity by simplifying communication over the most preferred or available device. By connecting employees with other employees and customers via conference call or online meeting, and sharing documents real-time with a simple click, our UCaaS solution drives efficiencies while at the same time reducing costs.
 
Contact Center
 
Fusion’s cloud-based, enterprise contact center offering is fully integrated with our UCaaS solution on our proprietary cloud services platform. Converging voice, data, web and mobile technologies, it enables customers to extend the features and functionality of the contact center throughout the enterprise while providing device and media-agnostic UCaaS services to the contact center. Comprising a full range of cost-effective applications once reserved for the largest enterprises through costly premise-based solutions, our cloud-based contact center offering delivers comprehensive, real-time and historical reporting, database integration (CRM, ERP, etc.), enhanced criteria-based routing and customer-controlled administration. Fusion’s contact center solution protects technology investments by providing a seamless migration path to the cloud, delivering everything a customer needs to monitor, maintain and manage a successful cloud-based contact center environment.
 
 
6
 
 
SIP Trunking
 
Fusion’s SIP trunking solution allows a customer to retain and use its existing telephone system, while connecting to the Fusion network for access to the cloud, as well as its local services and inbound/outbound domestic and international long distance services. Our SIP trunks efficiently and economically provide businesses with voice channels in any configuration (analog, T-1, PRI, or SIP). Customers save on their local, long distance, and international call charges, eliminate traditional line charges, and gain many of the advantages of cloud voice features and functionality, such as advanced call handling and out-of-area number portability. Burstable voice lines accommodate seasonal traffic fluctuations, marketing campaigns and business continuity requirements. SIP trunks also eliminate the cost of interoffice calling, and allow customers to combine their voice and data traffic onto a single broadband access facility for further cost savings, without having to abandon their existing technology investment. Fusion’s SIP trunking solution can be shared across customer locations and is enhanced by a proprietary administrative portal, which allows customers to alter call routing in real time and provides increased efficiency and control.
 
Cloud Connectivity
 
Fusion’s reliable and secure connections to the cloud ensure high levels of service quality and control. Leveraging our own expanding on-net network, as well as our relationships with U.S.-based and international carriers, we offer business customers a full complement of redundant, flexible and scalable network solutions, offering true diversity for built-in business continuity. Services range from dedicated circuits to high-speed broadband that are available in a variety of bandwidth levels. Fusion offers reliable, secure and cost-effective Internet access, as well as Ethernet and MPLS services. We also provide cloud-delivered SD-WAN services that facilitate optimized access for businesses to cloud services, private data centers and enterprise applications simultaneously over both ordinary broadband Internet and private links. Fusion’s quality of service routers seek to provide the highest quality voice traffic while reducing customer access costs. We believe that in addition to providing secure migration and connection to the cloud, providing a full complement of network services allows us to address a broader set of customer needs, delivering increased value and securing customer loyalty in the process.
 
Cloud Computing
 
Fusion’s cloud computing service centralizes information management, hardware, network and infrastructure in an off-premise location that is hosted and managed by Fusion. Offered as private or hybrid solutions, Fusion’s secure offerings drive efficiencies in both costs and resources allowing for rapid scalability and deployment of applications. These offerings provide a predictable, utility-based OpEx model, which eliminates significant capital expenditures, removes obsolescence concerns and future-proofs customer investments.
 
Managed Applications in the Cloud
 
Fusion offers several advanced, industry-specific SaaS solutions to meet the needs of large enterprises in key vertical markets, especially those facing the rigorous demands of regulatory requirements and/or the need to store, secure and move large amounts of customer or patient data. We believe that these applications represent significant future revenue potential, as we continue to introduce them to our existing enterprise customers and prospects.
 
Cloud Security: Unified Threat Management (UTM)
 
Fusion’s scalable, comprehensive and fully integrated UTM solution secures enterprise data as well as the network on which it is stored, moved or retrieved. The Fusion firewall is application, policy and permission- defined, enabling customers to exercise control over their own security environments. Continuous monitoring and alerts help detect, deter and defeat cyberattacks to mitigate against business disruptions, and malware threats are eliminated with antivirus and antispyware applications designed to maintain the highest level of security against external intrusions. Centrally managed and without requiring a dedicated Internet gateway or firewall on site, the cloud-based solution drives efficiencies in network management and staffing, detecting and blocking unwanted traffic before it impacts the network.
 
Cloud-Based Storage
 
Fusion offers a solution that addresses the explosive growth of data across all industries with a cost-effective and secure storage solution hosted in the cloud. This scalable, fully redundant solution is hosted off-premise, reduces customer data center footprints and resource requirements, and facilitates additional SaaS solutions that can be accommodated on the same cloud platform. Fusion delivers a storage and data back-up assessment service as part of its storage offering, measuring growth and duplication benchmarked against best practices. The solution consolidates requirements across the enterprise, increases efficiency and achieves economies of scale designed to reduce overall customer costs.
 
 
7
 
 
Backup and Recovery
 
Our “Backup and Recovery” is an enterprise-grade backup software solution that provides a single, integrated approach to data protection. Its comprehensive suite of tools and capabilities allow businesses to securely protect more data while using less network capacity and fewer storage resources without having to deploy multiple point solutions.
 
Secure File Sharing
 
Fusion offers a file sharing solution that allows businesses to share, sync and transfer important data across multiple platforms, while keeping security a main priority with military grade encryption. The solution delivers file access from any location, on any device to enable flexible and scalable file sharing, restoration and collaboration.
 
Secure Mobile Messaging and Data Integration
 
Our mobile software solutions seamlessly integrate and transmit messaging and other information across diverse applications and platforms in a secure, compliant manner to improve workforce coordination and collaboration. Our powerful data integration platform advances the expansion of our cloud ecosystem, facilitating its integration with a wide range of applications and business productivity software platforms.
 
Service Plans
 
Fusion offers several different service packages designed to meet specific customer requirements. Base level plans offer a basic service package for a low monthly recurring charge (“MRC”). Additional charges, such as local, long distance, or international calling, are charged at per minute rates. Other packages may include a specific number of local or long distance minutes or even unlimited local or long distance calling. Optional value-added features for basic services are available for an incremental monthly charge appropriate for the service.
 
Cloud connectivity services such as Internet access services and/or private line services are charged on a fixed monthly basis, and are generally based on the bandwidth utilized and the endpoints involved. Cloud computing services are generally composed of an upfront charge and an MRC. Fusion’s contracts with its Business Services customers range from one to five years in length.
 
Carrier Services
 
Fusion’s Carrier Services segment, which is currently operated through FGS, provides voice traffic termination employing primarily VoIP technology. This traffic typically consists of minutes of domestic and international long distance usage that are terminated to telephone numbers in the intended destination countries. The majority of this traffic is international in nature, and terminates to virtually all countries.
 
We employ least cost routing technology and systems in connection with all of our voice termination services to ensure high quality termination at the lowest possible cost, thus maximizing profit on that traffic. Using least cost routing technology, Fusion often “blends” routes to provide our customers with the optimal mix of price and quality, or to meet unique customer requirements for the termination of voice traffic to specific countries. We also leverage the termination capacity of the Carrier Business segment obtained through interconnection agreements and other methods of termination to carry international traffic generated by our Business Services segment.
 
All carrier voice services are priced on a per minute basis, based upon the destination called, the time of day and the customer’s overall traffic volume. FGS has reciprocal service agreements with the majority of its carrier customers, and the pricing in those agreements may also reflect the pricing provided to FGS for terminating its traffic. Prices for Internet access or private line service provided to carriers, as well as pricing for co-location services, are based on a fixed MRC for the services provided. FGS has contracts with most of its carrier customers, which typically have a one-year renewable term, no minimum commitments, and allow either party to terminate the arrangement without penalty.
 
Network
 
Fusion operates a robust and reliable carrier-grade network and infrastructure that delivers high quality, diverse and secure connections to our cloud services. Our Managed Network Services, Internet access, Ethernet, MPLS and cloud communications solutions can be provided either on-net leveraging our own extensive network, or off-net using the networks of our carrier partners, for truly diverse and redundant connections.
 
 
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Each of the Business Services network operations centers (“NOC”), as well as the NOC maintained by FGS, are manned 24 hours per day, 7 days per week and employ state-of-the-art monitoring and alert systems that are designed to ensure quality of service and a proactive response to potential customer service issues.
 
Our carrier-class network employs digitized, packet-switched service platforms capable of interfacing with most Internet protocols, as well as with TDM (time division multiplexing) or circuit-switched systems, and provides the flexibility necessary to seamlessly transport our customers’ voice and data traffic throughout the United States and the world. Internet access is delivered through dedicated and redundant high-speed interconnections to all major Internet backbones.
 
The Fusion network is characterized by its low cost of deployment and low recurring costs. It has been constructed to meet actual, rather than anticipated, customer demand with on-net and off-net connections to provide ubiquitous access, delivering maximum cost efficiency without sacrificing quality. This robust network allows us to provide diverse and redundant network connections with seamless automatic failover. Our major points of presence include: New York City; Newark, NJ; Philadelphia, PA; Boston, MA; Atlanta, GA; Miami, FL; Cleveland, OH; Chicago, IL; Dallas, TX; Los Angeles, CA; Washington, D.C.; San Jose, CA; Charlotte, NC; Jacksonville, FL; Columbus, OH; and Little Ferry, NJ.
 
Key elements of our network include a proprietary cloud communications platform, a BroadSoft cloud communications services platform; Cisco routers and switches, and Acme Packet and Sonus communications services platforms. These redundant network elements are interconnected via a dedicated fiber-based gigabit Ethernet backbone. Most network elements are based on software applications that execute entirely on off-the-shelf servers and are built for easy and rapid deployment and scalability, as well as security and reliability. Fusion has deployed a Global Convergence Solutions routing and rating management solution that has improved routing, rating and invoicing capabilities, facilitated cost savings through overhead reduction and driven efficiencies in route management.
 
Fusion’s centralized network elements are housed in carrier-grade switching facilities located in secure carrier buildings that house many other carriers and are interconnected to other major carrier buildings. These locations allow for cost-effective and rapid interconnection and capacity expansion to carrier customers, as well as major enterprise customers. Fusion believes its facility locations and equipment choices provide the platform required to support its envisioned growth and will allow it to quickly embrace emerging technologies as they become commercially available and viable.
 
Proprietary Cloud Services Platform
 
Our proprietary cloud services platform was designed and developed over many years by our own team of experienced developers using advanced, yet proven, technology. This proprietary platform is scalable, flexible and secure, delivering an integrated portfolio of cloud-based communications services that enable businesses of every size to increase productivity and efficiency while controlling costs. Information management, hardware, network and infrastructure are centralized off-premise, hosted and managed by Fusion, allowing customers to rapidly adjust to fluctuating and unpredictable service demands, drive efficiencies in staff and space, and eliminate the need for costly technology upgrades. The architecture of our proprietary platform has been designed to allow for the seamless integration of additional cloud-based applications, whether or not developed by Fusion. Not subject to third party end user licensing fees or technology release constraints, our proprietary platform allows faster, easier and more cost-effective introduction of new, business-critical applications, delivering a unique feature set engineered to quickly respond to customer demands and market requirements. We differentiate ourselves from our competitors by combining our robust carrier-grade network services to enable secure connections to the cloud, delivering true diversity and a fully integrated solution for maximum efficiency and cost savings.
 
Our proprietary platform has been designed using advanced technologies and best of breed equipment and provides for geographical diversity and redundancy. The platform has been designed for scalability as well as resiliency, and can be easily expanded to accommodate any required number of connections and customers. Platform solutions are location and device neutral, serving multiple as well as single locations nationwide, connecting users to customers and other employees on desktops, laptops, handsets, tablets and mobile phones, wherever they may be located. The platform is currently deployed in two diverse Tier 1 carrier data centers, and such platform has a fully functional, redundant system whose databases are constantly in sync. Thus, should one of the data centers be hit with a catastrophic event, customers should experience no interruption of service. The result is to ensure proven, reliable and consistent uptime performance, which is crucial for delivering mission critical solutions.
 
Developed with experienced in-house programmers, the platform requires no ongoing licensing fees for individual seats or SIP sessions, which we believe gives Fusion a competitive advantage against many other service providers. Written in current programming languages and utilizing proven technologies, the system enjoys efficiencies and capabilities not found in older legacy type platforms.
 
 
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Sales and Marketing
 
We market and sell our business services to small, medium and large customers through distribution partners, direct sales personnel and inside sales representatives. Our independent distribution partners are typically paid commissions based on their sales and, thereafter, the continued use of our services by the respective customers. Our sales employees, including direct sales and inside sales, are typically compensated through a combination of base salary and commissions based on their actual sales performance.
 
Our distribution partners generally target small-to medium-size businesses, while our direct sales force focuses on the larger enterprise customers in our targeted verticals. We believe that our cloud platform, infrastructure, systems and connectivity provide a strong competitive advantage in serving these larger enterprise customers, creating real value with specialized solutions that meet their more complex and rigorous requirements. Referrals, strategic relationships and the strength of our corporate relationships are also a key part of our overall sales and marketing plan. Our carrier services are sold entirely through our direct sales force.
 
Strategy
 
Our past acquisitions have been, and the Merger with Birch will be, important milestones in our strategic roadmap as we work to become one of the industry’s leading and most successful cloud services providers. Our plans for growth are supported by an experienced and tested management team and dedicated staff, as well as our advanced cloud strategy to organically grow our revenue from the Business Services segment and to continue to develop vertically oriented solutions and acquire additional cloud services companies.
 
Fusion intends to continue to grow organically through direct as well as indirect channel sales efforts; by securing large strategic distribution partners to extend our geographic and vertical market reach; and through the up-sale and cross-sale of services to our existing customer base.
 
We also continue to focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art networks and advanced services platforms. Our vertically oriented solutions, which are currently focused on healthcare, legal services, hospitality and real estate, offer a substantial opportunity to gain market share.
 
Fusion intends to build on the success of its past acquisitions through additional acquisitions of other cloud services companies, such as Birch. We believe that the experience gained in integrating people, products, systems, platforms and customers positions us well to advance our growth. We continue to look to acquire other companies that can expand our customer base and distribution capability, add additional cloud-based products and services and help us increase the scale of our operations.
 
Intellectual Property and Trademarks
 
We have several trademarks and service marks, which are supported by a combination of common law and statutory protection. We also own numerous domain names, which have been registered with the Corporation for Assigned Names and Numbers. The following trademarks are registered with the United States Patent and Trademark Office; however, except as otherwise noted, they are not registered at the international level:
 
Fusion®
 
Fusion (Logo)®
 
Clear Connections in the Cloud®
 
Apptix® (also registered with the European Community)
 
Cloud Alliance Network & Design®
 
Mailstreet®
 
The telecommunications and VoIP markets have been characterized by substantial litigation regarding patent and other intellectual property rights. Litigation, which could result in substantial cost and diversion of our efforts, may be necessary to enforce trademarks and/or service marks issued to us or to determine the enforceability, scope and validity of the proprietary rights of others. Legal proceedings to enforce our intellectual property or defend ourselves against third-party claims of infringement can be time consuming and costly. Adverse determinations in any litigation or interference proceeding could subject us to costs related to changing names, a loss of established brand recognition, or the need to change the technologies utilized in our services.
 
 
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Competition
 
Each of Fusion’s business segments are highly competitive, rapidly evolving, and subject to constant technological change. In each of our business segments, we compete with companies that are significantly larger and have substantially greater market presence, financial, technical, operational and marketing resources than we do. In the event that such a competitor expends significant sales and marketing resources in one or several markets where we compete with them, we may not be able to compete successfully in those markets. Specialized cloud services providers, who focus on one or more cloud services or applications, could adopt aggressive pricing and promotion practices that could impact our ability to compete. We also believe that competition will continue to increase, placing downward pressure on prices. Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions of our competitors. Further, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us. If our competitors were to provide better and more cost effective services than ours, we may not be able to increase our revenues or capture any significant market share.
 
Government Regulation
 
In the United States, our services are generally subject to varying degrees of federal, state and local regulation, including regulation by the Federal Communications Commission (the “FCC”) and various state public utility commissions or public service commissions. We may also be subject to similar regulation by foreign governments and their telecommunications/regulatory agencies. While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing. However, they do require the filing of various reports, compliance with public safety and consumer protection standards and the payment of certain regulatory fees and assessments.
 
We cannot provide assurance that the U.S. and foreign regulatory agencies exercising jurisdiction over us will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate, or will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority. Similarly, if our pricing and/or terms or conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs.
 
As a carrier, Fusion and FGS are subject to FCC regulation under the Communications Act of 1934, as amended. Fusion and FGS each have the necessary authority under Section 214 of the Communications Act to operate as a domestic and international carrier. Generally, international carrier traffic is subject to minimal regulation by state and local jurisdictions. Fusion also holds various state licenses authorizing us to provide intrastate services to our carrier and end-user customers, and we comply with state reporting, fee payment, tariffing, and other obligations with respect to these services. Should we fail at any time to hold the licenses required to provide our intrastate services, we could be subject to fines and/or other penalties.
 
Our VoIP services are lightly regulated, although certain traditional telecommunications regulations have been applied to VoIP services. The FCC requires interconnected VoIP services to comply with: 911 emergency service requirements; registration requirements; Communications Assistance for Law Enforcement requirements; obligations to support Universal Service including the Universal Service Fund (“USF”) and Telecommunications Relay Services, the North American Numbering Plan Administration, and Local Number Portability Administration; Customer Proprietary Network Information requirements; disability access obligations; Local Number Portability requirements; service discontinuance notification obligations; outage reporting requirements; and rural call completion reporting and rules related to ring signal integrity. The FCC defines interconnected VoIP service as service that (1) enables real-time, two-way voice communications, (2) requires a broadband connection from the user’s location, (3) requires Internet protocol compatible customer premises equipment, and (4) permits users generally to receive calls that originate on the public switched telephone network (“PSTN”) and to terminate calls to the PSTN. Under this definition, Fusion is a provider of interconnected VoIP service. We believe that our services are currently compliant with all applicable FCC requirements, and we and FGS have made and are making the required contributions to USF and other funds. Should either Fusion or FGS fail to meet any of the FCC requirements discussed above or fail to make required contributions in the future, we could be subject to revocation of our authority to operate or to fines and/or penalties.
 
