Annual report pursuant to section 13 and 15(d)

12. Notes Payable-Non-Related Parties and Equipment Financing Obligations

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12. Notes Payable-Non-Related Parties and Equipment Financing Obligations
12 Months Ended
Dec. 31, 2012
Notes to Financial Statements  
12. Notes Payable-Non-Related Parties and Equipment Financing Obligations

At December 31, 2012 and 2011, components of notes payable – non-related parties are comprised of the following:

 

  2012 2011
   $       16,500,000  $                  -   
            (1,815,920)                      -   
                          -               292,039
            14,684,080            292,039
     
Current portion of Senior Notes              (208,333)                      -   
Current portion of other notes payable                         -             (292,039)
   $       14,475,747  $                  -   

Senior Notes

Contemporaneously with the completion of the acquisition of NBS, Fusion and FNAC executed a Securities Purchase Agreement and Security Agreement (the “SPA”) with Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP and Plexus Fund II, LP (the “Lenders”). Under the SPA, the Company sold the Lenders (a) five-year Series A senior notes (the “Series A Notes”) in the aggregate principal amount of $6.5 million, bearing interest at the rate of 10.0% annually, and (b) five-year Series B senior notes (the “Series B Notes”, and together with the Series A Notes, the “Senior Notes”) in the aggregate principal amount of $10.0 million bearing interest at the rate of 11.5% annually.

All of the Senior Notes provide for the payment of interest on a monthly basis commencing October 31, 2012. The Series A Notes provide for monthly principal payments in the amount of $52,083 each, beginning September 30, 2013, with the outstanding principal balance being due and payable on October 27, 2017. The outstanding principal balance of the Series B Notes becomes due and payable on October 27, 2017.

The obligations to the Lenders are secured by first priority security interests on all of the assets of FNAC and NBS, as well as the capital stock of each of the Company’s subsidiaries, including NBS, and by second priority security interests in the accounts receivable pertaining to the Company’s Carrier Services business segment and all of the other assets of the Company. In addition, Fusion and NBS have guaranteed FNAC’s obligations under the SPA, including FNAC’s obligation to repay the Senior Notes.

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, making capital expenditures, dividend payments and cash distributions by subsidiaries. In addition, at all times while the Senior Notes are outstanding, Fusion is required to maintain a minimum cash bank balance of no less than $1 million in excess of any amounts outstanding under a permitted working capital line of credit. 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. At December 31, 2012 the Company was in compliance with all of the financial covenants under the Senior Notes.

In connection with the sale of the Senior Notes to the Lenders, the Company issued a nominal warrant to the Lenders to purchase 13,325,000 shares of the Company’s common stock (the “Lenders’ Warrant”). The Lenders’ Warrant is exercisable from the date of issuance until October 29, 2022, at an exercise price of $.01 per share. The Company is required to pay the exercise price on behalf of the Lenders at the time of exercise. Commencing upon the earlier of a change in control, the repayment of the Senior Notes in full or October 29, 2017, in the event that the Company’s common stock does not meet certain liquidity thresholds with respect to trading volume and market price, then the Lenders have the right to require the Company to repurchase the shares issued or issuable upon exercise of the Lenders’ Warrant at a repurchase price based upon the formulas set forth therein.

The Company recorded a discount on the Senior Notes based on the fair value of the Lenders’ Warrant as of the date of issuance, which was $1,865,500. The discount is being accreted over the life of the Senior Notes, and the discount was $1,815,920 as of December 31, 2012. In addition, the Lenders’ Warrant does not meet the criteria for equity classification under ASC Topic 480, Distinguishing Liabilities From Equity, and is not considered to be indexed to the Company’s own stock under the guidance provided in ASC Topic 815, Derivatives and Hedging. As a result, the Company recognized a derivative liability in the amount of $1,865,500 upon the issuance of the Lenders' Warrant. At December 31, 2012, the fair value of the derivative liability was $1,066,000, and the Company recognized a gain on the change in fair value of $799,500 for the year ended December 31, 2012.

The Company also incurred expenses in the approximate amount of $571,000 in connection with the SPA and sale of the Senior Notes, including a transaction fee paid to the Lenders of $330,000 and legal expenses of approximately $232,000. These amounts are reflected in Other assets on the Company’s consolidated balance sheet at December 31, 2012 and are being amortized as interest expense over the life of the Senior Notes.

In conjunction with the execution of the SPA, the Company and the Lenders also entered into a series of ancillary agreements relating to, among other things, securing the Lenders’ right to repayment of the Notes and establishing priority as to payments and to security among the Lenders and other creditors of the Company (the “Ancillary Agreements”). The Ancillary Agreements consist of:

· an IP Security Agreement under which the Company has pledged intellectual property to the Lenders to secure payment of the Notes;
· Intercreditor and Subordination Agreements under which creditors of the Company (including affiliates of the Company) and the Lenders have established priorities among them and reached certain agreements as to enforcing their respective rights against the Company (see note 13);
· a Pledge Agreement under which the Company has each pledged its equity interest in its subsidiaries to the Lenders;
· a Right of First Refusal Agreement granting Fusion certain rights to purchase the shares issued or issuable upon exercise of the Lenders’ Warrants; and
· a Management Rights Agreement and SBA Side Letters relating to the Lenders’ status and rights as small business lenders.

 

Other Notes Payable

On September 19, 2011, as more fully described in note 5, the Company received an advance of approximately $208,000 from the purchaser of its accounts receivable in connection with the agreement for the sale of certain of the Company’s accounts receivable. At December 31, 2011, the outstanding balance on this advance was $103,073, which was paid in full during the year ended December 31, 2012. Also during the year-ended December 31, 2012, the Company repaid approximately $189,000 to the issuer of a letter of credit for the unsecured portion of the letter of credit that had been drawn down in 2011 (see note 9).

At December 31, 2010 the Company had outstanding $683,070 of other notes payable to unrelated parties, $383,870 of which were repaid in their entirety in 2011. On May 11, 2011, $250,000 of notes payable, along with $3,139 of accrued interest, was converted into 2,531,387 shares of Fusion’s common stock and 5-year warrants to purchase 506,278 shares of common stock. The warrants are exercisable at 125% of the average closing price of the Fusion’s common stock for the five trading days prior to conversion. On August 5, 2011, $50,000 of the outstanding principal amount of the notes and approximately $15,000 of accrued interest thereon were converted into 644,987 shares of the Fusion’s common stock and 5-year warrants to purchase 128,998 shares of common stock. The warrants are exercisable at 125% of the average closing price of the Fusion’s common stock for the five trading days prior to conversion.

 

Equipment financing obligations

Equipment financing obligations at December 31, 2012 represents amounts payable under a software license financing obligation in the approximate amount of $215,000 for the purchase of an automated rate and routing system for the Company’s Carrier Services business segment, and approximately $23,000 for a vehicle owned by NBS.