Annual report pursuant to section 13 and 15(d)

14. Equity Transactions

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14. Equity Transactions
12 Months Ended
Dec. 31, 2013
Notes to Financial Statements  
14. Equity Transactions

Preferred Stock

On December 31, 2013, the Company issued to a total of 82 accredited investors (the “Investors”), an aggregate of 18,480 shares of its newly designated Series B-2 Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series B-2 Preferred Stock”) and (b) warrants (the “Investor Warrants”) to purchase 59,136,000 shares of the Company’s common stock (the “Warrant Shares” and together with the Series B-2 Preferred Stock, the “Series B-2 Offering”).  The Series B-2 Offering included the issuance of 2,052 shares of Series B-2 Preferred Stock and Investor Warrants to purchase 6,566,400 Warrant Shares, upon the conversion of $2,052,000 in indebtedness of the Company, including the conversion of $2,000,000 of notes payable to Marvin Rosen, $50,000 of other Company indebtedness payable to Matthew Rosen, Fusion’s Chief Executive Officer, and $2,000 payable to another Director of the Company.  Gross cash proceeds from the Series B-2 Offering were $16,428,000, and were used to partially finance the acquisition of the Broadvox Assets and for general corporate purposes.

 

Each share of Series B-2 Preferred Stock has a Stated Value of $1,000, and is convertible into shares of the Company’s common stock at a conversion price of $0.10 per share (the “Preferred Conversion Price”), subject to adjustment.  Subject to the other terms of the Series B-2 Preferred Stock, the Series B-2 Preferred Stock sold to the Investors is convertible into an aggregate of 184,800,000 shares of the Company’s common stock (the “Conversion Shares”).

 

The Investor Warrants may be exercised at any time following the Share Authorization Date (as defined below), for a number of Warrant Shares that is equal to 40% of the Stated Value divided by one hundred and twenty 125% of the Preferred Conversion Price, as adjusted for stock splits, combinations and reclassifications (the “Investor Warrant Exercise Price”).  Each Investor Warrant will be exercisable at the Investor Warrant Exercise Price for a five-year term commencing on the date of issuance.

 

The Series B-2 Preferred Stock may not be converted, and the Investor Warrants may not be exercised, until the effective date of an amendment to the Company’s Certificate of Incorporation increasing the number of authorized shares of the Company’s common stock sufficient to permit all of the outstanding Series B-2 Preferred Stock and Investor Warrants to be converted or exercised, as the case may be, into the Company’s common stock (the “Share Authorization Date”).  On January 30, 2014, the Company filed a proxy statement with the SEC seeking stockholder authorization to increase the number of authorized shares of common stock.

 

Subject to certain exceptions, the Company also agreed that, within 45 days following the Share Authorization Date, it will file a registration statement with the SEC registering the resale of the Conversion Shares and the Investor Warrant Shares, and to use its reasonable commercial efforts to cause the registration statement to become effective not more than 150 days thereafter.  The registration rights agreement with the Investors provides that in the event the Company fails to timely file the registration statement, fails to cause the registration statement to become effective within the time provided, or fails to provide Investors with an effective registration statement permitting re-sales by the Investors, then as liquidated damages and not as a penalty, the Company is required to pay each Investor an amount equal to 1% of the aggregate amount invested by such Investor for each 30-day period or pro rata portion thereof following the date by which such registration statement should have been filed or become effective; provided, that the maximum payment to each Investor shall not exceed 6% of the aggregate amount invested by such Investor.

 

Commencing January 1, 2016, the Company has the right to force the conversion of the Series B-2 Preferred Stock into common stock at the Preferred Conversion Price; provided that the volume weighted average price for Fusion’s Common stock is at least $0.25 for ten consecutive trading days.  In addition, shares of Series B-2 Preferred Stock bear a cumulative 6% annual dividend payable quarterly in arrears commencing March 31, 2014, in cash or shares of common stock, at the option of the Company.

 

The Investor Warrants provide for a downward adjustment of the exercise price if the Company were to issue common stock at an issuance price or issue convertible debt or equity securities with an exercise price that is less than the Investor Warrant Exercise Price.  As a result, the Investor Warrants are deemed not indexed to the Company’s common stock under the guidance provided by ASC Topic 815.  Accordingly, the Company recognized a derivative liability of approximately $6.0 million at December 31, 2013 for the fair value of the Investor Warrants based on a Black-Scholes valuation.

