UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
    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 CONNECT, INC.
(Exact name of registrant as specified in its 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
 (Registrants telephone number, including area code)
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “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 
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 10, 2018.
 
Title of Each Class
 
Number of Shares Outstanding
Common Stock, $0.01 par value
 
78,464,037
 

 
 
 
 
FUSION CONNECT, INC. AND SUBSIDIARIES 
TABLE OF CONTENTS
 
Part 1 Financial Information
 
 
 
Item 1. Financial Statements
1
 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
31
 
 
Item 4. Controls and Procedures
32
 
 
Part II Other Information
 
 
 
Item 1. Legal Proceedings
33
 
 
Item 1A. Risk Factors
33
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
37
 
 
Item 3. Defaults Upon Senior Securities
37
 
 
Item 4. Mine Safety Disclosures
37
 
 
Item 5. Other Information
37
 
 
       Item 6. Exhibits
37
 
 
Signatures
38
 
 
Index to Exhibits
39
 
As previously disclosed, on May 4, 2018 (the “Birch Closing Date”), Fusion Connect, Inc., a Delaware corporation (the “Fusion”), completed the merger (the “Birch Merger”) of its wholly-owned subsidiary, Fusion BCHI Acquisition LLC (“BCHI Merger Sub”), with and into Birch Communications Holding, Inc., a Georgia corporation (“Birch”), in accordance with the terms of the Agreement and Plan of Merger, dated as of August 26, 2017, as amended, among Fusion, Birch Merger Sub and Birch (the “Birch Merger Agreement”). As a result of the Birch Merger, each then existing subsidiary of Birch became indirect wholly-owned subsidiaries of Fusion. On May 4, 2018, Fusion also changed its corporate name from Fusion Telecommunications International, Inc. to Fusion Connect, Inc.
 
For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under generally acceptable accounting principles in the United States (“U.S. GAAP”) and Birch is considered the accounting acquirer. Accordingly, Birch’s historical results of operations will replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements.
 
In addition, as previously disclosed, on June 15, 2018 (the “MegaPath Closing Date”), the Company (as defined below) completed its acquisition of MegaPath Holding Corp., a Delaware corporation (“MegaPath”) through a merger (the “MegaPath Merger”) of Fusion MPHC Acquisition Corp. (“MegaPath Merger Sub”), with and into MegaPath, in accordance with the terms of the Agreement and Plan of Merger, dated as of May 4, 2018, among the Company, MegaPath, MegaPath Merger Sub and Shareholder Representative Services, LLC, as stockholder representative (the “MegaPath Merger Agreement”).
 
This quarterly report on Form 10-Q relates to the Company’s three and six-month periods ended June 30, 2018, which six-month period includes the date of the completion of the Birch Merger, and is therefore Fusion’s first quarterly report on Form 10-Q that includes results of operations for the combined company, including Birch and MegaPath.
 
Unless the context otherwise requires, references to the “Company,” the “combined company” “we,” “our” or “us” in this report refer to Fusion and its subsidiaries following the completion of the Birch Merger and references to “Fusion” refer to the Company prior to the completion of the Birch Merger.
 
Except as otherwise noted, references to “common stock” in this report refer to common stock, par value $0.01 per share, of Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split of its common stock (the “Reverse Split”). Unless noted otherwise, any share or per share amounts in this report, the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to the Reverse Split.
 
 
 
 
PART I FINANCIAL INFORMATION
 
Item 1. Financial Statements.
 
Fusion Connect, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except par value amounts)
 
 
 
 June 30,
2018
 
 
 December 31,
2017
 
 
 
 (unaudited)
 
 
 (audited)
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $13,535 
 $5,757 
Accounts receivable, net of allowance for doubtful
  52,384 
  25,372 
accounts of $6,077 and $2,652, respectively
    
    
Accounts receivable - stockholders/employees
  - 
  920 
Prepaid expenses
  10,443 
  6,290 
Inventory, net
  1,618 
  1,142 
Other assets
  4,504 
  2,505 
Current assets of discontinued operations
  - 
  40,038 
Total current assets
  82,484 
  82,024 
Long-term assets:
    
    
Property and equipment, net
  121,294 
  106,557 
Goodwill
  217,814 
  89,806 
Intangible assets, net
  183,826 
  68,834 
Other non-current assets
  33,462 
  877 
Total long-term assets
  556,396 
  266,074 
Total assets
 $638,880 
 $348,098 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
    
    
Current liabilities:
    
    
Accounts payable
 $76,075 
 $40,315 
Accrued telecommunications costs
  5,277 
  11,048 
Deferred customer revenue
  16,030 
  10,226 
Other accrued liabilities
  41,831 
  23,948 
Current portion of capital leases
  3,027 
  3,003 
Current portion of long-term debt
  24,500 
  26,500 
Current liabilities from discontinued operations
  - 
  34,864 
Total current liabilities
  166,740 
  149,904 
Long-term liabilities:
    
    
Non-current portion of long-term debt
  580,020 
  410,736 
Non-current portion of capital lease
  3,316 
  3,823 
Other non-current liabilities
  7,657 
  12,847 
Total non-current liabilities
  590,993 
  427,406 
Stockholders’ deficit:
    
    
Preferred stock, $0.01 par value, 10,000 shares authorized,
    
    
15 and 0 shares issued and outstanding, respectively
  - 
  - 
Common stock, $0.01 par value; 150,000 shares authorized,
    
    
78,415 and 25,161 shares issued and outstanding, respectively
  784 
  252 
Additional paid-in capital
  145,377 
  5,824 
Accumulated deficit
  (264,752)
  (236,477)
Accumulated other comprehensive (loss) income
  (262)
  1,189 
Total stockholders’ deficit
  (118,853)
  (229,212)
Total liabilities and stockholders’ deficit
 $638,880 
 $348,098 
 
    
    
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
1
 
 
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands)
 
 
 
For the Three Months Ended June 30,
 
 
For the Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $120,803 
 $116,677 
 $223,714 
 $231,743 
Cost of revenue (exclusive of depreciation and amortization,
    
    
    
    
shown below)
  66,189 
  63,039 
  121,316 
  125,899 
Gross Profit
  54,614 
  53,638 
  102,398 
  105,844 
Operating expenses:
    
    
    
    
Selling, general and administrative
  43,001 
  29,009 
  66,767 
  61,334 
Depreciation and amortization
  16,712 
  17,625 
  31,441 
  33,642 
Impairment losses on intangible assets
  - 
  - 
  2,314 
  - 
Foreign currency loss (gain)
  241 
  (131)
  511 
  (166)
Total operating expenses
  59,954 
  46,503 
  101,033 
  94,810 
 
