Annual report pursuant to Section 13 and 15(d)

5. Acquisition

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5. Acquisition
12 Months Ended
Dec. 31, 2015
Pro forma financial information  
5. Acquisition

Fidelity

 

In December 2015, Fusion, through its wholly owned subsidiary, Fusion NBS Acquisition Corp. (“FNBS”), completed the acquisition of all of the outstanding equity securities of Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC and Fidelity Access Networks, Inc., all Ohio entities (together with Fidelity Telecom, LLC hereinafter collectively referred to as “Fidelity”).  Fidelity provides customers with a suite of cloud based services, including cloud voice, cloud connectivity, cloud computing and cloud storage.

 

The purchase price paid to Fidelity shareholders was $29.9 million, consisting of $28.4 million in cash and 696,508 shares of Fusion’s common stock valued at $1.5 million (based upon the volume weighted average price of the common stock over a ten trading day period ending four trading days prior to the closing date). We funded the acquisition through borrowings under the Amended Credit Facility of approximately $27.5 million and cash on hand of approximately $0.9 million.

 

Upon acquisition, each Fidelity company became our wholly-owned subsidiary. The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the acquisition date.

 

The preliminary allocation of the purchase price as of the acquisition date is as follows:

 

Cash   $ 503,059  
Accounts receivable, net     273,809  
Prepaids     44,735  
Property and equipment     1,111,699  
Covenant not to compete     618,000  
Customer contracts     19,243,000  
Accrued liabilities     (692,606 )
Deferred tax liability     (7,710,536 )
Goodwill     16,502,971  
Total purchase price   $ 29,894,133  

 

The amount of goodwill recognized is primarily attributable to the expected contributions of Fidelity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. None of the goodwill recognized is expected to be deductible for income tax purposes. The intangible assets subject to amortization consist of customer relationships and non-compete agreements, with an estimated useful life of 14 and 5 years, respectively.

 

The results of operations of Fidelity are reflected in the Company’s consolidated statement of operations effective December 8, 2015.  The following table provides certain pro forma financial information for the Company for the year ended December 31, 2015 as if the acquisition of Fidelity had been consummated effective as of January 1, 2015 (in millions):

  

    2015  
Revenues   $ 119.2  
Net loss   $ (6.9 )

 

RootAxcess

 

In September 2015, the Company acquired the customer base, technology platform, infrastructure and certain other assets of RootAxcess, for an aggregate purchase price of $1.2 million, payable in either cash or in a mix of cash and, at our election, in up to $300,000 in shares of Fusion’s common stock. The purchase price was funded, in part, through borrowings of $0.5 million under the Amended Credit Facility. Of the $1.2 million purchase price, $0.7 million is being held by the Company against potential claims arising from breaches of representation and warranties and is currently included in due to Root Axcess seller on the consolidated balance sheet. RootAxcess is included as part of the ‘Business Services’ segment (See Note 12).

 

The aggregate purchase price has initially been allocated to the fair value of the assets acquired as follows:

 

Covenant not to compete   $ 232,943  
Customer contracts/relationships     747,381  
Fixed assets acquired     59,810  
Goodwill     159,866  
Purchase price   $ 1,200,000  

 

PingTone

 

In October 2014, the Company, through its wholly owned subsidiary Fusion PTC Acquisition, Inc., (“PTC”), completed the acquisition of all of the outstanding equity securities of PingTone Communications, Inc., a provider of integrated cloud-based communications services (“PingTone”).  The acquisition of PingTone was accomplished through a merger of PTC with and into PingTone, with PingTone surviving the merger.  As a result of this

transaction, PingTone became a wholly owned subsidiary of Fusion’s wholly owned subsidiary, FNBS, and an indirect subsidiary of Fusion.

 

The purchase price paid to PingTone shareholders was $10.6 million, consisting of $8.1 million in cash and 712,250 shares of Fusion’s common stock valued at $2.5 million.  A portion of the purchase price ($1,150,000, comprised of $862,500 in cash and 81,908 shares of Fusion common stock) has been placed into escrow to secure the representations, warranties and covenants made by the PingTone shareholders under the merger agreement.

 

The allocation of the purchase price of PingTone is as follows:

 

Cash   $ 826,035  
Accounts receivable, net     273,948  
Other current assets     141,256  
Property and equipment     481,111  
Other assets     60,941  
Deferred tax asset     1,688,011  
Intangible assets subject to amortization     4,211,300  
Goodwill     5,175,372  
Current liabilities     (496,417 )
Deferred tax liability     (1,688,011 )
Other liabilities     (28,724 )
Total purchase price   $ 10,644,822  

 

The results of operations of PingTone are reflected in the Company’s consolidated Statement of Operations effective November 1, 2014.  The following table provides certain pro forma financial information for the Company for the year ended December 31, 2014 as if the acquisition of PingTone had been consummated effective as of January 1, 2014 (in millions):

 

    2014
Revenues   $ 98.9  
Net loss   $ (3.1)