UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
 
þ    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015March 31, 2016
 
o    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 its 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
 (Registrants telephone number, including area code)
 
Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 þ  No o
 
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 þ  No o
 
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”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Acts.
 
Large accelerated fileroAccelerated filero
Non-accelerated fileroSmaller reporting companyþ
(Do (Do not check if 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 o No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 12, 2015.May 6, 2016.
 
Title of Each ClassNumber of Shares Outstanding
Common Stock, $0.01 par value9,091,29914,811,602




 
 
 
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
 
 Part 13
 Item 1.
3
 Item 2. 
22
 Item 3.
31  28
 Item 4.
31  29
 Part II
31  29
 Item 1.
31  29
 Item 1A.
32  29
 Item 2.
32  29
 Item 3.
  29
 Item 4.  29
 Item 5.  29
 Item 6.  30
 Signatures  31
32
  
32
 
32
32
33
34
 

 
2

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
PART 1 FINANCIAL INFORMATION
 
Item 1. Financial Statements.

  March 31,  December 31, 
  2016  2015 
  (unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $5,873,075  $7,540,543 
Accounts receivable, net of allowance for doubtful accounts of approximately $298,000 and $309,000, respectively  8,227,003   7,650,141 
Prepaid expenses and other current assets  2,549,157   1,618,603 
Total current assets  16,649,235   16,809,287 
Property and equipment, net  13,708,196   14,055,493 
Other assets:        
Security deposits  575,038   575,038 
Restricted cash  27,153   165,123 
Goodwill  27,049,678   27,060,297 
Intangible assets, net  44,433,420   45,824,399 
Other assets  1,266,523   281,045 
Total other assets  73,351,812   73,905,902 
TOTAL ASSETS $103,709,243  $104,770,682 
         
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Notes payable - non-related parties $685,780  $685,780 
Due to RootAxcess seller  400,000   300,000 
Equipment financing obligations  989,636   959,380 
Accounts payable and accrued expenses  13,716,756   13,129,225 
Total current liabilities  15,792,172   15,074,385 
Long-term liabilities:        
Notes payable - non-related parties, net of discount  30,754,690   30,795,745 
Term Loan  25,000,000   25,000,000 
Indebtedness under revolving credit facility  15,000,000   15,000,000 
Due to RootAxcess seller  166,667   333,333 
Due to TFB seller  1,011,607   - 
Notes payable - related parties  1,086,995   1,074,829 
Equipment financing obligations  1,955,301   2,085,416 
Derivative liabilities  431,633   953,005 
Total liabilities  91,199,065   90,316,713 
Commitments and contingencies        
Stockholders' equity (deficit):        
Preferred stock, $0.01 par value, 10,000,000 shares authorized,        
17,324 and 23,324 shares issued and outstanding  174   234 
Common stock, $0.01 par value, 50,000,000 shares authorized,        
14,810,917 and 12,788,971 shares issued and outstanding  148,110   127,890 
Capital in excess of par value  185,428,678   184,859,082 
Accumulated deficit  (173,066,784)  (170,533,237)
Total stockholders' equity  12,510,178   14,453,969 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $103,709,243  $104,770,682 
         
         
See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
3

  September 30,  December 31, 
  2015  2014 
  (unaudited)    
ASSETS      
Current assets:      
Cash and cash equivalents $3,955,845  $6,444,683 
Accounts receivable, net of allowance for doubtful accounts of approximately $395,410 and $245,000, respectively  7,063,754   7,087,599 
Prepaid expenses and other current assets  1,509,722   927,772 
Total current assets  12,529,321   14,460,054 
Property and equipment, net  14,018,560   13,478,912 
Other assets:        
Security deposits  573,998   648,998 
Restricted cash  164,381   1,164,381 
Goodwill  10,496,650   10,397,460 
Intangible assets, net  27,917,106   32,432,416 
Other assets  1,197,454   1,165,273 
Total other assets  40,349,589   45,808,528 
TOTAL ASSETS $66,897,470  $73,747,494 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Notes payable - non-related parties $685,780  $1,225,000 
Due to RootAxcess seller  366,667   - 
Equipment financing obligations  1,050,765   662,131 
Accounts payable and accrued expenses  11,139,248   10,471,514 
Total current liabilities  13,242,460   12,358,645 
Long-term liabilities:        
Notes payable - non-related parties, net of discount  31,866,658   41,263,934 
Due to RootAxcess seller  333,333   - 
Notes payable - related parties  1,334,479   1,292,878 
Indebtedness under revolving credit facility  12,500,000   - 
Equipment financing obligations  2,262,418   1,702,704 
Derivative liabilities  931,524   3,839,569 
Total liabilities  62,470,872   60,457,730 
Commitments and contingencies        
Stockholders' equity (deficit):        
Preferred stock, $0.01 par value, 10,000,000 shares authorized,        
24,166 and 26,793 shares issued and outstanding  242   268 
Common stock, $0.01 par value, 50,000,000 shares authorized,        
9,090,614 and 7,345,028 shares issued and outstanding  90,906   73,449 
Capital in excess of par value  176,474,482   175,519,459 
Accumulated deficit  (172,139,032)  (162,303,412)
Total stockholders' equity  4,426,598   13,289,764 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $66,897,470  $73,747,494 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations
(Unaudited)
  Three Months Ended March 31, 
  2016  2015 
       