    
    
    
    
Operating (loss) income
  (5,340)
  7,135 
  1,365 
  11,034 
 
    
    
    
    
Other (expense) income:
    
    
    
    
Interest expense, net
  (17,608)
  (11,852)
  (29,370)
  (21,481)
Loss on debt extinguishment
  (14,414)
  - 
  (14,414)
  - 
Other (expense) income
  (211)
  (28)
  (168)
  50 
Total other expense
  (32,233)
  (11,880)
  (43,952)
  (21,431)
 
    
    
    
    
Loss before income taxes
  (37,573)
  (4,745)
  (42,587)
  (10,397)
Income tax benefit (expense)
  3,872 
  44 
  4,869 
  (1,354)
Net loss from continuing operations
  (33,701)
  (4,701)
  (37,718)
  (11,751)
Net income (loss) from discontinued operations
  15,179 
  (4,743)
  6,218 
  (8,133)
Net loss
  (18,522)
  (9,444)
  (31,500)
  (19,884)
Other comprehensive income (loss):
    
    
    
    
Cumulative translation adjustment
  (655)
  44 
  (1,451)
  (256)
Comprehensive loss
 $(19,177)
 $(9,400)
 $(32,951)
 $(20,140)
 
    
    
    
    
Net loss from continuing operations
  (33,701)
  (4,701)
  (37,718)
  (11,751)
Preferred stock dividends (see note 5)
  (787)
  - 
  (787)
  - 
Net loss attributable to common stockholders
 $(34,488)
 $(4,701)
 $(38,505)
 $(11,751)
 
    
    
    
    
 
    
    
    
    
Basic and diluted loss per common share from continuing operations
 $(0.59)
 $(0.19)
 $(0.92)
 $(0.47)
Basic and diluted loss per common share from discontinued operations
 $0.26 
 $(0.19)
 $0.15 
 $(0.32)
 
    
    
    
    
Basic and diluted weighted average common shares outstanding
  58,248 
  25,161 
  41,796 
  25,161 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
2
 
 
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit
(in thousands)
 
 
 
Preferred Stock
 
 
Common Stock
 
 
Additional Paid-in
 
 
Accumulated Other Comprehensive 
 
 
Accumulated  
 
 
Stockholders'      
 
 
 
Shares
 
   $ 
 
Shares
 
 
$
 
 
Capital
 
 
Income  
 
 
   Deficit  
 
 
Deficit      
 
Balance at December 31, 2017
  - 
 $- 
  25,161 
 $252 
 $5,824 
 $1,189 
 $(236,477)
 $(229,212)
 
    
    
    
    
    
    
    
    
Cumulative effect of change in accounting principle
  - 
  - 
  - 
  - 
  - 
  - 
  3,725 
  3,725 
 
    
    
    
    
    
    
    
    
Balance at January 1, 2018
  - 
  - 
  25,161 
  252 
  5,824 
  1,189 
  (232,752)
  (225,487)
 
    
    
    
    
    
    
    
    
Preferred Series D issued (note 16)
  15 
  - 
  - 
  - 
  15,000 
  - 
  - 
  15,000 
 
    
    
    
    
    
    
    
    
Payment of Preferred Series D dividend
  - 
  - 
  - 
  - 
  - 
  - 
  (500)
  (500)
 
    
    
    
    
    
    
    
    
Distribution of the Birch Consumer Segment (note 3)
  - 
  - 
  - 
  - 
  (21,503)
  - 
  - 
  (21,503)
 
    
    
    
    
    
    
    
    
Common stock issued in Birch reverse acquisition (note 4)
  - 
  - 
  49,896 
  499 
  131,468 
  - 
  - 
  131,967 
 
    
    
    
    
    
    
    
    
Common stock issued in MegaPath acquisition (note 4)
  - 
  - 
  1,679 
  17 
  6,431 
  - 
  - 
  6,448 
 
    
    
    
    
    
    
    
    
Common stock issued in a previous acquisition by the legacy Fusion company
  - 
  - 
  129 
  1 
  499 
 - 
  - 
  500 
 
    
    
    
    
    
    
    
    
Proceeds from the sale of common stock, net of costs
  - 
  - 
  1,524 
  15 
  7,493 
  - 
  - 
  7,508 
 
    
    
    
    
    
    
    
    
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  (31,500)
  (31,500)
 
    
    
    
    
    
    
    
    
Cumulative translation adjustment
  - 
  - 
  - 
  - 
  - 
  (1,451)
  - 
  (1,451)
 
    
    
    
    
    
    
    
    
Proceeds from exercise of stock options
  - 
  - 
  26 
  - 
  73 
  - 
  - 
  73 
 
    
    
    
    
    
    
    
    
Stock-based compensation
  - 
  - 
  - 
  - 
  92 
  - 
  - 
  92 
Balance at June 30, 2018
  15 
 $- 
  78,415 
 $784 
 $145,377 
 $(262)
 $(264,752)
 $(118,853)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
3
 
 
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
 
 
For The Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net loss from continuing operations
 $(37,718)
 $(11,751)
Net loss from discontinued operations
  6,218 
  (8,133)
Net loss from continuing operations
  (31,500)
  (19,884)
 
    
    
Adjustments to reconcile net loss to net cash
    
    
 provided by operating activities
    
    
Depreciation and amortization
  31,441 
  33,642 
Deferred financing amortization
  2,142 
  1,882 
OID Interest
  1,688 
  850 
Deferred taxes
  (2,453)
  - 
Gain on disposal of fixed assets
  211 
  (26)
Loss on impairment of property, plant and equipment
  2,314 
  - 
Loss on extinguishment of debt
  14,414 
  - 
Non-cash share-based compensation
  92 
  30 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  (16,062)
  3,403 
Inventory, net
  (188)
  (298)
Prepaid expenses and other current assets
  945 
  (547)
Other assets
  (4,786)
  301 
Accounts payable
  25,935 
  10,129 
Other liabilities
  (7,446)
  (10,358)
Net cash provided by operating activities - continuing operations
  10,529 
  27,257 
Net cash used in operating activities - discontinued operations
  (8,614)
  (1,202)
Net cash provided by operating activities
  1,915 
  26,055 
 
    
    
Cash Flows from Investing Activities:
    
    
Acquisitions
  (20,565)
  - 
Purchases of property and equipment
  (15,369)
  (17,927)
Proceeds from disposal of fixed assets
  22 
  26 
Net cash used in investing activities - continuing operations
  (35,912)
  (17,901)
Net cash used in investing activities - discontinued operations
  (1,498)
  (4,713)
Net cash used in investing activities
  (37,410)
  (22,614)
 
