UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015
 
o    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 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.
 
Yesþ  Noo
 
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).  
 
Yesþ  No o
  
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”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large accelerated filer o    Accelerated filer                   o
     
 Non-accelerated filer   o    Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes o No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 12, 2015.
 
Title of Each Class
Number of Shares Outstanding
Common Stock, $0.01 par value
8,231,567
 


 
 
 
 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
TABLE OF CONTENTS
 
Part 1     Financial Information.
3
Item 1.   Financial Statements.
3
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.
29
Item 4.   Controls and Procedures.
29
Part II     Other Information.
29
Item 1.    Legal Proceedings.
29
Item 1A. Risk Factors.
29
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.
29
Item 3.    Defaults Upon Senior Securities.
30
Item 4.    Mine Safety Disclosures.
30
Item 5.    Other Information.
30
Item 6.    Exhibits.
30
Signatures.
31
Index to Exhibits
32
   
 
 
2

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
 
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
   
(unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 4,417,858     $ 6,444,683  
Accounts receivable, net of allowance for doubtful accounts of approximately $452,098 and $245,000, respectively
    7,167,733       7,087,599  
Prepaid expenses and other current assets
    1,384,088       927,772  
Total current assets
    12,969,679       14,460,054  
Property and equipment, net
    14,048,966       13,478,912  
Other assets:
               
Security deposits
    648,998       648,998  
Restricted cash
    1,164,810       1,164,381  
Goodwill
    10,397,460       10,397,460  
Intangible assets, net
    28,728,209       32,432,416  
Other assets
    1,013,675       1,165,273  
Total other assets
    41,953,152       45,808,528  
TOTAL ASSETS
  $ 68,971,797     $ 73,747,494  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Notes payable - non-related parties
  $ 1,225,432     $ 1,225,000  
Equipment financing obligations
    904,161       662,131  
Accounts payable and accrued expenses
    11,322,088       10,471,514  
Total current liabilities
    13,451,681       12,358,645  
Long-term liabilities:
               
Notes payable - non-related parties, net of discount
    41,035,730       41,263,934  
Notes payable - related parties
    1,320,227       1,292,878  
Equipment financing obligations
    1,862,724       1,702,704  
Derivative liabilities
    2,533,421       3,839,569  
Total liabilities
    60,203,783       60,457,730  
Commitments and contingencies
               
Stockholders' equity (deficit):
               
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
               
24,210 and 26,793 shares issued and outstanding
    242       268  
Common stock, $0.01 par value, 50,000,000 shares authorized,
               
8,224,482 and 7,345,028 shares issued and outstanding
    82,244       73,449  
Capital in excess of par value
    175,965,069       175,519,459  
Accumulated deficit
    (167,279,541 )     (162,303,412 )
Total stockholders' equity
    8,768,014       13,289,764  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 68,971,797     $ 73,747,494  
                 

See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
3

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)
 
                         
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                         
Revenues
  $ 25,063,695     $ 23,140,973     $ 50,326,733     $ 46,045,802  
Cost of revenues (exclusive of depreciation and amortization, shown separately below)
    13,813,616       12,747,441       27,826,308       24,976,473  
Gross profit
    11,250,080       10,393,532       22,500,426       21,069,329  
Depreciation and amortization
    3,039,758       2,597,978       6,043,205       5,165,469  
Selling, general and administrative expenses (including stock-based compensation of approximately $116,000 and $73,000 for the three months ended June 30, 2015 and 2014, respectively, and approximately $239,000 and $142,000 for the six months ended June 30, 2015 and 2014, respectively)
    9,857,721       7,825,494       19,594,015       15,644,891  
Total operating expenses
    12,897,478       10,423,472       25,637,219       20,810,360  
Operating (loss) income
    (1,647,399 )     (29,940 )     (3,136,794 )     258,969  
Other (expenses) income:
                               
Interest expense
    (1,608,709 )     (1,597,215 )     (3,215,552 )     (2,991,761 )
Gain (loss) on change in fair value of derivative liability
    2,510,950       (690,878 )     1,306,148       1,919,069  
Other income (expense), net
    32,750       719       70,069       (40,355 )
Total other income (expenses)
    934,991       (2,287,374 )     (1,839,335 )     (1,113,047 )
Loss before income taxes
    (712,408 )     (2,317,314 )     (4,976,129 )     (854,078 )
Provision for income taxes
    -       151,583       -       173,078  
Net loss
    (712,408 )     (2,468,897 )     (4,976,129 )     (1,027,156 )
Preferred stock dividends in arrears
    (388,098 )     (443,194 )     (807,086 )     (885,282 )
Net loss attributable to common stockholders
  $ (1,100,506 )   $ (2,912,091 )   $ (5,783,215 )   $ (1,912,438 )
                                 
Basic and diluted loss per common share
  $ (0.30 )   $ (0.39 )   $ (0.79 )   $ (0.38 )
                                 
Weighted average common shares outstanding:
                               
Basic and diluted
    8,461,794       6,876,617       8,311,499       6,842,532  

See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
4

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
 
   
Preferred Stock
   
Common Stock
   
Capital in Excess of Par
   
Accumulated Deficit
   
Stockholders' Equity (Deficit)
 
   
Shares
     $    
Shares
     $                      
Balance at December 31, 2014
    26,793     $ 268       7,345,028     $ 73,449     $ 175,519,459     $ (162,303,412 )   $ 13,289,764  
Net loss
                                            (4,976,129 )     (4,976,129 )
Conversion of preferred stock into common stock
    (2,583 )     (26 )     605,350       6,054       (6,028 )             -  
Dividends on preferred stock
                    215,937       2159       (2,159 )             -  
Issuance of common stock for services rendered
                    58,167       582       215,029               215,611  
Stock-based compensation
associated with stock incentive plans
                                238,768               238,768  
Balance at June 30, 2015
    24,210     $ 242       8,224,482     $ 82,244     $ 175,965,069     $ (167,279,541 )   $ 8,768,014  
 
See accompanying notes to the Condensed Consolidated Financial Statements.

