Annual report pursuant to section 13 and 15(d)

2. Summary Of Significant Accounting Policies (Policies)

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2. Summary Of Significant Accounting Policies (Policies)
12 Months Ended
Dec. 31, 2013
Summary Of Significant Accounting Policies Policies  
Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of Fusion and its wholly owned subsidiaries (see note 3). The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in accordance with Regulation S-X of the Securities and Exchange Commission (the “SEC”). All inter-company accounts and transactions have been eliminated in consolidation, and certain prior year balances have been reclassified to conform to the current presentation.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed and determinable, and collectability is reasonably assured. The Company records provisions against revenue for billing adjustments, which are based upon estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued and current economic trends. The provisions for revenue adjustments are recorded as a reduction of revenue when incurred.

 

The Company’s revenue is primarily derived from usage fees charged to other telecommunications carriers that terminate voice traffic over the Company’s network, and from the monthly recurring and usage fees charged to customers that purchase the Company’s business products and services.

 

Variable revenue is earned based on the length of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the Company’s allowance for billing adjustments. Revenue for each customer is calculated from information received through the Company’s network switches. The Company’s customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides the Company with the ability to complete a timely and accurate analysis of revenue earned in a period. The Company believes that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.

 

Fixed revenue is earned from monthly recurring services provided to the customer, for which the charges are contracted for over a specified period of time. Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer. The recurring customer charges continue until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.

Cost of Revenues

Cost of revenues for the Company’s Carrier Services business segment is comprised primarily of costs incurred from other domestic and international communications carriers to originate, transport, and terminate voice calls for the Company’s carrier customers. Thus the majority of the Company’s cost of revenues for this business segment is variable, based upon the number of minutes actually used by the Company’s customers and the destinations they are calling. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through the Company’s network switch. During each period, the call activity is analyzed and an accrual is recorded for the revenues associated with minutes not yet invoiced. This cost accrual is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates. Fixed expenses reflect the costs associated with connectivity between the Company’s network infrastructure, including its New York switching facility, and certain large carrier customers and vendors.

 

For the Company’s Business Services business segment, fixed expenses include the monthly recurring charges associated with certain platform services purchased from other service providers, the monthly recurring costs associated with private line services and the cost of broadband Internet access used to provide service to business customers.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded net of an allowance for doubtful accounts. On a periodic basis, the Company evaluates accounts receivable and records an allowance for doubtful accounts based on the Company’s history of past write-offs, collections experience and current credit conditions. Specific customer accounts are written off as uncollectible when collection efforts have been exhausted and payments are not expected to be received.

 

The Company has an agreement to sell certain of its accounts receivable under an arrangement with a third party (see note 4). These transactions qualify as sales of financial assets under the criteria outlined in Accounting Standards Codification Topic (“ASC”) 860, Transfers and Servicing, in that the rights, title and interest to the receivables are transferred. As a result, the Company accounts for the sales of its accounts receivable by derecognizing them from its consolidated balance sheet as of the date of sale and recording a loss on sale at the time the receivables are sold for the difference between the book value of the receivables sold and their respective purchase price.

Fair value of financial instruments

The carrying amounts of the Company’s assets and liabilities approximate their fair value presented in the accompanying consolidated balance sheets, due to their short maturities.

Intangible Assets

Intangible assets at December 31, 2013 and 2012 pertain to a trade name and trademark, non-compete agreements, proprietary technology, customer contracts and a below-market lease, all of which were acquired in the business combinations described in note 3. In determining fair value, the Company uses standard analytical approaches to business enterprise valuation (“BEV”), such as the income approach and the market comparable approach. The income approach involves estimating the present value of the subject asset’s future cash flows by using projections of the cash flows that the asset is expected to generate, and discounting these cash flows at a given rate of return. The market comparable approach is based on comparisons of the subject company to similar companies engaged in an actual merger or acquisition or to public companies whose stocks are actively traded. Each of these BEV methodologies requires the use of management estimates and assumptions. Amortization is recognized on a straight-line basis over the estimated useful lives of the respective assets, which ranges from two to fifteen years.

Goodwill

Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired (see note 3). Goodwill at December 31, 2013 and 2012 was $5.1 million and $2.4 million, respectively. Goodwill is not amortized but is instead tested annually for impairment. All of the Company’s goodwill is attributable to its Business Services business segment. The following table presents the change in goodwill during the years ended December 31, 2013 and 2012:

 

Balance at January 1, 2013     Additions (a)     Other (b)     Balance at December 31, 2013     Balance at January 1, 2012     Additions (a)     Other (b)     Balance at December 31, 2012  
$ 2,406,269       2,520,605       197,256     $ 5,124,130     $ -       2,381,201       25,068     $ 2,406,269  
                                                             

 

(a) - Amount relates to acquisitions.  See note 3.

 

(b) - Amount relates to adjustments to the preliminary purchase price for 2012 acquisitions.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company did not record any impairment charges for the years ended December 31, 2013 and 2012.

 

Impairment testing for goodwill is performed annually in the Company’s fourth fiscal quarter. The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. The Company has determined that its reporting units are its operating segments since that is the lowest level at which discrete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value, which is the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying amount, an impairment is recognized.