As a result of the FCC’s preemption of states’ ability to regulate certain aspects of VoIP service, and a trend in state legislatures to affirmatively deregulate VoIP services for most purposes, our VoIP services are subject to relatively few state regulatory requirements aside from collection of state and local E911 fees and state Universal Service support obligations. We believe that our VoIP services are currently compliant with all applicable state requirements, and we have made and are making the required contributions to E911, state USF, and other funds. The state regulatory framework for our VoIP services continues to evolve, so we, in conjunction with our professional advisors, monitor the actions of the various state regulatory agencies and endeavor to ensure that we are in compliance with applicable state law, including any new statutes or regulations that may be passed. However, there can be no assurance that we will become aware of all applicable requirements on a timely basis, or that we will always be fully compliant with applicable rules and regulations. Should we fail to be compliant with applicable state regulations, or to file required reports with state regulatory agencies, we could be subject to fines and/or penalties.
 
 
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While we believe VoIP services may be subject to additional federal, state, local, or international regulation in the future, it’s uncertain when or how the effects of such regulation could affect us and our business. If additional regulation does occur, it is possible that such regulatory agencies may impose surcharges, taxes or regulatory fees on VoIP service providers. The imposition of any such surcharges, taxes, or regulatory fees could increase the Company’s costs and thus reduce or eliminate any competitive advantage that we might enjoy today.
 
Employees
 
As of December 31, 2017, we had 271 employees, all of which were full time employees. None of our employees is represented by a labor union or collective bargaining agreement. We believe that the relationship between us and our employees is good and, to date, we have not experienced a work stoppage.
 
Customer Concentrations and Revenues and Assets by Geographic Area
 
For the years ended December 31, 2017 and 2016, no single customer accounted for more than 10% of the Company’s consolidated revenues or accounts receivable.
 
During the years ended December 31, 2017 and 2016, 91.8% and 89.5%, respectively, of the Company’s revenue was derived from customers in the United States and 8.2 % and 10.5%, respectively, was derived from international customers. As of December 31, 2017 and 2016, the Company had no assets located outside of the United States.
 
Available Information
 
Our principal executive offices are located at 420 Lexington Avenue, Suite 1718, New York, New York 10170. The telephone number at our executive offices is 212-201-2400 and our main corporate website is www.fusionconnect.com. The information on the Company’s website is neither a part of, nor incorporated by reference into, this report.
 
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports and statements filed or furnished pursuant to Section 13(a), Section 15(d) or Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), free of charge on our website, www.fusionconnect.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, between the hours of 10:00 am to 3:00 pm, or at the SEC’s website www.sec.gov. For information about the SEC’s Public Reference Room, please call 1-800-SEC-0339.
 
ITEM 1A. RISK FACTORS
 
An investment in our securities involves a high degree of risk. You should carefully consider the risk factors described below in evaluating our future prospects. In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.
 
Risks Relating to Our Business
 
Failure to comply with the financial and other covenants contained in our senior debt facilities is an event of default under these agreements.
 
Our acquisitions have been financed primarily through the issuance of secured debt with an aggregate principal amount outstanding of approximately $97.6 million at December 31, 2017. Currently, all assets of Fusion and its subsidiaries are pledged as collateral under its senior debt facilities. These facilities contain a number of affirmative and negative covenants, including but not limited to, restrictions on the payment of subordinate indebtedness, incurring additional indebtedness, making capital expenditures, paying dividends and cash distributions by subsidiaries. Under these senior facilities, we are also 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, or EBITDA. Failure to comply with any of the restrictive or financial covenants contained in these facilities could result in an event of default and accelerated demand for repayment of our outstanding debt. We do not have the financial resources to repay our senior debt if it is accelerated.
 
 
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As of September 30, 2016, we were not in compliance with the leverage ratio covenants contained in our senior credit facilities, and we received waivers and amendments from the lenders under these facilities as of September 30, 2016. After giving effect to the foregoing waiver, we were in compliance with all of the financial covenants contained in our debt agreements for the years ended December 31, 2017 and 2016. There can be no assurances however, that we will continue to be able to obtain such waivers in the future if we do not comply with the financial covenants contained in our credit facilities.
 
We have a history of operating losses and net losses. There can be no assurance that we will ever achieve profitability or have sufficient funds to execute our business strategy.
 
At December 31, 2017 and 2016, we had a working capital deficit of $15.4 million and $6.6 million, respectively. At December 31, 2017, we had a stockholders’ deficit of $1.2 million and at December 31, 2016, we had stockholders’ equity of $9.2 million. In addition, at December 31, 2017 and 2016, we incurred net losses applicable to common stockholders of $15.9 million and $15.1 million, respectively. Our cash flows from operations for the year ended December 31, 2017 were not sufficient to support our capital expenditure requirements and other obligations in 2017. We may not be able to generate profits in the future and may not be able to support our operations or otherwise establish a return on invested capital. In addition, we may not have sufficient funds to execute our business strategy, requiring us to raise additional funds from the equity markets or other sources, resulting in further dilution to our equity holders. These losses, among other things, have had, and may continue to have, an adverse effect on our working capital, total assets and stockholders’ equity.
 
The cloud services industry is highly competitive and we may be unable to compete effectively.
 
The cloud services industry is highly competitive, rapidly evolving and subject to constant technological change. In addition, many of our current cloud services competitors are significantly larger and have substantially greater market presence; greater financial, technical, operational and marketing resources; and more experience. In the event that any competitor expends significant sales and marketing resources in one or several markets where we compete with them, we may not be able to compete successfully in those markets. We also believe that competition will continue to increase, placing downward pressure on prices. Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions of our competitors. In addition, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us. If our competitors were to provide better and more cost effective services, we may not be able to increase our revenues or capture any significant market share.
 
Our business is capital intensive, and we do not currently generate sufficient revenue to offset our operating expenses. If we are unable to obtain additional funding when required, we may have to significantly curtail or possibly terminate some of our operations.
 
We may require future capital in order to continue to fund our operating expenses and to continue to otherwise execute our business plan and growth strategy. If we are unable to obtain the required funding or generate revenue sufficient to sustain our operations, we could be forced to significantly curtail or suspend our operations, including laying-off employees and selling assets. Additional capital may not be available to us when needed or on terms that are acceptable to us, or at all.
 
We have historically funded our working capital requirements through the sale of equity securities of Fusion. The sale of equity securities to fund operations is dilutive to our existing stockholders. The terms of our debt facilities currently and may in the future limit our ability to utilize cash flows generated from our Business Services segment to fund the Company’s other operations, including corporate overhead expenses. In the event we are unable to substantially increase our revenue to fund our operating expenses, we may be required to continue to fund operations through additional sales of Fusion’s equity securities. In the past, limited cash resources restricted our Carrier Services segment’s ability to purchase termination capacity with longer payment terms than the terms under which it is able to sell services to its customers. Should this trend continue, and should FGS not be disposed of as contemplated by the Merger Agreement, it could limit our ability to grow our revenues and/or margins, or limit our ability to achieve our revenue and/or margin targets in this segment.
 
 
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If we are unable to manage our growth or implement our expansion strategy, we may increase our costs without increasing our revenue.
 
We may not be able to expand our product offerings, customer base and markets, or implement the other features of our business strategy at the rate, or to the extent, presently planned. Our projected growth will place a significant strain on our administrative, operational and financial resources and may increase our costs. If we are unable to successfully manage our future growth, continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, we may not be able to maximize revenue or achieve profitability.
 
Our ability to grow our business is dependent upon market developments and traffic patterns, which may lead us to make expenditures that do not result in increased revenue.
 
Our purchase of network equipment and software will be based, in part, upon our expectations concerning future revenue growth and market developments. As we expand our network, we will be required to make significant capital expenditures, including the purchase of additional network equipment and software. To a lesser extent, our fixed costs will also increase from the ownership and maintenance of a greater amount of network equipment including our switching systems, gateways, routers and other related systems. If our traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of our network, our costs as a percentage of revenue would increase significantly.
 
Changes in technology and service offerings could affect the ability of our Business Services segment to compete in the marketplace for cloud communications services.
 
Our Business Services segment is subject to rapid and significant changes in technology, particularly in the emerging areas of cloud voice, cloud connectivity, cloud storage and cloud computing. Our industry has evolved significantly in these areas over the past few years, and is expected to continue to evolve. Emerging technologies could lead to the development of newer, more convenient, more cost-effective or otherwise more attractive services. In addition, the preferences and requirements of business customers are changing rapidly. Our ability to retain current customers and attract new customers may be highly dependent on whether we choose the technologies that will ultimately have the greatest customer acceptance, are able to adopt these new technologies and offer competitive new services when appropriate, or can compete successfully against other service providers that use these new technologies, many of whom are larger or possess greater financial or technical resources than we do. The development, introduction and marketing of such new services in response to new technologies or new customer demands may require us to increase our capital expenditures significantly. In addition, new technologies may be protected by patents or other intellectual property laws and therefore may only be available to our competitors and not to us.
 
Some of our services are dependent upon multiple service platforms, network elements, and back-office systems that are reliant on third party providers.
 
We have deployed back-office systems and services platforms that enable us to offer our customers a wide-array of services and features. Sophisticated back office information and processing systems are vital to our continued growth and our ability to continue to monitor costs, invoice customers, provision client orders, and achieve operating efficiencies. Some of these systems are dependent upon license agreements with third party vendors. These third party vendors may cancel or refuse to renew some of these agreements, and the cancellation or non-renewal of these agreements may harm our ability to invoice customers and provide services efficiently.
 
Our business could be materially and adversely affected in the event of accusations of infringement of third-party intellectual rights.
 
There has been substantial litigation in the areas in which we operate regarding intellectual property rights. Regardless of the merits, accusations and lawsuits concerning claims of infringement or misuse of another party’s proprietary rights may negatively affect customer relationships, may divert management’s attention away from other aspects of our operations and, upon resolution may have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
If we were found to be infringing on the intellectual property rights of a third party, we could be subject to liability for such infringement, which could be material. We could also be prohibited from selling certain services or required to redesign certain services, each of which could have a material adverse effect on our business and results of operations. These and other outcomes may result in the loss of a substantial number of existing customers or prevent our acquisition of new customers; cause us to pay license fees for intellectual property we are found to have infringed; cause our costs to increase; materially and adversely affect our brand in the marketplace and cause a substantial loss of good will; and cause us to cease certain services or offering certain features.
 
We rely upon certain proprietary rights in our technology, systems and business processes. If our protection of these rights were to be compromised, it could negatively affect our ability to compete or to achieve our projected business and financial results.
 
Our ability to compete depends, in part, upon our proprietary rights in our technology, systems and business processes. In general, our technology is based on the integration and use of publicly available hardware components, and is therefore afforded little protection under existing patent law. Some of our software and systems, while developed by us, are generally not unique in such a manner as to allow protection under existing patent law. As a result, we generally rely on a combination of contractual restrictions and the general protection afforded by copyright, trademark and trade secret laws to establish and protect our proprietary rights. Such limited protection could prove insufficient and thereby subject us to increased competition or impact the business or financial results of our operations.
 
 
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It is the Company’s policy to require employees, consultants and, when warranted, certain customers and vendors to execute confidentiality agreements with us. These agreements provide that confidential information developed or made known during the course of the relationship must be kept confidential and not disclosed to third parties except under certain limited circumstances. If such arrangements were to prove ineffective in protecting our confidential information, our business or financial performance could be negatively impacted.
 
The U.S. Patent and Trademark Office has granted Fusion federal registration for eight trademarks, and Federal registration of those trademarks will be effective for as long as we continue to use them and renew their registrations. We may register additional trademarks and other intellectual property rights in the future, although there can be no assurance that our effort to register these trademarks will be successful. Fusion generally does not register any of its copyrights with the U.S. Copyright Office, but relies on the protection afforded to such copyrights by the U.S. Copyright Act, which provides protection to authors of original works whether published or unpublished and whether registered or unregistered.
 
Vulnerabilities to security breaches, cyber intrusions and other malicious acts could adversely impact our business.
 
In the current environment, there are numerous and evolving risks to cybersecurity and privacy, including criminal hackers, state-sponsored intrusions, industrial espionage, employee malfeasance, and human or technological error. Computer hackers and others routinely attempt to breach the security of technology products, services, and systems such as ours, and those of customers, third-party contractors and vendors.  
 
Our operations depend on our ability to protect our network from interruption by damage from unauthorized entry, computer viruses or other events beyond our control. In the past, we may have been subject to denial or disruption of service (“DDOS”), and we may be subject to DDOS attacks in the future. We cannot assure you that our backup systems, regular data backups, security protocols, DDOS mitigation and other procedures that are currently in place, or that may be in place in the future, will be adequate to prevent significant damage, system failure or data loss. Critical to our provision of service is the storage, processing, and transmission of confidential and sensitive data. We store, process and transmit a wide variety of confidential and sensitive information including credit card, bank account and other financial information, proprietary, trade secret or other data that may be protected by intellectual property laws, customers' and employees' personally identifiable information, as well as other sensitive information. We, along with others in the industry, will be subject to cyber threats and security breaches, given the nature of the information we store, process and transmit.
 
Depending on the evolving nature of cyber threats and the measures we may have to implement to continue to maintain the security of our networks and data, our profitability may be adversely impacted or we may have to increase the price of our services which may make our offerings less competitive with other communications providers.
 
If an individual obtains unauthorized access to our network, or if our network is penetrated, our service could be disrupted and sensitive information could be lost, stolen or disclosed which could have a variety of negative impacts, including legal liability, investigations by law enforcement and regulatory agencies, and exposure to fines or penalties, any of which could harm our business reputation and have a material negative impact on our business. In addition, to the extent we market our services as compliant with particular laws governing data privacy and security, such as HIPAA (Health Insurance Portability and Accountability Act) and the Gramm-Leach-Bliley Act, any security breach that exposes protected information may make us susceptible to a number of claims related to our marketing.
 
Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their contracts with us or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
 
In contracts with larger enterprises, we sometimes agree to assume liability for security breaches in excess of the amount of committed revenue from the contract. In addition, there can be no assurance that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results.
 
 
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Our revenue growth is dependent upon our ability to build new distribution relationships and to acquire new customers.
 
Our ability to grow through efficient and cost effective deployment of our cloud services is, in part, dependent upon our ability to identify and contract with local, regional and national entities that will assist in the distribution of our products and services. If we are unable to identify, contract with or maintain such distribution relationships, or if the efforts of these agents are not successful, we may not grow the customer base or achieve the revenue level currently envisioned and our results of operations will be adversely impacted.
 
We are dependent upon our ability to obtain the necessary regulatory approvals and licenses to enter new domestic and international markets in which such approvals are required. Such approvals may or may not occur as planned and could be delayed.
 
Our ability to enter into new domestic and international markets may, in certain cases, rely upon our ability to obtain licenses or other approvals to operate in those markets, our ability to establish good working relationships with the relevant regulatory authorities in those jurisdictions or our ability to interconnect to the local telephone networks in those markets. If we are not able to obtain the necessary licenses, approvals or interconnections, our ability to enter these new markets may be delayed or prevented.
 
Industry consolidation could make it more difficult for us to compete.
 
Companies offering cloud voice, UCaaS, cloud connectivity, SaaS, IaaS and other cloud services are, in some circumstances, consolidating. We may not be able to compete successfully with businesses that have combined, or will combine, to produce companies with substantially greater financial, technical, sales and marketing resources, or with larger client bases, more extended networks or more established relationships with vendors and distributors. If we were to experience such heightened competitive pressures, there is a risk that our revenues may not grow as expected and the value of our equity securities could decline.
 
Our ability to provide services is often dependent on our suppliers and other service providers who may not prove to be reliable.
 
A majority of the voice calls made by our customers are connected through other communication carriers, which provide us with transmission capacity through a variety of arrangements. Our ability to terminate voice traffic in our targeted markets is an essential component of our ongoing operations. If we do not secure or maintain operating and termination arrangements, our ability to increase services to our existing markets and gain entry into new markets will be limited. Therefore, our ability to maintain and expand our business is dependent, in part, upon our ability to maintain satisfactory relationships with other domestic carriers, Internet service providers, international carriers, fiber optic cable providers and other service providers, many of which are our competitors, and upon our ability to obtain their services on a cost effective basis. In addition, if a carrier with whom we interconnect does not carry the traffic routed to it, or does not provide the required capacity, we may be forced to route our traffic to, or buy capacity from, a different carrier on less advantageous terms, which could reduce our profit margins or degrade our network service quality. In the event network service quality is degraded, it may result in a loss of customers. To the extent that any of these carriers with whom we interconnect raise their rates, change their pricing structure or reduce the amount of capacity they will make available to us, our revenues and profitability may be adversely affected.
 
We rely on third party equipment suppliers who may not be able to provide us the equipment necessary to deliver the services that we seek to provide.
 
We are dependent on third party equipment suppliers, including Cisco, BroadSoft, Acme Packet and Sonus, for equipment, software and hardware components. If these suppliers fail to continue product development and research and development or fail to deliver quality products or support services on a timely basis, or if we are unable to develop alternative sources of supply if and as required, such a failure could result in an inability to deliver the services that we currently provide or intend to provide, and our financial condition and results of operations may be adversely affected.
 
FGS’s Carrier Services business relies on the cooperation of other international carriers and incumbent service providers, who may not always cooperate with us in our attempt to serve a specific country or market.
 
In some cases, the growth of the FGS Carrier Services business requires the cooperation of other international carriers and/or the incumbent service provider in order to provide services to or from specific countries or markets. In the event the incumbent, or another in-country international carrier, does not cooperate with FGS or support FGS in its efforts to serve that country, its ability to provide service to or from that country may be delayed, or the costs to provide service might increase should it be forced to use another more expensive carrier. If FGS is unable to develop and maintain successful relationships with other international carriers and incumbent operators, its ability to cost-effectively service an important market could be adversely affected.
 