    
    
Cash Flows from Financing Activities:
    
    
Proceeds from notes payable and long-term debt
  650,000 
  15,000 
Repayment of debt obligation
  (551,494)
  (11,375)
Payment of capital lease obligations
  (1,840)
  (2,210)
Deferred financing costs and discounts
  (50,383)
  (4,325)
Issuance of Note Receivable
  (25,000)
  - 
Issuance of preferred stock
  14,500 
  - 
Proceeds from the sale of common stock
  7,508 
  - 
Proceeds from stock options
  73 
  - 
Net cash provided by (used in) financing activities - continuing operations
  43,364 
  (2,910)
 
    
    
Net increase in cash and cash equivalents - continuing operations
  17,981 
  6,446 
Net (decrease) in cash and cash equivalents - discontinued operations
  (10,112)
  (5,915)
Net increase in cash and cash equivalents
  7,869 
  531 
 
    
    
Cash and cash equivalents at beginning of period
  5,757 
  8,208 
Foreign currency translation effect on cash
  (91)
  27 
Cash and cash equivalents at end of period
 $13,535 
 $8,766 
 
    
    
Supplemental Disclosure of Cash Flow Information:
    
    
Interest paid
 $19,096 
 $18,064 
Income tax paid
 $- 
 $217 
Non-cash purchases of property and equipment
 $1,157 
 $- 
Non-cash issuance of stock for acquisition
 $138,915 
 $- 
Non-cash dividend
 $500 
 $- 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
4
 
 
Fusion Connect, Inc. and Subsidiaries
Unaudited Condensed Notes to Consolidated Financial Statements
 
Note 1. Organization and Business
 
Fusion Connect, Inc. is a Delaware corporation incorporated in September 1997 (“Fusion”). The Company (as defined below) is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud infrastructure, cloud computing and managed cloud-based applications, and business services to small, medium and large businesses.
 
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 products and services include cloud voice and Unified Communications-as-a-Service, improving communication 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 and contact center solutions.  Our cloud computing and Infrastructure-as-a-Service solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered.  Complemented by our Software-as-a-Service 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.
 
On May 4, 2018 (the “Birch Closing Date”), Fusion, completed the previously announced merger (the “Birch Merger”) of its wholly-owned subsidiary, Fusion BCHI Acquisition LLC (“BCHI Merger Sub”), with and into Birch Communications Holding, Inc., a Georgia corporation (“Birch”), in accordance with the terms of the Agreement and Plan of Merger, dated as of August 26, 2017, as amended, among Fusion, Birch Merger Sub and Birch (the “Birch Merger Agreement”). As a result of the Birch Merger, each then existing subsidiary of Birch became an indirect-wholly owned subsidiary of Fusion. On May 4, 2018, Fusion also changed its corporate name from Fusion Telecommunications International, Inc. to Fusion Connect, Inc.
 
For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under generally acceptable accounting principles in the United States (“U.S. GAAP”) and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer based on the terms of the Birch Merger Agreement and other factors, such as relative stock ownership following the Birch Closing Date. Accordingly, Birch’s historical results of operations replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements.
 
In addition, as previously disclosed, on June 15, 2018 (the “MegaPath Closing Date”), the Company (as defined below) completed its acquisition of MegaPath Holding Corp., a Delaware corporation (“MegaPath”) through a merger (the “MegaPath Merger”) of Fusion MPHC Acquisition Corp. (“MegaPath Merger Sub”), with and into MegaPath, in accordance with the terms of the Agreement and Plan of Merger, dated as of May 4, 2018, among the Company, MegaPath, MegaPath Merger Sub and Shareholder Representative Services, LLC, as stockholder representative (the “MegaPath Merger Agreement”).
 
This quarterly report on Form 10-Q relates to the Company’s three and six-month periods ended June 30, 2018, which six-month period includes the date of the completion of the Birch Merger, and is therefore Fusion’s first quarterly report on Form 10-Q that includes results of operations for the combined company, including Birch and MegaPath.
 
Unless the context otherwise requires, references to the “Company,” the “combined company” “we,” “our” or “us” in this report refer to Fusion and its subsidiaries following the completion of the Birch Merger and, as applicable, the MegaPath Merger and references to “Fusion” refers to the Company prior to the completion of the Birch Merger.
 
Except as otherwise noted, references to “common stock” in this report refers to common stock, par value $0.01 per share, of Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split of its common stock (the “Reverse Split”). Unless noted otherwise, any share or per share amounts in this report, the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to the Reverse Split.
 
 
5
 
 
See note 4 for additional information on the reverse acquisition and the Company’s acquisition of MegaPath.
 
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with Birch’s audited financial statements and notes thereto included in the Form 8-K filed by Fusion with the Securities and Exchange Commission (“SEC”) on May 10, 2018. The December 31, 2017 balance sheet information included herein was derived from the audited financial statements of Birch as of that date. The accompanying condensed consolidated financial statements have been prepared in accordance with US GAAP for interim financial information, the instructions for Form 10-Q and the rules and regulations of the SEC. Accordingly, since they are interim statements, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by US GAAP for annual financial statements, but reflect all adjustments consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. Interim results are not necessarily indicative of the results that may be expected for the 2018 fiscal year or for any other future periods.  Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation, including the transfer of certain assets from intangibles to property and equipment.
 
Principles of Consolidation
 
The financial statements include the accounts of the Company and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of these financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities. Actual results may differ substantially from these estimates. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full fiscal year or any other future periods.
 
Segment Reporting
 
Operating segments are defined as components of an enterprise for which discrete financial information is available and evaluated regularly by a company's chief operating decision maker in deciding how to allocate resources and assess performance. The Company has only one reportable segment – Business Services.
 
Notes Receivable
 
The Company recorded a notes receivable of $25.0 million in conjunction with the Vector Facility (as herein defined) and is classified as other non-current assets on its balance sheet as of June 30, 2018. See note 13 for additional information relating to the Vector Facility.
 
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.  
 
Income Taxes
 
The accounting and reporting requirements with respect to accounting for income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.
 
 
6
 
 
In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets.
 
Stock-Based Compensation
 
The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards on the date of grant. The fair values of stock options are estimated on the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable.
 
Revenue Recognition
 
Performance Obligations
 
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and represents the unit of account in applying the new revenue recognition guidance. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are satisfied over time as services are rendered or at a point in time depending on when the customer obtains control of the promised goods or services. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs when services are rendered.
 
