Annual report pursuant to section 13 and 15(d)

11. Notes Payable-Non-Related Parties

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11. Notes Payable-Non-Related Parties
12 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
11. Notes Payable-Non-Related Parties

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

    December 31, 2013     December 31, 2012  
Senior Notes   $ 41,791,667     $ 16,500,000  
Discount on Senior Notes     (4,377,680 )     (1,815,920 )
Total notes payable - non-related parties     37,413,987       14,684,080  
Less:                
Current portion of Senior Notes     (625,000 )     (208,333 )
Non-current portion notes payable - non-related parties   $ 36,788,987     $ 14,475,747  

 

Senior Notes

On October 29, 2012, Fusion and FNAC entered into 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”) 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 NBS.

The Series A Notes and the Series B Notes provide for the payment of interest on a monthly basis. The Series A Notes provided for monthly principal payments in the amount of $52,083 from September 30, 2013 through December 31, 2013, with the remaining outstanding principal balance being due and payable on October 27, 2017. The outstanding principal balance of the Series B Notes was originally due and payable on October 27, 2017. During the year ended December 31, 2013, the Company made principal payments on the Series A Notes in the amount of $208,333.

In connection with the sale of the Series A Notes and Series B 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 “Original Lenders’ Warrant”). The Original 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 Series A Notes and Series B 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 Original Lenders’ Warrant at a repurchase price based upon the formulas set forth therein.

The Company recorded a discount on the Series A Notes and Series B Notes based on the fair value of the Original Lenders’ Warrant as of the date of issuance, which was $1,865,500. The discount is being accreted over the life of the Series A Notes and the Series B Notes, and this discount was $1,493,552 and $1,815,920 as of December 31, 2013 and December 31, 2012, respectively. In addition, the Original Lenders’ Warrant does not meet the criteria for equity classification under ASC Topic 480, Distinguishing Liabilities From Equity (“ASC 480”), and is not considered to be indexed to the Company’s own stock under the guidance provided in ASC 815. As a result, the Company recognized a derivative liability in the amount of $1,865,500 upon the issuance of the Original Lenders' Warrant. At December 31, 2013 and December 31, 2012, the fair value of the derivative liability related to the Original Lenders’ Warrant was $1,664,292 and $1,066,000, respectively. The Company recognized a loss on the change in fair value of this derivative liability of $598,292 for the year ended December 31, 2013 and 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 Series A Notes and Series B 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, 2013 and 2012 and are being amortized as interest expense over the life of the 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 Series A Notes and Series B 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 Fusion and its Subsidiaries have each pledged their equity interests in certain 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.

 

On December 15, 2013, the Company sold to the Lenders Series C senior notes (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 of the Broadvox Assets (see note 3).

 

On December 31, 2013, the SPA was amended and restated whereby the Company sold to Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company of America, (collectively with Plexus Fund II, L.P., the “Senior Lenders”) Series D Senior Notes (the “Series D Notes”) in the aggregate principal amount of $25.0 million (collectively with the Series A Notes, the Series B Notes and the Series C Notes, the “Senior Notes”). The proceeds from the Series D Notes were used to finance the acquisition of the Broadvox Assets. Under the terms of the SPA, as amended:

 

· Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company of America became parties to the SPA and the Ancillary Agreements.
· The interest rate on all of the Senior Notes was adjusted to 11.15% per annum.
· The maturity date on all of the Senior Notes became December 31, 2018.
· Interest on all of the Senior Notes is payable monthly, and monthly principal payments aggregating $52,083 are required from January 2014 through December 2014.
· Monthly principal payments aggregating $102,083 are required from January 2015 through December 2018, with the outstanding principal balance on all of the Senior Notes payable at maturity.

 

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 $1.0 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 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. From time to time since May 15, 2013, the Company was not in compliance with the $1.0 million minimum cash balance requirement under the SPA. On August 14, 2013 and November 12, 2013, the Company and the Lenders entered into Waiver and Amendment Agreements to the SPA whereby the Lenders agreed to waive compliance with the $1.0 million minimum cash balance requirement and reduced the minimum cash balance requirement from $1.0 million to $0.5 million for certain periods. Under the Waiver and Amendment Agreements and the amended and restated SPA, the Company is required to maintain a minimum cash bank balance of no less than $1.0 million, in excess of any and all cash balances held by NBS and FBVX, at all times subsequent to December 31, 2013. The Company has been in compliance with the minimum cash bank balance requirement since December 31, 2013.

 

The obligations to the Senior Lenders are secured by first priority security interests on all of the assets of FNAC, NBS and FBVX, as well as the capital stock of each of the Company’s subsidiaries, including NBS and FBVX, 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, FBVX and NBS guaranteed FNAC’s obligations under the SPA, including FNAC’s obligation to repay the Senior Notes.

In connection with the amended and restated SPA with the Senior Lenders and the sale of the Series C Notes and Series D Notes, the Company issued an additional nominal warrant to the Senior Lenders to purchase 23,091,000 shares of the Company’s common stock (the “New Lenders’ Warrant”) on substantially the same terms as the Original Lenders’ Warrant. The New Lenders’ Warrant is exercisable from the date of issuance until December 31, 2023.

The Company recorded a discount on the Series C Notes and Series D Notes based on the fair value of the New Lenders’ Warrant as of the date of issuance, which was $2,884,128, with the discount to be accreted over the life of the Senior Notes. The New Lenders’ Warrant also does not meet the criteria for equity classification under ASC Topic 480, and is not considered to be indexed to the Company’s own stock under the guidance provided in ASC 815. As a result, the Company recognized a derivative liability in the amount of $2,884,128 upon the issuance of the New Lenders' Warrant.

The Company also incurred expenses in the approximate amount of $669,000 in connection with the amended SPA and sale of the Series D Notes, including a transaction fee paid to the Lenders of $500,000. These amounts are reflected in Other assets on the Company’s consolidated balance sheet at December 31, 2013 and 2012 and are being amortized as interest expense over the life of the Senior Notes.

 

Other notes payable

During the year ended December 31, 2013, the Company received advances from Prestige (see note 4) totaling $212,500. This amount is in addition to the proceeds received by the Company for the sale of accounts receivable. The Company repaid the entire amount of this advance during the year, 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 year ended December 31, 2013.

 

On September 19, 2011, the Company received an advance of $208,000 from Prestige. 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.