 
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Because we do business on an international level, we are subject to an increased risk of tariffs, sanctions and other uncertainties that may hurt our revenue.
 
There are certain risks inherent in doing business internationally, especially in emerging markets, such as unexpected changes in regulatory requirements, the imposition of tariffs or sanctions, licenses, customs, duties, other trade barriers, political risks, currency devaluations, high inflation, corporate law requirements and civil unrest. Many of the economies of these emerging markets are weak and volatile. FGS may not be able to mitigate the effect of inflation on its operations in these countries by price increases, even over the long-term. Also, deregulation of the communications markets in developing countries may or may not continue. Incumbent service providers, trade unions and others may resist legislation directed toward deregulation and may resist allowing FGS to interconnect to their networks. The legal systems in emerging markets also frequently have insufficient experience with commercial transactions between private parties, therefore FGS may not be able to protect or enforce its rights in some emerging market countries. Governments and regulations may change, thus impacting the availability of new licenses or the cancellation or suspension of existing operating licenses. The instability of the laws and regulations applicable to the FGS Carrier Services business, as well as their interpretation and enforcement, could materially impact its business in those countries and adversely affect its and our financial condition or results of operations.
 
The regulatory treatment of VoIP outside the United States varies from country to country. Some countries are considering subjecting VoIP services to the regulations applied to traditional telephone services and they may assert that FGS is required to register as a telecommunications carrier in that country or impose other more onerous regulations. In such cases, our failure to register could subject us to fines, penalties or forfeiture of our right to do business in that country. Regulatory developments such as these could have a material adverse effect on our ability to grow our international Business Services operations.
 
Additional taxation and government regulation of the cloud communications industry may slow our growth, resulting in decreased demand for our products and services and increased costs of doing business.
 
As a result of changes in regulatory policy, we could be forced to pay additional taxes on the products and services we provide. We structure our operations and our pricing based on assumptions about various domestic and international tax laws, tax treaties and other relevant laws. Taxation authorities or other regulatory authorities might not reach the same conclusions about taxation that we have reached in formulating our assumptions. We could suffer adverse tax and other financial consequences if our assumptions about these matters are incorrect or the relevant laws are changed or modified. In the U.S., our products and services are subject to varying degrees of federal, state and local regulation, including regulation by the FCC and various state public utility commissions. We may also be subject to similar regulation by foreign governments and their telecommunications and/or regulatory agencies. While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing. However, they do require the filing of various reports, compliance with public safety and consumer protection standards and the payment of certain regulatory fees and assessments.
 
We cannot assure you that applicable U.S. and foreign regulatory agencies will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate or that such agencies will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority. Similarly, if our pricing and/or terms and conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs.
 
We also hold various state licenses authorizing us to provide intrastate services to our carrier and end-user customers, and we comply with state reporting, fee payment, tariffing and other obligations with respect to these services. However, in several states where we provide de minimus intrastate services we may not have fully complied with applicable licensing requirements. Should we fail at any time to hold the licenses required to provide our intrastate services, we could be subject to fines or other penalties.
 
In addition to new regulations being adopted, existing laws may be applied to the Internet, which could hinder our growth.
 
New and existing laws may cover issues that include: sales and other taxes; user privacy; pricing controls; characteristics and quality of products and services; consumer protection; cross-border commerce; copyright, trademark and patent infringement; and other claims based on the nature and content of Internet materials. Changes to existing regulations or the adoption of new regulations could delay growth in demand for our products and services and limit the growth of our revenue.
 
 
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The effects of natural disasters such as hurricanes or other events over which we have no control could significantly disrupt our operations and could have a material adverse impact on our business.
 
Our Carrier Services operations were impacted by Hurricane Sandy in the Northeast region of the United States in late October of 2012. The severe weather conditions directly affected the ability of many of our carrier customers and vendors to connect to us. As a result, we did not generate the same levels of revenues and gross profit that we believe we would have generated absent these abnormal conditions. Any future disruptions to the operation of FGS’ network (should it not be disposed of as contemplated by the Merger Agreement) or Fusion’s network, including acts of war, terrorism or other force majeure events, could have a material adverse impact on our liquidity, financial condition and results of operations. Although we do carry business interruption insurance, we cannot assure you that our losses in the event of a natural disaster or other force majeure event would be completely covered by insurance.
 
If we do not retain our executive officers and senior management, or if we do not continue to attract and retain qualified personnel and independent sales agents, our ability to execute our business plan could be adversely affected.
 
Our existing executive officers and senior management have extensive experience in the communications industry, as well as many years of working together as an integrated management team directing our day-to-day operations. As a result, we are dependent on those individuals and the loss of the services of one or more of these individuals could impair our ability to execute our strategy or achieve our business and financial objectives.
 
We do not have written employment agreements with any of our executive officers or other members of our senior management team except for Matthew Rosen, our Chief Executive Officer.
 
We face competition for qualified personnel, including management, technical, financial and sales personnel. We also rely on independent sales agents to market and sell our services. If we are unable to attract and retain experienced and motivated personnel, including independent sales agents, the growth of our business or the effectiveness of our day-to-day operations may be negatively impacted and we may not be able to grow our customer base or achieve our business or financial objectives.
 
Risks Related to the Merger
 
The Merger may not be completed within the expected timeframe or at all, and the failure to complete the Merger may negatively affect the trading price of our common stock and could adversely affect our future business and financial results.
 
The Merger continues to be subject to a number of risks and uncertainties, including (1) we and Birch may not be able to obtain the financing necessary to complete the Merger; (2) we and Birch may not obtain all necessary regulatory approvals or such approvals may not be obtained in a timely fashion; and (3) timely satisfaction of all other closing conditions to the Merger. Failure to complete the Merger or significant delays in its completion could negatively affect the trading price of our common stock, adversely affect our future business and financial results and could result in our failure to timely realize certain synergies relating to such acquisition.
 
Our existing stockholders will experience substantial dilution if the Merger is consummated.
 
If the Merger is consummated, the Birch stockholders (through BCHI) will receive consideration, in the aggregate, equal to three times the Merger Shares. Therefore, there will be substantial dilution to the Fusion stockholders. The Fusion stockholders will have lower equity participation in the combined company and, as a result, reduced opportunity to participate in any future earnings or growth of the combined company and future appreciation in the value of our common stock than they have prior to the Merger.
 
If the Reverse Stock Split is consummated, our total market capitalization may decrease.
 
If the Reverse Stock Split is effected prior to the close of the Merger, the market price per share of our common stock after the Reverse Stock Split may not increase in proportion to the reduction in the number of shares of our common stock outstanding before the Reverse Stock Split, if and when it is effected. Accordingly, the total market capitalization of our common stock (the aggregate value of all of our common stock at the then existing market price) after the Reverse Stock Split may be lower than the total market capitalization before the Reverse Stock Split. There are numerous factors and contingencies that could affect our stock price following a proposed reverse stock split, including, but not limited to, the status of the market for our stock at the time, our reported results of operations in future periods, and general economic, market and industry conditions, and the market price of our common stock may not be sustainable at the bid price following such reverse stock split.
 
 
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The existing stockholders of Fusion will comprise a minority of the combined company after the consummation of the Merger and the Birch stockholders will nominate a majority of the Board of Directors.
 
If the Merger is consummated, the stockholders of Birch (through BCHI) will receive consideration equal to three times the number of shares of common stock outstanding and in-the-money Fusion warrants immediately prior the effective time of the Merger, subject to certain exceptions, making them the majority stockholders of the Company. Furthermore, under the terms of the Merger, BCHI is entitled to nominate five of the nine directors serving on the Company’s board of directors after the Merger (subject to Nasdaq’s independence requirements and one of the designees being subject to the reasonable consent of the Fusion committee). Accordingly, BCHI will have substantial influence over the board of directors and the operations of the Company after the consummation of the Merger.
 
The number of shares issuable as consideration will not be affected by an increase the trading price of our common stock.
 
The consideration payable in connection with the Merger is a fixed number of shares of common stock. Therefore, our stockholders will not be able to benefit from an increase in the trading price of our common stock during the pendency of the Merger, with respect to the consideration payable for Birch. Furthermore, the Merger Agreement does not provide Fusion with a price-based termination right, a merger consideration adjustment or other similar protection.
 
We may not realize the revenue growth opportunities and cost synergies that are anticipated from the planned Merger as we may experience difficulties in integrating Birch’s business with ours.
 
The benefits that are expected to result from the Merger will depend, in part, on our ability to realize the anticipated revenue growth opportunities and cost synergies as a result of the planned acquisition. Our success in realizing these revenue growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of Birch. There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition as sizable as Birch. The process of integrating operations could cause an interruption of, or loss of momentum in, our and Birch’s activities. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our company, service existing customers, attract new customers and develop new products or strategies. If senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will successfully or cost-effectively integrate Birch. The failure to do so could have a material adverse effect on our business, financial condition or results of operations.
 
Even if we are able to integrate Birch successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that we currently expect from this integration, and we cannot guarantee that these benefits will be achieved within anticipated timeframes or at all. For example, we may not be able to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with the integration of Birch. While it is anticipated that certain expenses will be incurred to achieve cost synergies, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the planned acquisition may be offset by costs incurred to, or delays in, integrating the businesses.
 
The Merger could impact or cause disruptions in our and Birch’s businesses which could have an adverse effect on our business, financial condition or results of operations following the completion of the Merger.
 
The Merger could cause disruption in our and Birch’s businesses, including:
 
our and Birch’s current and prospective customers and suppliers may experience uncertainty associated with the Merger, including with respect to current or future business relationships with us, Birch or the combined business and may attempt to negotiate changes in existing business;
our and Birch’s employees may experience uncertainty about their future roles with us, which may adversely affect our and Birch’s ability to retain and hire key employees;
the Merger may give rise to potential liabilities; and
the attention of our management and that of Birch may be directed toward the completion and implementation of the Merger and transaction-related considerations and may be diverted from the day-to-day business operations of the respective companies.
 
In connection with the Merger, we could also encounter additional transaction and integration-related costs or other factors such as the failure to realize all of the benefits anticipated in the Merger. The disruption to Birch’s business could be exacerbated by a delay in the completion of the Merger.
 
 
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The debt we expect to incur in connection with the Merger could have a negative impact on our liquidity or restrict our activities.
 
As of December 31, 2017, we had approximately $97.6 million of indebtedness outstanding. If the Merger is consummated, effective upon closing of the Merger we currently expect that our outstanding indebtedness will be approximately $580 million. New credit facilities related to the Merger will likely contain various covenants that limit our ability to engage in specified types of transactions. Our overall leverage and the terms of our financing arrangements could:
 
limit our ability to obtain additional financing in the future for working capital, capital expenditures and acquisitions;
make it more difficult to satisfy our obligations under the terms of our indebtedness;
limit our ability to refinance our indebtedness on terms acceptable to us or at all;
limit our flexibility to plan for and adjust to changing business and market conditions in the industries in which we operate and increase our vulnerability to general adverse economic and industry conditions;
require us to dedicate a substantial portion of our cash flow to make interest and principal payments on our debt, thereby limiting the availability of our cash flow to fund future acquisitions, working capital, business activities, and other general corporate requirements;
limit our ability to obtain additional financing for working capital, to fund growth or for general corporate purposes, even when necessary to maintain adequate liquidity, particularly if any ratings assigned to our debt securities by rating organizations were revised downward; and
subject us to higher levels of indebtedness than our competitors, which may cause a competitive disadvantage and may reduce our flexibility in responding to increased competition.
 
In addition, the restrictive covenants could require us to maintain specified financial ratios and satisfy other financial condition tests. Our ability to meet those financial ratios and tests will depend on our ongoing financial and operating performance, which, in turn, will be subject to economic conditions and to financial, market, and competitive factors, many of which are beyond our control. A breach of any of these covenants could result in a default under the instruments governing our indebtedness.
 
Birch may have liabilities that are not known, probable or estimable at this time.
 
As a result of the Merger, Birch will become our subsidiary and it will remain subject to all of its liabilities. There could be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing due diligence investigations of Birch. In addition, there may be liabilities that are neither probable nor estimable at this time that may become probable or estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results. We may learn additional information about Birch that adversely affects us, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable laws.
 
Risks Related to Ownership of our Common Stock
 
We are unlikely to pay cash dividends on our common stock in the foreseeable future.
 
We have never declared or paid any cash dividends on our common stock. We intend to retain any future earnings to finance our operations and expand our business and therefore do not expect to pay any cash dividends in the foreseeable future. Holders of our outstanding preferred stock are entitled to receive dividends prior to the payment of any dividends on our common stock. The payment of dividends is also subject to provisions of Delaware law prohibiting the payment of dividends except out of surplus and certain other limitations, as well as the provisions contained in our debt facilities.
 
Our common stock is subject to price volatility unrelated to our operations.
 
The market price of our common stock has fluctuated substantially and will likely continue to fluctuate due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in our industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of our common stock and securities issued by many other companies for reasons unrelated to operating performance.
 
In addition, the market price of our common stock may continue to fluctuate significantly in response to a number of other factors, many of which are beyond our control including, but not limited to, the following:
 
 
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ability to obtain and retain securities analyst coverage;
 
changes in securities analysts’ recommendations or estimates of our financial performance;
 
changes in the market valuations of companies similar to us;
 
announcements by our competitors of significant contracts, new offerings, acquisitions, commercial relationships, joint ventures, or capital commitments; and
 
failure to meet analysts’ expectations regarding financial performance.
 
Furthermore, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us, regardless of its merit, could result in substantial costs and divert the attention of our management from other business concerns, which in turn could harm our business.
 
Our common stock may become subject to the “penny stock” rules of the SEC, which will make transactions in our shares cumbersome and may reduce the value of an investment in our shares.
 
For so long as the trading price of our common stock is less than $5.00 per share, our common stock may be considered a "penny stock," and in such event trading in our common stock would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
 
SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
 
To date, we have not been considered a “penny stock” due to an exemption from Rule 15g-9 for companies with average annual audited revenues for the prior three years of in excess of $6,000,000 per year. However, should the exclusions from the definition of a “penny stock” change, or should our annual revenues fall dramatically, we may become subject to rules applicable to “penny stocks” and the market for our shares may be adversely affected.
 
The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights in favor of our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
 
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to the Company and its stockholders to the maximum extent permitted under Delaware corporate law. Our by-laws also require us to indemnify our directors to the maximum extent permitted by Delaware corporate law. We may also have contractual indemnification obligations under our agreements with our directors, officers and employees. These indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and its stockholders.
 
Our use of equity to fund operations is dilutive to existing stockholders and, depending upon the market price of our common stock at the time of issuance, we may be required to issue shares of common stock at depressed prices.
 
Historically, we have funded a vast majority of our working capital requirements through the sale of Fusion equity securities. The use of Fusion equity securities to fund operations is dilutive to our existing stockholders. Unless we are able to generate substantial revenues to fund our operating expenses, we may be required to continue to fund our operations through the sale of additional equity. Moreover, the dilutive effect on our stockholders caused by the issuance of new equity is directly impacted by the market price of our common stock at the time of issuance. If we are required to issue equity securities at a time when the market price for our common stock is depressed, we will need to issue more shares than if the market price was higher, and the dilutive effect on our stockholders will be greater.
 
 
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The issuance of our common stock upon the exercise of options or warrants or the conversion of outstanding convertible securities may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock.
 
As of March 9, 2018, we had 35,579,756 common shares outstanding and approximately 2,046,585 shares reserved for issuance upon conversion of outstanding preferred stock, 2,000,988 shares reserved for the exercise of outstanding warrants, and 3,017,687 shares reserved for the exercise of outstanding stock options. The issuance of our common shares upon the exercise of stock options or warrants, or conversion of preferred stock will increase the number of our publicly traded shares, which could depress the market price of our common stock.
 
The perceived risk of dilution may cause our common stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
 
We could use preferred stock to fund operations or resist takeovers, and the issuance of preferred stock may cause additional dilution.
 
Our certificate of incorporation authorizes Fusion to issue up to 10,000,000 shares of preferred stock, of which 5,045 shares of Series A-1, A-2 and A-4 Preferred Stock (the “Series A Preferred”) are currently issued and outstanding, and 9,171 shares of our Series B-2 Preferred Stock (the “Series B-2 Preferred”) are currently issued and outstanding. Upon completion of the Merger, the Series A Preferred and the Series B-2 Preferred will be converted into shares of our common stock. That notwithstanding, our existing certificate of incorporation gives, and the amended and restated certificate of incorporation to be filed in connection with the Merger will give the Board the authority to issue preferred stock without any further approval of our stockholders. We may issue additional shares of preferred stock to raise money to finance our operations. We may authorize the issuance of the preferred stock in one or more series. In addition, we may set the terms of preferred stock, including:
 
dividend and liquidation preferences;
 
voting rights;
 
conversion privileges;
 
redemption terms; and
 
other privileges and rights of the shares of each authorized series.
 
The issuance of large blocks of Fusion’s preferred stock could have a dilutive effect on our existing stockholders. It can also negatively impact our existing stockholders’ liquidation preferences. In addition, while we include preferred stock in our capitalization to improve our financial flexibility, we could also issue preferred stock to friendly third parties to preserve control by present management. This could occur if we become subject to a hostile takeover that could ultimately benefit our stockholders.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
Not applicable to smaller reporting companies.
 
 
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ITEM 2. PROPERTIES.
 
We are headquartered in New York, New York and lease offices and facilities in a number of other locations. Below is a list of our primary leased offices and other facilities as of December 31, 2017.
 