Customer revenue includes revenue received from the sale of integrated cloud solutions and business services and is comprised of monthly recurring charges, usage charges and initial nonrecurring charges. Monthly recurring charges include the fees paid by customers for services. Monthly recurring charges are recognized over the period that the corresponding services are rendered to customers. Usage charges consist of per-use sensitive fees paid for calls made. Additionally, access charges are comprised of charges paid primarily by interexchange carriers for the origination and termination of interexchange toll and toll-free calls. Usage and access charges are recognized monthly as the services are provided. Initial nonrecurring charges consist primarily of installation charges and revenue derived from sales of communications equipment such as phones. The Company recognizes installation revenue when the installation is complete.
 
Deferred Commissions
 
Direct incremental costs of obtaining a contract, consisting of sales commissions, are deferred and amortized over the estimated life of the customer, which is currently 36 months. We calculate the estimated life of the customer on an annual basis. The Company classifies deferred commissions as prepaid expenses or other noncurrent assets based on the timing of when it expects to recognize the expense.
 
Accounts Receivable
 
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
 
 
7
 
 
Recent Accounting Pronouncements
 
The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated balance sheets or statements of operations.
 
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 ASU 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. In April 2018, the Company early adopted this guidance with respect to its then outstanding warrants.
 
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation: Scope of Modification Accounting, to provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in ASC 718. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and should be applied prospectively to an award modified on or after the adoption date. The Company adopted the amendments effective January 1, 2018. The adoption did not have a material impact on its 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 of 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 this new guidance will have on its financial statements and related disclosures. The Company’s current future lease obligations are disclosed in note 12 and in Note 6 "Leases" in the Form 8-K filed by Fusion with the SEC on May 10, 2018.
 
In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASU No. 2014-09”), which outlines a comprehensive revenue recognition model that 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. ASU No. 2014-09 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 Company adopted this standard effective January 1, 2018, using the modified retrospective method. Following the adoption, the revenue recognition for the Company’s sales arrangements remained materially consistent with our historical practice.
 
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. All of these new standards, which are collectively hereinafter referred to “ASC 606” became effective beginning with the first quarter of 2018. See note 15 for further information.
 
 
8
 
 
Note 3. Discontinued Operations
 
As a condition to closing the transactions contemplated by the Birch Merger Agreement (see note 4), Birch was required to spin-off its U.S.-based consumer customers, wireless customers and its small business customer-base (which include those business customers with $111 per month or less of monthly revenue) and assets associated with the support of those customers (collectively, the “Birch Consumer Segment”). Accordingly, prior to closing the Birch Merger on the Birch Closing Date, Birch distributed the assets and liabilities associated with the Birch Consumer Segment to the pre-merger Birch shareholders. At the time of the distribution, the Birch Consumer Segment met the criteria in ASC 205-20-45 for discontinued operations and, as a result, the assets, liabilities and results of operations associated with the Birch Consumer Segment have been classified as discontinued operations for all periods presented in the accompanying unaudited condensed consolidated balance sheet, statements of operations and statements of cash flows.
 
Summarized results for discontinued operations are as follows (in thousands):
 
 
 
  Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Revenues
 $7,848 
 $24,988 
 $30,768 
 $51,755 
Cost of revenues, exclusive of depreciation and
    
    
    
    
amortization, shown separately below
  5,035 
  16,791 
  20,482 
  34,199 
Gross profit
  2,813 
  8,197 
  10,286 
  17,556 
 
    
    
    
    
Selling, general and administrative expenses
  3,824 
  7,763 
  11,809 
  15,738 
Depreciation and amortization
  500 
  3,684 
  2,008 
  6,873 
Impairment losses on intangible assets
  - 
  - 
  5,379 
  - 
Total operating expenses
  4,324 
  11,447 
  19,196 
  22,611 
Operating loss on discontinued operations
  (1,511)
  (3,250)
  (8,910)
  (5,055)
 
    
    
    
    
Other (expenses) income:
    
    
    
    
  Interest expense
  (607)
  (1,493)
  (2,169)
  (3,078)
  Gain on extinguishment of debt
  17,297 
  - 
  17,297 
  - 
 
    
    
    
    
Net income (loss) on discontinued operations
 $15,179 
 $(4,743)
 $6,218 
 $(8,133)
 
The carrying amounts of assets and liabilities associated with discontinued operations are as follows (in thousands):
 
 
 
December 31,
2017
 
Accounts receivable, net of allowance for doubtful accounts of
 
 
 
   approximately $1,917, respectively
 $9,549 
Prepaid expenses
  1,259 
Inventory
  37 
Property and equipment, net
  1,708 
Goodwill
  3,550 
Intangible assets
  23,935 
Total current assets of discontinued operations
 $40,038 
 
    
Accounts payable and accrued expenses
 $8,469 
Deferred customer revenue
  2,375 
Other accrued liabilities
  10,320 
Debt
  13,700 
Total current liabilities of discontinued operations
 $34,864 
 
    
 
 
9
 
 
Note 4. Acquisitions
 
Birch
 
On the Birch Closing Date, Birch merged with and into BCHI Merger Sub, with BCHI Merger Sub surviving the merger as a wholly-owned subsidiary of Fusion. For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under U.S. GAAP and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer based on the terms of the Birch Merger Agreement and other factors, such as relative stock ownership of the Company following the Birch Merger. Accordingly, Birch’s historical results of operations replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements. All share numbers and other information about equity securities prior to the acquisition of Birch in this report relate to legacy Fusion.
 
On the Birch Closing Date, all of the outstanding shares of common stock, par value $0.01 per share, of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) were cancelled and converted into the right to receive, in the aggregate, 49,896,310 shares (the “Merger Shares”) of Fusion common stock, which constituted approximately 65.5% of the then issued and outstanding shares of Fusion common stock on that date. Pursuant to subscription agreements executed by each of the former shareholders of Birch, the Merger Shares were issued in the name of, and are held by, BCHI Holdings, LLC, a Georgia limited liability company (“BCHI Holdings”).
 
The fair value of assets acquired and liabilities assumed as a result of the Birch and Fusion combination is based upon management’s estimates which have been derived, in part, from an analysis provided by an independent third-party valuation firm. The assumptions are subject to change for a period of up to one year from date of the Birch Merger. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and the trade name, present value and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from those estimates.
 