 
5

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
           
Net loss
  $ (4,976,129 )   $ (1,027,156 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    6,043,205       5,165,469  
Loss on disposal of property
    -       84,373  
Bad debt expense
    225,000       222,856  
Stock-based compensation
    238,768       142,140  
Stock and warrants issued for services rendered or in settlement of liabilities
    215,611       37,542  
Amortization of debt discount and deferred financing fees
    507,690       579,541  
Gain in the change in fair value of derivative liability
    (1,306,148 )     (1,919,069 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (305,135 )     (910,798 )
Prepaid expenses and other current assets
    (456,315     (862,851 )
Other assets
    155,190       (46,870 )
Deferred tax liability
    -       147,341  
Accounts payable and accrued expenses
    156,308       (1,521,179 )
Net cash provided by operating activities
    498,045       91,339  
                 
Cash flows from investing activities:
               
Purchase of property and equipment
    (1,859,265 )     (1,817,707 )
Proceeds from the sale of property and equipment
    -       46,116  
Payment of obligations related to purchase price of acquisitions
    -       (226,148 )
Returns of security deposits
    -       2,000,000  
Payment of security deposits
    -       (10,990 )
Change in restricted cash
    -       (136 )
Net cash used in investing activities
    (1,859,265 )     (8,865 )
                 
Cash flows from financing activities:
               
Proceeds from the sale of preferred stock and warrants, net
    -       3,984,426  
Proceeds from the accounts receivable factoring arrangement
    1,078,576       1,102,724  
Repayments of borrowings related to the accounts receivable factoring arrangement
    (769,517 )     (887,824
Payments on equipment financing obligations
    (361,948 )     (173,832 )
Repayments of notes payable - related parties
    -       (185,714 )
Repayments of notes payable - non-related parties
    (612,716 )     (312,500 )
Net cash (used in) provided by financing activities
    (665,605 )     3,527,280  
Net change in cash and cash equivalents
    (2,026,825 )     3,609,754  
Cash and cash equivalents, beginning of period
    6,444,683       6,176,575  
Cash and cash equivalents, end of period
  $ 4,417,858     $ 9,786,329  

See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
6

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.                      Organization and Business
 
Fusion Telecommunications International, Inc. (“Fusion” and together with its subsidiaries, the “Company”) is a Delaware corporation.  The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud storage and security to businesses of all sizes, and IP-based domestic and international voice services.  The Company currently operates in two business segments, ‘Business Services’ and ‘Carrier Services’.

Note 2.                      Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the year ended December 31, 2014.
 
Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 as filed with the SEC.  In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies

For a detailed discussion of significant accounting policies, please refer to our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes in our accounting policies during the quarter ended June 30, 2015.

Principles of Consolidation

The condensed consolidated interim financial statements include the accounts of Fusion and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates; accounting for income taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations taken as a whole, actual results could differ from those estimates, and such differences may be material.
 
Reclassifications

Certain reclassifications have been made to the prior years’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.
 
 
 
7

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less at the date of purchase. As of June 30, 2015 and December 31, 2014, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

Restricted Cash

Restricted cash consists primarily of cash held in reserve as required by the terms of the second amended and restated securities purchase agreement (the "SPA")  and certificates of deposit that serve to collateralize outstanding letters of credit for one of our non-cancellable operating leases. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists. Restricted cash at June 30, 2015 and December 31, 2014 includes $1,000,000 of cash held in reserve as required by the terms of the SPA, and certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $164,000.  The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.

Fair value of Financial Instruments
 
At June 30, 2015 and December 31, 2014, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.

Long-Lived Asset Impairment

The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable.  Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the six months ended June 30, 2015 or 2014, as there were no indicators of impairment.
 
 
8

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
 
Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (See Note 15).  The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, then the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Goodwill at June 30, 2015 and December 31, 2014 was approximately $10.4 million.  All of the Company’s goodwill is attributable to its ‘Business Services’ segment.  There was no change in goodwill as a result of adjustments to purchase price allocations of previous acquisitions during the quarter ended June 30, 2015. There was no impairment charge recorded for goodwill during the six months ended June 30, 2015 or 2014, as there were no indicators of impairment.

Advertising and Marketing Costs
 
Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. The Company’s advertising and marketing expense was approximately $122,000 and $33,000 for the three months ended June 30, 2015 and 2014, respectively, and approximately $234,000 and $77,000 for the six months ended June 30, 2015 and 2014, respectively.
 
Income Taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of June 30, 2015 and December 31, 2014.  The Company is subject to income tax examinations by major taxing authorities for all tax years since 2010 and its tax returns may be subject to review and


 
9

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


adjustment at a later date based on factors including, but not limited to, on-going analyses of, and changes to, tax laws, regulations and interpretations thereof.  No interest expense or penalties have been recognized as of June 30, 2015 and December 31, 2014.  During the three and six months ended June 30, 2015 and 2014, the Company recognized no adjustments for uncertain tax positions.
 
Stock-Based Compensation

The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at 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. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. In addition, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is a more reliable measurement.
 
New and Recently Adopted Accounting Pronouncements
 
In April 2015, the Financial Accounting Standard Board the (“FASB”) issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
 
In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
 
 In May 2014, the FASB issued authoritative guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, the FASB deferred the effective date of this guidance by one year. As such, this guidance will be effective on January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.
 
 
10

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3.    Earnings per share
 
Basic and diluted loss per share is computed by dividing (i) loss available to common stockholders, adjusted by approximately $1.5 million gain and $0.2 million loss on the fair value of the Company’s derivative liability for the three months ended June 30, 2015 and 2014, and $0.7 million gain for the six months ended June 30, 2015 and 2014, respectively, that is attributable to 728,333 outstanding warrants with a nominal exercise price and dividends on preferred stock, by (ii) the weighted-average number of common shares outstanding during the period, increased by the number of common shares underlying such warrants with a nominal exercise price as if such exercise had occurred at the beginning of the year.  

The following table sets forth the computation for basic and diluted net income per share for the three and six months ended June 30, 2015 and 2014:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Numerator
                       
Loss available to common stockholders
  $ (712,408 )   $ (2,468,897 )   $ (4,976,129 )   $ (1,027,156 )
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock
    (100,623 )     (100,624 )     (200,141 )     (200,141 )
Dividends declared on Series B-2 Convertible Preferred Stock
    (287,475 )     (342,570 )     (606,945 )     (685,141 )
(Gain) loss on nominal warrants
    (1,456,666 )     218,515       (742,900 )     (688,256 )
Loss attributable to common stockholders
  $ (2,557,172 )   $ (2,693,576 )   $ (6,526,115 )   $ (2,600,694 )
                                 
Denominator
                               
Basic and diluted weighted average common shares outstanding
    8,461,794       6,876,617       8,311,499       6,842,532  
Loss per share
                               
Basic and diluted
  $ (0.30 )   $ (0.39 )   $ (0.79 )   $ (0.38 )
 
For the six months ended June 30, 2015 and 2014, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:
 
   
Six Months Ended
 
   
June 30,
 
   
2015
   
2014
 
Warrants
    3,132,707       3,565,583  
Convertible preferred stock
    3,999,398       4,726,572  
Stock options
    682,234       386,333  
      7,814,339       8,678,488  
 
The net loss per common share calculation includes a provision for preferred stock dividends on the Company’s outstanding Series A-1, A-2 and A-4 Preferred Stock (the “Series A Preferred Stock”) of approximately $100,000 for the three months ended June 30, 2015 and 2014, and approximately $200,000 for the six months ended June 30, 2015 and 2014.  As of June 30, 2015, Fusion’s Board of Directors had not declared any dividends on the Series A Preferred Stock, and the Company had accumulated approximately $4,133,458 of preferred stock dividends.  Fusion’s Board of Directors has declared a dividend of $287,475 and $606,945 for the three and six months ended June 30, 2015, related to the Company’s Series B-2 Preferred Stock, which, in accordance with the terms of the Series B-2 Preferred Stock, was paid in the form of 143,732 and 215,937 shares of common stock.
 