Location
 
Lease Expiration Date
 
Annual Rent
 
Business Use
 
Approx. Sq. Ft.
420 Lexington Avenue, Suite 1718, New York, NY 10170
 
October 2020
 
$666,000
 
Lease of principal executive offices
 
9,956
 
 
 
 
 
 
 
 
 
3565 Piedmont Road, N.E., Suite 300, Atlanta, GA 30005
 
August 2022
 
$261,000
 
Lease of network facilities and office space
 
10,509
 
 
 
 
 
 
 
 
 
13921 Park Center Road Herndon, VA 20171
 
Month to month
 
$345,000
 
Lease of network facilities and office space
 
13,364
 
 
 
 
 
 
 
 
 
23250 Chagrin Blvd. Suite 250 Beachwood, OH 44122
 
May 2019
 
$93,000
 
Lease of sales and administrative office space
 
5,638
 
 
 
 
 
 
 
 
 
695 US Highway 46 West Suite 200
Fairfield, NJ 07004
 
August 2028
 
$203,000
 
Lease of network facilities and office space
 
13,511
 
 
 
 
 
 
 
 
 
811 North Catalina Suite 2120
Redondo Beach, CA 90277
 
May 2018
 
$31,000
 
Lease of network facilities and office space
 
1,200
 
 
 
 
 
 
 
 
 
14205 Burnet Rd. Suite 300 Austin, TX 78728
 
September 2020
 
$37,000
 
Lease of network facilities and office space
 
2,534
 
 
 
 
 
 
 
 
 
1451 W. Cypress Creek Rd. Suite 300, Room 392
Fort Lauderdale, FL 33309
 
Month to month
 
$42,000
 
Lease of network facilities and office space
 
593
 
We believe that our leased facilities are adequate to meet our current and future needs.
 
ITEM 3. LEGAL PROCEEDINGS.
 
From time to time, we 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. We do not expect that the outcome of any such claims or actions will have a material effect on our liquidity, results of operations or financial condition. As of December 31, 2017 and 2016, we did not have any significant ongoing legal matters.
 
ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
 
 
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PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our common stock is listed on The Nasdaq Capital Market under the symbol “FSNN.” The following tables list the high and low sales prices for our common stock for each fiscal quarter during the two preceding fiscal years.
 
Year Ended December 31, 2017
 
High
 
 
Low
 
First Quarter
 $2.02 
 $1.28 
Second Quarter
 $1.90 
 $1.30 
Third Quarter
 $3.57 
 $1.11 
Fourth Quarter
 $4.08 
 $2.30 
 
Year Ended December 31, 2016
 
 
 
 
 
 
First Quarter
 $3.80 
 $1.69 
Second Quarter
 $2.09 
 $1.20 
Third Quarter
 $2.46 
 $1.30 
Fourth Quarter
 $1.71 
 $0.96 
 
The market price for our common stock is highly volatile and fluctuates in response to a wide variety of factors.
 
Holders of Record
 
As of December 31, 2017, there were 526 holders of record of our common stock.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any cash dividends on our common stock in the foreseeable future. Subject to the rights of holders of any of our outstanding preferred stock, any future determination to pay dividends will be at the discretion of our board of directors, subject to applicable law, and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, the terms of our outstanding debt and other factors that our Board considers appropriate.
 
The holders of our Series A Preferred are currently entitled to receive cumulative dividends of 8% per annum payable in arrears, as and when declared by the Fusion board from January 1, 2008. To date, the Fusion board has not declared any dividends on any series of Series A Preferred. The holders of our Series B-2 Preferred are entitled to receive quarterly dividends at an annual rate of 6%. These dividends can be paid, at our option, either in cash or in shares of our common stock. Since the issuance of the Series B-2 Preferred in December 2013 and January 2014, all declared dividends through September 30, 2017 have been paid in shares of our common stock. The Company did not declare a dividend on its Series B-2 Preferred for the quarter ended December 31, 2017. In connection with the Merger, all holders of Series A Preferred and Series B-2 Preferred have been notified that they must convert their shares of preferred stock into shares of our common stock at the applicable conversion rate or their interests will be forfeited at the closing of the Merger.
 
Recent Sales of Unregistered Securities
 
None.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
Not applicable to smaller reporting companies.
 
 
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the notes related thereto included elsewhere in this report. This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” "should," "believes," "plans'" "potential," "predicts" “anticipate,” “intend” or “estimate” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements (see Item 1A, “Risk Factors”).
 
 
OVERVIEW
 
Our Business
 
We offer a comprehensive suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium and large businesses, and offer domestic and international VoIP services to carriers worldwide. Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors. We currently operate our business in two distinct business segments: Business Services and Carrier Services.
 
In the Business Services segment, we are focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud. Our core Business Services products and services include cloud voice and UCaaS, improving communication and collaboration on virtually any device, virtually anywhere, cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency, and contact center solutions. Our cloud computing and IaaS solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered. Complemented by our SaaS solutions such as security and business continuity, our advanced cloud offerings include private and hybrid cloud, storage, backup and recovery, and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud. The Company’s cloud-based services are flexible, scalable and rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.
 
Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors, through which we sell domestic and international voice services to other carriers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic and expand service delivery capabilities for our Business Services segment. Since September 1, 2017, our Carrier Services business has been operated through FGS, which is 60% owned by us and 40% owned by XcomIP. As noted elsewhere in this report, on or prior to the completion of the Merger we have agreed to use our reasonable best efforts to either (i) divest our 60% ownership interest in FGS, or (ii) dissolve FGS.
 
On August 26, 2017, Fusion and Merger Sub entered into the “Merger Agreement” with Birch. The Merger Agreement provides, among other things, that upon the terms and conditions set forth therein, Birch will merge with and into Merger Sub, with Merger Sub surviving the Merger.
 
On the effective date of the Merger, all of the outstanding shares of common stock of Birch will be cancelled and converted into the right to receive, in the aggregate, that number of shares of our common stock equal to three times the number of shares of Merger Shares. The Merger Shares will be issued in the name of, and held by, BCHI. The terms of the Merger Agreement are such that the Merger, if consummated, will result in a change in control of Fusion. As a result, the transaction will be accounted for as a reverse acquisition and recapitalization, with Birch as the acquirer for accounting purposes, and the historical financial statements of Birch (other than the Statement of Stockholders’ Equity) will become the historical financial statements of the Company.
 
Closing of the Merger is subject to numerous preconditions, including Fusion obtaining financing for the transaction, which will be used to retire existing senior debt facilities at Birch and Fusion. Each of Fusion and Birch has agreed to use reasonable best efforts to cooperate and arrange and obtain the debt financing necessary to effect the required refinancing and to complete the transactions contemplated by the Merger Agreement. On February 13, 2018, we announced that we had engaged Goldman Sachs, Morgan Stanley and MUFG as joint lead arrangers and joint bookrunners to arrange senior secured credit facilities to be entered into in connection with Merger. These facilities are expected to consist of $570 million senior secured term loans and a revolving credit facility. In addition, the Company expects to secure a $10 million subordinated note. Prior to the closing of the Merger, Birch is required to spin-off to the existing Birch shareholders its US-consumer business, which consists of (i) the residential customer base, life line and consumer wireless business in the United States, and (ii) its single-line business customer base in the United States. In addition, prior to the closing of the Merger, we are required to use our best commercial efforts to dispose of our interests in FGS or dissolve FGS. The Merger is currently expected to be completed by mid-April 2018.
 
 
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We manage our business based on gross profit and gross margin, which represents net revenue less the cost of revenue, and on net profitability after excluding certain non-cash and non-recurring items. The majority of our operations, engineering, information systems and support personnel are assigned to either the Business Services or Carrier Services business segment for segment reporting purposes.
 
We continue to focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art network and advanced services platforms. Our vertically oriented solutions, which are currently focused on healthcare, legal, hospitality and real estate, offer a substantial opportunity to gain additional market share.
 
Recent Acquisitions
 
In a two-step transaction completed in December 2015 and February 2016, we acquired Fidelity. Fidelity provided cloud voice, cloud connectivity, security, data center and cloud storage services to small, medium, and large business customers, primarily in the Midwest.
 
In April 2016, we acquired the intellectual property and assets of TFB, a provider of contact center solutions with an integrated cloud voice platform. The acquisition provides Fusion with entry into the contact center market, and provides cross-selling and up-selling opportunities as TFB's Fortune 500 enterprise customers, government entities and healthcare organizations are migrated to Fusion's cloud solutions platform.
 
In November 2016, we acquired Apptix. Apptix provided cloud-based communications, collaboration, virtual desktop, compliance, security and cloud computing solutions to approximately 1,500 business customers throughout the U.S.
 
In January 2018, we acquired substantially all of the assets of IQMax, a provider of secure messaging, enterprise data integration and advanced cloud communications solutions.
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
 
We have identified the policies and significant estimation processes discussed below as critical to our operations and to an understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included elsewhere in this report.
 
Revenue Recognition
 
We recognize revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured. We record provisions against revenue for billing adjustments, which are based upon estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued and current economic trends. The provisions for revenue adjustments are recorded as a reduction of revenue at the time revenue is recognized.
 
Our Business Services revenue includes MRC to customers for whom services are contracted over a specified period of time, and variable usage fees charged to customers that purchase our business products and services. Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer. MRC continues until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.
 
Our Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over our network. Variable revenue is earned based on the length of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the allowance for billing adjustments. Revenue for each customer is calculated from information received through our network switches. Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period. We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.
 
 
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Effective January 1, 2017, we changed the manner in which we account for federal and state universal service fees and surcharges in our consolidated statement of operations. We now include the amounts collected for these fees and surcharges in revenues, and report the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented. As a result, both our revenues and cost of revenues for years ended December 31, 2017 and 2016 include $3.3 million and $2.6 million, respectively, of federal and state universal service fees and surcharges.
 
Cost of Revenues
 
For our Business Services segment, cost of revenues include the MRC associated with certain platform services purchased from other service providers, the MRC associated with private line services and the cost of broadband Internet access used to provide service to business customers.
 
Cost of revenues for our Carrier Services segment is comprised primarily of costs incurred from other carriers to originate, transport, and terminate voice calls for our carrier customers. Thus, the majority of our cost of revenues for this segment is variable, based upon the number of minutes actually used by our customers and the destinations they are calling. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through our network switch. During each period, the call activity is analyzed and an accrual is recorded for the costs associated with minutes not yet invoiced. This cost accrual is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates. Fixed expenses reflect the costs associated with connectivity between our network infrastructure, including our New Jersey switching facility, and certain large carrier customers and vendors.
 
Fair Value of Financial Instruments
 
The carrying value of certain financial instruments such as accounts receivable, accounts payable and accrued expenses, approximates their fair values due to their short term nature. Some of the warrants issued in conjunction with the issuance of our debt and equity securities are accounted for in accordance with the guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”). For these warrant instruments that are not deemed to be indexed to Fusion’s stock, we classify the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the underlying warrants are exercised, and any change in fair value is recognized in our statement of operations. The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock (see notes 17 and 18 to the accompanying consolidated financial statements).
 
Accounts Receivable
 
Accounts receivable is recorded net of an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and adjust the allowance for doubtful accounts based on our history of past write-offs and collections and current credit conditions. Specific customer accounts are written off as uncollectible if the probability of a future loss has been established, collection efforts have been exhausted and payment is not expected to be received.
 
Impairment of Long-Lived Assets
 
We periodically review long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying value of the asset exceeds the projected undiscounted cash flows, we are 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. We recorded an asset impairment charge of $0.6 million for the year ended December 31, 2017 and did not record any impairment charges for the year ended December 31, 2016.
 
Impairment testing for goodwill is performed annually in our fourth fiscal quarter. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. We have determined that our reporting units are our operating segments since that is the lowest level at which discrete, reliable financial and cash flow information is available. The authoritative guidance provides entities with an option to perform a qualitative assessment to determine whether a quantitative analysis is necessary. We performed qualitative impairment evaluations on our goodwill as of December 31, 2017 and 2016 and determined that there were no indications that goodwill was impaired.
 
Income Taxes
 
We account for income taxes in accordance with U.S. GAAP, which requires the recognition of deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in our financial statements. Deferred income tax assets and liabilities are computed for temporary 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 to reduce deferred income tax assets when we determine that it is more likely than not that we will fail to generate sufficient taxable income to be able to utilize the deferred tax assets.
 
 
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Recently Issued Accounting Pronouncements
 
In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
 
During the first quarter of 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment." The amendments in this update eliminate the requirement to perform step two of the goodwill impairment test, which requires a hypothetical purchase price allocation when an impairment is determined to have occurred. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard update is effective as of the first quarter of 2020; however, early adoption is permitted for any interim or annual impairment tests performed after January 1, 2017. Fusion will adopt this standard on January 1, 2018. The adoption of this standard update will not have a significant impact on Company’s financial statements.
 
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The Company early adopted ASU 2016-18 effective January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In February 2016, the FASB issued ASU No. 2016-02, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
 
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard became effective as of January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards are to be recognized as income tax expense or income tax benefit in the statement of operations. In addition, the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur and excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
 
In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue: (i) identification of the contract, (ii) identification of the performance obligations, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue as the entity satisfies the performance obligations. The new criteria for revenue recognition may require a company to use more judgment and make more estimates than under the current guidance. The new guidance becomes effective in calendar year 2018 and early adoption in calendar year 2017 is permitted. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.
 
In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers (ASC 606): Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These standards will be effective for the Company beginning in the first quarter of 2018. Early adoption is permitted.
 
The Company will adopt the new standard and related updates effective January 1, 2018, using the modified retrospective method of adoption. The Company estimates that, based on available information, both the impact of the adjustment to opening retained earnings and the ongoing impact from the deferral of acquisition costs and activation and installation revenues will not be material to the Company’s financial statements.
 
 
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RESULTS OF OPERATIONS
 
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016:
 
 
 
2017
 
 
2016  
 
 
   
  % 
   
  % 
Revenues
 $150,530,557 
  100.0 
 $124,654,270 
  100.0 
Cost of revenues *
  83,033,401 
  55.2 
  70,667,382 
  56.7 
Gross profit
  67,497,156 
  44.8 
  53,986,888 
  43.3 
Depreciation and amortization
  14,521,046 
  9.6 
  13,096,587 
  10.5 
Asset impairment charge
  641,260 
  0.4 
 -
  - 
Selling, general and administrative expenses
  57,724,202 
  38.3 
  48,524,923 
  38.9 
Total operating expenses
  72,886,508 
  48.4 
  61,621,510 
  49.4 
Operating loss
  ( 5,389,352)
  (3.6)
  ( 7,634,622)
  (6.1)
Other (expenses) income:
    
    
    
    
Interest expense
  ( 8,648,600)
  (5.7)
  ( 6,742,143)
  (5.4)
(Loss) gain on change in fair value of derivative liability
  ( 909,272)
  (0.6)
  265,383 
  0.2 
Loss on disposal of property and equipment
  ( 311,707)
  (0.2)
  (129,119)
  (0.1)
Gain on change in fair value of contingent liability
  1,011,606 
  0.7 
  - 
  - 
Loss on extinguishment of debt
  - 
  - 
  (214,294)
  (0.2)
Other income, net
  209,235 
  0.1 
  128,987 
  0.1 
Total other expenses
  ( 8,648,738)
  (5.7)
  ( 6,691,186)
  (5.4)
Loss before income taxes
  ( 14,038,090)
  (9.3)
  ( 14,325,808)
  (11.5)
(Provision)/benefit for income taxes
  (61,511)
  (0.0)
  1,609,485 
  1.3 
Net loss
 $(14,099,601)
  (9.4)
 $(12,716,323)
  (10.2)
 
* Exclusive of depreciation and amortization, shown separately.
 
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
 
Revenues
 
Consolidated revenues were $150.5 million for the year ended December 31, 2017, as compared to $124.7 million for the year ended December 31, 2016, an increase of $25.8 million, or 20.8%. Revenues for the Business Services segment increased by $28.2 million to $117.3 million for the year ended December 31, 2017, as compared to $89.2 million for the year ended December 31, 2016. This increase is primarily attributable to revenue derived from new customers obtained from our acquisition of Apptix in November 2016 and to customer bases acquired in November 2016 and March 2017.
 
Carrier Services revenue of $33.2 million for the year ended December 31, 2017 reflects a decrease of $2.3 million, or 6.5%, as compared to the year ended December 31, 2016, due to a reduction in the number of minutes transmitted over ours and FGS’ network in 2017.
 
Cost of Revenues and Gross Margin
 
Consolidated cost of revenues was $83.0 million for the year ended December 31, 2017, as compared to $70.7 million for the year ended December 31, 2016. This increase is mainly due to additional costs arising from our acquisition of Apptix and, to a lesser extent, the acquired customer bases.
 
Consolidated gross margin was 44.8% for the year ended December 31, 2017, as compared to 43.3% for the year ended December 31, 2016, due to a higher concentration of Business Services revenue, which generates a higher margin than Carrier Services revenue, within our consolidated results in 2017. The Business Services gross margin decreased from 58.6% in 2016 to 56.5% 2017, due to lower margins associated with revenues from the acquired customer bases. The Carrier Services gross margin was 3.6 % for the year ended December 31, 2017, as compared to 4.8% in the prior year, mainly due to an increase in the blended cost per minute of traffic terminated.
 
 
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Depreciation and Amortization
 
Depreciation and amortization expense was $14.5 million for the year ended December 31, 2017, as compared to $13.1 million for the year ended December 31, 2016, mainly due to increased amortization expense related to the intangible assets acquired in the Apptix acquisition, partially offset by lower depreciation expense resulting from property and equipment that became fully depreciated during the year, and depreciation expense of $0.9 million recognized in 2016 to write off some of our capitalized internal development costs.
 
Selling, General and Administrative Expense
 
Selling, general and administrative expenses (“SG&A”) was $57.7 million for the year ended December 31, 2017, as compared to $48.5 million for the year ended December 31, 2016. This increase is mainly the result of additional salaries and other employee related costs of approximately $2.7 million attributable to the Apptix acquisition. In addition, we incurred higher sales commissions of $2.5 million as a result of the 20.8% increase in Business Services revenue, and a $1.5 million increase in cloud computing software licenses related to customers acquired in the Apptix transaction. Prior to the Apptix acquisition, this expense was less significant.
 
