Quarterly report pursuant to Section 13 or 15(d)

6. Notes Payable Non-Related Parties

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6. Notes Payable Non-Related Parties
6 Months Ended
Jun. 30, 2014
Notes to Financial Statements  
6. Notes Payable - Non-Related Parties

At June 30, 2014 and December 31, 2013, notes payable – non-related parties are comprised of the following:

 

      June 30, 2014   December 31, 2013
Senior Notes    $                 41,479,167    $              41,791,667
Discount on Senior Notes                       (4,042,840)                     (4,377,680)
Other notes payable                         1,102,724                                   -   
Total notes payable - non-related parties                       38,539,051                    37,413,987
Less:        
  Current portion                        (2,027,724)                        (625,000)
Non-current portion notes payable - non-related parties    $                 36,511,327    $              36,788,987

Senior Notes

On October 29, 2012, the Company and its wholly owned subsidiary, Fusion NBS Acquisition Corp. (“FNAC”) entered into a Securities Purchase Agreement and Security Agreement (the “Purchase Agreement”) with Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP and Plexus Fund II, LP (the “Lenders”). Under the Purchase Agreement, 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.

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 in connection with the Broadvox Transaction (see note 2). On December 31, 2013, the Purchase Agreement was amended and restated (the “SPA”) 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 sale of the Series D Notes were used to finance the Broadvox Transaction. Under the terms of the SPA:

 

· Plexus Fund III, L.P., Plexus Fund QP III, L.P. and United Insurance Company of America became parties to the SPA and to certain ancillary agreements that were entered into with the Lenders at the time of the Purchase Agreement.
· 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 (i) any amounts outstanding under a permitted working capital line of credit, and (ii) any and all cash balances held by the Company’s Business Services business segment. 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. As of and for the six months ended June 30, 2014, the Company was in compliance with all of the financial covenants contained in the SPA.

 

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 sale of the Senior Notes to the Senior Lenders, the Company issued nominal warrants to the Senior Lenders to purchase an aggregate of 728,333 shares of the Company’s common stock (the “Lenders’ Warrants”). The Lenders’ Warrants are exercisable from the date of issuance at an exercise price of $0.50 per share, with 266,501 warrants expiring on October 29, 2022, and the remainder expiring on December 31, 2023. The Company is required to pay the exercise price on behalf of the Senior Lenders at the time of exercise. The Company has recorded a discount on the Senior Notes based on the fair value of the Lenders’ Warrants as of the date of issuance. The discount is being accreted over the life of the Senior Notes, and was $4.0 million and $4.4 million as of June 30, 2014 and December 31, 2013, respectively.

Commencing upon the earlier of a change in control, the repayment of the Senior Notes in full or the five year anniversary of the issuance of the Lenders’ Warrants, 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 Senior Lenders have the right to require the Company to repurchase the shares issued or issuable upon exercise of the Lenders’ Warrants at a repurchase price based upon the formulas set forth therein. As a result, the Lenders’ Warrants do not meet the criteria for equity classification under ASC Topic 480, Distinguishing Liabilities From Equity (“ASC 480”), and are not considered to be indexed to the Company’s own stock under the guidance provided in ASC 815, and the Company recognized derivative liabilities aggregating $4.7 million upon the issuance of the Lenders' Warrants. At June 30, 2014 and December 31, 2013, the fair value of these derivative liabilities was $3.9 million and $4.5 million, respectively. The Company recognized a loss on the change in fair value of this derivative in the amount of $0.2 million for the three months ended June 30, 2014, and gain on the change in fair value of $0.7 million for the six months ending June 30, 2014. For the three and six months ended June 30, 2013, the Company recognized a gain on the change in fair value this derivative in the amount of $0.2 million and $0.1 million, respectively.

 

Expenses incurred in connection with the Purchase Agreement and SPA and the sale of the Senior Notes are reflected in Other assets on the Company’s consolidated balance sheet in the amount of $1.0 million and $1.1 million at June 30, 2014 and December 31, 2013, respectively, and are being amortized as interest expense over the life of the Senior Notes.

Other Notes Payable

As more fully described in note 1, from time to time the Company sells certain of its accounts receivable to an unrelated party at a discount. At June 30, 2014, $1.1 million of the receivables that were sold had yet to be collected by the transferee. All of these receivables were collected by the transferee subsequent to June 30, 2014, satisfying this obligation.