 
11

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 4.      Intangible Assets
 
Intangible assets as of June 30, 2015 and December 31, 2014 are as follows:

   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Trademarks and tradename
  $ 1,093,400     $ 1,093,400  
Proprietary technology
    5,781,000       5,781,000  
Non-compete agreements
    9,852,100       9,852,100  
Customer relationships
    24,897,800       24,897,800  
Favorable lease intangible
    218,000       218,000  
      41,842,300       41,842,300  
   Less: accumulated amortization
    (13,114,091 )     (9,409,884 )
   Intangible assets, net
  $ 28,728,209     $ 32,432,416  

Amortization expense was $1.9 million and $1.7 million for the three months ended June 30, 2015 and 2014, respectively, and for the six months ended June 30, 2015 and 2014 was $3.7 million and $3.3 million, respectively.  Estimated future aggregate amortization expense is expected to be as follows:
 
Year
 
Estimated Annual Amortization Expense
 
       
2015
  $ 3,523,262  
2016
  $ 3,587,246  
2017
  $ 3,454,097  
2018
  $ 2,729,701  
2019
  $ 1,895,455  
 
Note 5.    Stock–based compensation
 
The Company's stock-based compensation plan provides for the issuance of stock options to the Company’s employees, officers, and directors. The Compensation Committee of Fusion’s Board of Directors (the "Compensation Committee") approves all awards that are granted under the Company's stock-based compensation plan.

The following weighted average assumptions were used to determine the fair value of the stock options granted under the Company’s stock-based compensation plan using the Black-Scholes option-pricing model:

   
Six months ended June 30,
 
             
   
2015
   
2014
 
Dividend yield (%)
    0.0       0.0  
Expected volatility (%)
    112.6       137.2  
Average Risk-free interest rate (%)
    1.69       2.34  
Expected life of stock option term (years)
    7.82       8.08  

The Company recognized compensation expense of approximately $116,000 and $239,000 for the three and six months ended June 30, 2015, respectively, and $73,000 and $142,000 for the three and six months ended June 30, 2014, respectively.  These amounts are included in selling, general, and administrative expenses in the condensed consolidated interim statements of operations.
 
 
12

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the stock option activity for the six months ended June 30, 2015:
 
     
Number of Options
   
Weighted Average Exercise Price
             
Oustanding at December 31, 2014
 
607,877
 
$
8.00
 
Granted
 
108,730
 
$
3.71
 
Exercised
 
                 -
 
$
                       -
 
Forfeited
 
(26,318)
 
$
4.59
 
Expired
$
(8,055)
 
$
31.41
 
Outstanding at June 30, 2015
 
682,234
 
$
7.09
 
Exercisable at June 30, 2015
 
204,561
 
$
14.58
 
 
As of June 30, 2015, the Company had approximately $1.0 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plan, which is expected to be recognized over a weighted-average period of 2.1 years.
 
Note 6.     Supplemental Disclosure of Cash Flow Information
 
The following table summarizes the Company’s supplemental cash flows information:
 
   
Six Months Ended June 30,
 
Supplemental Cash Flow Information
 
2015
   
2014
 
   Cash paid for interest
  $ 2,680,029     $ 2,749,360  
   Cash paid for income taxes
  $ -     $ 21,495  
                 
Supplemental Non-Cash Investing and Financing Activities
               
   Property and equipment acquired under capital leases
  $ 764,991     $ 49,090  
   Dividend on Series B-2 preferred stock paid with the issuance of common stock
  $ 215,937     $ 123,833  
   Conversion of preferred stock into common stock
  $ 2,583,000     $ -  
 
 
13

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 7.     Prepaid Expenses and Other Current Assets
 
The following table sets forth the items in prepaid expenses and other current assets:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Insurance
  $ 88,001     $ 61,004  
Rent
    109,902       54,209  
Marketing
    57,598       34,482  
Sofware subscriptions
    588,705       502,696  
Real estate taxes and other taxes
    98,036       -  
Due from factoring party
    99,417       -  
Commissions
    22,000       23,015  
Other
    320,429       252,366  
    $ 1,384,088     $ 927,772  
 
Note 8.      Accounts Payable and Accrued Expenses
 
The following table sets forth the items in accounts payable and accrued expenses:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Trade accounts payable
  $ 2,788,089     $ 3,028,902  
Accrued bonus
    603,750       575,000  
Professional and consulting fees
    96,690       132,521  
Property and other taxes
    409,075       238,368  
Accrued network costs
    1,224,880       1,384,159  
Rent
    129,903       131,627  
Accrued Universal Service Fund fees
    1,063,712       538,302  
Customer deposits
    392,314       -  
Due to factoring party
    408,475       -  
Accrued payroll and vacation
    453,027       250,574  
Accrued sales and federal excise taxes
    1,842,489       1,722,554  
Accrued sales commissions
    763,421       864,928  
Interest payable
    33,518       33,341  
Deferred revenue
    655,396       729,618  
Other
    457,349       841,620  
    $ 11,322,088     $ 10,471,514  


 
14

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 9.      Equipment Financing Obligations

From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations.  These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 4% and 11%.  The Company’s equipment financing obligations are as follows:
 
   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Equipment financing obligations
  $ 2,766,885     $ 2,364,835  
Less: current portion
    (904,161 )     (662,131 )
Long-term portion
  $ 1,862,724     $ 1,702,704  
 
Note 10.    Notes Payable – Non-Related Parties
 
Notes payable – non-related at June 30, 2015 and December 31, 2014 is as follows:

   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Senior Notes
  $ 45,553,951     $ 46,166,667  
Discount on Senior Notes
    (3,292,789 )     (3,677,733 )
Total notes payable - non-related parties
    42,261,162       42,488,934  
Less: current portion
    (1,225,432 )     (1,225,000 )
Long-term portion
  $ 41,035,730     $ 41,263,934  
 
Note 11.     Derivative Liability

As part of various debt and equity financing transactions and other agreements, the Company has issued warrants to purchase shares of Fusion’s common stock. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”).  For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies 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 exercised, and any change in fair value is recognized in the Company’s statement of operations.  The fair values of the warrants have been estimated using Black-Scholes and other valuation models, and the quoted market price of Fusion’s common stock.
 
The following assumptions were used to determine the fair value of the warrants for the six months ended June 30, 2015 and 2014:

   
Six months ended June 30,
 
   
2015
   
2014
 
Stock price ($)
    2.13       5.30  
Exercise price ($)
    0 - 6.25       0 - 6.25  
Risk-free interest rate (%)
    2.07 - 2.35       2.53  
Expected volatility (%)
    112.6       135.1  
Time to maturity (years)
    7.3 - 8.5       8.3 - 9.5  
 
 
 
15

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

At June 30, 2015 and December 31, 2014, the fair value of the derivative was $2.5 million and $3.8 million, respectively.  For the three months ended June 30, 2015 and 2014, the Company recognized a gain on the change in the fair value of this derivative of approximately $2.5 million and a loss of approximately $0.7 million, respectively, and a gain of approximately $1.3 million and $1.9 million for the six months ended June 30, 2015 and 2014, respectively.