 

The authoritative guidance provides entities with an option to perform a qualitative assessment to determine if the fair value of the entity is less than its carrying value. The Company performed a qualitative impairment evaluation on the on the goodwill acquired on October 29, 2012 (see note 3) and determined that no impairment existed.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

Asset   Estimated Useful Lives
Network equipment   5 – 7 Years
Furniture and fixtures   3 – 7 Years
Computer equipment and software   3 – 5 Years
Customer premise equipment                                           2 – 3 Years

 

Leasehold improvements are depreciated over the shorter of the estimated useful lives of the assets or the term of the associated lease. Maintenance and repairs are recorded as a period expense, while betterments and improvements are capitalized.

 

Customer premise equipment primarily consists of switches, routers, handsets and ancillary items for which the Company retains title but are utilized at customer locations. At December 31, 2012, the Company had approximately $341,000 of such equipment which had been reflected as inventory in its consolidated balance sheet. The Company has reclassified this amount to property and equipment to more accurately reflect the nature, use and useful life of these assets.

 

The Company capitalizes a portion of its payroll and related costs for the development of software for internal use and amortizes these costs over three years. During the years ended December 31, 2013 and 2012, the Company capitalized costs pertaining to the development of internally used software in the approximate amount of $794,000 and $151,000, respectively.

Derivative Financial Instruments

The Company accounts for warrants issued in conjunction with the issuance of debt and equity in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging (“ASC 815”). For warrant instruments that are not deemed to be indexed to the Company’s own stock, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statement of operations (see notes 11, 14 and 22). The fair values of the warrants have been estimated using a Black-Scholes valuation model and the Company’s quoted market price.

Advertising and Marketing

Advertising and marketing expense includes cost for promotional materials and trade show expenses for the marketing of the Company’s business products and services. Advertising and marketing expenses were approximately $28,000 and $23,000 for the years ended December 31, 2013 and 2012, respectively.

Income Taxes

The accounting and reporting requirements with respect to income taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

 

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of December 31, 2013 and 2012. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2010 and may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of December 31, 2013 and 2012. During the years ended December 31, 2013 and 2012, the Company recognized no adjustments for uncertain tax positions.

Earnings (Loss) per Share

Basic loss per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The following securities were excluded in the calculation of diluted loss per share because their inclusion would be antidilutive:

 

    2013     2012  
Warrants     200,791,160       89,974,479  
Stock options      17,570,760       8,864,261  
Convertible preferred stock     192,563,181       70,064,862  
      410,925,101       168,903,602  

 

The net loss per common share calculation includes a provision for preferred stock dividends in the approximate amount of $402,000 and $404,000 for the years ended December 31, 2013 and 2012, respectively. However, no cash dividend has been declared by the Board of Directors for any of the years presented. The dilutive securities in the year ended December 31, 2013 include preferred stock convertible into 184,800,000 shares of common stock and warrants to purchase 59,136,000 shares of common stock that contain a provision that prohibits their conversion or exercise until the Company files an amendment to its Certificate of Incorporation to increase the number of shares which it is authorized to issue sufficient to permit the preferred stock and warrants to be converted and exercised, respectively (see note 14).

Discontinued Operations

The Company classifies a business component that either has been disposed of or is classified as held for sale as a discontinued operation if the cash flow of the component has been or will be eliminated from ongoing operations and the Company will no longer have any significant continuing involvement in the component. The results of operations of the discontinued component through the date of disposition, including any gains or losses on disposition, are aggregated and presented in the consolidated statement of operations as income (loss) on discontinued operations. See note 9 for additional information regarding discontinued operations.

Stock based compensation

The Company accounts for stock-based compensation by recognizing the fair value of compensation cost for all stock and stock-based awards over the service period (generally equal to the vesting period). Compensation cost is determined using the Black-Scholes option pricing model to estimate the fair value of the awards at the grant date. An offsetting increase to stockholders’ equity is recorded equal to the amount of the compensation expense charge.

 

Stock-based compensation for the years ended December 31, 2013 and 2012 is comprised of the following:

 

    2013 2012
Expenses associated with stock options granted to employees and directors   $ 189,484 89,929
Common stock issued in connection with an employment agreement          - 50,000
Common stock or warrants issued or issuable for services rendered        106,585 59,825
    $ 296,069 199,754

 

Stock-based compensation is included in selling, general, and administrative expenses in the consolidated statements of operations and, with respect to stock option expense, has been reduced for estimated forfeitures. When estimating forfeitures, the Company considers historical forfeiture rates as well as ongoing trends for actual option forfeiture.

 

The Company calculated the fair value of each common stock option grant on the date of grant using the Black-Scholes option pricing model method with the following assumptions:

 

    2013     2012  
Dividend yield     0.00 %     0.00 %
Stock volatility     137 %     138 %
Average Risk-free interest rate     0.68 %     1.74 %
Average option term (years)     3       3-4  
Recently Adopted and Issued Accounting Pronouncements

During the years ended 2013 and 2012, there were no new accounting pronouncements adopted by the Company that had a material impact on the Company’s consolidated financial statements. Management does not believe there are any recently issued, but not yet effective, accounting pronouncements that, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.