 

Holders of Series B-2 Preferred Stock have liquidation rights that are senior to those afforded to holders of the Company’s other equity securities, and holders of Series B-2 Preferred Stock are entitled to vote as one group with holders of common stock on all matters brought to a vote of holders of common stock (with each share of Series B-2 Preferred Stock being entitled to that number of votes into which the registered holder could have converted the Series B-2 Preferred Stock on the record date for the meeting at which the vote will be cast).  Holders of common stock are also entitled to vote as a separate class on all matters adversely affecting such class.

 

The Company sold the Series B-2 Preferred Stock and Investor Warrants through its officers and directors, in conjunction with the assistance of certain select broker-dealers.  The Company paid aggregate cash compensation to the broker-dealers of $0.7 million, and issued or is obligated to issue warrants to the broker-dealers or their respective designees to purchase 4,486,900 shares of the Company’s common stock.  Such warrants are exercisable for a period of 5 years at an exercise price of $0.125 per share and the shares of common stock issuable upon exercise of such warrants are afforded the same registration rights as are provided to purchasers of Series B-2 Preferred Stock

 

Between October 22, 2012 and October 24, 2012, the Company entered into subscription agreements with 91 accredited investors, pursuant to which the Company sold 6,027.75 investment Units consisting of (a) 6,027.75 shares of its Series B-1 Preferred Stock, (b) Fixed Warrants (the “Fixed Warrants”) to purchase 22,013,915 shares of Fusion’s common stock (the “Fixed Warrant Shares”), and (c) Contingent Warrants (the “Contingent Warrants”) to purchase 11,006,958 shares of Fusion’s common stock for gross proceeds of $6,027,750 (the “Series B-1 Offering”).  In addition, $750,000 of previously issued notes payable to related parties (see note 13) were converted, and an additional $84,000 of obligations of the Company payable to Mathew Rosen and another member of the Company’s management were satisfied, through the issuance of investment Units on the same terms as those received by the participants in the Series B-1 Offering.  At December 31, 2012, the Company had 6,861.75 shares of Series B-1 Preferred Stock outstanding.

 

Each share of Series B-1 Preferred Stock had a Stated Value of $1,000, and was convertible into a number of shares of the Company’s common stock that is equal to the Stated Value divided by the volume-weighted-average price of the Company’s common stock for the 10 trading days prior to the closing (the “Series B-1 Preferred Conversion Price”).  Based upon that calculation, and subject to the other terms of the Series B-1 Preferred Stock, the Series B-1 Preferred Stock outstanding as of December 31, 2012 was convertible into an aggregate of 62,672,008 shares of the Company’s common stock.

 

The Fixed Warrants may be exercised at any time following the Series B-1 Share Authorization Date (as defined below), for a number of Warrant Shares that is equal to fifty (50%) percent of the Stated Value of the Series B-1 Preferred Stock divided by 125% of the Series B-1 Preferred Conversion Price, as adjusted for stock splits, combinations and reclassifications (the “Fixed Warrant Exercise Price”).  Each Fixed Warrant is exercisable at the Fixed Warrant Exercise Price for a five-year term commencing on the date of issuance.

 

The Contingent Warrants contained an “Expiration Event” that was triggered on the filing by the Company with the Federal Communications Commission of a request for the approval of the transfer of the licenses and operating authorities associated with the then pending acquisition of NBS, or a similar business combination.  As of the date of the closing of the Series B-1 Offering, the Company had filed for and received approval from the Federal Communications Commission for the transfer of such licenses and operating authorities related to NBS.  As a result, an Expiration Event occurred and the Contingent Warrants expired.

 

The Series B-1 Preferred Stock could not be converted, and the Fixed Warrants could not be exercised, until the effective date of an amendment to the Company’s Certificate of Incorporation increasing the number of authorized shares of the Company’s common stock sufficient to permit all of the outstanding Series B-1 Preferred Stock and Fixed Warrants to be converted or exercised, as the case may be, into shares of Fusion’s common stock (the “Series B-1 Share Authorization Date”).  The Company received stockholder authorization to increase the number of authorized shares of common stock to 550,000,000 shares on February 15, 2013.  The amendment was filed with the Secretary of State of Delaware on February 21, 2013.  Upon such filing, the Series B-1 Share Authorization Date was fixed, the Series B-1 Preferred Stock became convertible in accordance with its terms and the Fixed Warrants became exercisable.

