10-K 1 fsnn_10k.htm ANNUAL REPORT Blueprint
 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10–K
 
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2016
 
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to________
 
 Commission File Number 001-32421
 
 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in charter)
 
 Delaware
 
58-2342021
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
 
420 Lexington Avenue, Suite 1718, New York, New York 10170
(Address of principal executive offices) (Zip Code)
 
 (212) 201-2400
(Registrant’s telephone number, including area code)
 
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
 
Name of each exchange on which registered
 Common Stock, par value $0.01 per share
 
The Nasdaq Capital Market
 
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
 
Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑  No ☐
 
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filler
Accelerated filer
Non-accelerated filler
Smaller reporting company
(do not check if a smaller reporting company)
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☑
 
The aggregate market value of the voting common stock held by non-affiliates of the registrant based upon the closing price of the common stock reported by The Nasdaq Capital Market on June 30, 2016 of $1.84 per share, was $14,445,507.
 
Indicate the number of shares outstanding of the registrant’s common stock as of the latest practicable date: 20,757,028 shares of common stock are issued and outstanding as of March 15, 2017.
 
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report (Items 10, 11, 12, 13 and 14) is incorporated by reference to the registrant’s definitive proxy statement which involves the election of directors, to the extent permitted by Instruction G(3) to Form 10-K.

 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Table of Contents
 
PART I
 
3
 
 
 
Item 1.
Business.
3
Item 1A.
Risk Factors.
13
Item 1B.
Unresolved Staff Comments.
21
Item 2.
Properties.
21
Item 3.
Legal Proceedings.
22
Item 4.
Mine Safety Disclosures.
22
 
 
 
PART II
 
22
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
22
Item 6.
Selected Financial Data.
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
23
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk.
31
Item 8.
Financial Statements.
32
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
32
Item 9A.
Controls and Procedures.
32
Item 9B.
Other Information.
32
 
 
 
PART III
 
33
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance.
33
Item 11.
Executive Compensation.
33
Item 12.
Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters.
33
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
33
Item 14.
Principal Accounting Fees and Services.
33
 
 
 
PART IV
 
34
 
 
 
Item 15.
Exhibits, Financial Statement Schedules.
34
 
 
 
SIGNATURES
39
 
 
INDEX TO EXHIBITS
41
 
 
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
PART I
 
This Form 10-K contains forward-looking statements. These statements relate to our expectations for future events and future financial performance. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential” and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. These statements are only predictions. Actual events or results may differ materially. Factors which could affect our financial results are described in Item 1A below and in Item 7 of Part II of this Form 10-K.   Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assume responsibility for the accuracy and completeness of the forward-looking statements. We undertake no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.
 
ITEM 1.  BUSINESS.
 
Overview
 
Fusion Telecommunications International, Inc. (“Fusion”), either directly or through its various subsidiaries (collectively, “we,” “us,” “our” or the “Company”), offers a comprehensive suite of cloud communications, cloud connectivity, cloud infrastructure, cloud computing, and managed cloud-based applications solutions to small, medium and large businesses, and offers domestic and international voice services to telecommunications carriers worldwide.  Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors.  We currently operate our business in two distinct business segments: Business Services and Carrier Services.
 
In the Business Services segment, Fusion is focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud. Our core Business Services products and services include cloud voice and unified communications as a service (“UCaaS”), improving communications and collaboration on virtually any device, virtually anywhere, and cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency. Our cloud computing and infrastructure as a service (“IaaS”) solutions are designed to provide our business customers with a platform on which additional cloud services can be layered. Complemented by our software as a service (“SaaS”) solutions such as security and business continuity, our advanced cloud offerings, including private and hybrid cloud, storage, backup and recovery, and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud. Fusion’s cloud-based services are flexible, scalable and can be rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.
 
Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors and sell our voice services to other communications service providers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending voice traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic, thereby increasing profitability and expanding the service delivery capabilities for our Business Services segment.
 
As a result of the acquisition of a number of cloud services businesses over the past five years, Fusion has expanded its business customer base to over 13,000 customer accounts, increased its distribution network to over 500 active distribution partners and added a significant number of network facilities and points of presence, thus expanding its geographic reach. Through these acquisitions, we acquired advanced systems and infrastructure and augmented our management team and employee base with talented, experienced, well-trained professionals, and further developed a strong platform for further acquisitions.
 
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
Fusion is seeking to capitalize on the rapid growth of the worldwide cloud services market, which is expected to grow 18% in 2017 to total $246.8 billion, up from $209.2 billion in in 2016, according to Gartner, Inc. The highest growth will come from cloud system infrastructure as a service, which is projected to grow 36.8% in 2017 to reach $34.6 billion. Cloud application services (SaaS) is expected to grow 20.1% to reach $46.3 billion. We are pursuing a three-tiered growth strategy: developing specialized solutions for key vertical markets (such as legal and healthcare), targeting and acquiring additional cloud services companies and implementing measures to accelerate organic growth. Our continuing effort to deliver advanced cloud solutions to larger companies with more complex requirements is supported by our proprietary cloud solutions platform that allows us to rapidly respond to large enterprise needs for customized or enhanced solutions. We intend to continue to develop vertically oriented solutions to expand our revenue opportunities and further differentiate our service suite, with current efforts directed primarily on the healthcare, legal, hospitality and real estate verticals. We intend to acquire additional cloud services companies that can further expand our customer base, allow us to provide additional cloud products and services to our portfolio and gain scale. Our growth strategy for the Business Services segment includes securing large strategic distribution partners, increasing our direct as well as indirect channel sales efforts and upselling solutions to our existing customer base.
 
Fusion’s management team has extensive experience in the technology, services and communications industry, with demonstrated leadership in middle market, entrepreneurial, small company, distressed and M&A environments.  We believe that our executive team has the experience and expertise to drive high value opportunities to the Company and execute on our acquisition and organic growth strategies.
 
Fusion was incorporated in Delaware and commenced operations in September 1997.  We currently have offices in: New York, NY; Wayne, NJ; Fort Lauderdale, FL; Atlanta, GA; Herndon, VA; and Beachwood, OH.
 
Acquisitions
 
The cloud services marketplace continues to be fragmented, with most providers challenged by a limited product portfolio, a lack of financial and operational resources, and a regional focus. Fusion believes this market segment offers strong opportunities for consolidation. We believe that the cross-marketing opportunities and economies of scale made possible through consolidation make such acquisitions an attractive vehicle to enhance our growth profile.
 
Fusion integrates the businesses it acquires and organizes the employees under one management team. Products and services and processes and procedures are rapidly integrated as well, while sales and support staff and distribution partners are trained to cross and up-sell our solutions to our existing and acquired customer bases. We believe that our integration strategy, in combination with our increasing expertise and our scalable, robust systems and infrastructure, will enable us to continue to efficiently integrate additional acquisitions in the future.
 
Since 2012, we have made the following acquisitions:
 
NBS
 
In October 2012, we acquired Network Billing Systems, LLC, headquartered in Wayne, NJ, and certain assets and liabilities of its affiliate, Interconnect Services Group II LLC (collectively, “NBS”), a cloud services provider delivering cloud voice and UCaaS, cloud connectivity and managed network services to small, medium and large businesses nationwide.
 
Broadvox Cloud Services Business
 
In December 2013, we acquired certain assets of Broadvox LLC’s cloud services business, which delivered cloud-based voice, UCaaS and cloud connectivity services to small, medium and large businesses.
 
PingTone
 
In October 2014, we acquired PingTone Communications, Inc. (“PingTone”), a provider of integrated cloud-based communications services headquartered in Herndon, VA. This acquisition added to our customer base, augmented the Company’s management team and added a direct sales force.
 
RootAxcess
 
In September 2015, we acquired the customer base, technology platform, infrastructure and other assets of Chicago-based RootAxcess. RootAxcess delivered a broad range of cloud solutions, including IaaS, cloud computing, cloud storage, cloud hosting, virtual data center, backup and recovery and virtual servers, using both private and hybrid cloud infrastructure.
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
Fidelity
 
In a two-step transaction completed in December 2015 and February 2016, we acquired Fidelity Access Networks, Inc. and its various subsidiaries (collectively, "Fidelity"). Fidelity provided cloud voice, cloud connectivity, security, data center and cloud storage services to small, medium, and large businesses, primarily in the Midwest.
 
TFB
 
In April 2016, we acquired the intellectual property and assets of Technology for Business Corporation (“TFB”), a provider of industry leading contact center solutions with a fully integrated advanced cloud voice platform. 
 
Apptix
 
On November 14, 2016, we acquired Herndon, Virginia-based Apptix, Inc. (“Apptix”), a wholly-owned subsidiary of Apptix ASA (OSE: APP). Apptix provided cloud-based communications, collaboration, virtual desktop, compliance, security and cloud computing solutions to approximately 1,500 business customers across the U.S. 
 
Business Services
 
Our cloud-based services are designed to meet the communications, network and computing requirements of growing businesses, while maximizing the price-performance ratio.  We believe that giving our customers access to the cloud provides a more cost-effective, reliable and secure communications and IT experience, and relieves them of the capital and support burdens associated with more traditional premise-based services.  Additionally, customers can reduce costs while adding features and functionality and improving productivity across their company.  Fusion is increasingly focused on providing specialized, market-based solutions to targeted verticals and larger enterprises, matching our advanced solutions to key industry-specific customer requirements.
 
We currently have over 13,000 business customer accounts. We offer a suite of advanced cloud-based services, including cloud communications, which encompasses cloud voice and UCaaS, and cloud connectivity that provides diverse and redundant access to the cloud. The Company’s managed network services converge voice and data applications, which include Internet access, Ethernet over Copper transmission facilities and Multi-Protocol Level Switching (“MPLS”) services at speeds ranging from 1.5 Mbps to 100 Gbps. Our cloud computing solutions include private and hybrid cloud, storage, backup and recovery and secure file sharing. Security and business continuity are offered as part of every solution.
 
Fusion’s services are designed to provide significant benefits to businesses of all sizes, with single or multiple locations. The integration of cloud solutions on our advanced services platforms allow customers to seamlessly connect people with the information they need to collaborate effectively, regardless of the device they use.
 
Our cloud solutions are also designed to minimize upfront capital costs, increase the scalability and flexibility of the customer’s communications network and service environment, provide robust features and functionality to increase productivity, and reduce the overall cost of communications.
 
Our proprietary cloud communications service platform allows us to rapidly respond to market requirements for new or enhanced products and services, as well as customize customer solutions as required for maximum flexibility, avoiding costly licensing fees and increasing our control over the service environment.  Fusion’s growing suite of business services includes:
 
Cloud Voice
 
Fusion’s cloud voice service allows a customer to replace its owned or leased premise-based office telephone system with a state-of-the-art digital telephone system provided by Fusion in the cloud. This feature-rich solution eliminates the need to own and operate a costly, complex telephone system, reduces upfront capital costs, and eliminates the cost of calls between customer locations. The service provides efficiencies for companies with multiple offices or a highly mobile workforce, and for companies that are opening a new office or need to expand or replace existing legacy telephone systems. All business service options can be configured by the user in real time, using a powerful administrative portal, virtually eliminating the costs associated with the labor-intensive reconfiguration of on-site telephone systems. Our contact center solutions provide advanced call center features and functionality that can be seamlessly integrated with our cloud voice solutions, reducing operational costs and increasing cost savings and efficiency. CRM integration, call recording and real-time monitoring are built into the contact center solution, increasing productivity without increasing costs.
 
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
Unified Communications
 
Our UCaaS offering complements our cloud voice solutions with integrated service features that seamlessly combine audio, video, messaging and web services, immediately connecting people with the information they need to communicate effectively. Our integrated cloud-based UCaaS collaboration suite is device and location agnostic, allowing businesses of all sizes to increase productivity by simplifying communication over the most preferred or available device. By connecting employees with other employees and customers via conference call or online meeting, and sharing documents real-time with a simple click, our UCaaS solution drives efficiencies while at the same time reducing costs.
 
Contact Center
 
Fusion’s cloud-based, enterprise contact center offering is fully integrated with our UCaaS solution on our proprietary cloud services platform. Converging voice, data, web and mobile technologies, it enables customers to extend the features and functionality of the contact center throughout the enterprise while providing device and media-agnostic UCaaS services to the contact center. Comprising a full range of cost-effective applications once reserved for the largest enterprises through costly premise-based solutions, our cloud-based contact center offering delivers comprehensive, real-time and historical reporting, database integration (CRM, ERP, etc.), enhanced criteria-based routing and customer-controlled administration. Fusion’s contact center solution protects technology investments by providing a seamless migration path to the cloud, delivering everything a customer needs to monitor, maintain and manage a successful cloud-based contact center environment.
 
SIP Trunking
 
Fusion’s SIP trunking solution allows a customer to retain and use its existing telephone system, while connecting to the Fusion network for access to the cloud, as well as its local services and inbound/outbound domestic and international long distance services. Our SIP trunks efficiently and economically provide businesses with voice channels in any configuration (analog, T-1, PRI, or SIP). Customers save on their local, long distance, and international call charges, eliminate traditional line charges, and gain many of the advantages of cloud voice features and functionality, such as advanced call handling and out-of-area number portability. Burstable voice lines accommodate seasonal traffic fluctuations, marketing campaigns and business continuity requirements. SIP trunks also eliminate the cost of interoffice calling, and allow customers to combine their voice and data traffic onto a single broadband access facility for further cost savings, without having to abandon their existing technology investment. Fusion’s SIP trunking solution can be shared across customer locations and is enhanced by a proprietary administrative portal, which allows customers to alter call routing in real time and provides increased efficiency and control.
 
Cloud Connectivity
 
Fusion’s reliable and secure connections to the cloud ensure high levels of service quality and control.  Leveraging our own expanding on-net network, as well as our relationships with U.S.-based and international carriers, we offer business customers a full complement of redundant, flexible and scalable network solutions, offering true diversity for built-in business continuity. Services range from dedicated circuits to high-speed broadband that are available in a variety of bandwidth levels.   Fusion offers reliable, secure and cost-effective Internet access, as well as Ethernet and MPLS services. Fusion’s quality of service routers seek to provide the highest quality voice traffic while reducing customer access costs.  We believe that in addition to providing secure migration and connection to the cloud, providing a full complement of network services allows us to address a broader set of customer needs, delivering increased value and securing customer loyalty in the process.
 
Cloud Computing
 
Fusion’s cloud computing service centralizes information management, hardware, network and infrastructure in an off-premise location that is hosted and managed by Fusion. Offered as private or hybrid solutions, Fusion’s secure offerings drive efficiencies in both costs and resources allowing for rapid scalability and deployment of applications. These offerings provide a predictable, utility-based OpEx model, which eliminates significant capital expenditures, removes obsolescence concerns and future-proofs customer investments.
 
Managed Applications in the Cloud
 
Fusion offers several advanced, industry-specific SaaS solutions to meet the needs of large enterprises in key vertical markets, especially those facing the rigorous demands of regulatory requirements and/or the need to store, secure and move large amounts of customer or patient data.  We believe that these applications represent significant future revenue potential, as we continue to introduce them to our existing enterprise customers and prospects.
 
