2. Significant Accounting Policies
|12 Months Ended|
Dec. 31, 2016
|Pro forma financial information|
|2. Significant Accounting Policies||
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the consolidated accounts of Fusion and its wholly-owned subsidiaries, and 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 intercompany balances and transactions have been eliminated in consolidation.
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. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue, allowance for doubtful accounts; fair value measurements; asset lives used in computing depreciation and amortization; valuation of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates, accounting for income taxes, contingencies, and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes, and actual results could differ from those estimates. These changes in estimates are recognized in the period they are realized.
Certain reclassifications have been made to the prior years financial statements in order to conform to the current years presentation. Specifically, approximately $1.2 million of deferred loan costs that had been included within Other assets on the Companys consolidated balance sheet is now reflected as a reduction to the carrying amount of the underlying debt, and the amounts due to the Root Axcess seller are now reflected in Obligations under asset purchase agreements. In addition, the loss on disposal of property and equipment of approximately $37,000 is now separately identified from Other income (expense) in the accompanying consolidated statement of operations. The reclassifications had no impact on net earnings previously reported.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less at the date of purchase. As of December 31, 2016 and 2015, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.
Restricted cash consists of certificates of deposit that serve to collateralize outstanding letters of credit. Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists.
At December 31, 2016 and 2015, the Company had certificates of deposit collateralizing a letter of credit aggregating to approximately $27,000 and $165,000, respectively.The letter of credit is required as security for one of the Companys non-cancelable operating leases for office facilities.
Under the terms of the Companys Amended and Restated Secured Credit Agreement, dated as of December 8, 2015 with Opus Bank (the Amended Credit Facility) and the Fourth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of December 8, 2015, withPraesidian Capital Opportunity Find III, LPand other lenders (the Fourth Amended SPA), the Company is no longer required to maintain a cash reserve of $1 million.
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 the revenue is recognized. Below is a summary of the provisions against revenue for the years ended December 31, 2016 and 2015:
The Companys Business Services revenue includes fixed revenue earned from monthly recurring services provided to customers, for whom charges are contracted for over a specified period of time, and from variable usage fees charged to customers that purchase the Companys Business Services products and services. 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.
Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over the Companys network. 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 Companys allowance for billing adjustments. Revenue for each customer is calculated from information received through the Companys network switches. The Companys 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.
Cost of Revenues
Cost of revenues for the Companys Business Services segmentconsist of fixed expenses which include monthly recurring charges associated with certain platform services purchased from other service providers, monthly recurring costs associated with private line services and the cost of broadband Internet access used to provide service to business customers.
For the Companys Carrier Services segment, cost of revenues is comprised primarily of costs incurred from other carriers to originate, transport, and terminate voice calls for the Companys carrier customers. Thus, the majority of the Companys cost of revenues for this segment is variable, based upon the number of minutes actually used by the Companys customers and the destinations they are calling. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through the Companys network switch. During each period, the call activity is analyzed and an accrual is recorded for the costs 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 Companys network infrastructure, including its New Jersey switching facility, and certain large carrier customers and vendors.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is 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 Companys 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. During the periods presented, the Company has not experienced any significant defaults on its accounts receivable.
Below is a summary of the changes in allowance for doubtful accounts for the years ended December 31, 2016 and 2015 (in thousands):
Business combinations are accountedfor using the purchase method of accounting, whereby the purchase price of the acquisition, including the fair value of contingent consideration, is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The results of operations of all business acquisitions are included in our Consolidated Financial Statements from the date of acquisition.
Goodwill as of the acquisition date, if any, is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, the Companys estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, to the extent the Company identifies adjustments to the purchase price or the purchase price allocation, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
All transaction costsincurred in connection with a business combination are expensed as incurred and are reflected in selling, general and administrative expense in the accompanying consolidated statements of operations.
Debt Issuance Costs
Costs incurred for the issuance of debt are reflected as a reduction in the carrying amount of the debt and are accreted as interest expense over the life of the debt using the interest method.
Goodwill is the excess of the acquisition cost of a businesscombination over the fair value of the identifiable net assets acquired. Goodwill at December 31, 2016 and 2015 was $36.7 million and $27.1 million, respectively. All of the Companys goodwill is attributable to its Business Services segment.