The preliminary purchase price allocation is as follows (in thousands):
 
 
    
 
Useful life (in years)
 
Purchase consideration for invested capital
 $221,172 
 
 
 
Less: debt
  (89,205)
 

 
Total purchase consideration for equity
 $131,967 
 
 
 
 
    
 
 
 
Cash
 $28,176 
 
 
 
Accounts receivable
  8,684 
 
 
 
Other current assets
  2,444 
 
 
 
Property and equipment
  13,008 
 
 
 
Other noncurrent assets
  1,220 
 
 
 
Intangible assets:
    
 
 
 
  Developed technology
  4,710 
  3 
  Trademark
  49,500 
  10 
  Customer relationships
  41,100 
  15 
  Goodwill
  99,253 
    
Deferred revenue
  (1,200)
    
Other liabilities, including debt
  (114,928)
    
 
 $131,967 
    
 
    
    
The excess of the purchase price over the assets acquired and liabilities assumed represents goodwill. The goodwill is primarily attributable to the synergies expected to arise from the combination and is not expected to be deductible for tax purposes.
 
 
10
 
 
MegaPath Holding Corporation
 
On June 15, 2018, the MegaPath Closing Date, the Company completed its acquisition of MegaPath. As required by the terms of the MegaPath Merger Agreement, the Company paid approximately $61.5 million of the $71.5 million purchase price in cash, with approximately $10 million of the purchase price paid in 1,679,144 shares of Fusion’s common stock, at an agreed upon price of $5.775 per share. As a result of the fixed price at which the Fusion shares were issued, from an accounting standpoint, the total purchase price actually paid by Fusion was $68.3 million. Of the cash consideration, $2.5 million was deposited into an escrow account to be held for one year to secure the indemnification obligations in favor of the Company under the MegaPath Merger Agreement.
 
The cash consideration, as well as certain expenses associated with the acquisition of MegaPath, were funded from approximately $62.0 million of borrowings under the First Lien Credit Agreement (as defined in note 13). See note 13 for additional information regarding the First Lien Credit Agreement.
 
The preliminary purchase price allocation is as follows (in thousands):
 
 
   
 
Useful life (in years)
 
Purchase consideration for invested capital
 $68,251 
 
 
 
Working capital
  3,779 
 

 
Debt
  (12,181)
 

 
Total purchase consideration for equity
 $59,849 
 
 
 
 
    
 
 
 
Cash
 $4,660 
 
 
 
Accounts receivable
  2,539 
 
 
 
Other current assets
  1,347 
 
 
 
Property and equipment
  6,319 
 
 
 
Other noncurrent assets
  1,602 
 
 
 
Intangible assets:
    
 
 
 
  Developed technology
  10,610 
  3 
  Trademark
  7,100 
  10 
  Customer relationships
  17,800 
  15 
  Goodwill
  28,755 
    
Deferred revenue
  (1,400)
    
Other liabilities, including debt
  (19,483)
    
 
 $59,849 
    
 
The following summarized unaudited consolidated pro forma information presents the results of operations of the Company had each of the Birch Merger and the MegaPath Merger occurred on January 1, 2017 (in thousands except per share information):
 
 
 
  Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Revenues
 $145,996 
 $173,200 
 $296,048 
 $342,827 
Net loss
  (27,714)
  (14,214)
  (46,483)
  (29,997)
Basic and diluted net loss per share
  (0.48)
  (0.56)
  (1.11)
  (1.19)
 
The summarized unaudited consolidated pro forma results set forth in this note are not necessarily indicative of results that would have occurred if the Birch Merger and the MegaPath Merger had been in effect for the periods presented. Further, these pro forma results are not intended to be a projection of future results.
 
During the three and six months ended June 30, 2018, total acquisition costs related to the Birch merger and the MegaPath Merger were $9.9 million and $10.6 million, respectively. These costs are included in selling, general and administrative (“SG&A”) expenses on the accompanying unaudited condensed consolidated statement of operations.
 
 
11
 
 
Note 5. Loss per share
 
Basic and diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
 
 
  Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2018
 
 
2017
 
 
2018
 
 
2017
 
Numerator
 
 
 
 
 
 
 
 
 
 
 
 
Net loss from continuing operations
 $(33,701)
 $(4,701)
 $(37,718)
 $(11,751)
Net income (loss) from discontinued operations
  15,179 
  (4,743)
  6,218 
  (8,133)
Total net loss
  (18,522)
  (9,444)
  (31,500)
  (19,884)
Undeclared dividends on Preferred Series D
  (287)
  - 
  (287)
  - 
Dividends paid on Preferred Series D
  (500)
  - 
  (500)
  - 
Total net loss less Preferred Series D dividends 
 $(19,309)
 $(9,444)
 $(32,287)
 $(19,884)
 
    
    
    
    
Denominator
    
    
    
    
Basic and diluted weighted average common shares outstanding
  58,248 
  25,161 
  41,796 
  25,161 
 
    
    
    
    
(Loss) income per share basic and diluted
    
    
    
    
From continuing operations
 $(0.59)
 $(0.19)
 $(0.92)
 $(0.47)
From discontinued operations
 $0.26 
 $(0.19)
 $0.15 
 $(0.32)
 
From the Birch Closing Date through June 30, 2018, dilutive securities excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects were as follows:
 
Warrants
  1,105,278 
Stock Options
  1,955,295 
 
Note 6. Prepaid Expenses
 
Prepaid expenses are as follows (in thousands):
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Insurance and benefits
 $1,175
 $252 
Rent
  642 
  907 
Software subscriptions
 3,137
  1,448 
Hardware maintenance
  1,255
  1,517 
Commissions
  2,292 
  - 
Line costs
  667
  706 
Taxes
  613 
  883 
Other
 662
  577 
 
 $10,443 
 $6,290 
 
 
12
 
 
Note 7. Property and Equipment
 
Property and equipment consist of the following (in thousands):
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Telecommunications equipment
 $100,722 
 $85,472 
Leasehold improvements
  11,110 
  10,591 
Office equipment
  1,838 
  1,731 
Buildings and building improvements
  1,540 
  1,540 
Furniture and fixtures
  5,597 
  5,160 
Computer Software
  36,632 
  32,663 
Land
  470 
  470 
Automobiles
  53 
  56 
Onboarding
  23,893 
  15,727 
Network transition
  50,199 
  45,863 
Construction-in-progress
  4,468 
  3,680 
Total owned assets
  236,522 
  202,953 
Less: accumulated depreciation
  (139,949)
  (120,761)
  Net owned assets
  96,573 
  82,192 
 
    
    
Capital lease assets
  40,084 
  38,123 
Less: accumulated depreciation
  (15,363)
  (13,758)
  Net capital lease assets
  24,721 
  24,365 
 
    
    
Property and equipment, net
 $121,294 
 $106,557 
 
 
13
 
 
For the three months ended June 30, 2018 and 2017, depreciation expense was $10.8 million and $11.8 million, respectively. For the six months ended June 30, 2018 and 2017, depreciation expense was $20.6 million and $22.0 million, respectively.
 