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
Cloud Security: Unified Threat Management (UTM)
 
Fusion’s scalable, comprehensive and fully integrated UTM solution secures enterprise data as well as the network on which it is stored, moved or retrieved. The Fusion firewall is application, policy and permission- defined, enabling customers to exercise control over their own security environments. Continuous monitoring and alerts help detect, deter and defeat cyberattacks to mitigate against business disruptions, and malware threats are eliminated with antivirus and antispyware applications designed to maintain the highest level of security against external intrusions. Centrally managed and without requiring a dedicated Internet gateway or firewall on site, the cloud-based solution drives efficiencies in network management and staffing, detecting and blocking unwanted traffic before it impacts the network.
 
Cloud-Based Storage
 
Fusion offers a solution that addresses the explosive growth of data across all industries with a cost-effective and secure storage solution hosted in the cloud. This scalable, fully redundant solution is hosted off-premise, reduces customer data center footprints and resource requirements, and facilitates additional SaaS solutions that can be accommodated on the same cloud platform. Fusion delivers a storage and data back-up assessment service as part of its storage offering, measuring growth and duplication benchmarked against best practices. The solution consolidates requirements across the enterprise, increases efficiency and achieves economies of scale designed to reduce overall customer costs.
 
Backup and Recovery
 
Fusion “Backup and Recovery” is an enterprise-grade backup software solution that provides a single, integrated approach to data protection. Its comprehensive suite of tools and capabilities allow businesses to securely protect more data while using less network capacity and fewer storage resources without having to deploy multiple point solutions.
 
Secure File Sharing
 
Fusion offers a file sharing solution that allows businesses to share, sync and transfer important data across multiple platforms, while keeping security a main priority with military grade encryption. The solution delivers file access from any location, on any device to enable flexible and scalable file sharing, restoration and collaboration.
 
Service Plans
 
Fusion offers several different service packages designed to meet specific customer requirements.  Base level plans offer a basic service package for a low monthly recurring charge (“MRC”). Additional charges, such as local, long distance, or international calling, are charged at per minute rates. Other packages may include a specific number of local or long distance minutes or even unlimited local or long distance calling. Optional value-added features for basic services are available for an incremental monthly charge appropriate for the service. 
 
Cloud connectivity services such as Internet access services and/or private line services are charged on a fixed monthly basis, and are generally based on the bandwidth utilized and the endpoints involved. Cloud computing services are generally composed of an upfront charge and an MRC. Fusion’s contracts with its Business Services customers range from one to five years in length.
 
Carrier Services
 
Fusion’s Carrier Services segment provides voice traffic termination employing primarily VoIP technology. This traffic typically consists of minutes of domestic and international long distance usage that are terminated to telephone numbers in the intended destination countries. The majority of this traffic is international in nature, and terminates to virtually all countries.  
 
We employ least cost routing technology and systems in connection with all of our voice termination services to ensure high quality termination at the lowest possible cost, thus maximizing profit on that traffic. Using least cost routing technology, Fusion often “blends” routes to provide our customers with the optimal mix of price and quality, or to meet unique customer requirements for the termination of voice traffic to specific countries.
 
We also leverage the termination capacity of the Carrier Business segment obtained through interconnection agreements and other methods of termination to carry international traffic generated by our Business Services segment. As we further grow our Business Services segment, we anticipate using an increasingly larger percentage of our termination capacity in support of the higher margin traffic generated from the Business Services segment. Where needed to meet a specific business customer’s requirements, we also procure Internet access and private line circuits from our network of domestic and international carriers.
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
All carrier voice services are priced on a per minute basis, based upon the destination called, the time of day, and the customer’s overall traffic volume. We have reciprocal service agreements with the majority of our carrier customers, and the pricing in those agreements may also reflect the pricing provided to us for terminating our traffic. Prices for Internet access or private line service provided to carriers, as well as pricing for co-location services, are based on a fixed MRC for the services provided.
 
We have contracts with most of our carrier customers, which typically have a one-year renewable term, no minimum commitments, and allow either party to terminate the arrangement without penalty.
 
Network
 
Fusion operates a robust and reliable carrier-grade network and infrastructure that delivers high quality, diverse and secure connections to our cloud services. Our Managed Network Services, Internet access, Ethernet, MPLS and cloud communications solutions can be provided either on-net leveraging our own extensive network, or off-net using the networks of our carrier partners, for truly diverse and redundant connections.
 
Both of our Carrier Services and Business Services network operations centers are manned 24 hours per day, 7 days per week and employ state-of-the-art monitoring and alert systems that are designed to ensure quality of service and a proactive response to potential customer service issues.
 
Our carrier-class network employs digitized, packet-switched service platforms capable of interfacing with most Internet protocols, as well as with TDM (time division multiplexing) or circuit-switched systems, and provides the flexibility necessary to seamlessly transport our customers’ voice and data traffic throughout the United States and the world.  Internet access is delivered through dedicated and redundant high-speed interconnections to all major Internet backbones.
 
The Fusion network is characterized by its low cost of deployment and low recurring costs. It has been constructed to meet actual, rather than anticipated, customer demand with on-net and off-net connections to provide ubiquitous access, delivering maximum cost efficiency without sacrificing quality. This robust network allows us to provide diverse and redundant network connections with seamless automatic failover. Our major points of presence include: New York City; Newark, NJ; Philadelphia, PA; Boston, MA; Atlanta, GA; Miami, FL; Cleveland, OH; Chicago, IL; Dallas, TX; Los Angeles, CA; Washington, D.C.; San Jose, CAS; Charlotte, NC; Jacksonville, FL; Columbus, OH; and Little Ferry, NJ.
 
Key elements of our network include a proprietary cloud communications platform, a BroadSoft cloud communications services platform; Cisco routers and switches, and Acme Packet and Sonus communications services platforms. These redundant network elements are interconnected via a dedicated fiber-based gigabit Ethernet backbone. Most network elements are based on software applications that execute entirely on off-the-shelf servers and are built for easy and rapid deployment and scalability, as well as security and reliability. Fusion has deployed a Global Convergence Solutions routing and rating management solution that has improved routing, rating and invoicing capabilities, facilitated cost savings through overhead reduction and driven efficiencies in route management.
 
Fusion’s centralized network elements are housed in carrier-grade switching facilities located in secure carrier buildings that house many other carriers and are interconnected to other major carrier buildings. These locations allow for cost-effective and rapid interconnection and capacity expansion to carrier customers, as well as major enterprise customers. Fusion believes its facility locations and equipment choices provide the platform required to support its envisioned growth and will allow it to quickly embrace emerging technologies as they become commercially available and viable.
 
Proprietary Cloud Services Platform
 
Our proprietary cloud services platform was designed and developed over many years by our own team of experienced programmers using advanced, yet proven technology. This proprietary platform is scalable, flexible and secure, delivering an integrated portfolio of cloud-based communications services that enable businesses of every size to increase productivity and efficiency while controlling costs. Information management, hardware, network and infrastructure are centralized off-premise, hosted and managed by Fusion, allowing customers to rapidly adjust to fluctuating and unpredictable service demands, drive efficiencies in staff and space, and eliminate the need for costly technology upgrades. The architecture of our proprietary platform has been designed to allow for the seamless integration of additional cloud-based applications, whether or not developed by Fusion. Not subject to third party end user licensing fees or technology release constraints, our proprietary platform allows faster, easier and more cost-effective introduction of new, business-critical applications, delivering a unique feature set engineered to quickly respond to customer demands and market requirements. We differentiate ourselves from our competitors by combining our robust carrier-grade network services to enable secure connections to the cloud, delivering true diversity and a fully integrated solution for maximum efficiency and cost savings.
 
 
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2016 ANNUAL REPORT ON FORM 10-K
 
 
Our proprietary platform has been designed using advanced technologies and best of breed equipment and provides for geographical diversity and redundancy. The platform has been designed for scalability as well as resiliency, and can be easily expanded to accommodate any required number of connections and customers. Platform solutions are location and device neutral, serving multiple as well as single locations nationwide, connecting users to customers and other employees on desktops, laptops, handsets, tablets and mobile phones, wherever they may be located. The platform is currently deployed in two diverse Tier 1 carrier data centers, and such platform has a fully functional, redundant system whose databases are constantly in sync. Thus, should one of the data centers be hit with a catastrophic event, customers should experience no interruption of service. The result is to ensure a proven, reliable and consistent uptime, which is crucial for delivering mission critical solutions.
 
Developed with experienced in-house programmers, the platform requires no ongoing licensing fees for individual seats or SIP sessions, which we believe gives Fusion a competitive advantage against many other service providers. Written in current programming languages and utilizing proven technologies, the system enjoys efficiencies and capabilities not found in older legacy type platforms.
 
Sales and Marketing
 
We market and sell our business services to small, medium and large customers through distribution partners, direct sales personnel and inside sales representatives. Our independent distribution partners are typically paid commissions based on their sales and, thereafter, the continued use of our services by the respective customers. Our sales employees, including direct sales and inside sales, are typically compensated through a combination of base salary and commissions based on their actual sales performance.
 
Our distribution partners generally target small-to medium-size businesses, while our direct sales force focuses on the larger enterprise customers in our targeted verticals.  We believe that our cloud platform, infrastructure, systems and connectivity provide a strong competitive advantage in serving these larger enterprise customers, creating real value with specialized solutions that meet their more complex and rigorous requirements.  Referrals, strategic relationships and the strength of our corporate relationships are also a key part of our overall sales and marketing plan.  Our carrier services are sold entirely through our direct sales force.
 
Strategy
 
Our recent acquisitions are important milestones in our strategic roadmap as we work to become one of the industry’s leading and most successful cloud services providers. Our plans for growth are supported by an experienced and tested management team and dedicated staff, as well as our advanced cloud strategy to organically grow our revenue from the Business Services segment and to continue to develop vertically oriented solutions and acquire additional cloud services companies.
 
Fusion intends to grow organically through direct as well as indirect channel sales efforts; by securing large strategic distribution partners to extend our geographic and vertical market reach; and through the up-sale and cross-sale of services to our existing customer base.
 
We continue to focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art networks and advanced services platforms. Our vertically oriented solutions, which are currently focused on healthcare, legal services, hospitality and real estate, offer a substantial opportunity to gain market share. We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment. For the year ended December 31, 2016, the Business Services segment accounted for 70.9% of our revenues, as compared to 65.1% for the year ended December 31, 2015.
 
Fusion intends to build on the success of its past acquisitions through additional acquisitions of other cloud services companies. We believe that the experience gained in integrating people, products, systems, platforms and customers positions us well to advance our growth. We continue to look to acquire companies that can expand our customer base and distribution capability, add additional cloud-based products and services and help us increase the scale of our operations.
 
We intend to manage our Carrier Services business segment through leveraging technology and systems improvements, enhancing product stability through stronger bi-lateral vendor relationships, and increasing sales to non-traditional carriers such as cable television providers, Internet search engine companies, and large IP telephone companies. We believe the revenue streams from such entities will be more predictable and will offer better margins than the revenues from traditional domestic and international carriers.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Intellectual Property and Trademarks
 
We have several trademarks and service marks, which are supported by a combination of common law and statutory protection. We also own numerous domain names, which have been registered with the Corporation for Assigned Names and Numbers.   The following trademarks are registered with the United States Patent and Trademark Office; however, except as otherwise noted, they are not registered at the international level:
 
Fusion®
Fusion (Logo®
Clear Connections in the Cloud®
Apptix® (also registered with the European Community)
Cloud Alliance Network & Design®
Mailstreet®
 
The telecommunications and VoIP markets have been characterized by substantial litigation regarding patent and other intellectual property rights. Litigation, which could result in substantial cost and diversion of our efforts, may be necessary to enforce trademarks and/or service marks issued to us or to determine the enforceability, scope and validity of the proprietary rights of others. Legal proceedings to enforce our intellectual property or defend ourselves against third-party claims of infringement can be time consuming and costly. Adverse determinations in any litigation or interference proceeding could subject us to costs related to changing names, a loss of established brand recognition, or the need to change the technologies utilized in our services.
 
Competition
 
Each of Fusion’s business segments are highly competitive, rapidly evolving, and subject to constant technological change. In each of our business segments, we compete with companies that are significantly larger and have substantially greater market presence, financial, technical, operational and marketing resources than we do. In the event that such a competitor expends significant sales and marketing resources in one or several markets where we compete with them, we may not be able to compete successfully in those markets. Specialized cloud services providers, who focus on one or more cloud service or application, could adopt aggressive pricing and promotion practices that could impact our ability to compete. We also believe that competition will continue to increase, placing downward pressure on prices. Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions of our competitors. Further, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us. If our competitors were to provide better and more cost effective services than ours, we may not be able to increase our revenues or capture any significant market share.
 
Government Regulation
 
In the United States, our services are generally subject to varying degrees of federal, state and local regulation, including regulation by the Federal Communications Commission (the “FCC”) and various state public utility commissions or public service commissions. We may also be subject to similar regulation by foreign governments and their telecommunications/regulatory agencies. While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing. However, they do require the filing of various reports, compliance with public safety and consumer protection standards and the payment of certain regulatory fees and assessments.
 
We cannot provide assurance that the U.S. and foreign regulatory agencies exercising jurisdiction over us will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate, or will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority. Similarly, if our pricing and/or terms or conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs. From time to time in the past, we have been delinquent in certain filing, reporting and payment obligations, including to the FCC and the Universal Service Administrative Company (“USAC”).  However, we are currently up-to-date with our filings, reports and payments to these and other telecommunications agencies having regulatory oversight over us.
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
As a carrier, we are subject to FCC regulation under the Communications Act of 1934, as amended. We have applied for and received the necessary authority under Section 214 of the Communications Act to operate as a domestic and international carrier. Generally, our international carrier traffic is subject to minimal regulation by state and local jurisdictions. We also hold various state licenses authorizing us to provide intrastate services to our carrier and end-user customers, and we comply with state reporting, fee payment, tariffing, and other obligations with respect to these services.  There may be some states where we provide minimal amounts of intrastate services where we have not fully complied with the licensing requirements. Should we fail at any time to hold the licenses required to provide our intrastate services, we could be subject to fines and/or other penalties.
 
Our VoIP services are lightly regulated, although certain traditional telecommunications regulations have been applied to VoIP services. The FCC requires interconnected VoIP services to comply with: 911 emergency service requirements; registration requirements; Communications Assistance for Law Enforcement requirements; obligations to support Universal Service including the Universal Service Fund (“USF”) and Telecommunications Relay Services, the North American Numbering Plan Administration, and Local Number Portability Administration; Customer Proprietary Network Information requirements; disability access obligations; Local Number Portability requirements; service discontinuance notification obligations; outage reporting requirements; and rural call completion reporting and rules related to ring signal integrity. The FCC defines interconnected VoIP service as service that (1) enables real-time, two-way voice communications, (2) requires a broadband connection from the user’s location, (3) requires Internet protocol compatible customer premises equipment, and (4) permits users generally to receive calls that originate on the public switched telephone network (“PSTN”) and to terminate calls to the PSTN. Under this definition, Fusion is a provider of interconnected VoIP service. We believe that our services are currently compliant with all applicable FCC requirements, and we have made and are making the required contributions to USF and other funds. Should we fail to meet any of the FCC requirements discussed above or fail to make required contributions in the future, we could be subject to revocation of our authority to operate or to fines and/or penalties.
 
