Quarterly report pursuant to sections 13 or 15(d)

7. Notes Payable Non-Related Parties

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7. Notes Payable Non-Related Parties
6 Months Ended
Jun. 30, 2013
Notes to Financial Statements  
7. Notes Payable - Non-Related Parties

 

7.   Notes Payable – Non-Related Parties

 

At June 30, 2013 and December 31, 2012, components of notes payable – non-related parties are comprised of the following: 

 

   

June 30,

2013

   

December 31,

2012

 
Senior Notes   $ 16,500,000     $ 16,500,000  
Discount on Senior Notes     (1,659,921 )     (1,815,920 )
Other notes payable     31,923       -  
Total notes payable - non-related parties     14,872,002       14,684,080  
Less:                
Current portion of Senior Notes     (520,832 )     (208,333 )
Current portion of other notes payable     (31,923 )     -  
Non-current portion notes payable - non-related parties   $ 14,319,247     $ 14,475,747  

 

Senior Notes

 

On October 29, 2012, the Company and its wholly-owned subsidiary, Fusion NBS Acquisition Corp. (“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.  The proceeds from the sale of the Senior Notes were used to finance the acquisition of NBS.

 

All of the Senior Notes provide for the payment of interest on a monthly basis. 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, the Company 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 and in excess of any and all cash balances held by NBS.  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 June 30, 2013 the Company was in compliance with all of the financial covenants under the Senior Notes.  At various times since May 15, 2013, the Company was not in compliance with the $1 million minimum cash balance requirement, which constitutes an event of default under the terms of the SPA.  On August 14, 2013, the Company and the Lenders entered into a Waiver and Amendment Agreement to the SPA (the “Waiver Agreement”) whereby the Lenders agreed to waive the event of default through August 14, 2013, and amended the SPA to reduce the minimum cash balance requirement from $1 million to $0.5 million between May 15, 2013 and August 31, 2013, after which time the minimum cash balance requirement reverts to $1 million.  After giving effect to the terms of the Waiver Agreement, the Company has at all times been in compliance with the restrictive covenant pertaining to the minimum cash balance requirement.

 

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 $1,659,921 and $1,815,920 as of June 30, 2013 and December 31, 2012, respectively.  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 June 30, 2013 and December 31, 2012, the fair value of the derivative liability was $960,733 and $1,066,000, respectively, and the Company recognized a gain on the change in fair value of $105,267 for the six months ended June 30, 2013.

 

Other notes payable

During the first six months of 2013, the Company received advances from the purchaser of its accounts receivable (see note 1) totaling $212,500.  This amount is in addition to the proceeds received by the Company for the sale of accounts receivable.  The Company repaid $181,577 of this advance during the period, along with advance fees of approximately $9,000.  These fees are reflected in Other expenses, net in the Company’s consolidated statement of operations for the six months ended June 30, 2013.