Note 8. Goodwill
 
During the six months ended June 30, 2018, goodwill activity is as follows (in thousands):
 
Balance, January 1, 2018
 $89,806 
Acquisitions (note 4):
    
  Birch reverse Merger
  99,253 
  MegaPath
  28,755 
Balance, June 30, 2018
 $217,814 
 
Note 9. Intangible Assets
 
Intangible assets are as follows (in thousands):
 
 
 
June 30, 2018
 
 
December 31, 2017
 
 
 
Gross Carrying Amount
 
 
Accumulated Amortization
 
 
Total
 
 
Gross Carrying Amount
 
 
Accumulated Amortization
 
 
Total
 
Subscriber acquisition costs
 $134,849 
 $(24,521)
 $110,328 
 $77,189 
 $(20,918)
 $56,271 
Tradenames and trademarks
  66,846 
  (8,333)
  58,513 
  13,146 
  (6,174)
  6,972 
Proprietary technology
  15,320 
  (335)
  14,985 
  - 
  - 
  - 
Noncompete agreement
  - 
  - 
    -
  3,000 
  (3,000)
  - 
Commissions
  - 
  - 
  -
  7,683 
  (2,092)
  5,590 
Total acquired intangibles
 $217,015 
 $(33,189)
 $183,826 
 $101,018 
 $(32,184)
 $68,834 
 
During the three months ended June 30, 2018 and 2017, the Company recorded no impairment charges. During the six months ended June 30, 2018 and 2017, the Company recorded impairment charges on certain intangible assets of $2.3 million and $0, respectively.
 
For the three months ended June 30, 2018 and 2017, amortization expense was $5.9 million and $5.8 million, respectively. For the six months ended June 30, 2018 and 2017, amortization expense was $10.8 million and $11.6 million, respectively. Estimated future aggregate amortization expense is expected to be as follows (in thousands):
 
          remainder of 2018
 $14,743 
2019
  23,678 
2020
  23,678 
2021
  20,728 
2022
  18,571 
Thereafter
  82,428 
 
 $183,826 
 
 
14
 
 
Note 10. Other Accrued Liabilities
 
Other accrued expenses are as follows (in thousands):
 
 
 
June 30,
2018
 
 
December 31,
2017
 
Compensation and benefits
 $5,813 
 $2,462 
Bonus
  3,585 
  729 
Taxes
  4,775 
  169 
Interest
  10,552 
  8,219 
Facility restructuring (note 11)
  1,885 
  3,131 
Legal settlements
  10,940 
  13,360 
Professional fees
  6,920 
  1,389 
Deferred tax
  481 
  2,934 
Sales commissions
  929 
  965 
Customer deposits
  1,056 
  429 
Other
  2,552 
  3,008 
 
  49,488 
  36,795 
Less noncurrent portion:
    
    
  Legal settlements
  (6,100)
  (8,520)
  Deferred tax
  (481)
  (2,934)
  Other
  (1,076)
  (1,393)
Total other non-current liabilities
  (7,657)
  (12,847)
Current portion of other accrued liabilities
 $41,831 
 $23,948 
 
Note 11. Restructuring Event
 
During 2018 and 2017, the Company implemented strategic re-alignments that included reductions in headcount, facility costs and other operating costs.
 
The following table summarizes changes to the accrued liability associated with the restructuring for the six months ended June 30, 2018 and 2017 (in thousands):
 
 
 
Employee Costs (1)
 
 
Facility Exit Costs (2)
 
 
Other Costs
 
 
Total
 
Balance, January 1, 2018
 $107 
 $3,131 
 $24 
 $3,262 
Expenses
 3,045
 534
 42
 3,621
Payments
  (2,877)
  (1,780)
  (66)
  (4,723)
Balance, June 30, 2018
  275
  1,885 
  - 
  2,160
 
    
    
    
    
Balance, January 1, 2017
 $- 
 $- 
 $- 
 $- 
Expenses
  810 
  2,416 
  - 
  3,226 
Payments
  (56)
  (31)
  - 
  (87)
Balance, June 30, 2017
 $754 
 $2,385 
 $- 
 $3,139 
__________
(1)
As of June 30, 2018, the remaining employee-related liability will be paid within four months and approximates fair value due to the short discount period.
(2)
These charges represent the present value of expected lease payments and direct costs to obtain a sublease, reduced by estimated sublease rental income. The timing and amount of estimated cash flows will continue to be evaluated each reporting period.
 
 
15
 
 
Note 12. Equipment and Network Infrastructure Financing Obligations
 
From time to time, the Company enters into capital lease arrangements to finance the purchase of network hardware and software utilized in its operations. These arrangements require monthly payments over a period of 2 to 20 years with interest rates ranging between 2.0% and 8.3% per annum. The Company’s equipment and network infrastructure financing obligations are as follows (in thousands):
 
 
 
June 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Equipment financing obligations
 $2,345 
 $1,292 
IRU (1)
  4,822 
  6,415 
Amount representing interest
  (824)
  (881)
Present value of minimum lease payments
  6,343 
  6,826 
Less current portion
  (3,027)
  (3,003)
Non-current portion
 $3,316 
 $3,823 
__________
(1)
Purchase of an indefeasible right to use (“IRU”) fiber network infrastructure owned by others.
 
The payment obligations under capital leases are as follows (in thousands):
 
         remainder of 2018
 $1,999 
2019
  2,211 
2020
  818 
2021
  442 
2022
  245 
Thereafter
  1,452 
 
 $7,167 
 
Note 13. Long-Term Debt
 
Debt consists of the following (in thousands):
 
 
 
June 30,
 
 
 
2018
 
First Lien Credit Agreement:
 
 
 
  Tranche A Term Loan
 $45,000 
  Tranche B Term Loan
  510,000 
  Revolving Facility
  - 
Second Lien Credit Agreement – Term Loan
  85,000 
Subordinated Note
  10,000 
Bircan Notes Payable
  3,348 
 
  653,348 
Less:
    