As a result of the FCC’s preemption of states’ ability to regulate certain aspects of VoIP service, and a trend in state legislatures to affirmatively deregulate VoIP services for most purposes, our VoIP services are subject to relatively few state regulatory requirements aside from collection of state and local E911 fees and state Universal Service support obligations. We believe that our services are currently compliant with all applicable state requirements, and we have made and are making the required contributions to E911, state USF, and other funds. The state regulatory framework for our VoIP services continues to evolve, so we, in conjunction with our professional advisors, monitor the actions of the various state regulatory agencies and endeavor to ensure that we are in compliance with applicable state law, including any new statutes or regulations that may be passed. However, there can be no assurance that we will become aware of all applicable requirements on a timely basis, or that we will always be fully compliant with applicable rules and regulations. Should we fail to be compliant with applicable state regulations, or to file required reports with state regulatory agencies, we could be subject to fines and/or penalties.
 
While we believe VoIP services may be subject to additional federal, state, local, or international regulation in the future, it is uncertain when or how the effects of such regulation could affect us and our business. If additional regulation does occur, it is possible that such regulatory agencies may impose surcharges, taxes or regulatory fees on VoIP service providers. The imposition of any such surcharges, taxes, or regulatory fees could increase the Company’s costs and thus reduce or eliminate any competitive advantage that we might enjoy today.
 
Employees
 
As of December 31, 2016, we had 306 employees, all of which were full time employees. None of our employees are represented by a labor union or collective bargaining agreement. We believe that the relationship between the Company and its employees are good, and, to date, we have not experienced a work stoppage.
 
Customer Concentrations and Revenues and Assets by Geographic Area
 
For the years ended December 31, 2016 and 2015, no single customer accounted for more than 10% of the Company’s consolidated revenues or accounts receivable.   
 
During the years ended December 31, 2016 and 2015, 89.5% and 87.1%, respectively, of the Company’s revenue was derived from customers in the United States and 10.5 % and 12.9%, respectively, was derived from international customers. As of December 31, 2016 and 2015, the Company had no assets located outside of the United States.
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Available Information
 
Our principal executive offices are located at 420 Lexington Avenue, Suite 1718, New York, New York 10170.  The telephone number at our executive offices is 212-201-2400 and our main corporate website is www.fusionconnect.com.    The information on the Company’s website is neither a part of, nor incorporated by reference into, this report.
 
We make available our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports and statements filed or furnished pursuant to Section 13(a), Section 15(d) or Section 14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), free of charge on our website, www.fusionconnect.com, as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).  Additionally, copies of materials filed by us with the SEC may be accessed at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549, between the hours of 10:00 am to 3:00 pm, or at the SEC’s website www.sec.gov. For information about the SEC’s Public Reference Room, please call 1-800-SEC-0339. 
 
 
 
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
ITEM 1A. RISK FACTORS
 
An investment in our securities involves a high degree of risk. You should carefully consider the risk factors described below in evaluating our future prospects.  In particular, keep these risk factors in mind when you read “forward-looking” statements elsewhere in this report. Forward-looking statements relate to our expectations for future events and time periods. Generally, the words “anticipates,” “expects,” “intends,” “may,” “should,” “plans,” “believes,” “predicts,” “potential”  and similar expressions identify forward-looking statements. Forward-looking statements involve risks and uncertainties, and future events and circumstances could differ significantly from those anticipated in the forward-looking statements. Any of the following risks could harm our business, operating results or financial condition and could result in a complete loss of your investment. Additional risks and uncertainties that are not yet identified or that we currently think are immaterial may also harm our business and financial condition in the future.
 
Risks Relating to Our Business
 
Failure to comply with the financial and other covenants contained in our senior debt facilities is an event of default under these agreements.
 
Our acquisitions have been financed primarily through the issuance of secured debt with an aggregate principal amount outstanding of approximately $101.6 million at December 31, 2016. Currently, all assets of Fusion and its subsidiaries are pledged as collateral under its senior debt facilities. These facilities contain a number of affirmative and negative covenants, including but not limited to, restrictions on the payment of subordinate indebtedness, incurring additional indebtedness, making capital expenditures, paying dividends and cash distributions by subsidiaries.  Under these senior facilities, we are also required to comply with various financial covenants, including leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization, or EBITDA.  Failure to comply with any of the restrictive or financial covenants contained in these facilities could result in an event of default and accelerated demand for repayment of our outstanding debt. We do not have the financial resources to repay our senior debt if it is accelerated.
 
At various times during the first six months of 2015, we were not in compliance with some of the financial covenants contained in our senior credit facility, particularly with respect to the minimum EBITDA and Fixed Charge Coverage Ratio covenants, and we failed to raise additional equity within the time frame committed in the facility. These events of default were waived by the note holders. In addition, as of September 30, 2016, we were not in compliance with the leverage ratio covenants contained in our senior credit facilities, and we received waivers and amendments from the lenders under these facilities as of September 30, 2016.
 
After giving effect to the foregoing waivers, we were in compliance with all of the financial covenants contained in our debt agreements for the years ended December 31, 2016 and 2015. There can be no assurances however, that we will continue to be able to obtain such waivers in the future if we do not comply with the financial covenants contained in our credit facilities.
 
We have a history of operating losses and net losses. There can be no assurance that we will ever achieve profitability or have sufficient funds to execute our business strategy.
 
At December 31, 2016, we had a working capital deficit of $6.6 million and at December 31, 2015, we had working capital of $1.7 million. At December 31, 2016 and 2015, we had stockholders’ equity of $9.2 million and $14.5 million, respectively.   In addition, at December 31, 2016 and 2015, we incurred net losses applicable to common stockholders of $15.1 million and $9.8 million, respectively.  Our cash flows from operations for the year ended December 31, 2016 were not sufficient to support our capital expenditure requirements and other obligations in 2016.  We may not be able to generate profits in the future and may not be able to support our operations or otherwise establish a return on invested capital.  In addition, we may not have sufficient funds to execute our business strategy, requiring us to raise additional funds from the equity markets or other sources, resulting in further dilution to our equity holders.  These losses, among other things, have had, and may continue to have, an adverse effect on our working capital, total assets and stockholders’ equity.
 
Our recent acquisitions do not provide assurance that the acquired operations will be accretive to our earnings or otherwise improve our results of operations.
 
Acquisitions, such as our recent acquisition of Apptix in November 2016, as well as our previously completed acquisitions, involve the integration of previously separate businesses into a common enterprise in which it is envisioned that synergistic operations and economies of scale will result in improved financial performance.  However, realization of these desired results are subject to numerous risks and uncertainties, including but not limited to the following:
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
diversion of management time and attention from daily operations;
difficulties integrating the acquired business, technologies and personnel into the existing business;
potential loss of key employees, key contractual relationships or key customers of the acquired businesses; and
in the case of a stock acquisition, exposure to unforeseen liabilities.
 
Notwithstanding consummation of our recent acquisitions, there is no assurance that these acquisitions will be or will continue to be accretive to our earnings or otherwise improve our results of operations.
 
If we are unable to successfully manage the integration of our acquisitions, we may not benefit from our acquisition strategy.
 
A significant part of our growth strategy is to supplement internal growth with targeted acquisitions.  We may not be successful in integrating newly acquired businesses into our day-to-day operations for a number of reasons, including if we are unable to (a) retain skilled managerial, technical, and sales personnel; (b) retain customers acquired; (c) integrate the services offered by acquired businesses with our existing services to achieve a single package of service offerings; (d) establish and maintain uniform standards, controls, policies and procedures throughout the Company; or (e) devote the management time required to successfully integrate the acquired businesses.
 
The cloud services industry is highly competitive and we may be unable to compete effectively.
 
The cloud services industry is highly competitive, rapidly evolving and subject to constant technological change.   In addition, many of our current cloud services competitors are significantly larger and have substantially greater market presence; greater financial, technical, operational and marketing resources; and more experience.  In the event that any competitor expends significant sales and marketing resources in one or several markets where we compete with them, we may not be able to compete successfully in those markets.  We also believe that competition will continue to increase, placing downward pressure on prices.  Such pressure could adversely affect our gross margins if we are not able to reduce our costs commensurate with the price reductions of our competitors.  In addition, the pace of technological change makes it impossible for us to predict whether we will face new competitors using different technologies to provide the same or similar services offered or proposed to be offered by us.  If our competitors were to provide better and more cost effective services, we may not be able to increase our revenues or capture any significant market share.
 
Our business is capital intensive, and we do not currently generate sufficient revenue to offset our operating expenses.  If we are unable to obtain additional funding when required, we may have to significantly curtail or possibly terminate some of our operations.
 
We may require future capital in order to continue to fund our operating expenses and to continue to otherwise execute our business plan and growth strategy.  If we are unable to obtain the required funding or generate revenue sufficient to sustain our operations, we could be forced to significantly curtail or suspend our operations, including laying-off employees and selling assets. Additional capital may not be available to us when needed or on terms that are acceptable to us, or at all.
 
We have historically funded our working capital requirements through the sale of common stock or preferred stock of Fusion.  The sale of equity securities to fund operations is dilutive to our existing stockholders.  The terms of our debt facilities may limit our ability to utilize cash flows generated from our Business Services segment to fund the Company’s other operations, including corporate overhead expenses.  In the event we are unable to substantially increase our revenue to fund our operating expenses, we may be required to continue to fund operations through additional sales of Fusion’s equity securities.  In the past, limited cash resources restricted our Carrier Services segment’s ability to purchase termination capacity with longer payment terms than the terms under which it is able to sell services to its customers.  Should this trend continue, it could limit our ability to grow our revenues and/or margins, or limit our ability to achieve our revenue and/or margin targets in this segment.
 
If we are unable to manage our growth or implement our expansion strategy, we may increase our costs without increasing our revenue.
 
We may not be able to expand our product offerings, customer base and markets, or implement the other features of our business strategy at the rate, or to the extent, presently planned.  Our projected growth will place a significant strain on our administrative, operational, and financial resources and may increase our costs.  If we are unable to successfully manage our future growth, continue to upgrade our operating and financial control systems, recruit and hire necessary personnel or effectively manage unexpected expansion difficulties, we may not be able to maximize revenue or achieve profitability.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Our ability to grow our business is dependent upon market developments and traffic patterns, which may lead us to make expenditures that do not result in increased revenue.
 
Our purchase of network equipment and software will be based, in part, upon our expectations concerning future revenue growth and market developments.  As we expand our network, we will be required to make significant capital expenditures, including the purchase of additional network equipment and software.  To a lesser extent, our fixed costs will also increase from the ownership and maintenance of a greater amount of network equipment including our switching systems, gateways, routers and other related systems.  If our traffic volume were to decrease, or fail to increase to the extent expected or necessary to make efficient use of our network, our costs as a percentage of revenue would increase significantly.
 
Changes in technology and service offerings could affect the ability of our Business Services segment to compete in the marketplace for cloud communications services.
 
Our Business Services segment is subject to rapid and significant changes in technology, particularly in the emerging areas of cloud voice, cloud connectivity, cloud storage and cloud computing.  Our industry has evolved significantly in these areas over the past few years, and is expected to continue to evolve.  Emerging technologies could lead to the development of newer, more convenient, more cost-effective or otherwise more attractive services.  In addition, the preferences and requirements of business customers are changing rapidly.  Our ability to retain current customers and attract new customers may be highly dependent on whether we choose the technologies that will ultimately have the greatest customer acceptance, are able to adopt these new technologies and offer competitive new services when appropriate, or can compete successfully against other service providers that use these new technologies, many of whom are larger or possess greater financial or technical resources than we do.  The development, introduction and marketing of such new services in response to new technologies or new customer demands may require us to increase our capital expenditures significantly.  In addition, new technologies may be protected by patents or other intellectual property laws and therefore may only be available to our competitors and not to us.
 
Some of our services are dependent upon multiple service platforms, network elements, and back-office systems that are reliant on third party providers.
 
We have deployed back-office systems and services platforms that enable us to offer our customers a wide-array of services and features. Sophisticated back office information and processing systems are vital to our growth and our ability to monitor costs, invoice customers, provision client orders, and achieve operating efficiencies.  Some of these systems are dependent upon license agreements with third party vendors.  These third party vendors may cancel or refuse to renew some of these agreements, and the cancellation or non-renewal of these agreements may harm our ability to invoice customers and provide services efficiently.
 
Our business could be materially and adversely affected in the event of accusations of infringement of third-party intellectual rights.
 
There has been substantial litigation in the areas in which we operate regarding intellectual property rights. Regardless of the merits, accusations and lawsuits concerning claims of infringement or misuse of another party’s proprietary rights may negatively affect customer relationships, may divert management’s attention away from other aspects of our operations and, upon resolution may have a material adverse effect on our business, results of operations, financial condition and cash flows.
 
If we were found to be infringing on the intellectual property rights of a third party, we could be subject to liability for such infringement, which could be material.  We could also be prohibited from selling certain services or required to redesign certain services, each of which could have a material adverse effect on our business and results of operations.  These and other outcomes may result in the loss of a substantial number of existing customers or prevent our acquisition of new customers; cause us to pay license fees for intellectual property we are found to have infringed; cause our costs to increase; materially and adversely affect our brand in the marketplace and cause a substantial loss of good will; and cause us to cease certain services or offering certain features.
  
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
We rely upon certain proprietary rights in our technology, systems and business processes.  If our protection of these rights were to be compromised, it could negatively affect our ability to compete or to achieve our projected business and financial results.
 
Our ability to compete depends, in part, upon our proprietary rights in our technology, systems and business processes.  In general, our technology is based on the integration and use of publicly available hardware components, and is therefore afforded little protection under existing patent law.  Some of our software and systems, while developed by us, are generally not unique in such a manner as to allow protection under existing patent law.  As a result, we generally rely on a combination of contractual restrictions and the general protection afforded by copyright, trademark and trade secret laws to establish and protect our proprietary rights.  Such limited protection could prove insufficient and thereby subject us to increased competition or impact the business or financial results of our operations.
 
It is the Company’s policy to require employees, consultants and, when warranted, certain customers and vendors to execute confidentiality agreements with us.  These agreements provide that confidential information developed or made known during the course of the relationship must be kept confidential and not disclosed to third parties except under certain limited circumstances.  If such arrangements were to prove ineffective in protecting our confidential information, our business or financial performance could be negatively impacted.
 
The U.S. Patent and Trademark Office has granted Fusion federal registration for eight trademarks, and Federal registration of those trademarks will be effective for as long as we continue to use them and renew their registrations.  We may register additional trademarks and other intellectual property rights in the future, although there can be no assurance that our effort to register these trademarks will be successful.  Fusion generally does not register any of its copyrights with the U.S. Copyright Office, but relies on the protection afforded to such copyrights by the U.S. Copyright Act, which provides protection to authors of original works whether published or unpublished and whether registered or unregistered.
 
Breaches in our network security systems may hurt our ability to deliver services and our reputation and result in liability.
 
We could lose customers or expose ourselves to liability if there are any breaches to our network security systems that jeopardize or result in the loss of confidential information stored in our computer systems.  Since our inception, we have experienced two known breaches of network security, which resulted in a temporary failure of certain network operations, but did not result in the loss of any confidential customer information or material financial losses. However, a future network security breach could harm our ability to deliver certain services, damage our reputation or subject us to liability.
 
Our revenue growth is dependent upon our ability to build new distribution relationships and to acquire new customers.
 
Our ability to grow through efficient and cost effective deployment of our cloud services is, in part, dependent upon our ability to identify and contract with local, regional and national entities that will assist in the distribution of our products and services.  If we are unable to identify, contract with or maintain such distribution relationships, or if the efforts of these agents are not successful, we may not grow the customer base or achieve the revenue level currently envisioned and our results of operations will be adversely impacted.
  
