Annual report pursuant to section 13 and 15(d)

3. Acquisition

v2.4.0.8
3. Acquisition
12 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
3. Acquisition

 

On December 31, 2013, the Company, through its wholly-owned subsidiary Fusion BVX LLC (“FBVX”), completed the acquisition of substantially all of the cloud services assets used by BroadvoxGO!, LLC and its affiliate Cypress Communications, LLC (collectively, “Sellers”) in the operation of their cloud services business.  A definitive agreement to purchase these assets, including the assumption of substantially all of the related on-going liabilities incurred in the ordinary course of business (collectively, the “Broadvox Assets”) was entered into on August 30, 2013, and amended on November 15, 2013 and December 16, 2013 (the “BVX Purchase Agreement”).

 

The purchase price of the Broadvox Assets of $32.1 million was paid in cash at closing (less the $1 million deposit previously delivered to the Sellers).  The Company had delivered a deposit of $0.2 million when the BVX Purchase Agreement was initially executed, and delivered additional deposits of $0.1 million and $0.7 million when the agreement was amended on November 15, 2013 and December 16, 2013, respectively.  In accordance with the terms of the BVX Purchase Agreement, the purchase price remains subject to adjustment based on certain working capital measurements described in the BVX Purchase Agreement that the Company expects will be finalized in the second quarter of 2014.  In addition, $3.21 million of the Purchase Price is being held in escrow for a period of up to one year as collateral to secure the accuracy of the Sellers’ representations, warranties and covenants contained in the BVX Purchase Agreement.

 

In accordance with the BVX Purchase Agreement, the Company and the Sellers entered into a Transitional Services Agreement governing the provision and receipt of certain services between the Company and the Sellers covering a range of topics including the Company's purchase of VOIP and wholesale services from the Sellers; the Company's utilization of the Sellers' network infrastructure; the Company’s temporary use of financial and administrative systems owned by the Sellers; the marketing of services offered by the Company by sales representatives of the Sellers; and the Company’s use of certain of Sellers’ office facilities and employees.   The aggregate purchase price has initially been allocated to the fair value of the net assets acquired as follows:

 

Accounts receivable   $ 1,486,552  
Other current assets     127,161  
Property and equipment     8,139,318  
Intangible assets subject to amortization     21,866,000  
Goodwill     2,520,605  
Current liabilities     (2,031,186 )
    $ 32,108,450  

 

The final allocation of the purchase price is subject to modification based upon a final determination and mutual agreement of the Company and Sellers with respect to the aforementioned working capital measurements.  The Company’s consolidated balance sheet as of December 31, 2013 includes the Broadvox Assets, and the results of operations generated by the Broadvox Assets will be reflected in the Company’s consolidated statement of operations effective January 1, 2014.

 

On October 29, 2012, the Company, through its wholly-owned subsidiary, Fusion NBS Acquisition Corp. (“FNAC”), completed the acquisition of all of the issued and outstanding membership interests of Network Billing Systems, LLC and substantially all of the assets of its affiliate, Interconnect Services Group II LLC (“ISG”), and thereby acquired the business operated by NBS and ISG (collectively, “NBS”).  Definitive agreements to purchase NBS had been entered into on January 30, 2012, and were amended on June 6, 2012, August 20, 2012, September 21, 2012 and October 24, 2012 (the “Purchase Agreements”).

 

NBS is a cloud services provider offering a wide range of hosted voice and data services, Internet and data network solutions to small, medium and large businesses in the United States.  In accordance with the terms of the Purchase Agreements, the Company’s purchase of NBS included approximately $496,000 of cash and the assumption of certain related liabilities.  The aggregate purchase price for the outstanding membership interests of NBS and the assets of ISG, net of the assumed liabilities, was $19.6 million, consisting of $17.75 million in cash, $0.6 million to be evidenced by promissory notes payable to the sellers of the NBS membership interests (the “Seller Notes”) and 11,363,636 shares of restricted common stock of Fusion valued at $1.25 million.  The purchase price was adjusted for an additional amount payable to the sellers following the application of certain working capital measurements described in the Purchase Agreements, the initial determination of which was $1,129,000.  The Seller Notes bear interest at the rate of 3% per annum and are payable in 14 equal monthly installments commencing January 31, 2013, and 10% of the cash portion of the Purchase Price was held in escrow for a period of up to one year as collateral to secure the accuracy of the sellers’ representations, warranties and covenants contained in the Purchase Agreements.  The escrow amount has since been released to the Sellers.  The Seller Notes, which were paid in their entirety subsequent to December 31, 2013, were payable to Jonathan Kaufman, the founder and principal operating officer of NBS, and his designees.  Payment of the Seller Notes was subordinated to payment of certain senior secured debt (see note 11).  The aggregate purchase price was allocated to the fair value of the net assets acquired as follows:

 

Cash   $ 496,352  
Accounts receivable     2,215,172  
Inventory     320,034  
Other current assets     214,463  
Property and equipment     1,463,322  
Other assets     2,600  
Intangible assets subject to amortization     15,765,000  
Goodwill     2,381,301  
Current liabilities, including $1,129,000 related to a working capital adjustment     (3,258,244 )
    $ 19,600,000  

 

The Company recognized goodwill of approximately $2,381,000 in connection with the acquisition of NBS.  Subsequent to the acquisition, in December 2012, the working capital payment due to the sellers was adjusted by approximately $25,000 resulting in a corresponding increase in goodwill.  This working capital payment is reflected as a Related party payable on the Company’s consolidated balance sheets of approximately $226,000 and $1,160,000 as of December 31, 2013 and 2012, respectively.

 

The Company’s consolidated financial statements include the assets, liabilities and results of operations of NBS effective as of the October 29, 2012 acquisition date. The Company’s statement of operations for the year ended December 31, 2012 includes revenues of approximately $4.5 million and net loss of approximately $73,000 related to NBS.

 

The following table provides certain pro forma financial information for the Company as if the acquisition of NBS and the Broadvox Assets had both been consummated effective as of January 1, 2012:

 

  ($000’s)   For the year ended December 31,  
    2013     2012  
Revenues   $ 94,148     $ 97,098  
Net loss   $ (12,490 )   $ (20,253 )

 

Concurrently with the acquisition of NBS, the Company entered into an Employment and Restrictive Covenant Agreement with Mr. Kaufman, under which Mr. Kaufman became the President of the Company’s combined Business Services business segment.

 

The acquisitions of the Broadvox Assets and NBS added approximately 10,000 customer locations to the Company’s Business Services segment, and are part of the Company’s strategy to increase the percentage of the Company’s total revenues contributed by the Business Services business segment, which generally operates at higher profit margins than does the Company’s Carrier Services business segment.