 

On September 30, 2013, in accordance with the terms of the Series B-1 Preferred Stock, the Company caused all of the outstanding Preferred Shares to be converted into 62,672,008 shares of common stock.  No shares of Series B-1 Preferred Stock were outstanding as of December 31, 2013.

 

The Series B-1 Offering was exempt from registration under the Securities Act of 1933, as amended, by reason of Section 4(2) and Rule 506 of Regulation D thereunder.  The Company incurred approximately $295,000 of expenses, including commissions and legal fees, related to the offering.  The net proceeds of approximately $5,732,000 were used to:

 

●   Repay $250,000 borrowed from Marvin Rosen and another Fusion director on September 17, 2012.

 

●   Repay a $300,000 unrelated party loan received on June 22, 2012.

 

●   Repay approximately $173,000 in satisfaction of all amounts due to the issuer of the letter of credit that was drawn down in 2011.

 

●   Fund a portion of the purchase price of the acquisition of NBS; and

 

●   For general corporate purposes.

 

 

As of December 31, 2013 and 2012, Fusion had an aggregate of 5,045 shares of Series A-1, A-2 and A-4 Cumulative Convertible Preferred Stock outstanding.  Holders of the Series A Preferred Stock are entitled to receive cumulative dividends at the rate of 8% per annum payable in arrears, when, as and if declared by the Company’s Board of Directors, on January 1 of each year.  The following table summarizes the activity in the Company’s various classes of preferred stock for the years ended December 31, 2013 and 2012:

 

    Series A-1 Preferred Stock     Series A-2 Preferred Stock     Series A-4 Preferred Stock     Series B-1 Preferred Stock     Series B-2 Preferred Stock     Total  
    Shares     $     Shares     $     Shares     $     Shares     $     Shares     $     Shares       $  
                                                                           
Balance at December 31, 2011     2,375       24       2,625       26       45       -       -       -       -       -       5,045       50  
Issuance of shares for cash                                                     6,028       60                       6,028       60  
Conversion of notes payable                                                     834       9                       834       9  
Balance at December 31, 2012     2,375       24       2,625       26       45       -       6,862       69       -       -       11,907       119  
Conversion of notes payable                                                                     2,052       21       2,052       21  
Conversion of preferred stock into common stock                                                     (6,862 )     (69 )                     (6,862 )     (69 )
Issuance of shares for cash                                                                     16,428       164       16,428       164  
Balance at December 31, 2013     2,375       24       2,625       26       45       -       -       -       18,480       185       23,525       235  

 

Common Stock

During the year ended December 31, 2013, the Company entered into subscription agreements with 60 accredited investors, under which the Company issued an aggregate of 50,257,163 shares of common stock and five-year warrants to purchase 25,128,583 shares of the Company’s common stock for aggregate consideration of $4.1 million.   The warrants are exercisable at 125% of the volume weighted-average price of the Company’s common stock for the 10 trading days prior to the date of closing.

 

Also during the year ended December 31, 2013, an executive officer of the Company converted $102,500 due to him into 1,177,965 shares of common stock and warrants to purchase 588,983 shares of the Company’s common stock, and another director of the Company converted $5,733 due to him into 76,237 shares of common stock and warrants to purchase 38,119 shares of common stock.  The warrants are exercisable at 125% of the volume weighted-average price of the Company’s common stock for the 10 trading days prior to the date of conversion.

 

During the year ended December 31, 2013, the Company issued an aggregate of 955,564 shares of common stock to third parties for services valued at $98,251.

 

During the year ended December 31, 2012, the Company entered into subscription agreements with 29 accredited investors, under which the Company issued an aggregate of 10,762,718 shares of common stock and five-year warrants to purchase 3,339,940 shares of the Company’s common stock for aggregate consideration of $1.2 million.  The warrants are exercisable at 112%-125% of the average closing price of the Company’s common stock for the five trading days prior to closing.

 

In February of 2012, two of the Company’s executive officers converted an aggregate of $35,000 owed to them by the Company into 444,445 shares of common stock and five-year warrants to purchase 133,335 shares of common stock.  The warrants are exercisable at approximately 112% of the average closing price of the Company’s common stock for the five trading days prior to the conversion.

 

On October 29, 2012, the Company issued 11,363,636 shares of common stock valued at $1.25 million as part of the purchase price of NBS, and issued 454,545 shares of common stock valued at $50,000 in connection with its entering into an executive employment agreement with Jonathan Kaufman.