We are dependent upon our ability to obtain the necessary regulatory approvals and licenses to enter new domestic and international markets in which such approvals are required.  Such approvals may or may not occur as planned and could be delayed.
 
Our ability to enter into new domestic and international markets may, in certain cases, rely upon our ability to obtain licenses or other approvals to operate in those markets, our ability to establish good working relationships with the relevant regulatory authorities in those jurisdictions, or our ability to interconnect to the local telephone networks in those markets.  If we are not able to obtain the necessary licenses, approvals or interconnections, our ability to enter these new markets may be delayed or prevented.
 
Industry consolidation could make it more difficult for us to compete.
 
Companies offering cloud voice, UCaaS, cloud connectivity, SaaS, IaaS and other cloud services are, in some circumstances, consolidating.  We may not be able to compete successfully with businesses that have combined, or will combine, to produce companies with substantially greater financial, technical, sales and marketing resources, or with larger client bases, more extended networks or more established relationships with vendors and distributors.  If we were to experience such heightened competitive pressures, there is a risk that our revenues may not grow as expected and the value of our equity securities could decline.
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Our ability to provide services is often dependent on our suppliers and other service providers who may not prove to be reliable.
 
A majority of the voice calls made by our customers are connected through other communication carriers, which provide us with transmission capacity through a variety of arrangements.  Our ability to terminate voice traffic in our targeted markets is an essential component of our ongoing operations. If we do not secure or maintain operating and termination arrangements our ability to increase services to our existing markets, and gain entry into new markets, will be limited.  Therefore, our ability to maintain and expand our business is dependent, in part, upon our ability to maintain satisfactory relationships with other domestic carriers, Internet service providers, international carriers, fiber optic cable providers and other service providers, many of which are our competitors, and upon our ability to obtain their services on a cost effective basis.  In addition, if a carrier with whom we interconnect does not carry the traffic routed to it, or does not provide the required capacity, we may be forced to route our traffic to, or buy capacity from, a different carrier on less advantageous terms, which could reduce our profit margins or degrade our network service quality.  In the event network service quality is degraded, it may result in a loss of customers.  To the extent that any of these carriers with whom we interconnect raise their rates, change their pricing structure or reduce the amount of capacity they will make available to us, our revenues and profitability may be adversely affected.
 
We rely on third party equipment suppliers who may not be able to provide us the equipment necessary to deliver the services that we seek to provide.
 
We are dependent on third party equipment suppliers for equipment, software and hardware components, including Cisco, BroadSoft, Acme Packet and Sonus. If these suppliers fail to continue product development and research and development or fail to deliver quality products or support services on a timely basis, or if we are unable to develop alternative sources of supply if and as required, such a failure could result in an inability to deliver the services that we currently provide or intend to provide, and our financial condition and results of operations may be adversely affected.
  
Our Carrier Services business relies on the cooperation of other international carriers and incumbent service providers, who may not always cooperate with us in our attempt to serve a specific country or market.
 
In some cases, the growth of our Carrier Services business requires the cooperation of other international carriers and/or the incumbent service provider in order to provide services to or from specific countries or markets.  In the event the incumbent, or another in-country international carrier, does not cooperate with us or support us in our efforts to serve that country, our ability to provide service to or from that country may be delayed, or the costs to provide service might increase should we be forced to use another more expensive carrier. If we are unable to develop and maintain successful relationships with other international carriers and incumbent operators, our ability to cost-effectively service an important market could be adversely affected.
 
Because we do business on an international level, we are subject to an increased risk of tariffs, sanctions and other uncertainties that may hurt our revenue.
 
There are certain risks inherent in doing business internationally, especially in emerging markets, such as unexpected changes in regulatory requirements, the imposition of tariffs or sanctions, licenses, customs, duties, other trade barriers, political risks, currency devaluations, high inflation, corporate law requirements and civil unrest.  Many of the economies of these emerging markets are weak and volatile.  We may not be able to mitigate the effect of inflation on our operations in these countries by price increases, even over the long-term.  Also, deregulation of the communications markets in developing countries may or may not continue.  Incumbent service providers, trade unions and others may resist legislation directed toward deregulation and may resist allowing us to interconnect to their networks.  The legal systems in emerging markets also frequently have insufficient experience with commercial transactions between private parties, therefore we may not be able to protect or enforce our rights in some emerging market countries.  Governments and regulations may change, thus impacting the availability of new licenses or the cancellation or suspension of existing operating licenses.  The instability of the laws and regulations applicable to our Carrier Services business, as well as their interpretation and enforcement, could materially impact our business in those countries and adversely affect our financial condition or results of operations.
 
The regulatory treatment of VoIP outside the United States varies from country to country.  Some countries are considering subjecting VoIP services to the regulations applied to traditional telephone services and they may assert that we are required to register as a telecommunications carrier in that country or impose other more onerous regulations.  In such cases, our failure to register could subject us to fines, penalties or forfeiture of our right to do business in that country.  Regulatory developments such as these could have a material adverse effect on our ability to grow our international operations.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Additional taxation and government regulation of the cloud communications industry may slow our growth, resulting in decreased demand for our products and services and increased costs of doing business.
 
As a result of changes in regulatory policy, we could be forced to pay additional taxes on the products and services we provide. We structure our operations and our pricing based on assumptions about various domestic and international tax laws, tax treaties and other relevant laws.  Taxation authorities or other regulatory authorities might not reach the same conclusions about taxation that we have reached in formulating our assumptions.  We could suffer adverse tax and other financial consequences if our assumptions about these matters are incorrect or the relevant laws are changed or modified. In the U.S., our products and services are subject to varying degrees of federal, state and local regulation, including regulation by the FCC and various state public utility commissions. We may also be subject to similar regulation by foreign governments and their telecommunications and/or regulatory agencies.  While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over our services and pricing.  However, they do require the filing of various reports, compliance with public safety and consumer protection standards, and the payment of certain regulatory fees and assessments.
 
We cannot assure you that applicable U.S. and foreign regulatory agencies will grant us the required authority to operate, will allow us to maintain existing authority so we can continue to operate or that such agencies will refrain from taking action against us if we are found to have provided services without obtaining the necessary authority.  Similarly, if our pricing and/or terms and conditions of service are not properly filed or updated with the applicable agencies, or if we are otherwise not fully compliant with the rules of the various regulatory agencies, regulators or other third parties could challenge our actions and we could be subject to forfeiture of our authority to provide service, or to penalties, fines, fees or other costs.
 
We also hold various state licenses authorizing us to provide intrastate services to our carrier and end-user customers, and we comply with state reporting, fee payment, tariffing, and other obligations with respect to these services.  However, in several states where we provide de minimus intrastate services we may not have fully complied with applicable licensing requirements. Should we fail at any time to hold the licenses required to provide our intrastate services, we could be subject to fines or other penalties.
 
In addition to new regulations being adopted, existing laws may be applied to the Internet, which could hinder our growth.
 
New and existing laws may cover issues that include: sales and other taxes; user privacy; pricing controls; characteristics and quality of products and services; consumer protection; cross-border commerce; copyright, trademark and patent infringement; and other claims based on the nature and content of Internet materials.  Changes to existing regulations or the adoption of new regulations could delay growth in demand for our products and services and limit the growth of our revenue.
 
The effects of natural disasters such as hurricanes or other events over which we have no control could significantly disrupt our operations and could have a material adverse impact on our business.
 
Our Carrier Services operations were impacted by Hurricane Sandy in the Northeast region of the United States in late October of 2012.  The severe weather conditions directly affected the ability of many of our carrier customers and vendors to connect to us.  As a result, we did not generate the same levels of revenues and gross profit that we believe we would have generated absent these abnormal conditions.  Any future disruptions to the operation of our network, including acts of war, terrorism or other force majeure events, could have a material adverse impact on our liquidity, financial condition and results of operations.  Although we do carry business interruption insurance, we cannot assure you that our losses in the event of a natural disaster or other force majeure event would be completely covered by insurance.
 
If we do not retain our executive officers and senior management, or if we do not continue to attract and retain qualified personnel and independent sales agents, our ability to execute our business plan could be adversely affected.
 
Our existing executive officers and senior management have extensive experience in the communications industry, as well as many years of working together as an integrated management team directing our day-to-day operations.  As a result, we are dependent on those individuals and the loss of the services of one or more of these individuals could impair our ability to execute our strategy or achieve our business and financial objectives.
 
We do not have written employment agreements with any of our executive officers or members of senior management team other than Matthew Rosen, our Chief Executive Officer.
 
We face competition for qualified personnel, including management, technical, financial and sales personnel.  We also rely on independent sales agents to market and sell our services.  If we are unable to attract and retain experienced and motivated personnel, including independent sales agents, the growth of our business or the effectiveness of our day-to-day operations may be negatively impacted and we may not be able to grow our customer base or to achieve our business or financial objectives.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Risks Related to Ownership of our Common Stock
 
We are unlikely to pay cash dividends on our common stock in the foreseeable future.
 
We have never declared or paid any cash dividends on our common stock.  We intend to retain any future earnings to finance our operations and expand our business and therefore do not expect to pay any cash dividends in the foreseeable future.  Holders of our outstanding preferred stock are entitled to receive dividends prior to the payment of any dividends on our common stock. The payment of dividends is also subject to provisions of Delaware law prohibiting the payment of dividends except out of surplus and certain other limitations, as well as the provisions contained in our debt facilities.
 
Our common stock is subject to price volatility unrelated to our operations.
 
The market price of our common stock has fluctuated substantially and will likely continue to fluctuate due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of other companies in our industry, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us.  In addition, the stock market is subject to extreme price and volume fluctuations.  This volatility has had a significant effect on the market price of our common stock and securities issued by many other companies for reasons unrelated to operating performance.
 
In addition, the market price of our common stock may continue to fluctuate significantly in response to a number of other factors, many of which are beyond our control including, but not limited to, the following:
 
ability to obtain and retain securities analyst coverage;
changes in securities analysts’ recommendations or estimates of our financial performance;
changes in the market valuations of companies similar to us;
announcements by us or our competitors of significant contracts, new offerings, acquisitions, commercial relationships, joint ventures, or capital commitments; and
failure to meet analysts’ expectations regarding financial performance.
 
Furthermore, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation.  A securities class action lawsuit against us, regardless of its merit, could result in substantial costs and divert the attention of our management from other business concerns, which in turn could harm our business.
 
Our common stock may become subject to the “penny stock” rules of the SEC, which will make transactions in our shares cumbersome and may reduce the value of an investment in our shares.
 
For so long as the trading price of our common stock is less than $5.00 per share, our common stock may be considered a "penny stock," and in such event trading in our common stock would be subject to the requirements of Rule 15g-9 under the Exchange Act. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements.  The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
 
SEC regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks.  These requirements severely limit the liquidity of securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities.  In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
 
To date, we have not been considered a “penny stock” due to an exemption from Rule 15g-9 for companies with average annual audited revenues for the prior three years of in excess of $6,000,000 per year.  However, should the exclusions from the definition of a “penny stock” change, or should our annual revenues fall dramatically, we may become subject to rules applicable to “penny stocks” and the market for our shares may be adversely affected.
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
The elimination of monetary liability against our directors, officers and employees under our certificate of incorporation and the existence of indemnification rights in favor of our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
 
Our certificate of incorporation contains provisions which eliminate the liability of our directors for monetary damages to the Company and its stockholders to the maximum extent permitted under Delaware corporate law.  Our by-laws also require us to indemnify our directors to the maximum extent permitted by Delaware corporate law.  We may also have contractual indemnification obligations under our agreements with our directors, officers and employees.  These indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees, which we may be unable to recoup.  These provisions and resultant costs may also discourage the Company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit the Company and its stockholders.
 
We will incur certain payment obligations and we will be subject to limitations on our use of Securities Act registration statements until we correct a deficiency in our Exchange Act reports.
 
We have been advised by the Corporate Finance Staff (the “Staff”) of the SEC that, in the Staff’s opinion, the financial statements of Apptix included as an exhibit to our Current Report on Form 8-K originally filed on November 18, 2016 (the “Apptix Form 8-K”), did not comply with applicable SEC auditing standards (the “Deficiency”). Until the Deficiency is corrected (a) we are not considered current in our reporting obligations under the Exchange Act, (b) we are not eligible to use Form S-3 under the Securities Act of 1933, as amended (the “Securities Act”) for registration of our securities prior to December 1, 2017, and (c) we will likely be unable to have a Securities Act registration statement declared effective by the Staff. We are currently working to correct the Deficiency and, once the required financial statements are completed, we intend to file a further amendment to the Apptix Form 8-K, and to make applicable filings with the SEC to permit resales of our common stock by stockholders holding contractual registration rights. Holders of such contractual rights may be entitled to certain damage payments prior to our regaining compliance with affected registration rights.
 
Our use of equity to fund operations is dilutive to existing stockholders and, depending upon the market price for our shares at the time of issuance, we may be required to issue shares at depressed prices.
 
Historically, we have funded a vast majority of our working capital requirements through the sale of Fusion equity securities.  The use of Fusion equity to fund operations is dilutive to our existing stockholders.  Unless we are able to generate substantial revenues to fund our operating expenses, we may be required to continue to fund operations through the sale of additional equity. Moreover, the dilutive effect on our stockholders caused by the issuance of new equity is directly impacted by the market price for our shares at the time of issuance.  If we are required to issue shares at a time when the market price for our equity securities is depressed, we will need to issue more shares than if the market price was higher, and the dilutive effect on our stockholders will be greater.
 
The issuance of our common stock upon the exercise of options or warrants or the conversion of outstanding convertible securities may cause significant dilution to our stockholders and may have an adverse impact on the market price of our common stock.
 
As of December 31, 2016, we had 20,642,028 common shares outstanding and approximately 2,628,389 shares reserved for issuance upon conversion of outstanding preferred stock, 2,902,862 shares reserved for the exercise of outstanding warrants, and 2,183,723 shares reserved for the exercise of outstanding stock options.  The issuance of our common shares upon the exercise of stock options or warrants, or conversion of preferred stock, will increase the number of our publicly traded shares, which could depress the market price of our common stock.
 
The perceived risk of dilution may cause our common stockholders to sell their shares, which would contribute to a downward movement in the stock price of our common stock.  Moreover, the perceived risk of dilution and the resulting downward pressure on our common stock price could encourage investors to engage in short sales of our common stock.  By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
We could use preferred stock to fund operations or resist takeovers, and the issuance of preferred stock may cause additional dilution.
 
Our certificate of incorporation authorizes Fusion to issue up to 10,000,000 shares of preferred stock, of which 5,045 shares of Series A-1, A-2 and A-4 Preferred Stock (the “Series A Preferred”) are currently issued and outstanding, and 12,254 shares of our Series B-2 Preferred Stock (the “Series B-2 Preferred”) are currently issued and outstanding.  Our certificate of incorporation gives the Fusion board of directors the authority to issue preferred stock without any further approval of our stockholders.  We may issue additional shares of preferred stock to raise money to finance our operations.  We may authorize the issuance of the preferred stock in one or more series. In addition, we may set the terms of preferred stock, including:
 
dividend and liquidation preferences;
voting rights;
conversion privileges;
redemption terms; and
other privileges and rights of the shares of each authorized series.
 
The issuance of large blocks of Fusion’s preferred stock could have a dilutive effect on our existing stockholders.  It can also negatively impact our existing stockholders’ liquidation preferences.  In addition, while we include preferred stock in our capitalization to improve our financial flexibility, we could also issue preferred stock to friendly third parties to preserve control by present management.  This could occur if we become subject to a hostile takeover that could ultimately benefit our stockholders.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
Not applicable to smaller reporting companies.
 