Note 12.  Notes Payable-Related Parties
 
Notes payable – related parties at June 30, 2015 and December 31, 2014 is as follows:

   
June 30,
   
December 31,
 
   
2015
   
2014
 
             
Notes payable to Marvin Rosen
  $ 1,478,081     $ 1,478,081  
Discount on note
    (157,854 )     (185,203 )
Total notes payable - non-related parties
  $ 1,320,227     $ 1,292,878  
 
The note payable to Marvin Rosen, the Company’s Chairman of the Board of Directors, is subordinated to the Company’s senior note obligations and the Company’s other obligations to its senior lenders under the SPA.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 60 days after the Company’s senior notes obligations are paid in full.  
 
For the six months ended June 30, 2015, the Company recognized interest expense on the note of approximately $53,000, and amortization on the discount of approximately $27,000.
 
Note 13.     Equity Transactions
 
Common Stock

Fusion is authorized to issue 50,000,000 shares of its common stock. As of June 30, 2015 and December 31, 2014, 8,224,482 and 7,345,028 shares of its common stock were issued and outstanding, respectively.

During the six months ended June 30, 2015, Fusion issued an aggregate of 58,167 shares of common stock to third party consultants for services rendered valued at $215,611. In addition, the Fusion Board of Directors declared aggregate dividends of $606,945 related to Fusion’s Series B-2 preferred stock, which, as permitted by the terms of the Series B-2 preferred stock, was paid in the form of 215,937 shares of Fusion’s common stock. Also, certain holders of Series B-2 preferred stock elected to convert 2,583 shares of their Series B-2 preferred stock into an aggregate of 605,350 shares of Fusion’s common stock.
 
Preferred Stock

Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of June 30, 2015 and December 31, 2014, there were 5,045 shares of Fusion’s Series A-1, A-2 and A-4 cumulative convertible preferred stock issued and outstanding. In addition, as of June 30, 2015 and December 31, 2014 there were 19,165 and 21,748 shares of Series B-2 preferred stock issued and outstanding, respectively.

The holders of the Series A preferred stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and if declared by Fusion’s Board of Directors, on January 1 of each year. As of June 30, 2015, no dividend had been declared by the Fusion Board of Directors with respect to the Series A preferred stock, and the Company had accumulated approximately $4,133,458 of preferred stock dividends. In addition, shares of Series B-2 preferred stock bear a cumulative 6% annual dividend payable quarterly in arrears, in cash or shares of common stock, at the option of the Company.
 
 
16

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Commencing on January 1, 2016, Fusion has the right to force the conversion of the Series B-2 preferred stock into common stock at the specified preferred conversion price; provided that the volume weighted average price for its common stock is at least $12.50 for ten consecutive trading days.  

Note 14.    Commitments and Contingencies
 
Legal matters
 
From time to time, the Company may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business.  Defending such proceedings can be costly and can impose a significant burden on the Company’s management and its other employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of June 30, 2015, the Company did not have any significant ongoing legal matters.

Note 15.    Segment Information
 
Operating segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance.

The Company has two reportable segments – “Carrier Services” and “Business Services”.  These segments are organized by the products and services that are sold and the customers that are served.  The Company measures and evaluates its reportable segments based on revenues and gross profit margins.  The Company’s measurement of segment gross profit exclude the Company’s executive, administrative and support costs.  The accounting policies of the segments are the same as those described in Note 2, Summary of  Significant Accounting Policies, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  The Company’s segments and their principal activities consist of the following:

Carrier Services

Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily Voice over Internet Protocol (“VoIP”) technology.  VoIP permits a less costly and more rapid interconnection between the Company and international telecommunications carriers, and generally provides better profit margins for the Company than other technologies.  The Company currently interconnects with over 270 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.
 
Business Services

Through this operating segment, the Company provides cloud communications, cloud connectivity, storage and security solutions to small, medium and large businesses. These services are sold through both the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party distributors to sell the Company’s products and services. The Business Services segment includes the Company’s acquisition of PingTone Communications effective as of November 1, 2014.
 
 
17

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Operating segment information for the three and six months ended June 30, 2015 and 2014 is summarized in the following table:

   
Three months ended June 30, 2015
 
   
Carrier Services
   
Business Services
   
Corporate and Unallocated*
   
Consolidated
 
Revenues
  $ 9,020,449     $ 16,043,246     $ -     $ 25,063,696  
Cost of revenues (exclusive of depreciation and amortization)
    7,971,898       5,841,717       -       13,813,616  
Gross profit
    1,048,551       10,201,529       -       11,250,080  
Selling, general and administrative expenses
    1,336,207       7,731,305       790,209       9,857,721  
Interest expense
    (91,191 )     (1,081,792 )     (435,726 )     (1,608,709 )
Gain on change in fair value of derivative liability
    -       -       2,510,950       2,510,950  
Other income (expenses)
    408,937       (153,710 )     (222,477 )     32,750  
Net (loss) income
  $ (15,835 )   $ (1,742,787 )   $ 1,046,214     $ (712,408 )
Total assets
  $ 1,719,940     $ 62,469,874     $ 4,781,983     $ 68,971,797  
 
   
Six months ended June 30, 2015
 
   
Carrier Services
   
Business Services
   
Corporate and Unallocated*
   
Consolidated
 
Revenues
  $ 17,497,571       32,829,163     $ -     $ 50,326,733  
Cost of revenues (exclusive of depreciation and amortization)
    15,898,565       11,927,743       -       27,826,308  
Gross profit
    1,599,006       20,901,420       -       22,500,426  
Depreciation and amortization
    90,922       5,911,602       40,680       6,043,204  
Interest expense
    (91,191 )     (2,644,019 )     (480,342 )     (3,215,552 )
Gain on change in fair value of derivative liability
    -       -       1,306,148       1,306,148  
Other income (expenses)
    408,937       (338,868 )             70,069  
Net loss
  $ (245,857 )   $ (3,732,823 )   $ (997,449 )   $ (4,976,129 )
                                 
Capital expenditures
  $ 31,344     $ 1,827,921     $ -     $ 1,859,265  

 
 
18

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

   
Three months ended June 30, 2014
 
   
Carrier Services
   
Business Services
   
Corporate and Unallocated*
   
Consolidated
 
Revenues
  $ 7,510,875     $ 15,630,098     $ -     $ 23,140,973  
Cost of revenues (exclusive of depreciation and amortization)
    6,714,319       6,033,122       -       12,747,441  
Gross profit
    796,556       9,596,976       -       10,393,532  
Depreciation and amortization
    53,503       2,522,472       22,003       2,597,978  
Selling, general and administrative expenses
    725,383       5,878,297       1,221,814       7,825,494  
Interest expense
    -       (1,400,275 )     (196,940 )     (1,597,215 )
Loss on change in fair value of derivative liability
    -       -       (690,878 )     (690,878 )
Other (expenses) income
    (52,997 )     (25,556 )     79,272       719  
Provision for income taxes
    -       -       151,583       151,583  
Net loss
  $ (35,327 )   $ (229,624 )   $ (2,203,946 )   $ (2,468,897 )
Total assets
  $ 5,040,316     $ 58,293,657     $ 6,720,174     $ 70,054,147  
 