Discounts
  (48,828)
Current portion
  (24,500)
Non-current portion
 $580,020 
 
 
16
 
 
On the Birch Closing Date, the Company entered into a First Lien Credit and Guaranty Agreement (the “First Lien Credit Agreement”) with Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (in such capacities, the “First Lien Agent”), the lenders party thereto (the “First Lien Lenders”), and all of the U.S.-based subsidiaries of the Company, as guarantors thereunder (the “Guarantors”), pursuant to which the First Lien Lenders extended (a) term loans to the Company in an aggregate principal amount of $555.0 million, consisting of the “Tranche A Term Loan” and “Tranche B Term Loan,” in an aggregate principal amount of $45.0 million and $510.0 million, respectively (collectively, the “First Lien Term Loan”), and (b) a revolving facility in an aggregate principal amount of $40.0 million (the “Revolving Facility”, and together with the First Lien Term Loan, the “First Lien Facility”). Borrowings under the First Lien Credit Agreement are computed based upon either the then current “base rate” of interest or “LIBOR” rate of interest, as selected by the Company at the time of its borrowings. Interest on borrowings that the Company designates as “base rate” loans bear interest per annum at the greatest of (a) the prime rate published by the Wall Street Journal, (b) the federal funds effective rate as published by the Federal Reserve Bank of New York plus 0.5%, (c) the Adjusted LIBOR Rate (as defined below) with an interest period of one month plus 1%, or (d)(i) 1% (for the Revolving Facility) or (ii) 2% (for the First Lien Term Loan) (collectively, the “Base Rate”); plus (x) 4.00%, with respect to the Tranche A Term Loan, (y) 6.50%, with respect to the Tranche B Term Loan, or (z) 4.00%, with respect to the Revolving Facility (which shall be subject to adjustment based upon the net leverage ratio of the Company and its subsidiaries after the delivery of the Company’s financial statements for fiscal quarter ended June 30, 2018 and related compliance certificate (the “Financial Statement Delivery Date”)). Interest on borrowings that the Company designates as “LIBOR” loans bear interest per annum at (a) the “LIBOR” rate divided by (b) one minus the “applicable reserve requirement” of the Federal Reserve for Eurocurrency liabilities (subject to a floor of 1% for the First Lien Term Loan) (the “Adjusted LIBOR Rate”); plus (x) 5.00%, with respect to the Tranche A Term Loan, (y) 7.50%, with respect to the Tranche B Term Loan, or (z) 5.00%, with respect to the Revolving Facility (which shall be subject to adjustment based upon the net leverage ratio of the Company and its subsidiaries after the Financial Statement Delivery Date). The Tranche A Term Loan has an original issue discount of 0.5%. The Tranche B Term Loan has an original issue discount of 4%, except for the $170 million portion of the Tranche B Term Loan made by one lender and certain of its affiliates, which has an original issue discount of 9%, for a blended original issue discount of approximately 5.67%. The Tranche A Term Loan and the Revolving Facility mature on the fourth anniversary of the Closing Date and the Tranche B Term Loan matures on the fifth anniversary of the Closing Date. The Guarantors guaranty the obligations of the Company under the First Lien Credit Agreement.
 
In addition, the Company simultaneously entered into a Second Lien Credit and Guaranty Agreement (the “Second Lien Credit Agreement”, and with the First Lien Credit Agreement, the “Credit Agreements”), by and among the Company, the Guarantors, Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (in such capacities, the “Second Lien Agent”, and together with the First Lien Agent, collectively the “Agents”), and the lenders party thereto (the “Second Lien Lenders”, and together with the First Lien Lenders, the “Lenders”), pursuant to which the Second Lien Lenders extended a term loan in the aggregate principal amount of $85.0 million (the “Second Lien Term Loan”, and collectively with the First Lien Term Loan, the “Term Loans”, and collectively with the First Lien Facility, the “Credit Facilities”). Borrowings under the Second Lien Credit Agreement are computed based upon either the then current “base” rate of interest or “LIBOR” rate of interest, as selected by the Company at the time of its borrowings. The interest on borrowings, under the Second Lien Term Loan that the Company designates as “base rate” loans, bear interest per annum at Base Rate plus 9.50%. The interest on borrowings, under the Second Lien Term Loan that the Company designates as “LIBOR” loans, bear interest per annum at (a) the “LIBOR” rate divided by (b) one minus the “applicable reserve requirement” of the Federal Reserve for Eurocurrency liabilities (subject to a floor of 1% for the Second Lien Term Loan), plus 10.50%. The Second Lien Term Loan has an original issue discount of 4.00% and it matures 5.5 years from the Closing Date. The Guarantors guaranty the obligations of the Company under the Second Lien Credit Agreement. The Credit Facilities may be prepaid, in whole or in part, subject to specified prepayment premiums.
 
As of June 30, 2018, the Credit Facilities (including the Revolving Facility) bear interest at a weighted-average rate of approximately LIBOR plus 7.6%. Excluding the Revolving Facility, the Credit Facilities bear interest at a weighted-average rate of approximately LIBOR plus 7.7%.
 
In connection with the Credit Facilities, the Company entered into (i) a First Lien Pledge and Security Agreement with the First Lien Agent and (ii) a Second Lien Pledge and Security Agreement with the Second Lien Agent, pursuant to which the Company and the Guarantors pledged substantially all of their owned and after acquired property as security for the obligations under the Credit Agreements, including the capital stock of the Guarantors and other direct and indirect subsidiaries of the Company (subject to certain limitations and restrictions set forth in these agreements).
 
 
17
 
 
Under the Credit Agreements, the Company is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to its obligations to the Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries. Furthermore, the Company is required to comply with various financial covenants, including net leverage ratio, fixed charge coverage ratio and maximum levels of consolidated capital expenditures; and its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of its indebtedness. As of June 30, 2018, the Company was in compliance with these financial covenants.
 
The proceeds of the Term Loans were used, in part, to refinance all of the existing indebtedness of Fusion and its subsidiaries (including Birch), under (i) the Credit Agreement, dated as of November 14, 2016, as amended, among Fusion NBS Acquisition Corp., a subsidiary of Fusion (“FNBS”), East West Bank (“EWB”), as Administrative Agent, Swingline Lender, an Issuing Bank and a Lender, and the other lenders party thereto; (ii) the Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, as amended, among FNBS, Fusion, the subsidiaries of Fusion guarantors thereto, Praesidian Capital Opportunity Fund III, LP, as Agent, and the lenders party thereto; and (iii) the Credit Agreement, dated as of July 18, 2014, among Birch, Birch Communications, Inc., Cbeyond, Inc., the other guarantors party thereto, the lenders party thereto and PNC Bank, National Association, as Administrative Agent. In addition, the Term Loans were used to repay, in full, approximately $0.9 million of indebtedness under that certain Second Amended and Restated Unsecured Promissory Note, dated November 14, 2016, payable by Fusion to Marvin Rosen. The proceeds were also used to pay the fees and expenses associated with the Birch merger and related transactions, including fees and expenses in connection with the Credit Facilities. The pay-off of the previous credit facilities, including the expensing of the related remaining unamortized debt costs, resulted in a debt extinguishment for accounting purposes. For the three and six months ended June 30, 2018, the Company recorded a loss on debt extinguishment of $14.4 million. For additional information on the previous credit facilities, see Birch's audited financial statements and notes thereto included in the Form 8-K filed by Fusion with the SEC on May 10, 2018.
 