ITEM 2.  PROPERTIES.
 
We are headquartered in New York, New York and lease offices and facilities in a number of other locations. Below is a list of our primary leased offices and other facilities as of December 31, 2016.
 
Location
 
Lease Expiration Date
 
Annual Rent
 
Business Use
 
Approx. Sq. Ft.
420 Lexington Avenue, Suite 1718, New York, NY 10170
 
October 2020
 
$666,000
 
Lease of principal executive offices
 
9,956
 
 
 
 
 
 
 
 
 
3565 Piedmont Road, N.E., Suite 300, Atlanta, GA 30005
 
August 2022
 
$261,000
 
Lease of network facilities and office space
 
10,509
 
 
 
 
 
 
 
 
 
155 Willowbrook Boulevard, Wayne, NJ 07470
 
October 2017
 
$140,000
 
Lease of network facilities and office space
 
10,757
 
 
 
 
 
 
 
 
 
13921 Park Center Road Herndon, VA 20171
 
November 2017
 
$345,000
 
Lease of network facilities and office space
 
13,364
 
 
 
 
 
 
 
 
 
1475 W. Cypress Creek Rd., Suite 204 Fort Lauderdale, FL 33309
 
August 2017
 
$82,000
 
Lease of network facilities and office space
 
5,183
 
 
 
 
 
 
 
 
 
23250 Chagrin Blvd. Suite 250 Beachwood, OH 44122
 
May 2019
 
$93,000
 
Lease of sales and administrative office space
 
5,638
 
 
 
 
 
 
 
 
 
1621 Euclid Avenue, Suite 730 Cleveland, OH 44122
 
April 2019
 
$93,000
 
Lease of network facilities and office space
 
10,000
 
We believe that our leased facilities are adequate to meet our current and future needs.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
ITEM 3. LEGAL PROCEEDINGS.
 
From time to time, we may be involved in a variety of claims, lawsuits, investigations and proceedings relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation arising in the ordinary course of business.  Defending such proceedings can be costly and can impose a significant burden on management and employees. We do not expect that the outcome of any such claims or actions will have a material effect on our liquidity, results of operations or financial condition. As of December 31, 2016 and 2015, we did not have any significant ongoing legal matters.
 
ITEM 4. MINE SAFETY DISCLOSURES.
 
Not applicable.
 
PART II
 
ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Market Information
 
Our common stock is listed on The Nasdaq Capital Market under the symbol “FSNN.” The following tables list the high and low sales prices for our common stock for each fiscal quarter during the two preceding fiscal years.
 
Year Ended December 31, 2016
 
High
 
 
Low
 
First Quarter
 $3.80 
 $1.69 
Second Quarter
 $2.09 
 $1.20 
Third Quarter
 $2.46 
 $1.30 
Fourth Quarter
 $1.71 
 $0.96 
Year Ended December 31, 2015
 
 
 
 
 
 
First Quarter
 $4.64 
 $3.52 
Second Quarter
 $4.75 
 $2.07 
Third Quarter
 $3.16 
 $1.88 
Fourth Quarter
 $3.44 
 $1.99 
 
The market price for our common stock is highly volatile and fluctuates in response to a wide variety of factors.
 
Holders of Record
 
As of December 31, 2016, there were approximately 561 stockholders of record of our common stock.
 
Dividend Policy
 
We have never declared or paid any cash dividends on our common stock nor do we anticipate paying any cash dividends on our common stock in the foreseeable future.  Subject to the rights of holders of our outstanding Series A Preferred and Series B-2 Preferred, any future determination to pay dividends will be at the discretion of our board of directors, subject to applicable law, and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, the terms of our outstanding debt and other factors that our Board considers appropriate.
 
The holders of our Series A Preferred are entitled to receive cumulative dividends of 8% per annum payable in arrears, as and when declared by the Fusion board from January 1, 2008.  To date, the Fusion board has not declared any dividends on any series of Series A Preferred.  The holders of our Series B-2 Preferred have been entitled to receive quarterly dividends at an annual rate of 6%.  These dividends can be paid, at our option, either in cash or in shares of our common stock.
 
Recent Sales of Unregistered Securities
 
None.
 
 
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
ITEM 6. SELECTED FINANCIAL DATA.
 
Not applicable to smaller reporting companies.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the notes related thereto included elsewhere in this report.  This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1996.  Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” "should," "believes," "plans'" "potential," "predicts" “anticipate,” “intend” or “estimate” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements (see Item 1A, “Risk Factors”).
 
OVERVIEW
 
Our Business
 
We offer a comprehensive suite of cloud communications, cloud connectivity, cloud computing, and managed cloud-based applications solutions to small, medium and large businesses, and offer domestic and international VoIP services to carriers worldwide.  Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration of leading edge solutions in the cloud, increasing customer collaboration and productivity by seamlessly connecting employees, partners, customers and vendors.  We currently operate our business in two distinct business segments: Business Services and Carrier Services.
 
In the Business Services segment, we are focused on becoming our business customers’ single source for leveraging the increasing power of the cloud, providing a robust package of what we believe to be the essential services that form the foundation for their successful migration to, and efficient use of, the cloud.  Our core Business Services products and services include cloud voice and UCaaS, improving communication and collaboration on virtually any device, virtually anywhere, cloud connectivity services, securely and reliably connecting customers to the cloud with managed network solutions that are designed to increase quality and optimize network efficiency, and contact center solutions.  Our cloud computing and IaaS solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered.  Complemented by our SaaS solutions such as security and business continuity, our advanced cloud offerings include private and hybrid cloud, storage, backup and recovery, and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud. The Company’s cloud-based services are flexible, scalable and rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.
 
Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors, through which we sell domestic and international voice services to other carriers throughout the world.  Customers include U.S.-based carriers sending voice traffic to international destinations, and foreign carriers sending traffic to the U.S. and internationally.  We also purchase domestic and international voice services from many of our Carrier Services customers.  Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic and expand service delivery capabilities for our Business Services segment.
 
We manage our business segments based on gross profit and gross margin, which represents net revenue less the cost of revenue, and on net profitability after excluding certain non-cash and non-recurring items.  The majority of our operations, engineering, information systems and support personnel are assigned to either the Business Services or Carrier Services business segment for segment reporting purposes.
 
We continue to focus our sales and marketing efforts on developing vertically oriented solutions for targeted markets that require the kind of specialized solutions made possible by our state-of-the-art network and advanced services platforms.  Our vertically oriented solutions, which are currently focused on healthcare, legal, hospitality and real estate, offer a substantial opportunity to gain additional market share.   We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment.   In addition to lowering the underlying costs of termination, we believe that our Carrier Services segment supports the growth of the Business Services segment by providing enhanced service offerings for business customers and by strengthening its relationships with major service providers throughout the world.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Recent Acquisitions
 
In a two-step transaction completed in December 2015 and February 2016, we acquired Fidelity. Fidelity provided cloud voice, cloud connectivity, security, data center and cloud storage services to small, medium, and large business customers, primarily in the Midwest.
 
In April 2016, we acquired the intellectual property and assets of TFB, a provider of contact center solutions with an integrated cloud voice platform. The acquisition provides Fusion with entry into the contact center market, and provides cross-selling and up-selling opportunities as TFB's Fortune 500 enterprise customers, government entities and healthcare organizations are migrated to Fusion's cloud solutions platform.
 
On November 14, 2016, we acquired Apptix. Apptix provided cloud-based communications, collaboration, virtual desktop, compliance, security and cloud computing solutions to approximately 1,500 business customers throughout the U.S. 
 
Our Performance
 
Revenues for the year ended December 31, 2016 were $122.0 million, an increase of $20.4 million, or 20%, compared to the year ended December 31, 2015. The increase is due to acquisitions in the Business Services segment. Our operating loss for 2016 decreased from $9.0 million in 2015 to $7.6 million in 2016. Our net loss in 2016 was $12.7 million, as compared to $8.2 million in 2015.
 
Our Outlook
 
Our ability to achieve positive cash flows from operations and net profitability is substantially dependent upon our ability to increase revenue in both of our business segments and/or on our ability to achieve further cost savings and operational efficiencies in our operations.
  
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities.  We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources.  We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions.  If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.
 
We have identified the policies and significant estimation processes discussed below as critical to our operations and to an understanding of our results of operations.  For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included elsewhere in this report.
 
Revenue Recognition
 
We recognize 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.  We record 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 at the time revenue is recognized.
 
Our Business Services revenue includes monthly recurring charges (“MRC”) to customers for whom services are contracted over a specified period of time, and variable usage fees charged to customers that purchase our business products and services.  Revenue recognition commences after the provisioning, testing and acceptance of the service by the customer.  MRC continues 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.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Our Carrier Services revenue is primarily derived from usage fees charged to other carriers that terminate voice traffic over our 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 allowance for billing adjustments.  Revenue for each customer is calculated from information received through our network switches.  Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates.  This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period.  We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.
 
Cost of Revenues
 
For our Business Services segment, cost of revenues include the MRC associated with certain platform services purchased from other service providers, the MRC associated with private line services and the cost of broadband Internet access used to provide service to business customers.
 
Cost of revenues for our Carrier Services segment is comprised primarily of costs incurred from other carriers to originate, transport, and terminate voice calls for our carrier customers.  Thus, the majority of our cost of revenues for this segment is variable, based upon the number of minutes actually used by our customers and the destinations they are calling.  Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through our 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 our network infrastructure, including our New Jersey switching facility, and certain large carrier customers and vendors.
 
Fair Value of Financial Instruments
 
The carrying value of certain financial instruments such as accounts receivable, accounts payable and accrued expenses, approximates their fair values due to their short term nature.  Some of the warrants issued in conjunction with the issuance of our debt and equity securities are accounted for in accordance with the guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”).  For these warrant instruments that are not deemed to be indexed to Fusion’s stock, we classify the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the underlying warrants are exercised, and any change in fair value is recognized in our statement of operations.  The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock (see notes 17 and 18 to the accompanying consolidated financial statements).
 
Accounts Receivable
 
Accounts receivable is recorded net of an allowance for doubtful accounts.  On a periodic basis, we evaluate our accounts receivable and adjust the allowance for doubtful accounts based on our history of past write-offs and collections and current credit conditions.  Specific customer accounts are written off as uncollectible if the probability of a future loss has been established, collection efforts have been exhausted and payment is not expected to be received.
 
Impairment of Long-Lived Assets
 
We periodically review 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, we evaluate recoverability by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset.  If the carrying value of the asset exceeds the projected undiscounted cash flows, we are 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.  We did not record any impairment charges for the years ended December 31, 2016 and 2015.
 
Impairment testing for goodwill is performed annually in our fourth fiscal quarter.  The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level.  We have determined that our reporting units are our operating segments since that is the lowest level at which discrete, reliable financial and cash flow information is available.  The authoritative guidance provides entities with an option to perform a qualitative assessment to determine whether a quantitative analysis is necessary.  We performed qualitative impairment evaluations on our goodwill as of December 31, 2016 and 2015 and determined that there were no indications that goodwill was impaired.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Income Taxes
 
We account for income taxes in accordance with U.S. GAAP, which requires the recognition of deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in our financial statements.  Deferred income tax assets and liabilities are computed for temporary 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 to reduce deferred income tax assets when we determine that it is more likely than not that we will fail to generate sufficient taxable income to be able to utilize the deferred tax assets.
 
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 lessee’s 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 lessee’s 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, FASB issued 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 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, 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 is effective for interim and annual reporting periods beginning after December 15, 2015. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
 
In April 2015, FASB issued guidance requiring an entity to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company adopted this guidance retrospectively for all periods presented and reclassified all of its debt issuance costs in its 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.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
RESULTS OF OPERATIONS
 
The following table summarizes our results of operations for the years ended December 31, 2016 and 2015: 
 
 
 
2016
 
 
2015  
 
 
 
$
 
 
%
 
 
$
 
 
%
 
Revenues
 $122,045,320 
  100.0 
 $101,694,516 
  100.0 
Cost of revenues *
  68,058,432 
  55.8 
  56,724,121 
  55.8 
Gross profit
  53,986,888 
  44.2 
  44,970,395 
  44.2 
Depreciation and amortization
  13,096,587 
  10.7 
  12,975,981 
  12.8 
Selling, general and administrative expenses
  48,524,923 
  39.8 
  41,009,107 
  40.3 
Total operating expenses
  61,621,510 
  50.5 
  53,985,088 
  53.1 
Operating loss
  ( 7,634,622)
  (6.3)
  ( 9,014,693)
  (8.9)
Other (expenses) income:
    
    
    
    
Interest expense
  ( 6,742,143)
  (5.5)
  ( 6,062,923)
  (6.0)
Loss on extinguishment of debt
  ( 214,294)
  (0.2)
  ( 2,720,355)
  (2.7)
Gain on change in fair value of derivative liability
  265,383 
  0.2 
  1,843,997 
  1.8 
Loss on disposal of property and equipment
  ( 129,119)
  (0.1)
  ( 37,444)
  (0.0)
Other income, net
  128,987 
  0.1 
  101,057 
  0.1 
Total other expenses
  ( 6,691,186)
  (5.5)
  ( 6,875,668)
  (6.8)
Loss before income taxes
  ( 14,325,808)
  (11.7)
  ( 15,890,361)
  (15.6)
Income tax benefit
  1,609,485 
  1.3 
  7,660,536 
  7.5 
Net loss
 $(12,716,323)
  (10.4)
 $(8,229,825)
  (8.1)
 
* Exclusive of depreciation and amortization, shown separately.
 
Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
 
Revenues
 
Consolidated revenues were $122.0 million for the year ended December 31, 2016, as compared to $101.7 million for the year ended December 31, 2015, an increase of $20.4 million, or 20.0%.  Revenues for the Business Services segment increased by $20.4 million to $86.6 million for the year ended December 31, 2016, as compared to $66.2 million for the year ended December 31, 2015.  This increase is primarily attributable to revenue derived from new customers obtained from our acquisitions of Fidelity in the amount of $17.8 million, and Apptix in the amount of $3.0 million in 2016, both of which were not present in 2015.
 
Carrier Services revenue of $35.5 million for the year ended December 31, 2016 was essentially unchanged from the year ended December 31, 2015, as a 31% decrease in the number of minutes transmitted over our network was offset by a 45% increase in the blended rate per minute of traffic terminated.
  
Cost of Revenues and Gross Margin
 
Consolidated cost of revenues was $68.1 million for the year ended December 31, 2016, as compared to $56.7 million for the year ended December 31, 2015. This increase is mainly due to additional costs arising from our acquisition of Fidelity and, to a lesser extent, an increase in cost of revenues in the Carrier Services of approximately $1.2 million.
 
Consolidated gross margin was 44.2% for the years ended December 31, 2016 and 2015, due to a higher concentration of Business Services revenue, which generates a higher margin than Carrier Services revenue, within our consolidated results in 2016. The Business Services gross margin decreased from 63.5% in 2015 to 60.4% 2016, to an increase in total customer services costs attributable to the RootAxcess and Fidelity acquisitions. The Carrier Services gross margin was 4.8 % for the year ended December 31, 2016, as compared to 8.2% in the prior year, mainly due to a 50.7% increase in the blended cost per minute of traffic terminated.
 