 
   
Six months ended June 30, 2014
 
   
Carrier Services
   
Business Services
   
Corporate and Unallocated*
   
Consolidated
 
Revenues
  $ 14,673,371     $ 31,372,431     $ -     $ 46,045,802  
Cost of revenues (exclusive of depreciation and amortization)
    13,033,057       11,943,416       -       24,976,473  
Gross profit
    1,640,314       19,429,015       -       21,069,329  
Depreciation and amortization
    116,198       5,005,102       44,169       5,165,469  
Selling, general and administrative expenses
    1,441,232       11,840,301       2,363,358       15,644,891  
Interest expense
    -       (2,754,067 )     (237,694 )     (2,991,761 )
Gain on change in fair value of derivative liability
                    1,919,069       1,919,069  
Other (expenses) income
    (94,037 )     (26,656 )     80,338       (40,355 )
Provision for income taxes
    -       -       173,078       173,078  
Net loss
  $ (11,153 )   $ (197,111 )   $ (818,892 )   $ (1,027,156 )
                                 
Capital expenditures
  $ 56,995     $ 1,760,712     $ -     $ 1,817,707  
 
 *The Company employs executive, administrative, human resources, and finance resources that service both the Carrier Services and Business Services segments.  The amounts reflected as Corporate and Unallocated represent those operating expenses, assets and capital expenditures that were not allocated to a business segment or product line.
  
Note 16.    Related Party Transactions

Since March 6, 2014, the Company has engaged a third party to prepare its tax returns and to provide related tax advisory services. Larry Blum, a member of Fusion’s Board of Directors, is a Senior Advisor and a former partner of the third party that the Company is using to provide tax advisory services.


 
19

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 17.     Fair Value Disclosures
 
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
 
Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—No observable pricing inputs in the market

The following table represents the fair value of the liability measured at fair value on a recurring basis:

   
Level 1
   
Level 2
   
Level 3
   
Total
 
As of June 30, 2015
                       
Non-current liabilities:
                       
Derivative liability (see note 11)
  $ -     $ -     $ 2,533,421     $ 2,533,421  
As of December 31, 2014
                               
Non-current liabilities:
                               
Derivative liability (see note 11)
  $ -     $ -     $ 3,839,569     $ 3,839,569  
 
Changes in the derivative warrant liability for the six months ended June 30, 2015 are as follows:
 
Balance at December 31, 2014
  $ 3,839,569  
Gain for the period:
       
  Included in net loss
    (1,306,148 )
Balance at June 30, 2015
  $ 2,533,421  
 
Note 18.     Subsequent Events

On June 16, 2015, the Company and the senior lenders entered into a Second Amendment to the SPA whereby the senior lenders agreed, among other things, to (i) increase the amount of our capital lease indebtedness to  $7.0 million, (ii) extend to July 31, 2015, the date by which we are required to satisfy the minimum cash commitment, (iii) extend to September 30, 2015, the date by which EBITDA at Fusion must equal or exceed  EBITDA at Fusion’s subsidiaries.  In the Second Amendment, we also agreed to sell at least $3.0 million of Fusion equity securities by July 31, 2015 on terms reasonably satisfactory to the senior lenders.  As of July 31, 2015, we failed to sell the required equity securities and we also failed to meet the minimum cash commitment.  In addition, we were not in compliance with our minimum EBITDA and Fixed Charge Coverage Ratio covenants for the three months ended June 30, 2015.  On August 13, 2015, the holders of our senior notes waived our events of default with respect to the minimum EBITDA and Fixed Charge Coverage Ratio obligations and extended to September 30, 2015 the date by which we must raise $3.0 million of additional capital from the sale of Fusion equity and our obligation to satisfy the minimum cash commitment.   As a result of this waiver and amendment, we were in compliance with our obligations under the SPA as of June 30, 2015.  We are in active discussion with potential equity investors regarding the $3.0 million investment in Fusion, with our senior lenders concerning permanent adjustments to our existing covenants, and with other financing sources concerning a new senior debt facility.  We are unable to provide any assurance, however, that any of these discussions will result in final agreement(s) or that the terms and conditions of any such agreements will be acceptable to us.

 
20

 

 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.
 
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 communications 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, improving communication 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 IaaS solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered.  Complemented by storage solutions, as well as SaaS solutions such security and business continuity, our advanced cloud offerings allow our larger enterprise customers to experience the increased efficiencies and agility delivered by the cloud.  Fusion’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 over 270 carrier customers and vendors, and sells its domestic and international 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 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.
 
We manage our business segments 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 intend to increasingly 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, with an initial focus on healthcare, legal services, hospitality and real estate, offer a substantial opportunity to gain market share.   We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment.   In addition to lowering the underlying costs of termination, we believe that our Carrier Services business supports the growth of the Business Services segment by providing enhanced service offerings for business customers and by strengthening its relationships with major service providers throughout the world.

Our Performance

Revenues for the three months ended June 30, 2015 were $25.0 million, an increase of $1.9 million, or 8.3%, compared to the three months ended June 30, 2014.  Our operating loss for the three months ended June 30, 2015 was $1.7 million, compared to an operating loss of $30,000 in the same period a year ago, as a result of higher salaries and payroll benefits of approximately $1.3 million and depreciation and amortization expense of approximately $0.4 million.
 
 
 
21

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

We had a net loss for the three months ended June 30, 2015 of $0.7 million, compared to a net loss of $2.5 million for the three months ended June 30, 2014, the improvement in net loss was primarily a result of the gain in the change in the fair value of our derivative liability of approximately $2.5 million.

Revenues for the six months ended June 30, 2015 were $50.3 million, an increase of $4.3 million, or 9.3%, compared to the six months ended June 30, 2014.  Our operating loss for the six months ended June 30, 2015 was $3.1 million, as compared to an operating income of $0.3 million in the same period a year ago, mainly due to higher salaries and payroll benefits of approximately $2.3 million and depreciation and amortization expense of $0.9 million.  We had a net loss for the six months ended June 30, 2015 of $4.9 million, as compared to net loss of $1.0 million for the six months ended June 30, 2014, primarily a result of higher interest expense, depreciation and amortization, and selling, general and administrative expenses.
 
Our Outlook
 
Our ability to achieve positive cash flows from operations and net profitability is substantially dependent upon our ability to increase revenue in both of our business segments and, to a lesser extent, on our ability to identify further synergistic cost savings and operational efficiencies from our recent acquisitions.
 
Revenues from our Carrier Services segment have declined over the last few years due, in large part, to decreases in the prevailing rates charged for the termination of international traffic.  We believe these declines resulted largely from increased competition, deregulation in many of the markets we serve and the use by competitors of lower cost, Internet-based technologies.  While the market demand for international voice termination has seen a corresponding increase over the last few years, we have been unable to increase our revenues accordingly due to capacity limitations on our network switching platform and liquidity constraints.  During late 2014, we implemented new systems and equipment which increased our network capacity to levels necessary to compete in the current market environment and allow us to increase our traffic volume and, therefore, gross profit for this business segment. 