Asset Impairment Charge
 
During the year ended December 31, 2017, we recognized an impairment charge of $0.6 million in connection with the write-down of some our intangible assets related to the TFB acquisition in 2016.
 
Operating Loss
 
Our operating loss was $5.4 million for the year ending December 31, 2017, as compared to $7.6 million for the year ended December 31, 2016. The decrease is primarily due to the increase in gross profit of $13.5 million resulting from the increase in Business Services revenue, largely offset by the increase in SG&A of $9.5 million and the increase in depreciation and amortization expense of $1.4 million.
 
Interest Expense
 
Interest expense was $8.6 million for the year ended December 31, 2017, as compared to $6.7 million for the year ended December 31, 2016. The increase was mainly attributable to an increase of $25 million in our senior debt in November of 2016 that was incurred under a new credit facility entered into in connection with our acquisition of Apptix. Interest expense was also impacted in 2017 by rising interest rates.
 
Change in Fair Value of Derivative Liabilities
 
During the year ended December 31, 2017, we recognized a loss on the change in fair value of derivative liabilities of $0.9 million, as compared to a gain of $0.3 million for the year ended December 31, 2016. These gains and losses are related to warrants we issued to purchasers of our Series B-2 Preferred in 2013 and 2014, the terms of which require them to be treated as liabilities and not as equity instruments. The changes in their fair value are required to be recorded through the statement of operations at each accounting period. These warrants are valued using an option pricing model and other valuation models, such that increases in Fusion’s common stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases in Fusion’s common stock price result in a lower valuation and a gain being recorded in our income statement.
 
We expect that we will be subject to additional fluctuations in our income statement in 2018 based on changes in Fusion’s common stock price and the corresponding changes in fair value of our derivative liabilities associated with our Series B-2 Preferred warrants. These warrants expire in December of 2018 and January of 2019.
 
Other Income and Expenses
 
At December 31, 2017, the Company determined that all of the intangible assets related to TFB were fully impaired, and that the Company would not be required to pay any royalties under the terms of the purchase agreement. As a result the Company derecognized the royalty liability of $1 million. We also incurred a loss on disposal of property and equipment of $0.3 million.

During the year ended December 31, 2016, we recognized a loss on the extinguishment of debt in the amount of $0.2 million when we refinanced our senior secured credit facility in November 2016 (see “Liquidity and Capital Resources”). We also incurred a loss on disposal of property and equipment of $0.1 million.
 
Income Taxes

For the year ended December 31, 2016, the Company recorded deferred tax liabilities of $1.7 million as a result of intangible assets subject to amortization acquired in business acquisitions that are not amortizable for income tax purposes. As a result of these business combinations, the recording of the deferred tax liabilities resulted in a release of the valuation allowance against the Company’s deferred tax assets of $1.7 for the year ended December 31, 2016, with a corresponding income tax benefit. The tax benefit will be realized as the Company amortizes the intangible assets over their estimated useful lives.
 
Net Loss
 
Our net loss for the year ended December 31, 2017 was $14.1 million, as compared to $12.7 million for the year ended December 31, 2016. The increase in net loss was largely due to an income tax benefit recorded in 2016 of $1.6 million.
 
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LIQUIDITY AND CAPITAL RESOURCES
 
Since our inception, we have incurred significant net losses. At December 31, 2017, we had a working capital deficit of $15.4 million, as compared to $6.6 million at December 31, 2016, and we had a stockholders’ deficit of $1.2 million at December 31, 2017, as compared to stockholders’ equity of $9.2 million at December 31, 2016. Our consolidated cash balance at December 31, 2017 was $2.5 million, as compared to $7.2 million at December 31, 2016.
 
During 2017 and 2016, we relied primarily on the sale of Fusion’s equity securities and the cash generated from our Business Services segment to fund operations, and we issued additional debt securities to fund our acquisitions and growth strategy. On February 5, 2018, we completed a public offering of 12,397,500 shares of our common stock for gross proceeds of $41.4 million. The net proceeds, after underwriting discounts and commissions but before estimated offering expenses payable by us, were $38.7 million. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. On November 16, 2016, we sold 2,213,700 shares of our common stock and received net proceeds, after offering expenses, of $2.3 million. While we believe we have sufficient cash to fund our operations and meet our operating and debt obligations for the next twelve months, we may be required to raise additional capital to support our business plan. There can be no assurances that such funds will be available to the Company as and when needed or on terms acceptable to us, or at all.
 
We have never paid cash dividends on our common stock, and we do not anticipate paying cash dividends on our common stock in the foreseeable future. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Subject to the rights of holders of our outstanding preferred stock, any future determination to pay dividends is at the discretion of Fusion’s Board of Directors, and will be dependent upon our financial condition, operating results, capital requirements, Delaware law requirements, general business conditions, the terms of our senior secured credit facilities and other factors that Fusion’s Board of Directors and senior management consider appropriate.
 
The holders of the Series B-2 Preferred are entitled to receive quarterly dividends at an annual rate of 6%. These dividends can be paid, at the Company’s option, either in cash or, under certain circumstances, in shares of Fusion’s common stock. For the year ended December 31, 2017, the Board declared dividends of $0.5 million on the Series B-2 Preferred, which, as permitted by the terms of the Series B-2 Preferred, was paid in the form of 256,706 shares of Fusion common stock. No dividends were declared or paid on the Series B-2 Preferred for the quarter ended December 31, 2017. In connection with the Merger, all shares of Series B-2 Preferred and all outstanding shares of Series A Preferred will either be converted into shares of Fusion common stock or forfeited in accordance with their terms.
 
On November 14, 2016, contemporaneously with an acquisition, we entered into the East West Credit Agreement with East West Bank, as administrative agent and the lenders identified therein (collectively, the “East West Lenders”). Under the East West Credit Agreement, the East West Lenders extended us a (i) $65.0 million term loan and (ii) $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis). The proceeds of the term loan were used to retire the $40 million that was outstanding under a previously existing credit facility, and to fund the cash portion of the purchase price of the Apptix acquisition in the amount of $23.1 million.
 
Borrowings under the East West Credit Agreement are evidenced by notes bearing interest at rates to be computed based upon either the then current “prime” rate of interest or “LIBOR” rate of interest, as selected by us at the time of borrowing. Interest on borrowings that we designate 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 we designate as “LIBOR rate” loans bear interest at the LIBOR rate published by the Wall Street Journal, plus 5% per annum. The current interest rate is 6.25% per annum.
 
From January 1, 2017 through January 1, 2018, we were required to repay the term loan in equal monthly payments of $270,833. Since January 2, 2018, those monthly payments increased to $541,667 and will remain at that amount through 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 East West Credit Facility. During the year ended December 31, 2017, we paid down $1.5 million of the $3.0 million that was outstanding under the revolving credit facility, and at December 31, 2017, $61.8 million was outstanding under the term loan and $1.5 million was outstanding under the revolving credit facility.
 
Under the East West Credit Agreement:
 
 
We are subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to our obligations to the East West Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries.
 
 
We are 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 our failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of this indebtedness.
 
 
We granted the East West Lenders security interests in all of our assets, as well as our 60% membership interest in FGS and the capital stock of our Fusion NBS Acquisition Corp. subsidiary (“FNAC”) and each of its subsidiaries.
 
 
Fusion and its subsidiaries other than FNAC and FGS (and future subsidiaries of both) guaranteed FNAC’s obligations, including FNAC’s repayment obligations thereunder.
 
 
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On November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries other than FNAC entered into the Fifth Amended and Restated Securities Purchase Agreement (the “Praesidian Facility”) with Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United Insurance Company of America (collectively, the “Praesidian Lenders”). The Praesidian Facility amends and restates a prior facility, pursuant to which FNAC previously sold its Series A, Series B, Series C, Series D, Series E and Series F senior notes in an aggregate principal amount of $33.6 million (the “SPA Notes”). The proceeds from the SPA Notes were used to finance previous acquisitions within our Business Services segment. These notes require payments of monthly interest in the amount of $0.3 million and the entire principal amount of the notes are due on May 12, 2022. The current interest rate is 10.8% per annum.
 
The Praesidian Facility contains financial covenants that are substantially similar to those contained in the East West Credit Agreement. At December 31, 2017, we were in compliance with all of the financial covenants under the East West Credit Agreement and the Praesidian Facility.
 
On February 13, 2018, the Company announced that it had engaged Goldman Sachs, Morgan Stanley and MUFG as joint lead arrangers and joint bookrunners to arrange senior secured credit facilities to be entered into in connection with Merger. These facilities are expected to consist of $570 million senior secured term loans and a revolving credit facility. These facilities will be used to retire amounts outstanding under the East West Credit Agreement and the Praesidian Facility as well as all existing senior debt at Birch.
 
The Merger is currently expected to be completed by mid-April 2018. Should the Merger not be completed, however, we believe we have sufficient cash to service our debt and fund our operations for the next twelve months. We may be required to raise additional capital to support our business plan and there can be no assurances that such funds will be available to the Company as and when needed or on terms acceptable to us, or at all.
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
 
 
Year ended December 31,
 
 
 
2017
 
 
2016
 
Net cash provided by operating activities
 $5,321,096 
 $326,287 
Net cash used in investing activities
  (4,568,443)
  (27,598,005)
Net cash (used in)/provided in financing activities
  (5,444,175)
  26,815,115 
Net decrease in cash and cash equivalents
  (4,691,522)
  (456,603)
Cash and cash equivalents, including restricted cash, beginning of year
  7,249,063 
  7,705,666 
Cash and cash equivalents, including restricted cash, end of year
 $2,557,541 
 $7,249,063 
 
Cash provided by operating activities was $5.3 million and $0.3 million for the years ended December 31, 2017 and 2016, respectively. The following table illustrates the primary components of our cash flows from operations:
 
 
 
Year ended December 31,
 
 
 
2017
 
 
2016
 
Net loss
 $(14,099,601)
 $(12,716,323)
Non-cash expenses, gains and losses
  18,871,033 
  13,164,671 
Changes in accounts receivable
  (3,331,828)
  578,134 
Changes in accounts payable and accrued expenses
  5,350,183 
  (1,254,445)
Other
  (1,468,691)
  554,250 
Cash provided by operating activities
 $5,321,096 
 $326,287 
 
Cash used in investing activities was $4.6 million for the year ended December 31, 2017, as compared to $27.6 million for the year ended December 31, 2016. Our capital expenditures were $4.3 million in 2017, as compared to $4.8 million in 2016. For the year ended December 31, 2016, we paid $23.3 million in cash for acquisitions, primarily for Apptix, net of cash acquired.
 
Cash used in financing activities was $5.4 million for the year ended December 31, 2017, and cash provided by financing activities was $26.8 million for the year ended December 31, 2016. During the year ended December 31, 2017, we made total payments under our senior secured credit facility in the amount of $4.8 million, made payments under capital lease obligations of $1.1 million and payments for obligations under asset purchase agreements of $0.6 million, partially offset by proceeds we received from the exercise of warrants in the amount of $1.0 million. During 2016, we received $66.7 million of proceeds, net of transaction costs, upon our entering into the East West Credit Agreement, retired a $40.0 million credit facility, received $2.3 million from the sale of Fusion common stock and made payments on equipment financing obligations of $1.0 million.
 
 
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OTHER MATTERS
 
Inflation
 
We do not believe inflation has a significant effect on our operations at this time.
 
Off Balance Sheet Arrangements
 
Through December 31, 2017, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other commercially narrow or limited purposes.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for smaller reporting companies.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The Company’s consolidated financial statements required by this Item are included after Item 16 of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017. Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to accomplish their objectives. In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2017 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
 
Changes in Internal Control over Financial Reporting
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15D-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017. Based on that evaluation, our principal executive officer and principal accounting officer concluded that there has not been any material change in our internal control over financial reporting during the quarter ended December 31, 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION.
 
Not applicable.
 
 
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PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
The members of the Company’s Board of Directors (the “Board”) and the Company’s executive officers, together with their respective ages and certain biographical information are set forth below, along with, in the case of Directors, a description of the qualifications that led the Board to conclude that the individual should serve as a Director. As discussed elsewhere in this report, in the event the Merger is consummated, significant changes to the Company’s executive officers and Directors are anticipated:
 
Name
Age
Position 
Marvin S. Rosen
77
Chairman of the Board
Philip D. Turits
84
Secretary, Treasurer and Director
Matthew D. Rosen
46
Chief Executive Officer and Director
Jack Rosen
71
Director
William Rubin
65
Director
Paul C. O'Brien
78
Director
Michael J. Del Giudice
75
Director
Larry Blum
75
Director
Gordon Hutchins, Jr.
68
President and Chief Operating Officer
Michael R. Bauer
45
Chief Financial Officer
Jonathan Kaufman
58
Chief Strategy Officer
James P. Prenetta, Jr.
55
Executive Vice President and General Counsel
Jan Sarro
63
Executive Vice President – Marketing and Business Development
Russell P. Markman
67
President, Business Services
Lisa Taranto
50
Vice President, Finance and Principal Accounting Officer
 
Board of Directors and Executive Officers
 
Marvin S. Rosen, Chairman of the Board
 
Marvin Rosen co-founded the Company in 1997. He has served as the Chairman of the Board since November 2004, Vice Chairman of the Board from December 1998 to November 2004 and has been a member of the Board since March 1998. He served as our Chief Executive Officer from April 2000 to March 2006. In January 2014, he rejoined the international law firm of Greenberg Traurig LLP as a shareholder specializing in corporate securities matters. He previously was a shareholder of that firm and also acted as Of Counsel for a number of years. Mr. Rosen was Finance Chairman for the Democratic National Committee from September 1995 to January 1997. Currently, he serves on the Board of Directors of the Robert F. Kennedy Center for Justice and Human Rights and the Howard Gilman Foundation. Mr. Rosen served on the Board of Directors of Terremark Worldwide, Inc. from 2000 until its sale to Verizon in 2011. The Board believes that Mr. Rosen’s background as the co-founder and former Chief Executive Officer of the Company, a securities attorney and as a former director of a another public company provides him with the industry, financial, legal, and leadership experience to advise the Board on strategic and tactical matters. Mr. Rosen’s son, Matthew Rosen, is our Chief Executive Officer, and serves on our Board of Directors.
 
Philip D. Turits, Secretary, Treasurer, and Director
 
Mr. Turits co-founded the Company in 1997 and has served as a Director since September 1997, as Secretary since October 1997, as Treasurer since March 1998 and as Vice Chairman of the Board from March 1998 to December 1998. From September 1991 to February 1996, Mr. Turits served as Treasurer and Chief Operating Officer for Larry Stuart, Ltd., a consumer products company, and prior to 1991 he served as President and Chief Executive Officer of Continental Chemical Company. The Board believes that Mr. Turits’ background as the co-founder and Secretary/Treasurer of the Company and an experienced corporate executive provides him with the operational, financial and leadership experience necessary to provide valuable guidance to management, particularly in the financial aspects of our business.
 
Matthew D. Rosen, Chief Executive Officer and Director
 
Mr. Rosen has served as a Director since May 2005 and has been our Chief Executive Officer since March 2006. He served as our President from March 2006 until March 2008, as our Chief Operating Officer from August 2003 to March 2006, as our Executive Vice President and Chief Operating Officer from February 2002 to August 2003, as our Executive Vice President and President of Global Operations from November 2000 to January 2002 and as our President of US Operations from March 2000 to November 2000. The Board believes that Mr. Rosen’s background as our current Chief Executive Officer and as our former Chief Operating Officer, a senior executive in the telecommunications industry, an experienced operations executive and a former investment banker provides him with the industry, operational, financial and leadership experience to advise the Board on all aspects of the Company’s business. Mr. Rosen is the son of our Chairman of the Board, Marvin Rosen.
 
 
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Jack Rosen, Director
 
Mr. Rosen has served as a Director since July 2012. Mr. Rosen is the founder and has been the Chief Executive of Rosen Partners LLC, a residential and commercial real estate development firm, for more than the past five years. He is also the current Chairman of the American Council for World Jewry, Inc. and the current President of the American Jewish Congress. In addition, Mr. Rosen oversees a wide array of healthcare, cosmetic and telecommunications business ventures throughout the U.S., Europe and Asia. Mr. Rosen currently serves on the Advisory Board of Altimo, an investment company in Russia, Turkey and the Commonwealth of Independent States, operating in the field of mobile and fixed-line communications. Mr. Rosen is currently a member of the Council on Foreign Relations, an independent, nonpartisan membership organization, think tank, and publisher. The Board believes that Mr. Rosen’s background as a leader in many international organizations and as a corporate director in the telecommunications industry provides him with the leadership experience necessary to provide valuable direction and guidance to executive management and the Board.
 
William Rubin, Director
 
Mr. Rubin has served as a Director since February 2012. Since 1992, he has been President of the Rubin Group, a consulting firm representing clients before governmental entities. Previously, he was Assistant Insurance Commissioner and Treasurer of the State of Florida, where he was directly responsible for all activities related to the Florida State Board of Administration, the agency that manages the investments for Florida’s pension funds. Mr. Rubin also serves as an advisor to many large companies, primarily health care companies doing business in Florida. The Board believes that Mr. Rubin’s background as a senior governmental official and a lobbyist provides him with the financial and leadership experience to be a valuable advisor to executive management and the Board.
 
Paul C. O’Brien, Director
 
Mr. O’Brien has served as a Director since August 1998. Since January 1995, he has served as the President of the O’Brien Group, Inc., a consulting and investment firm. From February 1988 to December 1994, he was the President and Chairman of New England Telephone (a subsidiary of NYNEX), now Verizon, a telecommunications company. Mr. O'Brien also serves on the Board of Directors of Astrobotics and The Computer Merchant and is the Chairman of the Board of Jumpstart Micro Inc. The Board believes that Mr. O’Brien’s background as President of a consulting and investment firm, former Chairman of a major telecommunications company and a corporate director provides him with the industry, operational, financial, and leadership experience necessary to effectively guide the Board on all aspects of the Company’s business.
 