 

As of December 31, 2013 and 2012, the number of shares of common stock that the Company is authorized to issue was 550,000,000 and 300,000,000, respectively, and the number of shares of common stock issued and outstanding were 303,833,242 and 178,250,533, respectively.

 

Stock Options and Warrants

In accordance with the Company's 2009 Stock Option Plan, the Company reserved 7,000,000 shares of common stock for issuance to employees at exercise prices determined by the Board of Directors.  On February 15, 2013, the Company’s stockholders ratified an increase in the number of shares available for issuance under the 2009 Stock Option Plan to 16,500,000.  Options under the plan typically vest in annual increments over a three or four year period, expire ten years from the date of grant and are issued at exercise prices no less than 100% of the fair market value at the time of grant. The Company has also reserved 2,617,400 shares for issuance in the event of exercise of outstanding options granted under the now expired 1998 Stock Option Plan

 

The following summary presents information regarding outstanding options as of December 31, 2013 and 2012 and changes during the years then ended with regard to all options:

 

    Number of Options     Weighted Average Exercise Price  

Weighted Average Remaining

Contract Term

Outstanding at December 31, 2011     6,634,261     $ 0.75   6.86 years
Granted in 2012     2,511,500       0.11    
Forfeitures in 2012     (147,291 )     0.11    
Expirations in 2012     (134,209 )     0.21    
Outstanding at December 31, 2012     8,864,261       0.58   6.93 years
Granted in 2013     9,043,610       0.08    
Forfeitures in 2013     (152,625 )     0.11    
Expirations in 2013     (184,486 )     1.10    
Outstanding at December 31, 2013     17,570,760     $ 0.33   7.81 years
                   
Exercisable at December 31, 2013     6,482,026     $ 0.73   5.12 years

 

The following table summarizes information about stock options outstanding as of December 31, 2013:

 

Range of Exercise

Prices

    Options Outstanding    

Weighted Average

Life (Years)

   

Weighted Average

Price

    Options Exercisable    

Weighted Average

Price

 
$ 0.06 - $0.10       10,500,985       9.30     $ 0.08       990,751     $ 0.09  
$ 0.11 - $0.17       4,450,375       7.30       0.11       2,872,375       0.11  
$ 0.18 - $0.31       908,000       3.85       0.31       907,500       0.31  
$ 0.39 - $0.69       642,000       3.25       0.69       642,000       0.69  
$ 0.75 - $2.28       175,750       2.45       2.28       175,750       2.28  
$ 2.46 - $4.38       841,150       1.33       3.41       841,150       3.41  
$ 4.70 - $6.45       52,500       1.15       6.20       52,500       6.20  
          17,570,760       7.81     $ 0.33       6,482,026     $ 0.73  

 

The weighted-average estimated fair value of stock options granted was $.07 and $.08 during the years ended December 31, 2013 and 2012, respectively.  No stock options were exercised during the years ended December 31, 2013 and 2012.  As of December 31, 2013, there was approximately $675,000 of total unrecognized compensation cost related to stock options granted under the Company’s stock incentive plan which is expected to be recognized over a weighted-average period of 2.39 years.

  

The Company, as part of various debt and equity financing transactions and other agreements, has issued warrants to purchase shares of Fusion’s common stock.  The following summarizes the information relating to warrants issued and the activity during the years ended December 31, 2013 and 2012:

 

   

Number of

Warrants

   

Per Share

Exercise Price

    Weighted Average Exercise Price  
Outstanding at December 31, 2011     47,615,186       0.08-1.67     $ 0.25  
Granted in 2012     43,827,454       0.01-0.16       0.10  
Exercised in 2012     -       -          
Expired in 2012     (1,468,161 )     0.48-0.64       0.61  
Outstanding at December 31, 2012     89,974,479       0.08-1.67       0.18  
Granted in 2013     117,691,970       0.01-0.17       0.10  
Expired in 2013     (6,875,289 )     0.14-0.46       0.28  
Exercised in 2013     -       -          
Outstanding at December 31, 2013     200,791,160               0.125  

 

All warrants are fully exercisable upon issuance, except for the 59,136,000 Investor Warrants issued as part of the Series B-2 Preferred Offering, which will not become exercisable until the Share Authorization Date.

 

As a result of the warrants issued in connection with conversions of indebtedness and satisfaction of other liabilities of the Company, the Company recognized a loss on the extinguishment of debt in the amount of $1,105,283 and $335,315 in the years ended December 31, 2013 and 2012, respectively.