Results of Operations

The following table summarizes the results of our consolidated operations for the three and six months ended June 30, 2015 and 2014:

 
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2015
   
% Sales
     
2014
   
% Sales
   
2015
   
% Sales
     
2014
   
% Sales
 
                                                 
Revenues
  $ 25,063,695       100.0 %   $ 23,140,973       100.0 %   $ 50,326,733       100.0 %   $ 46,045,802       100.0 %
Cost of revenues*
    13,813,616       55.1 %     12,747,441       55.1 %     27,826,308       55.3 %     24,976,473       54.2 %
Gross profit
    11,250,080       44.9 %     10,393,532       44.9 %     22,500,426       44.7 %     21,069,329       45.8 %
Depreciation and amortization
    3,039,758       12.1 %     2,597,978       11.2 %     6,043,205       12.0 %     5,165,469       11.2 %
Selling, general and administrative expenses
    9,857,721       39.3 %     7,825,494       33.8 %     19,594,015       38.9 %     15,644,891       34.0 %
Total operating expenses
    12,897,478       51.5 %     10,423,472       45.0 %     25,637,219       50.9 %     20,810,360       45.2 %
Operating (loss) income
    (1,647,399 )     -6.6 %     (29,940 )     -0.1 %     (3,136,794 )     -6.2 %     258,969       0.6 %
Other (expenses) income:
                                                               
Interest expense
    (1,608,709 )     -6.4 %     (1,597,215 )     -6.9 %     (3,215,552 )     -6.4 %     (2,991,761 )     -6.5 %
Gain (loss) on change in fair value of derivative liability
    2,510,950       10.0 %     (690,878 )     -3.0 %     1,306,148       2.6 %     1,919,069       4.2 %
Other expenses, net
    32,750       0.1 %     719       0.0 %     70,069       0.1 %     (40,355 )     -0.1 %
Total other income (expenses)
    934,991       3.7 %     (2,287,374 )     -9.9 %     (1,839,335 )     -3.7 %     (1,113,047 )     -2.4 %
Loss before income taxes
    (712,408 )     -2.8 %     (2,317,314 )     -10.0 %     (4,976,129 )     -9.9 %     (854,078 )     -1.9 %
Provision for income taxes
    -       0 %     151,583       0.7 %     -       0 %     173,078       0.4 %
Net loss
  $ (712,408 )     -2.8 %   $ (2,468,897 )     -10.7 %   $ (4,976,129 )     -9.9 %   $ (1,027,156 )     -2.2 %
 
*Exclusive of depreciation and amortization, shown separately below.
 
22

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Three Months Ended June 30, 2015 Compared with Three Months Ended June 30, 2014
 
Revenues

Consolidated revenues were $25.0 million during the three months ended June 30, 2015 compared to $23.1 million during the three months ended June 30, 2014, an increase of $1.9 million, or 8.3%.  

Revenues for the Business Services segment were $16.0 million for the three months ended June 30, 2015 as compared to $15.6 million for the three months ended June 30, 2014.  The increase is primarily due to the inclusion of revenues from our acquisition of PingTone which was completed on October 31, 2014.

Carrier Services revenue of approximately $9.0 million represents an increase of $1.5 million, or 20.1%, from the same period a year ago, mainly due to a 35% increase in overall traffic volume partially offset by a decrease of 11% in the blended per minute rate of traffic terminated.
 
Cost of Revenues and Gross Margin
 
Consolidated cost of revenues was $13.8 million for the three months ended June 30, 2015 as compared to $12.7 million for the three months ended June 30, 2014.  The increase was primarily due to higher cost of traffic terminated in the Carrier Services segment of approximately $1.3 million slightly offset by a decrease of $0.2 million in the costs incurred by the Business Services segment. 
 
For the three months ended June 30, 2015, consolidated gross margin remained unchanged at 44.9%, as compared to the same three month period a year ago.

Gross margin for the Business Services segment was 63.6% for the three months ending June 30, 2015 as compared to 61.4% for the three months ending June 30, 2014, as a result of the incremental revenue from PingTone and a favorable mix in cost of revenues.

Gross margin for the Carrier Services segment was 11.6% for the three months ended June 30, 2015 as compared to 10.6% in the three months ended June 30, 2014.  This increase was due to an approximately 35% increase in minutes of traffic terminated and a decrease of approximately 12% in the cost per minute of traffic terminated over the same period a year ago.

Depreciation and Amortization
 
Depreciation and amortization expense was $3.0 million for the three months ended June 30, 2015 as compared to $2.6 million during the same period a year ago, primarily due to our acquisition of PingTone.
 
 Selling, General and Administrative Expenses
 
Selling, general and administrative expenses (“SG&A”) for the three months ended June 30, 2015 was $9.9 million as compared to $7.8 million for the three months ended June 30, 2014.  This increase is the result of higher salaries and employee related benefits of approximately $1.1 million driven primarily by headcount increase as a result of our PingTone acquisition, professional and consulting fees of $0.09 million, integration costs of approximately $0.3 million associated with our Broadvox and Pingtone acquisitions, and office and general expenses of $0.10 million.

Operating Loss
 
Our operating loss for the three months ended June 30, 2015 was $1.7 million as compared to an operating loss of $30,000 for the three months ended June 30, 2014.  The increase in operating loss was due to increases in SG&A and depreciation and amortization expense.

 
 
23

 


FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Interest Expense
 
Interest expense increased by approximately $11,000 in the three months ended June 30, 2015 as compared to the three months ended June 30, 2014, mainly due to an additional $5.0 million of senior debt incurred in October 2014 to finance the PingTone acquisition.

Change in Fair Value of Derivative Liability
 
During the three months ended June 30, 2015, we recognized a gain on the change in fair value of our derivative liability in the amount of $2.5 million compared to a loss in the amount of $0.7 million for the same period in 2014.  These gains and losses are related to the derivatives associated with the warrants that we issued to our senior lenders in 2012 and 2013 and with the warrants we issued to purchasers of our preferred stock, the terms of which require them to be treated as liabilities and not equity instruments.  The changes in their fair value are required to be recorded through the statement of operations at each accounting period.  The warrants are valued using the Black-Scholes pricing model and other option pricing models, such that increases to our stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases to our 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 significant fluctuations in our income statement in 2015 and beyond based on changes in our stock price and the corresponding changes in fair value of our derivative liabilities.
  
Net Loss
 
Net loss for the three months ended June 30, 2015 was $0.7 million as compared to a net loss of $2.5 million for the three months ended June 30, 2014, an improvement of approximately $1.8 million. This improvement was primarily a result of the gain on the change in the fair value of our derivative liability of approximately $2.5 million.
 
Six Months Ended June 30, 2015 Compared with Six Months Ended June 30, 2014

Revenues

Consolidated revenues were $50.3 million for the six months ended June 30, 2015 compared to $46.0 million for the six months ended June 30, 2014, an increase of $4.3 million, or 9.3%.  

