Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

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Acquisitions
9 Months Ended
Sep. 30, 2018
Business Combinations [Abstract]  
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. During the three months ended September 30, 2018, an adjustment to Birch’s Goodwill in the amount of $0.4 million was recognized due to changes in the estimated fair value of liabilities assumed.

 

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     99,590          
Deferred revenue     (1,200 )        
Other liabilities, including debt     (115,265 )        
    $ 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.

 

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 $10.0 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

September 30,

   

Nine Months Ended

September 30,

 
    2018     2017     2018     2017  
Revenues   $ 143,428     $ 159,893     $ 439,477     $ 487,281  
Net loss     (17,631 )     (12,261 )     (64,550 )     (41,776 )
Basic and diluted net loss per share     (0.23 )     (0.49 )     (1.19 )     (1.66 )

 

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 nine months ended September 30, 2018, total acquisition costs related to the Birch Merger and the MegaPath Merger were $0.1 million and $10.7 million, respectively. These costs are included in selling, general and administrative (“SG&A”) expenses on the accompanying unaudited condensed consolidated statement of operations.