 
27
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
Depreciation and Amortization
 
Depreciation and amortization expense was essentially unchanged in in 2016 as compared to 2015, as a $2.0 million increase in depreciation expense in 2016 was offset by a $2.0 million decrease in amortization expense, as some our intangible assets became fully amortized in 2016. During the year ended December 31, 2016, we recorded depreciation expense of $0.9 million to write off some of our capitalized internal development costs.
 
Selling, General and Administrative Expense
 
Selling, general and administrative expenses (“SG&A”) was $48.5 million for the year ended December 31, 2016, as compared to $41.0 million for the year ended December 31, 2015.  This increase is mainly the result of higher salaries and employee related benefit costs of approximately $6.2 million, driven primarily by an increase in headcount attributable to our acquisitions of Fidelity and, to a lesser extent Apptix. In addition, we incurred higher sales commissions of $1.3 million as a result of the 31% increase in Business Services revenue.
 
Operating Loss
 
Our operating loss was $7.6 million for the year ending December 31, 2016, as compared to $9.0 million for 2015. The decrease is primarily due to the increase in gross profit of $9.0 million resulting from the increase in Business Services revenue, largely offset by the increase in SG&A of $7.5 million.
 
Interest Expense
 
Interest expense was $6.7 million for the year ended December 31, 2016, as compared to $6.1 million for the year ended December 31, 2015. The increase was due to higher average indebtedness in 2016 to finance our acquisitions (see “Liquidity and Capital Resources”) and to higher amortization of debt discount and debt issuance costs.
 
Loss on Extinguishment of Debt
 
During the year ended December 31, 2016, we recognized a loss on the extinguishment of debt in the amount of $0.2 million when we replaced our existing senior secured credit facility with a larger senior secured facility in November of 2016 (see “Liquidity and Capital Resources”). During the year ended December 31, 2015, we recognized a loss on the extinguishment of debt of $2.7 million as a result of debt discount and a debt issuance costs write-off of $1.7 million and a prepayment penalty of approximately $1.0 million associated with the retirement of approximately $20.0 million of outstanding notes.
 
Change in Fair Value of Derivative Liabilities
 
During the year ended December 31, 2016, we recognized a gain on the change in fair value of our derivative liabilities of $0.3 million, as compared to $1.8 million during the year ended December 31, 2015. These gains are related to warrants we issued to our senior lenders in 2012 and to purchasers of our Series B-2 Preferred Stock in 2013 and 2014, the terms of which require them to be treated as liabilities and not as equity instruments. The changes in their fair value are required to be recorded through the statement of operations at each accounting period. These warrants are valued using an option pricing model and other valuation models, such that increases in Fusion’s common stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases in Fusion’s common stock price result in a lower valuation and a gain being recorded in our income statement.
 
We expect that we will be subject to additional fluctuations in our income statement in 2017 and beyond based on changes in Fusion’s common stock price and the corresponding changes in fair value of our derivative liabilities associated with the warrants issued in connection with our Series B-2 Preferred Stock.
 
Net Loss
 
Our net loss for the year ended December 31, 2016 was $12.7 million, as compared to $8.2 million for the year ended December 31, 2015. The increase in net loss was largely due to a lower income tax benefit in 2016 of $1.6 million, as compared to $7.7 million in 2015.
 
 
 
28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
Since our inception, we have incurred significant net losses.  At December 31, 2016, we had a working capital deficit of $6.6 million and stockholders’ equity of $9.2 million, as compared to working capital and stockholders’ equity of $1.7 million and $14.5 million, respectively, at December 31, 2015. Our consolidated cash balance at December 31, 2016 was $7.2 million, as compared to $7.5 million at December 31, 2015.  While we believe we have sufficient cash to fund our operations and meet our operating and debt obligations for the next twelve months, we may be required to raise additional capital to support our business plan. There can be no assurances that such funds will be available to the Company as and when needed or on terms acceptable to us, or at all.  
 
During 2016 and 2015, we relied primarily on the sale of Fusion’s equity securities and the cash generated from our Business Services segment to fund operations, and we issued additional debt securities to fund our acquisitions and growth strategy. On November 16, 2016, we sold 2,213,700 shares of Fusion common stock and received net proceeds, after offering expenses, of $2.3 million. We intend to use the net proceeds from this offering for working capital and other general corporate purposes.
 
We have never paid cash dividends on Fusion’s common stock, and we do not anticipate paying cash dividends on Fusion’s common stock in the foreseeable future. We intend to retain all of our earnings, if any, for general corporate purposes, and, if appropriate, to finance the expansion of our business. Subject to the rights of holders of our outstanding preferred stock, any future determination to pay dividends is at the discretion of Fusion’s Board of Directors, and will be dependent upon our financial condition, operating results, capital requirements, Delaware law requirements, general business conditions, the terms of our senior secured credit facilities and other factors that Fusion’s Board of Directors and senior management consider appropriate.
 
The holders of our Series B-2 Preferred Stock are entitled to receive quarterly dividends at an annual rate of 6%.  These dividends can be paid, at the Company’s option, either in cash or, under certain circumstances, in shares of Fusion common stock. The Fusion Board of Directors declared a dividend of $2.0 million for the year ended December 31, 2016 on the Series B-2 Preferred Stock, which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 1,140,568 shares of Fusion’s common stock.
 
In December 2015, the Company entered into an Amended and Restated Credit Facility with Opus Bank (the “Opus Credit Facility”), which facility amended and restated, in its entirety, the $40.0 million credit facility originally entered into by us with Opus Bank in August 2015. As was the case with the original Opus facility, the Opus Credit Facility consisted of a $15.0 million revolving credit facility and a $25.0 million term loan. We used the proceeds from the Opus Credit Facility to fund our acquisitions of Fidelity and RootAxcess, and to retire approximately $11.0 million of notes issued under the Praesidian Facility (as defined below).
 
Concurrent with the execution of the Opus Credit Facility, we executed the Fourth Amended Securities Purchase Agreement with Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund IIIA, LP and United Insurance Company of America (the “Fourth Amended SPA”). The Fourth Amended SPA amended and restated the terms of the Third Amended and Restated Securities Purchase Agreement and Security Agreement (the “Third Amendment”), which itself amended and restated earlier versions of this securities purchase agreement. The Third Amendment, together with each earlier and subsequent version of this facility are hereinafter collectively referred to as the “Praesidian Facility.”  Specifically, the Fourth Amended SPA amended the Third Amendment to (i) provide the consent of the continuing lenders to the acquisition of Fidelity (ii) join Fidelity as a guarantor and credit party under the Fourth Amended SPA, and (iii) modify or eliminate certain of the financial covenants contained in the Third Amendment, specifically the requirement to maintain a minimum unencumbered cash bank balance of $1.0 million at all times effective as of December 31, 2015.
 
On November 14, 2016, contemporaneously with the Apptix acquisition, we entered into a credit agreement (the “East West Credit Agreement”) with East West Bank and Opus (collectively with East West Bank, the “East West Lenders”). Under the East West Credit Agreement, the East West Lenders extended the Company (i) a $65.0 million term loan and (ii) a $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis). The proceeds of the term loan were used to retire the $40 million outstanding under the Opus Credit Facility, and to fund the cash portion of the purchase price of the Apptix acquisition in the amount of $23.1 million.
 
Borrowings under the East West Credit Agreement are evidenced by promissory notes bearing interest at rates to be computed based upon either the then current “prime” rate of interest or “LIBOR” rate of interest, as selected by us at the time of borrowing. Interest on borrowings that we designate as “base rate” loans bear interest at the greater of the prime rate published by the Wall Street Journal or 3.25% per annum, in each case plus 2% per annum. Interest on borrowings that we designate as “LIBOR rate” loans bear interest at the LIBOR rate published by the Wall Street Journal, plus 5% per annum.
 
 
29
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
We are required to repay the term loan in equal monthly payments of $270,833 commencing January 1, 2017 and continuing until January 1, 2018, when monthly payments increase to $541,667 until the maturity date of the term loan on November 12, 2021, when the remaining $36.8 million of principal is due. Borrowings under the revolving credit facility are also payable on the November 12, 2021 maturity date of the facility. At December 31, 2016, $3.0 million was outstanding under the revolving credit facility.
 
In conjunction with the execution of the East West Credit Agreement, we and the East West Lenders also entered into (i) an IP Security Agreement under which we pledged intellectual property to the East West Lenders to secure payment of the East West Credit Agreement, (ii) Subordination Agreements under which certain creditors of the Company, including the lenders under the Praesidian Facility, and the East West Lenders have established priorities among them and reached certain agreements as to enforcing their respective rights against the Company, and (iii) a Pledge and Security Agreement under which Fusion and its Fusion NBS Acquisition Corp. subsidiary (“FNAC”) have each pledged its equity interest in its subsidiaries to the East West Lenders.
 
Under the East West Credit Agreement:
 
The Company is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to its obligations to the East West Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries.
 
The Company is required to comply with various financial covenants, including leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization; and its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of its indebtedness.
 
The Company granted the East West Lenders security interests on all of its assets, as well as the capital stock of FNAC and each of its subsidiaries.
 
Fusion and its subsidiaries (and future subsidiaries of both) guaranteed FNAC’s obligations, including FNAC’s repayment obligations thereunder.
 
Also on November 14, 2016, we entered into a fifth amendment and restatement of the Praesidian Facility. This amendment, among other things, extended the maturity date of the notes outstanding under the Praesidian Facility to May 12, 2022, with no principal payments required until the maturity date, and modified certain financial covenants under the Praesidian Facility such that the covenants are now substantially similar to those contained in the East West Credit Agreement. In addition, the lenders under the Praesidian facility agreed to subordinate their right to repayment to all amounts owed under the East West Credit Agreement. At December 31, 2016, we were in compliance with all of the financial covenants contained in the East West Credit Agreement and the Praesidian Facility, and we had $33.6 million principal amount of notes outstanding under the Praesidian Facility.
 
At December 31, 2016, we have a note payable outstanding of $0.9 million to Marvin Rosen, the Chairman of Fusion’s Board. This note is subordinated to all amounts borrowed under the East West Credit Agreement and the Praesidian Facility.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after all borrowings under the East West Credit Agreement are paid in full.   For the years ended December 31, 2016 and 2015, we paid interest of approximately $97,000 on this note.
 
We have entered into various capital lease agreements to finance the purchase of property and equipment, at interest rates generally ranging from 5.3% to 6.6%.   Scheduled principal payments under these leases for the year ended December 31, 2017 aggregate to $1.0 million.
 
On September 12, 2011, we entered into a purchase and sale agreement with Prestige Capital Corporation (“Prestige”), whereby we may could certain of our Carrier Services accounts receivable to Prestige at a discount in order to improve our liquidity and cash flow. Under the terms of that agreement, Prestige paid a percentage of the face amount of the receivables at the time of sale, and the remainder, net of the discount, was paid to us within two business days after Prestige received payment on those receivables. For the year ended December 31, 2016 and 2015, proceeds from the accounts receivable factoring arrangement was $0 and $1.8 million, respectively.  The arrangement with Prestige was terminated during the third quarter of 2016. 
 
 
30
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
The following table sets forth a summary of our cash flows for the periods indicated:
 
 
 
Year ended December 31,
 
 
 
2016
 
 
2015
 
Net cash provided by (used in) operating activities
 $326,287 
 $(152,603)
Net cash used in investing activities
  (27,460,035)
  (30,863,462)
Net cash provided by financing activities
  26,815,115 
  32,111,925 
Net (decrease) increase in cash and cash equivalents
  (318,633)
  1,095,860 
Cash and cash equivalents, beginning of year
  7,540,543 
  6,444,683 
Cash and cash equivalents, end of year
 $7,221,910 
 $7,540,543 
 
Cash provided by (used in) operating activities was $0.3 million and ($0.2) million for each of the years ended December 31, 2016 and 2015, respectively.  The following table illustrates the primary components of our cash flows from operations:
 
 
 
Year ended December 31,
 
 
 
2016
 
 
2015
 
Net loss
 $(12,716,323)
 $(8,229,825)
Non-cash expenses, gains and losses
  13,552,338 
  7,421,855 
Changes in accounts receivable
  190,467 
  (883,253)
Changes in accounts payable and accrued expenses
  (1,254,445)
  2,005,632 
Other
  554,250 
  (467,012)
Cash provided by (used in) operating activities
 $326,287 
 $(152,603)
 
Cash used in investing activities was $27.5 million for the year ended December 31, 2016, as compared to $30.9 million for the year ended December 31, 2015.  For the year ended December 31, 2016, we paid $23.3 million in cash for acquisitions, primarily Apptix, net of cash acquired, and had $4.8 million of capital expenditures. For the year ended December 31, 2015, we paid approximately $28.5 million in cash, net of cash acquired, for acquisitions, and had capital expenditures of $3.4 million.  
 
Cash provided by financing activities was $26.8 million for the year ended December 31, 2016, as compared to $32.1 million for the year ended December 31, 2015.  During 2016, we received $66.7 million of proceeds, net of transaction costs, upon our entering into the East West Credit Agreement, retired the $40.0 million Opus Credit Facility, received $2.3 million from the sale of Fusion common stock and made payments on equipment financing obligations of $1.0 million. During 2015, we raised $5.6 million from the sale of Fusion equity securities, issued $9.0 million of notes, borrowed $40.0 million under the Opus Credit Facility to fund our acquisitions of Fidelity and RootAxcess and to retire outstanding notes of approximately $20.0 million, and made debt service and equipment financing payments of approximately $1.9 million.  
 
OTHER MATTERS
 
Inflation
 
We do not believe inflation has a significant effect on our operations at this time.
 
Off Balance Sheet Arrangements
 
Through December 31, 2016, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance sheet arrangements or other commercially narrow or limited purposes.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for smaller reporting companies.
 
 
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The Company’s consolidated financial statements required by this Item are included after Item 15 of this report.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
  
ITEM 9A. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, to allow timely decisions regarding required disclosure.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
 
Our management, with the participation of our principal executive officer and our principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016.  Based upon that evaluation and subject to the foregoing, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.   In designing and evaluating our disclosure controls and procedures, management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
 
Management’s Report on Internal Control over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act). Management conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the assessment, management concluded that the internal control over financial reporting was effective as of December 31, 2016 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP.
 
Changes in Internal Control over Financial Reporting
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15D-15(f) under the Exchange Act) that occurred during the year ended December 31, 2016.  Based on that evaluation, our principal executive officer and principal accounting officer concluded that there has not been any material change in our internal control over financial reporting during the quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
ITEM 9B. OTHER INFORMATION.
 
Not applicable.
 
 
 
32
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
PART III
 
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
As permitted by Instruction G(3) to Form 10-K, the information required by this Item has been omitted but will be filed by us on or prior to April 30, 2017.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
As permitted by Instruction G(3) to Form 10-K, the information required by this Item has been omitted but will be filed by us on or prior to April 30, 2017.  
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
As permitted by Instruction G(3) to Form 10-K, the information required by this Item has been omitted but will be filed by us on or prior to April 30, 2017.
 
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
As permitted by Instruction G(3) to Form 10-K, the information required by this Item has been omitted but will be filed by us on or prior to April 30, 2017.  
 
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
As permitted by Instruction G(3) to Form 10-K, the information required by this Item has been omitted but will be filed by us on or prior to April 30, 2017.
 
 
 
33
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
PART IV
 
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
(a) (1) Financial Statements.
 
The consolidated financial statements filed as part of this Annual Report on Form 10-K are identified in the Index to Consolidated Financial Statements. 
 