Revenues for the Business Services segment increased by $1.5 million in 2015 to $32.8 million from $31.3 million in 2014, mainly as the result of the inclusion of revenues from the PingTone acquisition which was completed on October 31, 2014.

Carrier Services revenue of $17.5 million represents an increase of $2.8 million, or 19.2%, from a year ago, as a result of a 29% increase in the volume of traffic terminated over our network offset by a 7% decrease in the blended rate realized per minute of traffic terminated.

Cost of Revenues and Gross Margin

Consolidated cost of revenues was $27.8 million for the six months ended June 30, 2015 compared to $24.9 million for the six months ended June 30, 2014.  This increase was primarily due to higher cost of traffic terminated in the Carrier Services segment of $2.9 million.

Consolidated gross margin was 44.7% in the six months ended June 30, 2015 compared to 45.8% in the six months ended June 30, 2014. The increase is due to the higher mix of Business Services revenue resulting from the PingTone acquisition.

Gross Margin for the Business Services segment was 63.7% in the first six months of 2015 compared to 61.9% in the first six months of 2014, as a result of the incremental revenue from PingTone of approximately $1.5 million and a favorable mix in improvement in the cost of revenues of approximately $16,000.

Gross margin for the Carrier Services business segment was 9.1% for the six months ended June 30, 2015 compared to 11.2% in the six months ended June 30, 2014, primarily due to a 5% decrease in the blended rate of per minute traffic terminated.
 
 
24

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Depreciation and Amortization

Depreciation and amortization increased by approximately $0.9 million to $6.1 million for the six months ended June 30, 2015 from $5.2 million during the same period of a year ago, mainly as a result of the Pingtone acquisition that contributed approximately $85,000 and $400,000 in depreciation and amortization expense.

Selling, General and Administrative Expenses

SG&A expenses increased by $3.9 million for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.  The increase is the result of higher salaries and employee related benefits of approximately $2.1 million driven primarily by headcount increase as a result of the PingTone acquisition, office and general expenses of $0.2 million, and higher integration costs of approximately $1.0 million as a result of the Broadvox and PingTone acquisitions.

Operating Loss

Our operating loss was $3.1 million for the six months ending June 30, 2015 as compared to an operating income of $0.3 million for the same period of a year ago.  The operating loss is driven primarily by an increase in SG&A of approximately $3.9 million and depreciation and amortization expense of $0.9 million.

Interest Expense

Interest expense increased by $0.2 million in the six months ended June 30, 2015 as compared to the six months ended June 30, 2014, mainly due to an additional $5.0 million of senior debt incurred in October 2014 to finance the PingTone acquisition.
 
Change in Fair Value of Derivative Liability

The change in fair value of the derivative was a gain of $1.3 million in the six months ended June 30, 2015 compared to a gain of $1.9 million the six months ended June 30, 2014.  This change is due to the decrease in Fusion's stock price during these periods, which decreases the value of our derivative liability.

Net Loss

Our net loss was $4.9 million for the six months ended June 30, 2015 compared to a net loss of $1.0 million in the same period of a year ago, mainly due to the increase in SG&A of approximately $3.9 million and depreciation and amortization expense of $0.9 million, partially offset by the increase in the gain on the change of the fair value of our derivative liability.

Liquidity and Capital Resources
 
Since our inception, we have incurred significant net losses. In addition, we have only recently begun to generate positive cash flow from operations.  At June 30, 2015, we had negative working capital of $482,000 and stockholders’ equity of approximately $8.8 million.  At December 31, 2014, we had working capital of $2.1 million and stockholders’ equity of approximately $13.3 million.  Our consolidated cash balance at June 30, 2015 was $4.4 million as compared to $6.4 million at December 31, 2014.  While we believe that 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 are no current commitments for such funds and there can be no assurances that such funds will be available to the Company as and when needed.  

During fiscal year 2013 and for most of fiscal year 2014, we relied primarily on the sale of our equity securities and the cash generated from the operations of our Business Services segment to fund our operations.
 
 
25

 

 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

We have never paid any cash dividends on our common stock, and we do not anticipate paying any 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, general business conditions, the terms of our senior debt and other factors that our Board of Directors and senior management of the Company consider appropriate.

The holders of the Series A-1, A-2, and A-4 preferred stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, as and if declared by the Fusion Board of Directors. The holders of the Series B-2 preferred stock 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 in shares of our common stock.

As of June 30, 2015, the Fusion Board of Directors had not declared any dividends on Fusion’s Series A preferred stock, and the Company had accumulated approximately $4.1 million of undeclared preferred stock dividends.  The Fusion Board of Directors declared a dividend of $287,475 for the three months ended June 30, 2015 related to the Series B-2 preferred stock, which, as permitted by the terms of the Series B-2 preferred stock, was paid in the form of 143,732 shares of Fusion’s common stock.

At June 30, 2015, we have approximately $43 million principal amount of senior notes outstanding under the second amended and restated securities purchase agreement (the “SPA”) as follows:

  
Series A and B Notes.  On October 29, 2012, the Company sold the Series A Notes in the aggregate principal amount of $6.5 million, bearing interest at the rate of 10.0% annually, and the Series B notes in the aggregate principal amount of $10.0 million bearing interest at the rate of 11.5% annually.  The proceeds from the sale of the Series A Notes and Series B Notes were used to finance the acquisition of Network Billing Systems, LLC.  

  
Series C Notes. On December 15, 2013, the Company sold the Series C Notes in the aggregate principal amount of $0.5 million.  The proceeds were used to pay a deposit on the purchase price to the sellers in connection with our acquisition of certain assets of Broadvox.

  
Series D Notes. On December 31, 2013, the Company sold the Series D Notes in the aggregate principal amount of $25.0 million.  The proceeds from the sale of the Series D Notes were used to finance the acquisition of certain assets of Broadvox.

  
Series E Notes. On October 31, 2014, contemporaneously with the completion of the acquisition of PingTone, the Company sold the Series E Notes in an aggregate principal amount of $5.0 million.

In accordance with the terms of the SPA, the senior notes bear interest at an annual rate of 11.15%, with monthly principal payments of approximately $102,119 from January 2015 through October 2019 with the outstanding principal balance on all the senior notes payable at maturity on October 31, 2019.
 
For the three months ended June 30, 2015 and 2014, we paid interest expense on the senior notes of approximately $1.3 million and $1.2 million, respectively, and $2.6 million and $2.3 million for the six months ended June 30, 2015 and 2014, respectively.

We have a note payable outstanding of approximately $1.3 million from Marvin Rosen, the Company’s Chairman of the Board of Directors.  This note is subordinated to the senior notes and the Company’s other obligations to the senior lenders.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 60 days after the Senior Notes are paid in full.   For the three months ended June 30, 2015 and 2014 and six months ended June 30, 2015 and 2014, we paid interest expense on this note of approximately $27,000 and $53,000, respectively.