The following table presents the changes in the carrying amounts of goodwill during the years ended December 31, 2016 and 2015:
Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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 (see Note 23) 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 units goodwill to its implied fair value, which is the fair value of the reporting unit less the fair value of the units assets and liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying amount, an impairment is recognized.
In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
The Company performed a quantitative impairment analysis on its goodwill as of December 31, 2016 and qualitative evaluation as of December 31, 2015 and determined that goodwill was not impaired.
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, 2016 and 2015, as there were no indicators of impairment.
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:
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.
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, 2016 and 2015, the Company capitalized costs pertaining to the development of internally used software in the amount of $1.2 million and $0.9 million, respectively.
Fair Value of Financial Instruments
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies considered to be appropriate. At December 31, 2016 and 2015, the carrying value of the Companys accounts receivable, accounts payable and accrued expenses approximate their fair values due to their short maturities.
Derivative Financial Instruments
For equity and equity indexed instruments with down round provisions, the Company accounts for warrants issued in conjunction with the issuance of debt or equity securities of the Company in accordance with the guidance contained in Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging (ASC 815). For warrant instruments that are not deemed to be indexed to Fusions common 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 Companys statements of operations (see notes 17 and 18). The fair values of the warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusions common stock (see notes 17 and 18).
The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are the consideration received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is determined to be a more reliable measurement.
Advertising and Marketing
Advertising and marketing expense includes cost for promotional materials and trade show expenses for the marketing of the Companys products and services. Advertising and marketing expenses were $0.7 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively.
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, 2016 and 2015. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2012 and for previous periods as it relates to the Companys net operating loss carryforward.
No interest expense or penalties have been recognized as of December 31, 2016 and 2015. During the years ended December 31, 2016 and 2015, the Company recognized no adjustments for uncertain tax positions.
Factoring of accounts receivable
During the year ended December 31, 2015, the Company had a factoring agreement with Prestige Capital Corporation (Prestige). Under the terms of the agreement, upon receipt and acceptance of each transfer of accounts receivable Prestige advanced the Company up to 75% of the net face value of the accounts receivable or 65% of the net face value of any unbilled yet earned amounts associated with the accounts receivable. The Company paid a discount fee which was deducted from the face value of the accounts receivable. The discount fee was based on the number of days the accounts receivable is outstanding from the date of the advance. For the years ended December 31, 2016 and 2015, the Company recognized discount fees on the transfer of the accounts receivable of $0 and approximately $40,000, respectively. These amounts are recorded in Other (expenses) income in the accompanying consolidated statements of operations. The Prestige agreement was terminated in 2016 and there were no transfers of receivables to Prestige in the year ended December 31, 2016.
In accordance with ASC 860, Transfers and Servicing,the Company recognizes the accounts receivable and the associated liability when the accounts receivable were transferred to Prestige, and derecognizes the accounts receivable and the liability upon receipt of collections of the transferred receivables by Prestige.
Recently Issued Accounting Pronouncements
In November 2016, the Financial Accounting Standard Board (FASB) issued ASU 2016-18, Restricted Cash, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-2, Leases, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessees obligation to make lease payments arising from a lease measured on a discounted basis, and a right to-use asset, which is an asset that represents the lessees right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.
In November 2015, the FASBissued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17), which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard is effective beginning on January 1, 2017 with early application permitted as of the beginning of any interim or annual reporting period. The Company does not expect this guidance to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued guidance that eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. This guidance became effective for interim and annual reporting periods beginning after December 15, 2015. Adoption of this standard did not have a material impact on the Companys consolidated financial statements.
In April 2015, the FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a reduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance became effective for interim and annual reporting periods beginning after December 15, 2015. Adoption of this standard did not have a material impact on the Companys consolidated financial statements.
In May 2014, FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, FASB deferred the effective date of this guidance until January 1, 2018 and the Company is currently assessing the impact of this guidance on its consolidated financial statements.
The entire disclosure for all significant accounting policies of the reporting entity.
Reference 1: http://www.xbrl.org/2003/role/presentationRef