Quarterly report pursuant to sections 13 or 15(d)

1. Basis of Presentation, Consolidation, and Summary of Selected Significant Accounting Policies

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1. Basis of Presentation, Consolidation, and Summary of Selected Significant Accounting Policies
6 Months Ended
Jun. 30, 2012
Notes to Financial Statements  
1. Basis of Presentation, Consolidation, and Summary of Selected Significant Accounting Policies

The accompanying notes to the unaudited condensed consolidated interim financial statements should be read in conjunction with audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for Fusion Telecommunications International, Inc. and its Subsidiaries (collectively, the “Company”).  All material intercompany balances and transactions have been eliminated in consolidation.  These condensed consolidated interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”) and therefore omit or condense certain footnotes and other information normally included in condensed consolidated interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of the condensed consolidated interim financial statements have been made. The results of operations for an interim period are not necessarily indicative of the results for the entire year.

 

During the six months ended June 30, 2012 and 2011, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying condensed consolidated interim statements of operations.  In addition, certain prior year balances have been reclassified to conform to the current presentation.

 

Cash and cash equivalents

 

Cash and cash equivalents includes funds held in escrow in connection with the Company’s private placement efforts for the sale of its equity securities.  A corresponding liability is recorded for the Company’s obligation to issue equity securities, which amounted to $0.8 million as of June 30, 2012.

 

Income taxes

 

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes.  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 June 30, 2012 and December 31, 2011.  The Company is subject to income tax examinations by major taxing authorities for all tax years since 2009 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 June 30, 2012 and December 31, 2011. During the six month periods ended June 30, 2012 and 2011, the Company recognized no adjustments for uncertain tax positions.

 

Loss per share

 

The Company complies with the accounting and disclosure requirements regarding earnings per share. Basic loss per share excludes dilution and is computed by dividing loss attributable 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 as of June 30, 2012 and 2011 because their inclusion would be antidilutive:

 

    2012     2011  
                 
Warrants     51,372,711       43,668,191  
Stock options     6,548,261       5,286,174  
Convertible preferred stock     7,206,168       6,834,314  
      65,127,140       55,788,679  


The net loss per common share calculation includes a provision for preferred stock dividends in the approximate amount of $100,000 and $123,000 for the three months ended June 30, 2012 and 2011, respectively, and approximately $201,000 and $267,000 for the six months ended June 30, 2012 and 2011, respectively.  As of June 30, 2012, the Board of Directors had not declared any dividends on the Company’s preferred stock, and the Company had accumulated approximately $2,924,000 of preferred stock dividends.

 

Sale of accounts receivable

 

The Company is party to an agreement, entered into in September of 2011, whereby it can sell certain of its accounts receivable at a discount in order to enhance the Company’s liquidity and cash flow.  The Company recognizes a loss on the sale of accounts receivable for the amount of the discount at the time the receivables are sold and derecognizes the applicable receivables from its consolidated balance sheet, as the Company has determined that the transfer of accounts receivable to the counterparty under this agreement meets the criteria for a sale of financial assets.  For the three and six months ended June 30, 2012 the Company recognized a loss on the sale of accounts receivable of approximately $94,000 and $169,000, respectively, and approximately $1.5 million and $1.0 million of the Company’s outstanding accounts receivable had been sold as of June 30, 2012 and December 31, 2011 respectively.

 

Stock–based compensation

 

The Company accounts for stock-based compensation by recognizing the fair value of the compensation cost for all stock awards over their respective service periods, which are generally equal to the vesting period.  This compensation cost is determined using option pricing models intended to estimate the fair value of the awards at the date of grant using the Black-Scholes option-pricing model.  An offsetting increase to stockholders' equity is recorded equal to the amount of the compensation expense charge.

 

Stock-based compensation expense recognized in the condensed consolidated interim statements of operations for the three and six months ended June 30, 2012 and 2011 includes compensation expense for stock-based payment awards granted prior to June 30, 2012 but not yet vested, based on the estimated grant date fair value.  As stock-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest, it 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 impact of stock-based compensation expense on the Company’s results of continuing operations was approximately $54,000 and $10,000 for the three months ended June 30, 2012 and 2011, respectively, and approximately $61,000 and $33,000 for the six months ended June 30, 2012 and 2011, respectively.  These amounts are included in selling, general, and administrative expenses in the condensed consolidated interim statements of operations.

 

The following table summarizes the stock option activity for the six months ended June 30, 2012:

 

Activity  

(unaudited)

Number of Options

   

Weighted Average Exercise

Price

 
                 
Outstanding at December 31, 2011     6,634,261     $ 0.75  
Granted     49,500     $ 0.10  
Cancelled or expired     (135,500 )   $ 0.16  
Outstanding at June 30, 2012     6,548,261     $ 0.75  
Exercisable at June 30, 2012     4,533,430     $ 1.04  

 

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:

 

    (unaudited)  
    Six Months Ended June 30,  
    2012     2011  
                 
Dividend yield     0.00 %     0.00 %
Stock volatility     111.2-148.7 %     138.1-179.7 %
Average Risk-free interest rate     0.28 %     1.93-2.46 %
Average option term (years)     4       4  

 

As of June 30, 2012, there was approximately $107,000 of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under the Company’s Stock Incentive Plans, which is expected to be recognized over a weighted-average period of 2.06 years.


Fair value of financial instruments

 

The carrying amounts of the Company’s assets and liabilities approximate the fair value presented in the accompanying Condensed Consolidated Balance Sheets, due to their short-term maturities.

 

Use of estimates

 

The preparation of condensed consolidated interim 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 condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the period.  Actual results could be affected by the accuracy of those estimates.

 

Restricted cash

 

At June 30, 2012 and December 31, 2011 the Company had approximately $303,000 and $300,000, respectively, of cash restricted from withdrawal and held by a bank as a certificate of deposit securing a letter of credit.  This restricted cash is required as a security deposit under one of the Company’s non-cancelable operating leases for office facilities.