As set forth in the SPA, our obligations to the senior lenders are secured by a first priority security interest on all of the assets of Fusion’s subsidiaries (including their capital stock) and by a second lien on the accounts receivable and other assets of our Carrier Services segment which continues to be operated through Fusion.  Further, subject to certain limitations, the borrower subsidiaries and Fusion have guaranteed the obligations of the borrower under the SPA, including its obligations to repay the senior notes.
 
 
26

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

In addition, the SPA contains a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to the senior notes, incurring additional indebtedness (as defined), making capital expenditures, dividend payments and cash distributions by subsidiaries.  As set forth in the SPA, ,  we are required to maintain a minimum cash bank balance of no less than $1.0 million in excess of any amounts outstanding under a permitted working capital line of credit and in excess of any and all cash balances held by Fusion’s subsidiaries through which it provides Business Services (the “minimum cash commitment”).  The SPA also requires on-going compliance with various financial covenants, including leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization.  Failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of the senior notes.  We do not have the financial resources to repay the senior notes if we are required to pay them off prior to  their maturity date.
 
For the year ended December 31, 2014, we exceeded the limit on capital expenditures set forth in the SPA, which constituted to an event of default under terms of the senior notes and the SPA. On March 27, 2015, the holders of our senior notes waived the event of default for 2014 and amended the terms of the SPA by adjusting the threshold for 2015. As a result of the amendment, we were in compliance with the capital expenditure limit for the year ended December 31, 2014. 

On June 16, 2015, the Company and the senior lenders entered into a Second Amendment to the SPA whereby the senior lenders agreed, among other things, to (i) increase the amount of our capital lease indebtedness to  $7.0 million, (ii) extend to July 31, 2015, the date by which we are required to satisfy the minimum cash commitment, (iii) extend to September 30, 2015, the date by which EBITDA at Fusion must equal or exceed  EBITDA at Fusion’s subsidiaries.  In the Second Amendment, we also agreed to sell at least $3.0 million of Fusion equity securities by July 31, 2015 on terms reasonably satisfactory to the senior lenders.  As of July 31, 2015, we failed to sell the required equity securities and we also failed to meet the minimum cash commitment.  In addition, we were not in compliance with our minimum EBITDA and Fixed Charge Coverage Ratio covenants.    On August 13, 2015, the holders of our senior notes waived our events of default with respect to the minimum EBITDA and Fixed Charge Coverage Ratio obligations and extended to September 30, 2015 the date by which we must raise $3.0 million of additional capital from the sale of Fusion equity and our obligation to satisfy the minimum cash commitment.   As a result of this waiver and amendment, we were in compliance with our obligations under the SPA as of June 30, 2015.    We are in active discussion with potential equity investors regarding the $3.0 million investment in Fusion, with our senior lenders concerning permanent adjustments to our existing covenants, and with other financing sources concerning a new senior debt facility.  We are unable to provide any assurance, however, that any of these discussions will result in final agreement(s) or that the terms and conditions of any such agreements will be acceptable to us.
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
             
Net cash provided by operating activities
  $ 498,045     $ 91,339  
Net cash used in investing activities
    (1,859,265 )     (8,865 )
Net cash (used in) provided by financing activities
    (665,605 )     3,527,280  
Net (decrease) increase in cash and cash equivalents
    (2,026,825 )     3,609,754  
Cash and cash equivalents, beginning of period
    6,444,683       6,176,575  
Cash and cash equivalents, end of period
  $ 4,417,858     $ 9,786,329  
 

Cash provided by operating activities increased to $0.5 million for the six months ended June 30, 2015 compared to $0.09 million for the six months ended June 30, 2014, primarily due to changes in non-cash items. The following table illustrates the primary components of our cash flows from operations:
 
 
Six Months Ended June 30,
 
  2015    
2014
 
Net loss
$ (4,976,129 )   $ (1,027,156 )
Non-cash expenses, gains and losses
  5,924,126       4,312,852  
Accounts receivable
  (305,135 )     (910,798 )
Accounts payable and accrued expenses
  156,308       (1,521,179 )
Other
  (301,125 )     (762,380 )
Cash provided by  operating activities
$ 498,045     $ 91,339  
 
 
27

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
Cash used in investing activities, comprised mainly of capital expenditures, was approximately $1.9 million for the six months ended June 30, 2015, compared to $1.8 million for the six months ended June 30, 2014.  Capital expenditures for the remainder of 2015 are expected to be approximately $0.8 million to fund the purchase of network and related equipment and operational support systems as we continue to grow our Business Services segment.  A portion of our capital expenditure requirements may be financed through capital leases or other equipment financing arrangements. Many of these projects are subject to review and cancellation at the discretion of our Chief Executive Officer and Board of Directors.
 
Cash used in financing activities for the six months ended June 30, 2015 of approximately $0.7 million was primarily attributable to payments of $0.6 million to our senior lenders, $0.4 million in capital lease payments, and approximately $0.8 million repayment of borrowings under a factoring arrangement with a third party, offset by approximately $1.1 million in proceeds received from the transfer of receivables from such related party.
 
Other Matters

Inflation
 
We do not believe inflation has a significant effect on our operations at this time.

Off Balance Sheet Arrangements
 
At June 30, 2015, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Forward Looking Statements
 
Certain statements and the discussion contained herein regarding our business and operations may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. 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”, “anticipate”, “intend”, “estimate” or “continue” 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. Our primary risk is our ability to attract new capital to execute on our comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, our ability to comply with our senior debt agreements, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, natural disasters, acts of war, terrorism or other events beyond our control and the other factors identified by us from time to time in our filings with the SEC.  However, the risks included should not be assumed to be the only things that could affect our future performance.

All forward-looking statements included are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements.

 
28

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Disclosure under this section is not required for a smaller reporting company.
 
Item 4. Controls and Procedures.
 
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (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 Chief Executive Officer and Chief Financial Officer, as appropriate, 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 Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015.  Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

Our Chief Executive Officer and Acting Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION

Item 1. Legal Proceedings.
 
None.

Item 1A. Risk Factors.
 
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.  There have been no material changes to our risk factors from those previously disclosed in such Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
During the quarter covered by this report, we issued an aggregate of 46,500 shares of common stock valued at approximately $169,000 to third party consultants for services rendered.  These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.

 
29

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES


Item 3. Defaults Upon Senior Securities.
 
None.

Item 4. Mine Safety Disclosures.
 
Not applicable

Item 5. Other Information.
 
None.
 
Item 6. Exhibits.
 
EXHIBIT NO.
 
DESCRIPTION
 
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Second Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated June 16, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., 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.
10.64  
Waiver and Third Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated August 12, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., 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.
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

 
30

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
 
       
August 13, 2015
By:
/s/ Gordon Hutchins, Jr.
 
   
Gordon Hutchins, Jr.
 
   
President, Chief Operating Officer and Acting Chief Financial Officer
 

 
31

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
Index to Exhibits
 
EXHIBIT NO.
 
DESCRIPTION
 
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Second Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated June 16, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., 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.
 
Waiver and Third Amendment to Second Amended and Restated Securities Purchase Agreement and Security Agreement, dated August 12, 2015 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, Fusion BVX LLC, PingTone Communications, Inc., 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.
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
* Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 

32