(a) (2) Exhibits.
 
The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC.
  
 
Exhibit No.
 
Description
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation (*)
3.1.1
 
Certificate of Amendment to Certificate of Incorporation(14)
3.2
 
Bylaws (*)
10.1
 
1998 Stock Option Plan (*)
10.1.1
 
2009 Stock Option Plan(16)
10.1.2
 
2016 Equity Incentive Plan (14)
10.2
 
Employment Agreement, dated as of November 5, 2015, between registrant and Matthew D. Rosen (12)
10.3
 
Form of Warrant to Purchase Common Stock (*)
10.4
 
Lease Agreement between registrant and SLG Graybar Sublease, LLC for Suite 1718 at 420 Lexington Avenue, New York, NY office (*)
10.4.1
 
Lease Modification Agreement dated November 19, 2014, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (13)
10.5
 
Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (*)
10.5.1
 
Sixth Amendment dated July 23, 2014, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (13)
10.5.2
 
Seventh Amendment, dated August 2015, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office(1)
10.5.3
 
Eight Amendment, dated July 8, 2016, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office(1)
 
 
 
10.6
 
Form of Promissory Note and Security Agreement (2)
10.7
 
Non-Competition Agreement between registrant and Marvin Rosen (*)
10.8
 
Form of Warrant (3)
10.9
 
Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (4)
10.10
 
Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (4)
10.11
 
Amendment No. 1 dated June 6, 2013 to the Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (10)
 
 
34
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
10.12
 
Warrant to Purchase Common Stock issued by registrant to Marvin Rosen, dated July 31, 2002 (*)
10.13
 
Amendment No. 1 dated June 6, 2013 to the Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (10)
10.14
 
Amendment No. 2 dated August 20, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.15
 
Amendment No. 2 dated August 20, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.16
 
Amendment No. 3 dated September 21, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.17
 
Amendment No. 3 dated September 21, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.18
 
Amendment No. 4 dated October 24, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.19
 
Amendment No. 4 dated October 24, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.20
 
Lease Agreement dated October 1, 2012 by and between Manchester Realty, LLC and Fusion NBS Acquisition Corp (7)
10.20.1
 
Lease Modification Agreement, dated October 1, 2014 by and between 280 Holdings, LLC (successor in interest to Manchester Realty, LLC) and Fusion NBS Acquisition Corp (11)
10.21
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III (5)
10.22
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III Praesidian Fund III Series B Note (5)
10.23
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
10.24
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
10.25
 
Praesidian Fund III Common Stock Purchase Warrant dated October 29, 2012 (5)
10.26
 
Praesidian Fund III-A Common Stock Purchase Warrant dated October 29, 2012 (5)
10.27
 
Intellectual Property Security Agreement dated as of October 29, 2012 by the registrant and Network Billing systems, LLC, in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP (5)
10.28
 
Right of First Refusal Agreement dated as of October 29, 2012 by and among Fthe registrant, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, LP and Praesidian Capital Opportunity Fund III as agent (5)
10.29
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III (5)
10.30
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III-A (5)
 
 
 
35
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
10.31
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp., and Plexus Fund II, LP (5)
10.32
 
Asset Purchase and Sale Agreement effective as of August 30, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC (6)
10.33
 
First Amendment to the Asset Purchase and Sale Agreement effective as of November 15, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC (7)
10.34
 
Second Amendment to the Asset Purchase and Sale Agreement effective as of December 16, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress Communications, LLC (8)
10.35
 
Third Amendment to Securities Purchase Agreement is entered into as of December 16, 2013, by and among Fusion NBS Acquisition Corp, the registrant, Network Billing Systems, LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP, and Praesidian Capital Opportunity Fund III, LP as agent (9)
10.36
 
Form of Common Stock Purchase Warrant (9)
10.37
 
Form of Registration Rights Agreement (9)
10.38
 
Form of Series C Note (9)
10.39
 
Form of Series D Note dated December 31, 2013 (9)
10.40
 
Form of Management Rights Letter dated December 31, 2013 (9)
10.41
 
Form of Lenders’ Warrant dated December 31, 2013 (9)
10.42
 
Joinder Agreement dated as of December 31, 2013 by and among the registrant, Fusion NBS Acquisition Corp., Fusion BVX LLC in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and United Insurance Company Of America (9)
10.43
 
Assignment and Assumption Agreement dated as of December 31, 2013 by and among BroadvoxGo!, LLC, Cypress Communications, LLC, the registrant, and Fusion BVX, LLC (9)
10.44
 
Bill of Sale dated as of December 31, 2013 delivered by BroadvoxGo!, LLC and Cypress Communications, LLC (9)
10.45
 
Limited Trademark License Agreement dated as of December 31, 2013 by and among Broadvox, LLC; the registrant and Fusion BVX LLC (9)
 
10.46
 
Form of Series E Note, dated as of October 31, 2014 (11)
10.47
 
Agreement and Plan of Merger, dated as of October 15, 2014, by and among the registrant, Fusion PTC Acquisition Inc., PingTone Communications, Inc., the Majority Stockholders of PingTone Communications, Inc. and J Shelby Bryan, as Stockholders Representative (11)
10.48
 
Stock Purchase and Sale Agreement, dated as of December 8, 2015, by and among Fusion NBS Acquisition Corp., Mitch Marks, Ron Kohn and Robert Marks (13)
10.49
 
Credit Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., and East West Bank and the Other Lenders from time to time party hereto (15)
10.50
 
Subordination Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., Praesidian Capital Opportunity Fund III, LP, and East West Bank (15)
10.51
 
Intercreditor and Subordination Agreement dated as of November 14, 2016 by and among Marvin Rosen, the registrant and East West Bank (15)
 
Pledge and Security Agreement dated as of November 14, 2016 by and among each of the Grantors Party thereto and East West Bank (15)
 
 
 
36
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
 
Guaranty dated as of November 14, 2016 from the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC and Apptix, Inc. to East West Bank (15)
10.54
 
Intellectual Property Security Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc., Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., and East West Bank (15)
10.55
 
Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, by and among Fusion NBS Acquisition Corp., as borrower, the registrant, Network Billing Systems, L.L.C., Fusion BVX, LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Fidelity Access Networks, Inc., Apptix, Inc., Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United Insurance Company of America (15)
10.56
 
Stock Purchase and Sale Agreement dated November 14, 2016 by and among Fusion NBS Acquisition Corp., the registrant and Apptix ASA (15)
10.57
 
Registration Rights Agreement dated as of November 14, 2016 by and between the registrant and Apptix ASA (15)
10.58
 
Common Stock Purchase Agreement dated November 14, 2016 by and among the registrant and the Purchasers (15)
 
Office Lease, as amended between Chagrin-Green, LLC and Fidelity Access Networks, LLC (1)
 
First Amendment to Lease Agreement dated as of August 2015 by and between Piedmont Center, 1-4 LLC and the registrant (1)
14
 
Code of Ethics of registrant (11)
 
List of Subsidiaries (1)
23.1
 
Consent of EisnerAmper LLP(1)
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2
 
Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1
 
Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
32.2
 
Section 1350 Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS***
 
XBRL Instance Document
101.SCH***
 
XBRL Taxonomy Extension Schema Document
101.CAL***
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE***
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Originally filed with the Company’s Registration Statement no. 33-120412 and incorporated herein by reference.
 
 
**
Originally filed with the Company’s Registration Statement no. 33-120206 and incorporated herein by reference.
 
 
***
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
(1)
Filed herewith.
(2)
Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed April 13, 2011 and incorporated herein by reference.
(3)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 15, 2006 and incorporated herein by reference.
 
 
 
 
37
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
 
(4)
Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed March 30, 2012 and incorporated herein by reference.
(5)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 2, 2012 and incorporated herein by reference.
(6)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on September 4, 2013 and incorporated herein by reference.
(7)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 21, 2013 and incorporated herein by reference.
(8)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 19, 2013 and incorporated herein by reference.
(9)
Filed as an Exhibit to the Company’s Current Report on Form 8-K/A filed on January 7, 2014 and incorporated herein by reference.
(10)
Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference.
(11)
Filed as an Exhibit to the Company’s Current Report on Form 8-K dated November 3, 2014 and incorporated herein by reference.
(12)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 10, 2015 and incorporated herein by reference.
(13)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 14, 2015, and incorporated herein by reference.
(14)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 18, 2016, and incorporated herein by reference.
(15)
Filed as an Exhibit to the Company’s Form 10-K filed on March 28, 2016 and incorporated herein by reference.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
38
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on the date indicated.
 
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.  
 
 
 
 
Date: March 20, 2017
By:  
/s/  MATTHEW D. ROSEN
 
 
 
Matthew D. Rosen 
 
 
 
Chief Executive Officer and Principal Executive Officer 
 
 
 
 
 
 
 
 
Date: March 20, 2017
By:  
/s/  MICHAEL R. BAUER
 
 
 
Michael R. Bauer 
 
 
 
Chief Financial Officer, Principal Financial Officer
 
 
 
   
 
 
By:
/s/ Lisa Taranto
 
 
 
Lisa Taranto  
 
 
 
Vice President of Finance and Accounting, Principal Accounting Officer 
 
 
 
 
 
 
39
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
POWER OF ATTORNEY
 
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Matthew D. Rosen and Michael R. Bauer, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
 
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons in the capacities and on the date indicated:
 
 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ MARVIN S. ROSEN
 
Chairman of the Board
 
 
Marvin S. Rosen
 
 
 
March 20, 2017
 
 
 
 
 
/s/ PHILIP D. TURITS
 
Director
 
 
Philip D. Turits
 
 
 
March 20, 2017
 
 
 
 
 
/s/ MATTHEW D. ROSEN
 
Chief Executive Officer and Director
 
 
Matthew D. Rosen
 
 
 
March 20, 2017
 
 
 
 
 
/s/ JACK ROSEN
 
Director
 
 
Jack Rosen
 
 
 
March 20, 2017
 
 
 
 
 
/s/ WILLIAM RUBIN
 
Director
 
 
William Rubin
 
 
 
March 20, 2017
 
 
 
 
 
/s/ LARRY BLUM
 
Director
 
 
Larry Blum
 
 
 
March 20, 2017
 
 
 
 
 
/s/ PAUL C. O’BRIEN
 
Director
 
 
Paul C. O'Brien
 
 
 
March 20, 2017
 
 
 
 
 
/s/ MICHAEL J. DEL GIUDICE
 
Director
 
 
Michael J. Del Giudice
 
 
 
March 20, 2017
 
 
40
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
INDEX TO EXHIBITS
 
 
Exhibit No.
 
Description
 
 
 
3.1
 
Amended and Restated Certificate of Incorporation (*)
3.1.1
 
Certificate of Amendment to Certificate of Incorporation(14)
3.2
 
Bylaws (*)
10.1
 
1998 Stock Option Plan (*)
10.1.1
 
2009 Stock Option Plan(16)
10.1.2
 
2016 Equity Incentive Plan (14)
10.2
 
Employment Agreement, dated as of November 5, 2015, between registrant and Matthew D. Rosen (12)
10.3
 
Form of Warrant to Purchase Common Stock (*)
10.4
 
Lease Agreement between registrant and SLG Graybar Sublease, LLC for Suite 1718 at 420 Lexington Avenue, New York, NY office (*)
10.4.1
 
Lease Modification Agreement dated November 19, 2014, between registrant and SLG Graybar Sublease, LLC for the 420 Lexington Avenue, New York, NY office (13)
10.5
 
Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc. for the Fort Lauderdale, Florida office, as amended (*)
10.5.1
 
Sixth Amendment, dated July 23, 2014, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office (13)
10.5.2
 
Seventh Amendment, dated August 2015, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office(1)
10.5.3
 
Eight Amendment dated July 8, 2016, to Lease Agreement between registrant and Fort Lauderdale Crown Center, Inc., for the Fort Lauderdale, Florida office(1)
 
 
 
10.6
 
Form of Promissory Note and Security Agreement (2)
10.7
 
Non-Competition Agreement between registrant and Marvin Rosen (*)
10.8
 
Form of Warrant (3)
10.9
 
Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (4)
10.10
 
Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (4)
10.11
 
Amendment No. 1 dated June 6, 2013 to the Asset Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Interconnect Systems Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (10)
10.12
 
Warrant to Purchase Common Stock issued by registrant to Marvin Rosen, dated July 31, 2002 (*)
 
 
41
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
10.13
 
Amendment No. 1 dated June 6, 2013 to the Membership Interest Purchase and Sale Agreement dated January 30th, 2012 between the registrant, Network Billing Systems, LLC, Jonathan Kaufman, and Christiana Trust as trustee of the LK Trust (10)
10.14
 
Amendment No. 2 dated August 20, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.15
 
Amendment No. 2 dated August 20, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.16
 
Amendment No. 3 dated September 21, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.17
 
Amendment No. 3 dated September 21, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.18
 
Amendment No. 4 dated October 24, 2012 to the Asset Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Interconnect Services Group II LLC, Jonathan Kaufman, Lisa Kaufman as trustee of the JK Trust and Jonathan Kaufman as trustee of the LKII Trust (5)
10.19
 
Amendment No. 4 dated October 24, 2012 to the Membership Interest Purchase and Sale Agreement dated January 30, 2012 between the registrant, Fusion NBS Acquisition Corp., Network Billing Systems, LLC, Jonathan Kaufman and Christiana Trust as trustee of the LK Trust (5)
10.20
 
Lease Agreement dated October 1, 2012 by and between Manchester Realty, LLC and Fusion NBS Acquisition Corp (7)
10.20.1
 
Lease Modification Agreement, dated October 1, 2014, by and between 280 Holdings, LLC (successor in interest to Manchester Realty, LLC) and Fusion NBS Acquisition Corp (11)
10.21
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III (5)
10.22
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III Praesidian Fund III Series B Note (5)
10.23
 
Series A Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
10.24
 
Series B Promissory Note dated October 29, 2012 payable to Praesidian Fund III-A (5)
10.25
 
Praesidian Fund III Common Stock Purchase Warrant dated October 29, 2012 (5)
10.26
 
Praesidian Fund III-A Common Stock Purchase Warrant dated October 29, 2012 (5)
10.27
 
Intellectual Property Security Agreement dated as of October 29, 2012 by the registrant and Network Billing systems, LLC, in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP (5)
10.28
 
Right of First Refusal Agreement dated as of October 29, 2012 by and among the registrant Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, LP and Praesidian Capital Opportunity Fund III as agent (5)
10.29
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III (5)
10.30
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp. and Praesidian Capital Opportunity Fund III-A (5)
10.31
 
Management Rights Agreement dated as of October 29, 2012 by and among the registrant, Fusion NBS Acquisition Corp., and Plexus Fund II, LP (5)
 
 
 
42
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
 
10.32
 
Asset Purchase and Sale Agreement effective as of August 30, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC; and Cypress Communications, LLC (6)
10.33
 
First Amendment to the Asset Purchase and Sale Agreement effective as of November 15, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress Communications, LLC (7)
10.34
 
Second Amendment to the Asset Purchase and Sale Agreement effective as of December 16, 2013 by and among the registrant, Fusion Broadvox Acquisition Corp.; BroadvoxGo!, LLC,; and Cypress Communications, LLC (8)
10.35
 
Third Amendment to Securities Purchase Agreement is entered into as of December 16, 2013, by and among Fusion NBS Acquisition Corp, the registrant, Network Billing Systems, LLC, Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, and Plexus Fund II, LP, and Praesidian Capital Opportunity Fund III, LP as agent (9)
10.36
 