Michael J. Del Giudice, Director
 
Mr. Del Giudice has served as a Director since November 2004. He is a Senior Managing Director of Millennium Capital Markets LLC and Senior Managing Director of MCM Securities LLC, both of which he founded in 1996. Mr. Del Giudice also serves as Chairman of Carnegie Hudson Resources, LLC, founded in 2012. Mr. Del Giudice has been a Member of the Board of Directors of Consolidated Edison Company of New York, Inc. since 1999, and is currently a member of its Audit Committee and Chairman of its Corporate Governance and Nominating Committee. Mr. Del Giudice served as a director of Reis, Inc. from 2007 to 2013 and was a director of Barnes and Noble, Inc. from 1999 to September 2010. He is also Vice Chairman of the New York Racing Association. Mr. Del Giudice was a General Partner and Managing Director at Lazard Freres & Co. LLC from 1985 to 1995. From 1983 to 1985, Mr. Del Giudice was Chief of Staff to New York Governor Mario M. Cuomo. He served from 1979 to 1981 as Deputy Chief of Staff to Governor Hugh L. Carey and from 1975 to 1979 as Chief of Staff to the then Speaker of the New York Assembly. The Board believes that Mr. Del Giudice’s background as a Senior Managing Director of securities and investment firms, an investment banker, Chief of Staff to a Governor and an active corporate director provides him with the financial and leadership experience to be a valuable advisor to executive management and the Board.
 
Larry Blum, Director
 
Mr. Blum has served as a Director since February 2012. He has been a Senior Advisor for Marcum LLP (formerly known as Marcum Rachlin), independent registered public accountants, since 2011. For more than 18 years, Mr. Blum served as the Managing Partner of Rachlin LLP, directing the firm’s growth to its position as Florida’s largest independent accounting and business advisory firm up until its merger with Marcum LLP in 2009. Mr. Blum has also served as a litigation advisor and is a member of the Florida Bar. The Board believes that Mr. Blum’s background as a former managing partner of a public accounting firm and his expertise in the areas of strategic planning, mergers and acquisitions and domestic and international taxation provides him with the financial and leadership experience to be a valuable advisor to executive management and the Board.
 
 
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Gordon Hutchins, Jr., President and Chief Operating Officer
 
Mr. Hutchins has served as our President and Chief Operating Officer since March 2008. Mr. Hutchins served as our Executive Vice President from December 2005 to March 2008 and as Acting Chief Financial Officer from January 2010 to April 2016. Prior to joining us, Mr. Hutchins served as President and Chief Executive Officer of SwissFone, Inc., a telecommunications carrier. Prior to joining SwissFone, Mr. Hutchins served as President and Chief Executive Officer of STAR Telecommunications, Inc., an international telecommunications carrier. Mr. Hutchins has also served as President and Chief Executive Officer of GH Associates, Inc., a management-consulting firm that he founded.During his early career, Mr. Hutchins served as President and Chief Executive Officer of LDX NET, Inc., a fiber optic network company, and held positions with MCI, McDonnell Douglas Corporation and AT&T.
 
Michael R. Bauer, Chief Financial Officer
 
Mr. Bauer has served as our Chief Financial Officer since April 13, 2016. Prior to joining the Company, Mr. Bauer served as Chief Financial Officer at GTT Communications Inc. from June 2012 to June 2015. Prior to serving as GTT’s Chief Financial Officer, Mr. Bauer served as its acting Chief Financial Officer, Principal Accounting Officer and Treasurer from December 2011 to June 2012 and as its Vice President, Finance and Controller from June 2009 to December 2011. Mr. Bauer has over 20 years of broad finance and accounting experience. Prior to joining GTT, Mr. Bauer led the financial planning and analysis and investor relations efforts at MeriStar Hospitality Corporation. Mr. Bauer began his career with Arthur Andersen in audit and business advisory services.
 
Jonathan Kaufman, Chief Strategy Officer
 
Mr. Kaufman has served as our Chief Strategy Officer since January 2015. Prior to assuming that position, Mr. Kaufman served as President, Business Services, from October 2012 (the date we acquired his company, Network Billing Systems, LLC, a company he founded in 1998) until January 2015. From its founding until its sale in 2012, Mr. Kaufman served as Chief Executive Officer of Network Billing Systems. Prior to founding Network Billing Systems, Mr. Kaufman served as Chief Executive Officer of Target Telecom Inc., a telecommunications service company that he founded in 1984 and sold to WorldCom in 1996.
 
Russell P. Markman, President Business Services
 
Mr. Markman has served as our President Business Services since January 2015. Prior to assuming that role, Mr. Markman served as Executive Vice President, Business Services from October 2012 to January 2015. Prior to our acquisition of Network Billing Systems in October 2012, Mr. Markman served as President of that company from January 2009 to October 2012. Prior to becoming President of Network Billing Systems, Mr. Markman served as Vice President, Operations from October 2003 to October 2012. Prior to joining Network Billing Systems, Mr. Markman established the alternate channel distribution program for commercial sales at RCN Corporation, where he served as Director of Commercial Sales.
 
James P. Prenetta, Jr., Executive Vice President and General Counsel
 
Mr. Prenetta has served as our Executive Vice President and General Counsel since June 2017 and previously served in that role from May 2014 through January 2015. From January 2015 to June 2017, Mr. Prenetta acted as Corporate Counsel to Fusion. From September 2009 to January 2017, Mr. Prenetta served as General Counsel and Corporate Secretary for Hibernia NGS Limited and its various subsidiaries. Prior to joining Hibernia Networks, Mr. Prenetta served as Senior Vice President, General Counsel and Corporate Secretary for One Communications Corporation and its predecessor CTC Communications Corp. from January 2004 to September 2009. From 2003 to 2009, Mr. Prenetta also served as special counsel to Columbia Ventures Corporation, an investment firm.
 
Jan Sarro, Executive Vice President – Marketing and Business Development
 
Ms. Sarro has served as our Executive Vice President of Marketing and Business Development since November 2012. Prior to assuming that role, Ms. Sarro served as our Executive Vice President – Corporate Services from March 2008 to October 2012, as our Executive Vice President, Carrier Services from April 2005 to March 2008, and as our Vice President of Sales and Marketing from March 2002 to April 2005. Prior to joining the Company, Ms. Sarro served as President of the Americas for Viatel, Inc., a global, facilities-based communications carrier. Ms. Sarro has over 30 years of experience in the telecommunications industry. Ms. Sarro has also held senior executive marketing and sales management positions at Argo Communications, FTC Communications, TRT Communications and WorldCom.
 
Lisa Taranto, Vice President, Finance and Principal Accounting Officer
 
Ms. Taranto has served as our Principal Accounting Officer since August 2015 and as our Vice President, Finance since January 2014. From January 2014 until August 2015, she also held the position of Vice President, Accounting. Prior to joining us, Ms. Taranto served as Vice President, Finance and Accounting for Broadvox, LLC and from January 2006 to January 2011 served as Vice President, Accounting and Financial Operations for Cypress Communications. From May 2003 to April 2005, Ms. Taranto held senior financial management roles at AirGate PCS (a Sprint Company), where she built the company's settlements operations organization and held a position on that company's external controls and disclosures committee. Ms. Taranto has over 25 years of financial management experience in the communications industry. Earlier in her career, Ms. Taranto held executive management roles at MCI/Verizon Business, where she led the Global Financial Operations and IT Revenue Systems organizations.
 
 
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Board of Directors
 
The Board oversees our business affairs and monitors the performance of senior management. In accordance with our corporate governance principles, the Board does not involve itself in the day-to-day operations of the Company. The Directors keep themselves informed through discussions with the Chief Executive Officer and our other executive officers of the Company, by reading the reports and other materials that we send them and by participating in Board and committee meetings. If any Director resigns, dies or is otherwise unable to serve out his or her term, or if the Board increases the number of Directors, the Board may fill any vacancy by a vote of a majority of the Directors then in office. A Director elected to fill a vacancy serves for the unexpired term of his or her predecessor. Except as otherwise provided by Delaware law, any director or the entire board may be removed, with or without cause, by a majority of the shares then entitled to vote at an election of directors.
 
Our By-laws provide that the Board shall consist of not less than one Director and that a Director’s term extends from the date of his or her election until our next annual meeting of stockholders. Through Board action, the number of directors of the Company has been set at no less than seven and no more than 17. The Board currently consists of eight members.
 
During 2017, 14 meetings of the Board were held all of which were telephonic. All incumbent directors, other than Jack Rosen and William Rubin attended at least 75% of the total meetings of the Board; and all directors attended at least 75% of the total meetings of the Committees on which they served.
 
Committees of the Board
 
The Board has established a Compensation and Nominating Committee (the “Compensation Committee”), a Strategic and Investment Banking Committee (the “Strategic Committee”) and an Audit Committee (the “Audit Committee” and together with the Compensation Committee and the Strategic Committee, hereinafter referred to as the “Committees”) to devote attention to specific subjects and to assist the Board in the discharge of its responsibilities. The functions of the Committees and their current members are set forth below:
 
Compensation Committee
 
The primary functions of the Compensation Committee are to;
 
evaluate and assess, on an annual basis, the performance of the Chief Executive Officer;
make recommendations to the Board regarding base salaries, annual incentive awards (equity and/or cash) and long-term incentive awards for the Chief Executive Officer and, in consultation with the Chief Executive Officer, for other executive officers;
establish performance objectives for executive officers under our incentive compensation plans with particular consideration to appropriate levels of risk-taking incentives;
make recommendations to the Board regarding employment agreements, severance agreements, change in control agreements and similar arrangements;
retain compensation consultants to be used to assist in the evaluation of the compensation of the Chief Executive Officer and other executive officers and obtain advice and assistance from internal and outside legal, accounting or other advisors;
review and recommend to the Board the nominees for election as Directors and assist the Board in identifying and attracting qualified candidates;
periodically review and assess the adequacy and levels of Director compensation; and
periodically review succession plans for key executive officer positions.
 
During 2017, the members of our Compensation Committee were Michael J. Del Giudice – Chairman, Paul C. O'Brien and Larry Blum, each of whom was a non-employee member of our Board. During 2017, the Compensation Committee held six meetings. The Board has determined that each of these Directors is independent within the meaning of Nasdaq Rule 5605(a)(2). The charter of the Compensation Committee is posted on our website (www.fusionconnect.com), and a copy of that charter can be obtained by contacting our Corporate Secretary at:
 
 
37
 
 
Fusion Telecommunications International, Inc.
Attention: Corporate Secretary 420 Lexington Avenue, Suite 1718
New York, New York 10170
 
The information on our website is neither incorporated by reference herein nor otherwise made a part of this report.
 
Audit Committee
 
Our Audit Committee’s primary function is to assist the Board in fulfilling its oversight responsibilities by reviewing the integrity of our financial statements, our internal control systems, our auditing, accounting and financial reporting processes (including those associated with the Sarbanes-Oxley Act of 2002) and the qualification and independence of our independent accountants. The Audit Committee’s primary duties are to:
 
serve as an independent and objective party to monitor our quarterly and annual financial reporting process and the adequacy of our internal control systems;
review and appraise the audit efforts of our independent accountants; and
provide an open avenue of communication among the independent accountants, financial and senior management and the Board.
 
To fulfill its responsibilities and duties, the Audit Committee:
 
reviews and discusses with management and the independent accountants our annual audited financial statements and any reports or other financial information submitted to any governmental body or to the public;
reviews with management and the independent accountants the Company’s quarterly financial statements prior to the filing of the Company’s Quarterly Reports on Form 10-Q or prior to release of earnings for the quarter;
reviews and approves any related-party transactions;
appoints and replaces the independent accountants and approves the professional fees to be paid to the independent accountants, including the range of audit and non-audit fees;
reviews with the independent auditors all critical accounting policies and practices being used by the Company;
ensures the independence of the independent accountants by preapproving all auditing and non-audit services to be performed for the Company, ensures the rotation of audit partners as required by law, and discusses with the independent auditors the matters required to be discussed by applicable auditing standards;
reviews any significant disagreements among management and the independent accountants in connection with the preparation of the Company’s financial statements;
establishes procedures relating to the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees of concerns regarding questionable accounting and auditing matters; and
establishes, reviews and updates periodically our Code of Ethics to ensure that management has established a system to monitor and enforce our Code of Ethics.
 
During 2017, the members of our Audit Committee were Paul C. O'Brien – Chairman, Michael Del Giudice and Larry Blum, each of whom was a non-employee member of our Board. Our Board has determined that Michael Del Giudice is our Audit Committee Financial Expert within the meaning of SEC Rules. Our Board has also determined that each of the Directors serving on our Audit Committee is independent within the meaning of Nasdaq Rule 5605(a)(2). The Audit Committee charter is posted on our website (www.fusionconnect.com), and a copy of the charter can also be obtained by contacting our Corporate Secretary. The information on our website is neither incorporated by reference nor otherwise made a part of this report. The Audit Committee held four meetings in 2017.
 
 
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Strategic and Investment Banking Committee
 
The members of our Strategic Committee are Marvin S. Rosen – Chairman, Michael Del Giudice and Philip D. Turits. Our Strategic Committee evaluates and recommends investment strategies with investment banks and brokerage houses and assists in the evaluation of potential mergers and acquisitions candidates. The Strategic Committee does not currently have a written charter. The Strategic Committee acts at the direction of the Board. The Strategic Committee held no meeting in 2017.
 
Board Role in Risk Oversight
 
The Board has overall responsibility for risk oversight, with a particular focus on those areas of risk that might have the most significant impact on the Company. These risk oversight responsibilities are primarily discharged through the Audit Committee and the Compensation Committee. The roles of these committees in risk evaluation are as follows:
 
Audit Committee. The Audit Committee oversees the risk management policies and practices related to the financial reporting process and to our published financial statements. In addition, the Audit Committee from time to time reviews those risk management policies and practices with executive management and our auditors, to insure full compliance and the minimization of finance-related risks.
 
Compensation Committee. The Compensation Committee oversees the risk management policies and practices related to compensation and compensation-related risks, as well as possible risks related to succession planning. This oversight responsibility specifically includes working with executive management in relation to employee compensation policies, practices and programs.
 
Fusion’s executive officers direct the day-to-day implementation and monitoring of the management policies and practices established by the Board and its committees. As part of its periodic meetings with executive management, the Board reviews the Company’s risk management policies and practices.
 
Audit Committee Report
 
With respect to the year ended December 31, 2017, in addition to its other work, the Audit Committee:
 
●          
reviewed and discussed with management and EisnerAmper, LLP (“EA”), our independent registered public accounting firm, our audited consolidated financial statements as of December 31, 2017 and the year then ended;
●          
discussed with EisnerAmper, LLP the matters required to be discussed by Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as amended, with respect to its review of the findings of Eisner Amper LLP during its examination of our financial statements; and
●          
received from EisnerAmper, LLP written affirmation of its independence as required by the Independence Standards Board Standard No. 1, “Independence Discussions with Audit Committees.” In addition, the Audit Committee discussed with EisnerAmper, LLP its independence and determined that the provision of non-audit services was compatible with maintaining auditor independence.
 
Based on the review and discussion summarized above, the Audit Committee recommended that the Board include the audited consolidated financial statements in the 2017 Annual Report on Form 10-K for filing with the SEC.
 
Submitted by:
 
/s/ Paul C. O’Brien, Chairman
/s/ Michael Del Giudice
/s/ Larry Blum
 
Shareholder Communications with Directors
 
The Board recommends that communications with the Board be initiated in writing and addressed as follows:
 
                                                        Fusion Telecommunications International, Inc.
Attention: Corporate Secretary- Shareholder Communications
420 Lexington Avenue, Suite 1718 New York, New York 10170
 
 
39
 
 
This centralized process will assist the Board in reviewing and responding to stockholder communications in an appropriate manner. The name of any specific Director recipient should be noted in the communication. The Board has instructed our Corporate Secretary to forward such correspondence only to the intended recipient; however, the Board has also instructed our Corporate Secretary, prior to forwarding any correspondence, to review such correspondence and, in his or her discretion, not to forward certain items if they are deemed of a commercial or frivolous nature or otherwise inappropriate for the Board's consideration. In such cases, some of that correspondence may be forwarded elsewhere within the Company for review and possible response.
 
Code of Ethics
 
Since 2004, we have had a Corporate Code of Ethics, the current version of which applies to all members of our Board, the Chief Executive Officer, any other principal executive officer, the Chief Financial Officer and Corporate Controller. To receive a copy of our Code of Ethics, a stockholder may write to Fusion Telecommunications International, Inc., Attention: Corporate Secretary, 420 Lexington Avenue, Suite 1718, New York, New York 10170 or may contact our Corporate Secretary’s office at (212) 201-2407. A copy of our Code of Ethics has been incorporated by reference as an exhibit to this report and is also posted on our website (www.fusionconnect.com). Disclosure of amendments to, or waivers of, provisions of the Code of Ethics will be publicly disclosed in accordance with applicable rules and regulations and will be made available upon request in the manner indicated above.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16 (a) of the Exchange Act requires that every person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security (other than an exempted security) which is registered pursuant to Section 12, or who is a director or an officer of the issuer of such security, file the ownership reports required by Section 16 of the Exchange Act.
 
Based solely upon the Company’s review of Forms 3 and 4 and amendments thereto furnished to us during or with respect to our most recent fiscal year, and Forms 5 and amendments thereto furnished to us with respect to our most recent fiscal year and any written representation from a reporting person (as defined in Item 405 of Regulation S-K) that no Form 5 is required, during the Company’s most recent fiscal year the following Section 16 officers and directors and beneficial owners of more than 10% of any class of our equity securities failed to timely file one form each: Mr. Turits failed to timely file one Form 4 reporting two transactions and Apptix ASA failed to file one Form 3.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
Executive Officers Summary Compensation Table
 
The following table summarizes all compensation recorded by us in each of the last two completed fiscal years for our Named Executive Officers.
 