The Term Loans were also used to make a prepayment of an aggregate of approximately $3.0 million of indebtedness of Birch under related party subordinated notes each dated October 28, 2016, in favor of Holcombe T. Green, Jr., R. Kirby Godsey and the Holcombe T. Green, Jr. 2013 Five-Year Annuity Trust. The remaining balance of $3.3 million was brought forward and is now evidenced by three Amended and Restated Subordinated Notes, each dated as of the Birch Closing Date (the “Bircan Notes”). The Bircan Notes accrue interest at the rate of 12% per annum, with interest due in quarterly installments. The Bircan Notes are being amortized in three equal installments and will be paid off in March 2019. The Bircan Notes are unsecured and the Company’s obligations thereunder are subordinated to amounts borrowed under the Credit Facilities.
 
In addition, $62.0 million of the Tranche B Term Loan was used by the Company to pay the cash portion of the purchase price for MegaPath and certain expenses incurred in connection with that transaction. See note 4 for additional information on the MegaPath Merger.
 
Green Subordinated Note
 
On the Birch Closing Date, Holcombe T. Green, Jr. loaned the Company an additional $10 million, which is evidenced by a subordinated promissory note (the “Green Note”). The Green Note accrues interest at a rate of 13% per annum, was issued with an original issue discount of 4% and matures on the date which is 91 days after the maturity date of the Second Lien Term Loan. Prior to maturity, only interest is payable on the Green Note. The Green Note is unsecured, and obligations thereunder are subordinated to amounts borrowed under the Credit Facilities.
 
Vector Facility
 
In connection with its participation in the Tranche B Term Loan under the First Lien Credit Agreement, Vector Fusion Holdings (Cayman), Ltd. (“Vector”) entered into a separate credit agreement (the “Vector Credit Agreement”) with Goldman Sachs Lending Partners LLC, as administrative agent and lender (“Goldman Sachs”), and U.S. Bank National Association, as collateral agent and collateral custodian, pursuant to which Vector borrowed funds from Goldman Sachs, the proceeds of which were used to purchase Tranche B Term Loans under the First Lien Credit Agreement. In connection therewith, Vector issued to the Company, and the Company purchased from Vector, a $25 million unsecured subordinated note (the “Vector Note”). The Vector Note bears interest at the rate earned by the bank account in which the proceeds of the Vector Note have been deposited and matures on May 3, 2024. The Vector Note is subordinate in right of payment to Vector’s loan from Goldman Sachs. Except in limited circumstances, the Company is not entitled to any distribution on account of the principal, premium or interest or any other amount in respect of the Vector Note until all amounts owed by Vector under the Vector Credit Agreement are paid in full. Similarly, while the Company has the right to declare obligations under the Vector Note to be immediately due and payable upon the occurrence of an event of default (including, without limitation, in the event of any insolvency, bankruptcy or liquidation of Vector), the Company is not entitled to receive any payment on account of the Vector Note until Vector’s obligations under the Vector Credit Agreement are paid in full. The Vector Note is pledged as security for the Company’s obligations under the Credit Facilities.
 
 
18
 
 
In addition, in connection with its participation in the Tranche B Term Loan, Vector and certain of its affiliates entered into a side letter with the Company pursuant to which Vector is entitled to certain non-voting board observation rights, including the receipt of materials provided to the Company’s board and attendance at regularly scheduled quarterly Company board meetings. Such board observation rights are not transferrable to any assignee of the Tranche B Term Loans.
 
Estimated future aggregate payments for long-term debt are expected are expected to be as follows (in thousands):
 
          remainder of 2018
 $23,068 
2019
  28,842 
2020
  38,156 
2021
  41,625 
2022
  72,844 
Thereafter
  448,813 
 
 $653,348 
 
Note 14. Obligations Under Asset Purchase Agreements
 
In connection with certain historical acquisitions completed by Fusion, the Company has various obligations to the sellers, mainly for payments of portions of the purchase price that have been deferred under the terms of the respective agreements. Such obligations to sellers or other parties associated with these transactions are as follows (in thousands):
 
 
 
June 30,
 
 
December 31,
 
 
 
2018
 
 
2017
 
Customer base acquisitions
 $38 
 $- 
IQMax
  447 
  - 
 
  485 
    
Less current portion(1)
  (485)
  - 
Long-term portion
 $- 
 $- 
 

(1) Included in "other accrued liabilities" on the accompanying condensed consolidated balance sheets as of June 30, 2018.
 
Note 15. Revenues from Contracts with Customers
 
The Company adopted ASC 606 using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of stockholders’ equity at January 1, 2018. Under the new guidance, these service revenues continue to be recognized when the services are provided. However, the new requirement to defer incremental contract acquisition and fulfillment costs, including sales commissions and installation costs, and recognize such costs over the period where control of goods and services are transferred resulted in the recognition of additional deferred contract costs in the consolidated balance sheet at the date of adoption. The following table presents the cumulative effect of the changes made to the consolidated balance sheet at January 1, 2018 (in thousands):
 
 
 
Balance as of
 
 
ASC 606
 
 
Balance as of
 
 
 
December 31,
2017
 
 
Transition
Adjustment
 
 
January 1,
2018
 
Assets
 
 
 
 
 
 
 
 
 
Prepaid expenses
 $6,290
 $2,203 
 $8,493
Intangible assets, net
  68,834 
  (3,304)
  65,530 
Other non-current assets
  877 
  4,826 
  5,703 
 
 $76,001
 $3,725 
 $79,726
Stockholders' Equity
    
    
    
Accumulated deficit
 $(236,477)
 $3,725 
 $(232,752)
 
 
19
 
 
The following table summarizes the current impacts associated with the adoption of ASC 606 on the accompanying condensed consolidated balance sheet and statement of operations and comprehensive loss (in thousands): 
 
 
 
June 30, 2018  
 
 
 
 
 
 
 
 
 
Impact of
 
 
 
As reported
 
 
Previous guidance
 
 
Adoption of ASC 606
 
Assets
 
 
 
 
 
 
 
 
 
Prepaid expenses
 $10,443
 
 $8,226
 
 $2,217 
Intangible assets, net
  183,826 
  189,020 
  (5,194)
Other non-current assets
  33,462
 
  30,485
 
  2,977 
 
    
    
    
Liabilities
    
    
    
Deferred customer revenue
  (16,030)
  (15,864)
  (166)
 
    
    
    
Stockholders' Equity
    
    
    
Accumulated deficit
  (264,752)
  (264,586)
  (166)