Form of Common Stock Purchase Warrant (9)
10.37
 
Form of Registration Rights Agreement (9)
10.38
 
Form of Series C Note (9)
10.39
 
Form of Series D Note dated December 31, 2013 (9)
10.40
 
Form of Management Rights Letter dated December 31, 2013 (9)
10.41
 
Form of Lenders’ Warrant dated December 31, 2013 (9)
10.42
 
Joinder Agreement dated as of December 31, 2013 by and among the registrant, Fusion NBS Acquisition Corp., Fusion BVX LLC in favor of Praesidian Capital Opportunity Fund III, LP, Praesidian Capital Opportunity Fund III-A, LP, Plexus Fund II, L.P., Plexus Fund III, L.P., Plexus Fund QP III, L.P., and United Insurance Company Of America (9)
10.43
 
Assignment and Assumption Agreement dated as of December 31, 2013 by and among BroadvoxGo!, LLC, Cypress Communications, LLC, the registrant, and Fusion BVX, LLC (9)
10.44
 
Bill of Sale dated as of December 31, 2013 delivered by BroadvoxGo!, LLC and Cypress Communications, LLC (9)
10.45
 
Limited Trademark License Agreement dated as of December 31, 2013 by and among Broadvox, LLC; Fusion Telecommunications International, Inc. and Fusion BVX LLC (9)
 
10.46
 
Form of Series E Note, dated as of October 31, 2014 (11)
10.47
 
Agreement and Plan of Merger, dated as of October 15, 2014, by and among the registrant, Fusion PTC Acquisition Inc., PingTone Communications, Inc., the Majority Stockholders of PingTone Communications, Inc. and J Shelby Bryan, as Stockholders Representative (11)
10.48
 
Stock Purchase and Sale Agreement, dated as of December 8, 2015, by and among Fusion NBS Acquisition Corp., Mitch Marks, Ron Kohn and Robert Marks (13)
10.49
 
Credit Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., and East West Bank and the Other Lenders from time to time party hereto (15)
10.50
 
Subordination Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., Praesidian Capital Opportunity Fund III, LP, and East West Bank (15)
10.51
 
Intercreditor and Subordination Agreement dated as of November 14, 2016 by and among Marvin Rosen, Fusion Telecommunications International, Inc. and East West Bank (15)
 
Pledge and Security Agreement dated as of November 14, 2016 by and among each of the Grantors Party thereto and East West Bank (15)
 
Guaranty dated as of November 14, 2016 from the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC and Apptix, Inc. to East West Bank (15)
 
 
 
43
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
 
10.54
 
Intellectual Property Security Agreement dated as of November 14, 2016 by and among Fusion NBS Acquisition Corp., the registrant, Network Billing Systems, LLC, PingTone Communications, Inc., Fusion BVX LLC, Fidelity Telecom, LLC, Fidelity Access Networks, Inc., Fidelity Connect, LLC, Fidelity Voice Services, LLC, Apptix, Inc., and East West Bank (15)
10.55
 
Fifth Amended and Restated Securities Purchase Agreement and Security Agreement, dated as of November 14, 2016, by and among Fusion NBS Acquisition Corp., as borrower, the registrant, Network Billing Systems, L.L.C., Fusion BVX, LLC, PingTone Communications, Inc., Fidelity Access Networks, LLC, Fidelity Connect LLC, Fidelity Voice Services, LLC, Fidelity Access Networks, Inc., Apptix, Inc., Praesidian Capital Opportunity Fund III, L.P., Praesidian Capital Opportunity Fund III-A, LP and United Insurance Company of America (15)
10.56
 
Stock Purchase and Sale Agreement dated November 14, 2016 by and among Fusion NBS Acquisition Corp., Fusion Telecommunications International, Inc. and Apptix ASA (15)
10.57
 
Registration Rights Agreement dated as of November 14, 2016 by and between the registrant and Apptix ASA (15)
10.58
 
Common Stock Purchase Agreement dated November 14, 2016 by and among the registrant and the Purchasers (15)
 
Office Lease, as amended between Chagrin-Green, LLC and Fidelity Access Networks, LLC (1)
 
First Amendment to Lease Agreement dated as of August 2015 by and between Piedmont Center, 1-4 LLC and the registrant. (1)
14
 
Code of Ethics of registrant (11)
 
List of Subsidiaries (1)
23.1
 
Consent of EisnerAmper LLP(1)
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
31.2
 
Certification of President Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (1)
32.1
 
Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
32.2
 
Section 1350 Certification of President Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (1)
101.INS***
 
XBRL Instance Document
101.SCH***
 
XBRL Taxonomy Extension Schema Document
101.CAL***
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF***
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB***
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE***
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
*
Originally filed with the Company’s Registration Statement no. 33-120412 and incorporated herein by reference.
 
 
**
Originally filed with the Company’s Registration Statement no. 33-120206 and incorporated herein by reference.
 
 
***
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
 
(1)
Filed herewith.
(2)
Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed April 13, 2011 and incorporated herein by reference.
 
 
 
44
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
2016 ANNUAL REPORT ON FORM 10-K
 
 
 
(3)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 15, 2006 and incorporated herein by reference.
 
(4)
Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed March 30, 2012 and incorporated herein by reference.
(5)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 2, 2012 and incorporated herein by reference.
(6)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on September 4, 2013 and incorporated herein by reference.
(7)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 21, 2013 and incorporated herein by reference.
(8)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 19, 2013 and incorporated herein by reference.
(9)
Filed as an Exhibit to the Company’s Current Report on Form 8-K/A filed on January 7, 2014 and incorporated herein by reference.
(10)
Filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed on August 14, 2013 and incorporated herein by reference.
(11)
Filed as an Exhibit to the Company’s Current Report on Form 8-K dated November 3, 2014 and incorporated herein by reference.
(12)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 10, 2015 and incorporated herein by reference.
(13)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on December 14, 2015, and incorporated herein by reference.
(14)
Filed as an Exhibit to the Company’s Current Report on Form 8-K filed on November 18, 2016, and incorporated herein by reference.
(15)
Filed as an Exhibit to the Company’s Form 10-K filed on March 28, 2016 and incorporated herein by reference.
 
 
 
45
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
 
 
Index to Consolidated Financial Statements
 
Report of Independent Registered Public Accounting Firm
 
 
F- 1
 
 
 
 
Consolidated Balance Sheets
 
 
F- 2
 
 
 
 
Consolidated Statements of Operations
 
 
F- 3
 
 
 
 
Consolidated Statements of Changes in Stockholders' Equity
 
 
F- 4
 
 
 
 
Consolidated Statements of Cash Flows
 
 
F- 5
 
 
 
 
Notes to Consolidated Financial Statements 
 
 
F- 6
 
 
 
 
 
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders
Fusion Telecommunications International, Inc.
 
 
We have audited the accompanying consolidated balance sheets of Fusion Telecommunications International, Inc. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2016. The financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fusion Telecommunications International, Inc. and subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
 
 
/s/ EisnerAmper LLP
 
New York, New York
March 20, 2017
 
 
F-1
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
 
CONSOLIDATED BALANCE SHEETS
 
 
 
December 31, 2016
 
 
December 31, 2015
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $7,221,910 
 $7,540,543 
Accounts receivable, net of allowance for doubtful accounts of
    
    
approximately $427,000 and $309,000, respectively
  9,359,876 
  7,650,141 
Inventory
    
    
Prepaid expenses and other current assets
  1,160,184 
  1,618,603 
Total current assets
  17,741,970 
  16,809,287 
Property and equipment, net
  14,248,915 
  14,055,493 
Security deposits
  630,373 
  575,038 
Restricted cash
  27,153 
  165,123 
Goodwill
  35,689,215 
  27,060,297 
Intangible assets, net
  63,617,471 
  45,824,399 
Other assets
  77,117 
  9,808 
Deferred tax asset
  - 
  - 
TOTAL ASSETS
 $132,032,214 
 $104,499,445 
 
    
    
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    
    
Current liabilities:
    
    
Notes payable - non-related parties
 $2,979,167 
 $685,780 
Obligations under asset purchase agreements - current portion
  622,463 
  300,000 
Equipment financing obligations
  1,002,578 
  959,380 
Escrow payable
  - 
  - 
Accounts payable and accrued expenses
  19,722,838 
  13,129,225 
Related party payable
  - 
  - 
Current liabilities from discontinued operations
  - 
  - 
Total current liabilities
  24,327,046 
  15,074,385 
Long-term liabilities:
    
    
Notes payable - non-related parties, net of discount
  31,431,602 
  30,795,746 
Notes payable - related parties
  875,750 
  1,074,829 
Term loan
  60,731,204 
  24,728,762 
Indebtedness under revolving credit facility
  3,000,000 
  15,000,000 
Obligations under asset purchase agreements
  890,811 
  333,333 
Equipment financing obligations
  1,237,083 
  2,085,416 
Derivative liabilities
  348,650 
  953,005 
Other long-term liabilities
  - 
  - 
Total liabilities
  122,842,146 
  90,045,476 
Commitments and contingencies
    
    
Stockholders' equity (deficit):
    
    
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
    
    
17,299 and 23,324 shares issued and outstanding
  174 
  234 
Common stock, $0.01 par value, 90,000,000 and 50,000,000 shares authorized,
    
    
20,642,028 and 12,788,971 shares issued and outstanding
  206,422 
  127,890 
Capital in excess of par value
  192,233,032 
  184,859,082 
Accumulated deficit
  (183,249,560)
  (170,533,237)
Total stockholders' equity (deficit)
  9,190,068 
  14,453,969 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 $132,032,214 
 $104,499,445 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-2
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
For the Year Ended December 31,
 
 
 
2016
 
 
2015
 
Revenues
 $122,045,320 
 $101,694,516 
Cost of revenues, exclusive of depreciation and
    
    
amortization, shown separately below
  68,058,432 
  56,724,121 
Gross profit
  53,986,888 
  44,970,395 
Depreciation and amortization
  13,096,587 
  12,975,981 
Selling general and administrative expenses (including stock-based
    
    
compensation of $878,343 and $639,296 for the years ended
    
    
December 31, 2016 and 2015, respectively)
  48,524,923 
  41,009,107 
Impairment charge
  - 
  - 
Total operating expenses
  61,621,510 
  53,985,088 
Operating loss
  (7,634,622)
  (9,014,693)
Other (expenses) income:
    
    
Interest expense
  (6,742,143)
  (6,062,923)
Loss on extinguishment of debt
  (214,294)
  (2,720,355)
Gain on change in fair value of derivative liabilities
  265,383 
  1,843,997 
Loss on disposal of property and equipment
  (129,119)
  (37,444)
Other income, net
  128,987 
  101,057 
Total other expenses
  (6,691,186)
  (6,875,668)
Loss before income taxes
  (14,325,808)
  (15,890,361)
Income tax benefit
  1,609,485 
  7,660,536 
Net loss
  (12,716,323)
  (8,229,825)
Preferred stock dividends
  (2,388,007)
  (1,578,220)
Net loss attributable to common stockholders
  (15,104,330)
  (9,808,045)
Loss applicable to common stockholders:
    
    
Basic and diluted loss per common share:
 $(0.98)
 $(1.32)
Weighted average common shares outstanding:
    
    
Basic and diluted
  15,406,184 
  8,873,766 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-3
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
 
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
 
 
Preferred Stock
 
 

Common Stock  
 
 
Capital in
Excess of Par  
 
 
Accumulated Deficit  
 
 
Stockholders' Equity
 
 
 
Shares
 
 
$
 
 
Shares
 
 
$
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
  26,793 
 $268 
  7,345,028 
 $73,449 
 $175,519,459 
 $(162,303,412)
 $13,289,764 
Net loss
    
    
    
    
    
  ( 8,229,825)
  (8,229,825)
Conversion of preferred stock into common stock
  ( 3,469)
  ( 34)
  782,550 
  7,826 
  (7,792)
    
  - 
Dividends on preferred stock
    
    
  434,201 
  4,344 
  (4,344)
    
  - 
Proceeds from the sale of common stock
    
    
  2,582,568 
  25,826 
  5,604,174 
    
  5,630,000 
Conversion of related party note to common stock
    
    
  137,615 
  1,376 
  298,624 
    
  300,000 
Issuance of common stock in lieu of cash bonus
    
    
  11,468 
  115 
  24,885 
    
  25,000 
Settlement of outstanding debt with common stock
    
    
  3,700 
  37 
  11,840 
    
  11,877 
Exercise of lenders warrants
    
    
  728,333 
  7,282 
  356,885 
    
  364,167 
Common stock issued as part of purchase price -
    
    
    
    
    
    
    
Fidelity acquisition
    
    
  696,508 
  6,965 
  1,493,035 
    
  1,500,000 
Modification of previously issued warrants and
    
    
    
    
    
    
    
reclassification to stockholders' equity
    
    
    
    
  678,400 
    
  678,400 
Issuance of common stock for services rendered
    
    
  67,000 
  670 
  244,620 
    
  245,290 
Stock-based compensation associated with stock incentive plans
    
    
    
    
  639,296 
    
  639,296 
Balance at December 31, 2015
  23,324 
  234 
  12,788,971 
  127,890 
  184,859,082 
  (170,533,237)
  14,453,969 
Net loss
    
    
    
    
    
  (12,716,323)
  (12,716,323)
Conversion of preferred stock into common stock
  (6,025)
  (60)
  1,205,000 
  12,050 
  (11,990)
    
  - 
Dividends on preferred stock
    
    
  1,140,568 
  11,406 
  (11,406)
    
  - 
Proceeds from the sale of common stock
    
    
  2,213,700 
  22,137 
  2,323,009 
    
  2,345,146 
Conversion of related party note to common stock
    
    
  217,391 
  2,174 
  247,826 
    
  250,000 
Adjustment for prior issuances and conversions of warrants
    
    
    
    
  338,972 
    
  338,972 
Adjustment for fractional shares
    
    
  685 
  8 
 (8)
    
  - 
Cancellation of common stock issued to PingTone Sellers
    
    
  (51,380)
  (514)
  (179,830)
    
  (180,344)
Stock-based compensation associated with stock incentive plans
    
    
    
    
  853,458 
    
  853,458 
Issuance of common stock - Apptix acquisition
    
    
  2,997,926 
  29,979 
  3,597,511 
    
  3,627,490 
Issuance of restricted stock
    
    
  55,000 
  550 
  99,000 
    
  99,550 
Issuance of common stock for services rendered
    
    
  74,167 
  742 
  117,408 
    
  118,150 
Balance at December 31, 2016
  17,299 
 $174 
  20,642,028 
 $206,422 
 $192,233,032 
 $(183,249,560)
 $9,190,068 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
F-4
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2016 and 2015
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
 
Year ended December 31,
 
 
 
2016
 
 
2015
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(12,716,323)
 $( 8,229,825)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
    
    
Depreciation and amortization
  13,096,587 
  12,975,981 
Loss on extinguishment on debt
  214,294 
  1,682,035 
Loss on accounts receivable settlement exchanged for equipment
  - 
  111,659 
Deferred taxes
  (1,669,485)
  (7,710,536)
Loss on disposal of property and equipment
  129,119 
  37,444 
Bad debt expense
  387,667 
  435,376 
Stock-based compensation
  878,343 
  639,296 
Stock and warrants issued for services rendered or in settlement of liabilities
  118,150 
  245,290 
Amortization of debt discount and deferred financing fees