 
 
 
 
Salary
 
 
  Bonus   
 
 
Stock Awards
 
 
Option
Awards
 
 
All Other
 Compensation
 
 
Total
 
Name and Principal Position (1)

 Year
 
 ($)
 
 
(2)($) 
 
 
(3) ($)
 
 
(4) ($)
 
 
(5) ($)
 
 
($)
 
Matthew D. Rosen
 
2017
 $425,000 
 $212,500 
 $- 
 $1,703,930 
 $1,917 
 $2,343,847 
Chief Executive Officer
 
2016
 $425,000 
 $350,000 
 $- 
 $259,230 
 $2,102 
 $1,036,332 
 
 
    
    
    
    
    
    
Gordon Hutchins, Jr.,
 
2017
 $275,000 
 $- 
 $- 
 $- 
 $424 
 $275,424 
President & Chief Operating Officer
 
2016
 $275,000 
 $60,000 
 $- 
 $72,584 
 $456 
 $408,040 
 
 
    
    
    
    
    
    
Michael R. Bauer,
 
2017
 $250,000 
 $- 
 $- 
 $- 
 $517 
 $250,717 
Chief Financial Officer
 
2016
 $179,006 
 $41,000 
 $99,550 
 $57,031 
 $468 
 $377,055 
 
 
40
 
 
(1)
Included in these columns are amounts earned, though not necessarily paid to the Named Executive Officer, during the corresponding fiscal year. Named Executive Officers consists of: (i) our Principal Executive Officer regardless of compensation level, and (ii) our two most highly compensated executive officers (other than our Principal Executive Officer), who were serving as such on December 31, 2017 and whose total 2017 compensation exceeded $100,000.
(2)
In the first quarter of 2018, in connection with the completion of the public offering of our common stock in January 2018, Mr. Rosen, Mr. Hutchins and Mr. Bauer received a bonus payment in the amount of $187,500, $60,000 and $40,000, respectively.
(3)
Reflects 55,000 shares of the Company's common stock that vest ratably over a period of three years that Mr. Bauer received in connection with his appointment as Chief Financial Officer.
(4)
Reflects the dollar amount recognized for financial statement reporting purposes for the fiscal years ended December 31, 2017 and 2016, for restricted stock and option awards. The value attributable to restricted share and option awards is computed based on aggregate grant date fair value in accordance with Financial Accounting Standards Board ASC Topic 718, and the assumptions made in the valuations of the restricted shares and option awards are included in Note 2 (Summary of Significant Accounting Policies – Stock Based Compensation) of the notes to our consolidated financial statements for the year ended December 31, 2017 included elsewhere in this report. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.
(5)
Represents life insurance premiums paid by us.
 
Employment Agreements, Termination of Employment and Change-In-Control Arrangements
 
On November 5, 2015, we executed an employment agreement with Matthew D. Rosen, our Chief Executive Officer. The term of Mr. Rosen's employment agreement with the Company will expire on October 31, 2018. The Company and Mr. Rosen intend to negotiate and enter into a new employment agreement to take effect upon expiration of such existing contract, or sooner. Mr. Rosen’s employment agreement provides (i) for an annual base salary of not less than $425,000 (subject to annual review for cost of living increases, performance and market conditions), (ii) for an annual bonus equal to at least 50% of base salary if the Company achieves positive adjusted EBITDA, and (iii) that in the event his employment is terminated (a) by the Company without “cause” (as defined in his employment agreement), or (b) by Mr. Rosen for “good reason” (as defined in his employment agreement), including as a result of a resignation by Mr. Rosen for any reason within six months following a change in control of the Company (as defined in his agreement), he will receive unpaid base salary accrued through the effective date of the termination plus any pro-rata bonus that would be payable had he completed a full year of employment and a lump sum payment (within 30 days of the effective date of said transaction) equal to 200% of his base salary then in effect and 200% of his highest annual bonus for the three years preceding his termination.  In addition, upon any such termination of employment, all stock options held by Mr. Rosen would vest in full. Mr. Rosen’s employment agreement also provides that the Company will cooperate in good faith to afford Mr. Rosen the right to exercise his stock options in full immediately prior to a change in control.
 
Mr. Rosen’s employment agreement also includes a one year non-disclosure, employee non-solicitation and non-compete provisions.  
 
In the event of a sale of the Company or substantially all of the assets of the Company and its subsidiaries for cash or securities or a combination thereof, Mr. Rosen is entitled to a one-time bonus equal to the following: (i) if the Company’s stockholders receive aggregate consideration of up to $149,999,999, Mr. Rosen is entitled to receive a special bonus equal to 2.5% of such consideration paid/distributed to the Fusion stockholders; (ii) 3.5% of such consideration if such consideration is between $150 million and $249,999,999; (iii) 4.5% if such consideration is between $250 million and $349,999,999; and (iv) 5% if such consideration exceeds $350 million. The Compensation Committee, with advice of counsel, has determined that the proposed merger between the Company and Birch does not trigger the payment of the one-time bonus contemplated by this provision of Mr. Rosen's employment agreement. That fact notwithstanding, and considering that the structure of the Birch transaction was not contemplated by the terms of Mr. Rosen’s employment agreement, the Compensation Committee has determined that a special one-time transaction bonus is warranted and, subject to closing of the Merger, intends to pay him a special one-time bonus.
 
Mr. Rosen’s employment agreement also provides that the Board will, within 90 days following execution of the employment agreement, develop a plan that enables Mr. Rosen to obtain a 5% equity stake in the Company within three years from the date of his employment agreement. On November 13, 2017, the Board granted and Mr. Rosen agreed to accept options to purchase 822,298 shares of our common stock in satisfaction of this obligation, two thirds of these options vested on the date of grant and the remaining one-third vested on February 3, 2018. The exercise price of these options, which is $2.51, was set at the closing price of our common stock on November 10, 2017 (the last trading day before the grant was approved by the Board).
 
 
41
 
 
In 2016, the Company declared a special bonus to Mr. Rosen in the amount of $535,500 for bonus amounts due but not paid by the Company for periods prior to 2014.
 
Gordon Hutchins Jr. serves as our President and Chief Operating Officer.  Mr. Hutchins does not have a written employment agreement with the Company.  Effective January 1, 2015, Mr. Hutchins’ annual salary was increased to $275,000.   Mr. Hutchins is entitled to receive a bonus of up to 25% of his annual salary if the Company achieves designated corporate performance metrics.  
 
Michael R. Bauer serves as our Chief Financial Officer. Mr. Bauer does not currently have a formal employment agreement with the Company. However, his offer letter provides that his annual salary is $250,000 and he is entitled to receive a bonus of up to 25% of his annual salary if the Company achieves designated corporate performance metrics. In connection with his appointment as Chief Financial Officer, in 2016 Mr. Bauer received a grant of 55,000 generally restricted shares of our common stock, which shares vest ratably over a three year period and which shares (along with stock options granted to Mr. Bauer) vest in the event of a change in control of the Company (as defined in his offer letter). In the event Mr. Bauer’s employment is terminated (i) within six months following a change in control, except for “Cause” (as defined in his offer letter), or (ii) by the Company “Without Cause” (as defined in his offer letter), or (iii) due to a resignation by Mr. Bauer for “Good Reason” (as defined in his offer letter) then the Company is obligated to pay him severance in an amount equal to salary and the cost of health benefit continuation for a period of six months (in a lump sum or installments, at the election of the Company).
 
Determination of Executive Compensation
 
The compensation of our Chief Executive Officer is determined by the Compensation Committee.  The compensation of our other executive officers is determined by the Compensation Committee, in consultation with the Chief Executive Officer. In determining the levels and forms of compensation to be paid to our executive officers, the Compensation Committee considers overall Company performance, departmental or business segment performance, individual executive performance and experience, internal equity with regard to other executive positions, general economic conditions, and typical levels and forms of compensation at similarly-sized companies with business models similar to ours.
 
In considering levels and forms of compensation at other companies, the Compensation Committee relies not only on its own knowledge, but also on published salary reviews and compensation studies for companies with business models similar to ours, for specific executive positions and for industry in general.
 
Our goal is to provide each of our executive officers with a total compensation package (base salary, the potential for a performance-based annual cash bonus, and time-based equity incentives) that is competitive.  We endeavor to appropriately balance the levels of fixed compensation and “at risk” compensation, as well as the levels of cash compensation and equity incentives.  
 
In addition to cash-based and equity-based compensation, our executive officers are eligible to participate in the benefit programs that are offered to all of our employees, including medical insurance, dental insurance, life insurance, a 401(k) plan, and a variety of other elective benefit plans.  We do not offer perquisites or other significant benefits to our executive officers that are not otherwise available to all of our employees.
 
2017 Director Compensation
 
Our Directors do not receive cash compensation for their services on the Board or Committees. However, they are reimbursed for out-of-pocket expenses incurred in attending Board and Committee meetings.  In addition, until 2017, we annually granted Directors stock options for their services, the amount of which was determined by the Compensation Committee. Due to the pending Merger with Birch, no options were granted to the Directors in 2017.  The following table provides information relating to compensation paid to the Directors for the 2017 fiscal year.
 
Name
 
Fees Earned Or Paid In Cash (S) 
 
 
 Stock Awards ($)
 
 
Option Awards ($)
 
 
 Non-Equity Incentive Plan Compensation
 
 
 Nonqualified Deferred Compensation Earnings
 
 
All Other Compensation ($)
 
 
 Total ($) (1)
 
Marvin S. Rosen
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
Michael J. Del Giudice
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
Jack Rosen
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
Paul C. O'Brien
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
Philip D. Turits
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
William Rubin
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
Larry Blum
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 $- 
 
(1)
    The table does not include amounts reimbursed for expenses incurred in attending Board and Committee meetings.
 
 
42
 
 
2016 Equity Incentive Plan
 
On October 28, 2016, our stockholders approved the 2016 Fusion Telecommunications International, Inc. 2016 Equity Incentive Plan (the “2016 Plan”), which was previously adopted by the Board on August 22, 2016. The 2016 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, restricted stock units, stock grants, stock units, performance shares, performance share units and performance cash (collectively “awards”). The 2016 Plan also permits the grant of awards that are intended to qualify for the “performance-based compensation” exception to the $1.0 million limitation on the deduction of compensation imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended.   The 2016 Plan supersedes and replaces the 2009 Plan (as defined below), which plan remains in effect solely with respect to outstanding awards that have not been exercised, forfeited, canceled, expired or otherwise terminated. The 2016 Plan provides a long-term, equity-based incentive designed to assist our retention of key personnel, align the interests of our Directors, executive officers and employees with those of our stockholders and focus participants on the achievement of long-term business objectives that will increase share value.
 
The total number of shares of common stock reserved under the 2016 Plan is an amount equal to 10% of our shares outstanding from time-to-time on a fully-diluted basis, plus shares from any award granted under the 2009 Plan that terminates, expires or lapses in any way following the effective date of the 2016 Plan. In addition, the 101,749 shares not granted under the 2009 Plan are also available for grant under the 2016 Plan. Subject to the express provisions of the 2016 Plan, if any award granted under the 2016 Plan terminates, expires, or lapses for any reason, or is paid in cash, any stock subject to or surrendered will again be stock available for the grant of an award under the 2016 Plan. The exercise of a stock-settled SAR, or broker-assisted “cashless” exercise of an option (or a portion thereof) will reduce the number of shares of our common stock available for issuance pursuant to the 2016 Plan by the entire number of shares of our common stock subject to that SAR or option (or applicable portion thereof), even though a smaller number of shares of our common stock will be issued upon such an exercise. Also, shares of our common stock tendered to pay the exercise price of an option or tendered or withheld to satisfy a tax withholding obligation arising in connection with an award will not become available for use under the 2016 Plan.
 
The 2016 Plan contains the following provisions, which the Company believes reflect best practices for equity-compensation plans: (i) prohibits the grant of stock options and SARs with discounted exercise prices, (ii) prohibits the repricing of stock options and SARs without stockholder approval, (iii) prohibits the recycling of awards tendered in payment of an option or withheld to satisfy tax obligations; (iv) contains a definition of change in control whereby potential acceleration of awards will only occur in the event of an actual change in control transaction; (v) includes, as a general rule, double-trigger vesting following a change in control; and (vi) imposes a $500,000 limit on the value of awards that may be granted to any one participant who is a non-employee director during any 12-month period.
 
The 2016 Plan is administered by the Compensation Committee.  The Compensation Committee determines, from time to-time, those of our executive officers, Directors and employees to whom awards will be granted, the amount of the awards granted to each individual, the vesting schedule of the awards and all other terms and conditions of the award. As of March 9, 2018, the Company had granted options to purchase 1,920,348 shares of Fusion common stock under the 2016 Plan. No other forms of awards have been granted.
 
2009 and 1998 Stock Option Plans
 
On December 17, 2009, the stockholders approved and ratified our 2009 Stock Option Plan (the “2009 Plan”), which was previously adopted by the Board in March 2009.  This plan replaced our 1998 Stock Option Plan, the term of which expired as to new option grants.   
 
The number of shares reserved for issuance under the 2009 Plan was 1,260,000.   The 2009 Plan is administered by the Compensation Committee.  As of March 9, 2018, there were outstanding options to purchase 1,082,449 shares of common stock under the 2009 Plan. Options to purchase 15,130 shares of common stock also remain outstanding under the now expired 1998 Stock Option Plan, with such options expiring at various dates through 2020.
 
 
43
 
 
Outstanding Equity Awards at Year End
 
The following table provides information concerning unexercised options and stock awards that have not vested for each Named Executive Officer as of December 31, 2017.  The table gives effect to the 1:50 reverse split completed by us in May 2014.
 
 
 
 
 
 
  OPTION AWARDS 
 
 
 STOCK AWARDS
 
Name
 
 
Number of securities underlying unexercised options (#) exercisable
 
 
 
Number of securities underlying unexercised options (#) unexercisable
 
 
 Equity incentive plan awards; Number of securities underlying unexercised unearned options (#)
 
 
 
   Option exercise prices ($) 
 
 Grant Date
 Option expiration
 date
 
 
Number of shares or units of stock that have not vested (#) 
 
 
 
Market value of shares or units of stock that have not vested ($) 
 
 
 Equity incentive plan awards; Number of unearned shares, units or other rights that have not vested (#) 
 
 
 Equity incentive plan awards; Market or Payout Value of unearned shares, units or other rights that have not vested (#) 
 
Matthew D. Rosen
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  7,000 
  - 
  - 
 $15.50 
3/26/2008
3/26/2018
  - 
  - 
  - 
  - 
 
  7,000 
  - 
  - 
 $5.50 
3/26/2009
3/26/2019
  - 
  - 
  - 
  - 
 
  8,750 
  - 
  - 
 $6.00 
4/14/2010
4/14/2020
  - 
  - 
  - 
  - 
 
  8,750 
  - 
  - 
 $4.50 
10/19/2011
10/19/2021
  - 
  - 
  - 
  - 
 
  10,000 
    
  - 
 $5.50 
10/17/2012
10/17/2022
  - 
  - 
  - 
  - 
 
  71,236 
  - 
  - 
 $4.25 
7/29/2013
7/29/2023
  - 
  - 
  - 
  - 
 
  28,986 
  - 
  - 
 $3.52 
10/17/2014
10/17/2024
  - 
  - 
  - 
  - 
 
  51,014 
  - 
  - 
 $3.45 
10/17/2014
10/17/2024
  - 
  - 
  - 
  - 
 
  100,000 
  - 
  - 
 $2.07 
10/7/2015
10/6/2025
  - 
  - 
  - 
  - 
 
  85,000 
  165,000 
  - 
 $1.26 
11/5/2016
11/11/2026
  - 
  - 
  - 
  - 
 
  550,940 
  271,358 
  - 
 $2.51 
11/09/2017
11/9/2017
  - 
  - 
  - 
  - 
Total
  928,676 
  436,358 
  - 
    
 
 
  - 
  - 
  - 
  - 
Gordon Hutchins, Jr.
    
    
    
    
 
 
    
    
    
    
 
  4,000 
  - 
  - 
 $15.50 
3/26/2008
3/26/2018
  - 
  - 
  - 
  - 
 
  4,000 
  - 
  - 
 $5.50 
3/26/2009
3/26/2019
  - 
  - 
  - 
  - 
 
  5,000 
  - 
  - 
 $6.00 
4/14/2010
4/14/2020
  - 
  - 
  - 
  - 
 
  6,500 
  - 
  - 
 $4.50 
10/20/2011
10/19/2021
  - 
  - 
  - 
  - 
 
  6,500 
    
  - 
 $5.50 
10/17/2012
10/17/2022
  - 
  - 
  - 
  - 
 
  20,342 
  - 
  - 
 $4.25 
7/29/2013
7/29/2023
  - 
  - 
  - 
  - 
 
  25,000 
  - 
  - 
 $3.52 
10/17/2014
10/17/2024
  - 
  - 
  - 
  - 
 
  35,000 
  - 
  - 
 $2.07 
10/7/2015
10/6/2025
  - 
  - 
  - 
  - 
 
  23,800 
  46,200 
  - 
 $1.26 
11/5/2016
11/11/2026
    
    
    
    
Total
  130,142 
  46,200 
  - 
    
 
 
  - 
  - 
  - 
  - 
 
    
    
    
    
 
 
    
    
    
    
Michael R. Bauer
  18,700 
  36,300 
  - 
 $1.26 
 11/11/2016
11/11/2026
  36,300 
 $65,703(1)
  - 
  - 
Total
  18,700 
  36,300 
  - 
    
 
 
  36,300 
 $65,703(1)
  - 
  - 
 
(1)
The value attributed to the restricted shares issued to Mr. Bauer is computed in accordance with FASB ASC Topic 718. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. All options vest ratably over three years from their grant date subject to acceleration in certain circumstances.
 
 
44
 
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
The following table presents information regarding the beneficial ownership of each class of our voting securities as of March 9, 2018 by:
 
each person who beneficially owns more than 5% of our voting securities;
each of our Directors and named executive officers (as defined in Item 402(a)(3) of Regulation S-K) individually; and
all executive officers and Directors as a group.
 
The Company’s voting securities consist of our common stock and our Series B-2 Preferred, which generally vote as a single class on all matters.  Each share of our common stock is entitled to one vote per share.  Each share of our Series B-2 Preferred is entitled to 200 votes (which represents the number of shares of our common stock into which each share of our Series B-2 Preferred is convertible. As of March 9, 2018, the total number of voting securities issued and outstanding (“Voting Shares”) was 37,423,127 consisting of (a) 35,579,756 Voting Shares evidenced by 35,579,756 shares of our common stock, and (b) 1,834,200 Voting Shares evidenced by 9,171 shares of Series B-2 Preferred. In the event the Merger with Birch is consummated, it is anticipated that all outstanding preferred stock will be retired on or prior to the effective date of the Merger.
 
Unless otherwise indicated, the address of each beneficial owner in the following table is c/o Fusion Telecommunications International, Inc., 420 Lexington Avenue, Suite 1718, New York, NY 10170. We believe that all persons, unless otherwise noted, named in the following table have sole voting and investment power with respect to all Voting Shares shown as being owned by them. Under U.S. securities laws, a person is considered to be the beneficial owner of securities owned by him/her (or certain persons whose ownership is attributed to him/her) and that can be acquired by him/her within 60 days from that date, including upon the exercise of options, warrants or convertible securities.
 
We determine a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by such owner, but not those held by any other person, and which are exercisable within 60 days of March 9, 2018, have been exercised or converted.
 
 
 
 
 
 
Number of Voting Shares Beneficially Owned
 
 
Percentage of Voting Shares
 
 
 
 
 
 
 
 
 
 
 
William Rubin
  (1)
  204,334 
  * 
Matthew D. Rosen
  (2)
  1,319,327 
  5.6%
Marvin S. Rosen
  (3)
  2,013,072 
  9%
Larry Blum
  (4)
  64,391 
  * 
Michael J. Del Giudice
  (5)
  74,079 
  * 
Jack Rosen
  (6)
  126,038 
  * 
Gordon Hutchins, Jr.
  (7)
  124,838 
  * 
Paul C. O’Brien
  (8)
  118,432 
  * 
Philip D. Turits
  (9)
  146,401 
  * 
Michael R. Bauer
  (10)
  36,666 
  * 
All Directors and Executive Officers as a Group (15 persons)
    
  4,841,637 
  13.4%
 
*Less than 1% of outstanding shares. 
________________________
 
(1)
Includes (i) 11,150 shares of Fusion common stock issuable upon the exercise of options, (ii) 200 shares of Series B-2 Preferred convertible into 40,000 shares of Fusion common stock; and (iii) 20,132 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants.
 
(2)
Includes 1,167,134 shares of Fusion common stock issuable upon the exercise of options, (ii) 14,695 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants; (iii) 76 shares of Series B-2 Preferred convertible into 15,200 shares of Fusion common stock; and (iv) 50 shares of Series A-1 Preferred and 5 shares of Series A-2 Preferred convertible into a total of 823 shares of Fusion common stock.
 
 
45
 
 
(3)
Includes (i) 230,158 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants, (ii) 11,500 shares of Fusion common stock issuable upon the exercise of options, (iii) 722 shares of Series B-2 Preferred convertible into 144,400 shares of Fusion common stock; (iv) 1,610 shares of Fusion common stock held by a Delaware Trust Custodian IRA of Mr. Rosen; and (v) 50 shares of Series A-1 Preferred and 25 shares of Series A-2 Preferred convertible into a total of 1,375 shares of Fusion common stock.
 
(4)
Includes (i) 42,185 shares of Fusion common stock held by trusts for which his wife serves as trustee, (ii) 4,456 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants held by trusts for which his wife serves as trustee, (iii) 11,150 shares of Fusion common stock issuable upon the exercise of options; and (iv) 33 shares of Series B-2 Preferred convertible into 6,600 shares of Fusion common stock held by trusts for which his wife serves as trustee.
 
(5)
Includes (i) 11,500 shares of Fusion common stock issuable upon the exercise of options, (ii) 320 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants, (iii) 11,381 shares of Fusion common stock held in the name of Catskill Investor Group, LLC, (iv) 5 shares of Series B-2 Preferred convertible into 1,000 shares of Fusion common stock, and (v) 200 shares of Series A-1 Preferred and 75 shares of Series A-2 Preferred owned by Catskill Investor Group, LLC, that are convertible into a total of 4,811 shares of Fusion common stock.
 
(6)
Includes (i) 9,600 shares of Fusion Common Stock issuable upon the exercise of Fusion common stock purchase warrants held in the name of Rosen-Kaiyuan, LLC, of which Jack Rosen is the managing member, (ii) 53,868 shares of Fusion common stock held by Rosen Partners, LLC and 12,095 shares of Fusion common stock held by Rosen-Kaiyuan, LLC, (iii) 11,150 shares of Fusion Common Stock issuable upon the exercise of options,  (iv) 150 shares of Series B-2 Preferred convertible into 30,000 shares of Fusion common stock held in the name of Rosen-Kaiyuan, LLC, and (v) 200 shares of Series A-1 Preferred and 50 shares of Series A-2 Preferred convertible into a total of 4,121 shares of Fusion common stock.
 
(7)
Includes (i) 118,592 shares of Fusion common stock issuable upon the exercise of options, and (ii) 25 shares of Series A-2 Preferred convertible into a total of 690 shares of Fusion common stock.
 
(8)
Includes (i) 11,500 shares of Fusion common stock issuable upon the exercise of options, (ii) 3,200 shares of Fusion common stock issuable upon the exercise of Fusion common stock purchase warrants, (iii) 50 shares of Series B-2 Preferred convertible into 10,000 shares of Fusion common stock, and (iv) 100 shares of Series A-1 Preferred convertible into 1,371 shares of Fusion common stock.
 
(9)
Includes (i) 29 shares of Fusion common stock held by his wife, (ii) 320 shares of Fusion common stock issuable upon the exercise of Fusion Common Stock purchase warrants, (iii) 54,834 shares of Fusion common stock issuable upon the exercise of options, (iv) 5 shares of Series B-2 Preferred convertible into 1,000 shares of Fusion common stock, (v) 25 shares of Series A-1 Preferred and 30 shares of Series A-2 Preferred convertible into a total of 1,171 shares of Fusion common stock.
 
(10)
Reflects the vested portion of restricted stock.
 
Equity Compensation Plans
 
The following table sets forth securities authorized for issuance under our equity compensation plans as of December 31, 2017.
 
Plan Category
 
Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights
 
 
Weighted Average Exercise Price of Outstanding Options, Warrants and Rights 
 
 
Number of Securities Remaining Available For Future Issuance
 
Equity Compensation Plans Approved by Stockholders
  3,017,927 
 $2.38 
  504,910 
 
    
    
    
Equity Compensation Plans Not Approved by Stockholders 
  
  None 
 
  
None
 
  
  None 
 
Total
  3,017,927 
  2.38 
  504,910 
 
 
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ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
Officer and Director Loans to Company
 
In November 2016, Marvin Rosen, Chairman of the Company, converted $250,000 of his outstanding promissory note to the Company into 217,391 shares of our common stock at a price of $1.15 per share. Of these shares, 21,739 shares were issued at Mr. Rosen's direction in the name of his son, Matthew Rosen, the Company’s Chief Executive Officer.
 
In December 2015, Matthew D. Rosen, converted $25,000 owed to him by the Company (for a partial bonus payable to him under the terms of his employment contract) into 11,468 shares of our common stock at a price of $2.18 per share. See “Executive Compensation,” included elsewhere in this report.
 
In December 2015, Marvin Rosen converted $300,000 of his outstanding promissory note to the Company into 137,615 shares of our common stock at a price of $2.18 per share.
 
Engagement for Tax Services
 
Since March 6, 2014, the Company has engaged Marcum LLP to prepare the Company’s tax returns and to provide related tax advisory services.  The Company paid this firm approximately $205,000 and $135,000 for the years ended December 31, 2017 and 2016, respectively.  Larry Blum is a Senior Advisor to and a former partner of Marcum.
 
Director Independence
 
We apply the standards of Nasdaq Rule 5605(a)(2) for determining the independence of the members of our Board and Committees. Based upon our application of those standards, the Board has determined that the following members of the Board are independent:
 
Larry Blum
Jack Rosen
William Rubin
Paul C. O'Brien
Michael J. Del Giudice
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
The aggregate fees billed to the Company by the Company’s independent registered public accounting firm, EA, for each of the years ended December 31, 2017 and 2016 are as follows:
 
Audit and Audit-Related Fees
 
The fees billed for professional services rendered by EA for the years ended December 31, 2017 and 2016 were approximately $0.2 million.  The fees billed for professional services included fees associated with the audit of the Company’s annual financial statements, reviews of the Company’s quarterly financial statements and consent for the Company’s registration statement.
 
Tax Related Fees
 
There were no fees billed for tax-related services by EA during the year ended December 31, 2017 and 2016.
 
All Other Fees
 
Fees for other services that were not included in the categories above billed by EA during the years ended December 31, 2017 and 2016 were approximately $149,000 and $90,000, respectively. These fees were primarily for audit and due diligence services related to business acquisition transactions undertaken by the Company.
 
 
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Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Accountants
 
Consistent with SEC policies regarding auditor independence, the Audit Committee has the responsibility for appointing, setting compensation, and overseeing the work of the independent accountants.  In recognition of this responsibility, the Audit Committee has established a policy to pre-approve all audit and permissible non-audit services provided by the independent accountant.
 
Prior to engagement of the independent accounting firm for the audit of the Company’s 2018 consolidated financial statements, management will submit to the Audit Committee for approval an aggregate of services expected to be rendered during that year for each of the three categories of services.
 
Audit and audit-related services include audit work performed in the preparation of annual financial statements, reviews of the Company’s interim financial statements and work that generally only the independent accountants can reasonably be expected to provide, including comfort letters, statutory audits, employee benefit plan audits and attest services and consultation regarding financial accounting and/or reporting standards.
 
Other Fees are those fees associated with services not captured in the other categories, including due diligence and other audit services related to mergers and acquisitions.
 
Prior to engagement, the Audit Committee pre-approves these services by category of service. During the year, circumstances may arise when it may become necessary to engage the independent accounting firm for additional services not contemplated in the original pre-approval. In those instances, the Audit Committee requires specific pre-approval before engaging the independent accountant.
 
The Audit Committee may delegate pre-approval authority to one or more of its members. The member to whom such authority is delegated must report, for informational purposes only, any pre-approval decisions to the Audit Committee at its next scheduled meeting.
 
 In 2017, all audit and permissible non-audit services provided by the independent accountants were preapproved by the Audit Committee.
 
 
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PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(a) (1) Financial Statements.
 
The consolidated financial statements filed as part of this Annual Report on Form 10-K are identified in the Index to Consolidated Financial Statements.
 
(a) (2) Exhibits.
 
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.
 
Exhibit No.
 
Description
 
 
 
 
Certificate of Incorporation (*)
 
Certificate of Amendment to Certificate of Incorporation (14)
 
Certificate of Designation of the Rights and Preferences of the Series A-1 Preferred Stock, as amended (16)
 
Certificate of Designation of the Rights and Preferences of the Series A-2 Preferred Stock, as amended (17)
 
Certificate of Designation of the Rights and Preferences of the Series A-4 Preferred Stock, as amended (18)
 
Certificate of Designations of Preferences, Rights and Limitations of Series B-2 Senior Cumulative Convertible Preferred Stock (19)
 
Certificate of Elimination of Series A Convertible Redeemable Preferred Stock, Series B Convertible Redeemable Preferred Stock, Series C Convertible Redeemable Preferred Stock, Series A-3 Cumulative Convertible Preferred Stock and Series B-1 Cumulative Convertible Preferred Stock (24)
 
Bylaws (*)
 
1998 Stock Option Plan (*)
 
2009 Stock Option Plan (15)
 
2016 Equity Incentive Plan (14)
 
Employment Agreement, dated as of November 5, 2015, between registrant and Matthew D. Rosen (12)
 
Form of Warrant to Purchase Common Stock (*)
 
Lease Agreement between registrant and SLG Graybar Sublease, LLC for Suite 1718 at 420 Lexington Avenue, New York, NY office (*)
 
Lease Modification Agreement dated November 19, 2014, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (13)
 
Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (*)
 
Sixth Amendment dated July 23, 2014, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (28)
 
Seventh Amendment, dated August 2015, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (25)
 
Eight Amendment, dated July 8, 2016, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (25)
 
Form of Promissory Note and Security Agreement (2)
 
Non-Competition Agreement between registrant and Marvin Rosen (*)
 
Form of Warrant (3)
 
Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (4)
 
Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (4)
 
Amendment No. 1 dated June 6, 2013 to the Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (10)
 
 
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10.12
 
Reserved
 
Amendment No. 1 dated June 6, 2013 to the Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (10)
 
Amendment No. 2 dated August 20, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
 
Amendment No. 2 dated August 20, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and  Christiana Trust as trustee of the LK Trust (5)
 
Amendment No. 3 dated September 21, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
 
Amendment No. 3 dated September 21, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana  Trust as trustee of the LK Trust (5)
 
Amendment No. 4 dated October 24, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
 
Amendment No. 4 dated October 24, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
 
Lease Agreement dated June 30, 2017, between LMR USA LLC and Network Billing Systems LLC for the 695 US Route 46 West, Fairfield, NJ office (21)
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III (5)
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III (5)
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
 
Praesidian Fund III Common Stock Purchase Warrant dated October 29, 2012 (5)
 
Praesidian Fund III-A Common Stock Purchase Warrant dated October 29, 2012 (5)
 
Intellectual Property Security Agreement dated as of October 29, 2012 by the registrant and Network Billing Systems, LLC, in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP (5)
 
Right of First Refusal Agreement dated as of October 29, 2012 by and among the registrant, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, LP and Praesidian Capital Opportunity  Fund III as agent (5)
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III (5)
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III-A (5)
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp., and  Plexus Fund II, LP (5)
 
Asset Purchase and Sale Agreement effective as of August 30, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC (6)
 
First Amendment to the Asset Purchase and Sale Agreement effective as of November 15, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC (7)
 
Second Amendment to the Asset Purchase and Sale Agreement effective as of December 16, 2013 by and among the registrant,  Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress Communications, LLC (8)
 
Third Amendment to Securities Purchase Agreement is entered into as of December 16, 2013, by and among Fusion NBS Acquisition Corp, the registrant, Network Billing Systems, LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP, and Praesidian Capital Opportunity Fund III, LP as agent (9)
 
 
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Form of Common Stock Purchase Warrant (9)
 
Form of Registration Rights Agreement (9)
 
Form of Series C Note (9)
 
Form of Series D Note dated December 31, 2013 (9)
 
Form of Management Rights Letter dated December 31, 2013 (9)
 
Form of Lenders’ Warrant dated December 31, 2013 (9)
 
Joinder Agreement dated as of December 31, 2013 by and among the registrant, Fusion NBS Acquisition Corp., Fusion BVX LLC in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and United Insurance Company of America (9)
 
Assignment and Assumption Agreement dated as of December 31, 2013 by and among BroadvoxGo!, LLC, Cypress Communications, LLC, the registrant, and Fusion BVX, LLC (9)
 
Bill of Sale dated as of December 31, 2013 delivered by BroadvoxGo!, LLC and Cypress Communications, LLC (9)
 
Limited Trademark License Agreement dated as of December 31, 2013 by and among Broadvox, LLC; the registrant and Fusion BVX LLC (9)
 
Form of Series E Note, dated as of October 31, 2014 (11)
 
Agreement and Plan of Merger, dated as of October 15, 2014, by and among the registrant, Fusion PTC Acquisition Inc., PingTone Communications, Inc., the Majority Stockholders of PingTone Communications, Inc. and J Shelby Bryan, as Stockholders Representative (11)
 
Stock Purchase and Sale Agreement, dated as of December 8, 2015, by and among Fusion NBS Acquisition Corp., Mitch Marks, Ron Kohn and Robert Marks (13)
 
Credit Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., and East West Bank and the Other Lenders from time to time party hereto (26)
 
 
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Waiver dated January 26, 2018 to Credit Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, East West Bank, as Administrative Agent, Swingline Lender, an Issuing Bank and a Lender and each other Lender from time  to time party to the Credit Agreement. (22)
 
Consent dated January 8, 2018 to Credit Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, East West Bank, as Administrative Agent, Swingline Lender, an Issuing Bank and a Lender and each other Lender from  time to time party to the Credit Agreement. (22)
 
Consent dated February 23, 2018 to Credit Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, East West Bank, as Administrative Agent, Swingline Lender, an Issuing Bank and a Lender and each other Lender from  time to time party to the Credit Agreement. (1)
 
Subordination Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., Praesidian Capital Opportunity Fund III, LP, and East West Bank (26)
 
Intercreditor and Subordination Agreement dated as of November 14, 2016 by and among Marvin Rosen, the registrant and East West Bank (26)  
 
Pledge and Security Agreement dated as of November 14, 2016 by and among each of the Grantors Party thereto and  East West Bank (26)  
 
Guaranty dated as of November 14, 2016 from the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC  and Apptix, Inc. to East West Bank (26)  
 
Intellectual Property Security Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., and East West Bank (26)  
 
Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, by and among Fusion NBS Acquisition Corp., as borrower, the registrant, Network Billing Systems, L.L.C., Fusion BVX, LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Fidelity Access Networks, Inc., Apptix, Inc., Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital  Opportunity Fund III-A, LP and United Insurance Company of America (26)  
 
Consent dated January 8, 2018 to Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian  Capital Opportunity Fund III-A, LP, and United Insurance Company of America. (26)  
 
Consent dated February 15, 2018 to Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, as amended, by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, L.L.C., Fusion BVX LLC, Pingtone Communications, Inc., Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Apptix, Inc., Fusion BCHI Acquisition LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian  Capital Opportunity Fund III-A, LP, and United Insurance Company of America. (1)
 
 
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