Revenues $33,184,415  $25,263,038 
Cost of revenues (exclusive of depreciation and amortization, shown separately below)  19,921,677   14,012,692 
Gross profit  13,262,738   11,250,346 
Depreciation and amortization  2,916,263   3,003,447 
Selling, general and administrative expenses (including stock-based compensation of $198,884 and $122,516 for the three months ended March 31, 2016 and 2015, respectively)  11,424,786   9,736,294 
Total operating expenses  14,341,049   12,739,741 
Operating loss  (1,078,311)  (1,489,395)
Other (expenses) income:        
Interest expense  (1,627,964)  (1,606,843)
Gain (loss) on change in fair value of derivative liability  182,400   (1,204,802)
Other income, net  (9,670)  37,319 
Total other expenses  (1,455,234)  (2,774,326)
Loss before income taxes  (2,533,545)  (4,263,722)
Provision for income taxes  -   - 
Net loss  (2,533,545)  (4,263,722)
Preferred stock dividends  (1,531,982)  (418,988)
Net loss attributable to common stockholders $(4,065,527) $(4,682,710)
Basic and diluted loss per common share $(0.30) $(0.49)
Weighted average common shares outstanding:        
Basic and diluted  13,741,366   8,159,534 
See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
34

 
 

Condensed Consolidated StatementsStatement of OperationsStockholders’ Equity
(Unaudited)

  Preferred Stock  Common Stock  Capital in Excess of Par  Accumulated Deficit  Stockholders' Equity (Deficit) 
  Shares  $  Shares  $          
Balance at December 31, 2015  23,324  $234   12,788,971  $127,890  $184,859,082  $(170,533,239) $14,453,967 
Net loss                      (2,533,545)  (2,533,545)
Conversion of preferred stock into common stock  (6,000)  (60)  1,866,667   18,667   (18,607)      - 
Dividends on preferred stock          125,279   1,253   (1,253)      - 
Adjustment for prior issuances and conversion of warrants                  338,972       338,972 
Issuance of common stock for services rendered          30,000   300   51,600       51,900 
Stock-based compensation associated with stock incentive plans                  198,884       198,884 
Balance at March 31, 2016  17,324  $174   14,810,917  $148,110  $185,428,678  $(173,066,784) $12,510,178 
 
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2015  2014  2015  2014 
             
Revenues $24,530,824  $22,486,531  $74,857,557  $68,532,333 
Cost of revenues (exclusive of depreciation and amortization, shown separately below)  13,533,647   12,312,188   41,359,955   37,288,661 
Gross profit  10,997,177   10,174,343   33,497,602   31,243,672 
Depreciation and amortization  3,140,427   2,830,727   9,183,632   7,996,196 
Selling, general and administrative expenses (including stock-based compensation of approximately $154,000 and $111,000 for the three months ended September 30, 2015 and 2014, respectively, and approximately $393,000 and $253,000 for the nine months ended September 30, 2015 and 2014, respectively)  9,796,483   8,137,368   29,379,196   23,782,259 
Total operating expenses  12,936,911   10,968,095   38,562,828   31,778,455 
Operating loss  (1,939,734)  (793,752)  (5,065,226)  (534,783)
Other (expenses) income:                
Interest expense  (1,434,734)  (1,442,508)  (4,650,286)  (4,434,269)
Gain on change in fair value of derivative liability  1,237,730   2,389,203   2,543,878   4,308,272 
Loss on extinguishment of debt  (2,720,355)  -   (2,720,355)  - 
Other (expense) income, net  (2,398)  9,639   56,369   (30,716)
Total other (expenses) income  (2,919,757)  956,334   (4,770,394)  (156,713)
(Loss) income before income taxes  (4,859,491)  162,582   (9,835,620)  (691,496)
(Benefit) provision for income taxes  -   (147,341)  -   25,737 
Net (loss) income  (4,859,491)  309,923   (9,835,620)  (717,233)
Preferred stock dividends in arrears  (379,740)  (432,972)  (1,186,826)  (1,318,254)
Net loss attributable to common stockholders $(5,239,231) $(123,049) $(11,022,446) $(2,035,487)
Basic and diluted loss per common share $(0.72) $(0.19) $(1.52) $(0.57)
Weighted average common shares outstanding:                
Basic and diluted  8,958,815   7,093,215   8,529,642   6,927,011 
See accompanying notes to the Condensed Consolidated Financial Statements.
 
4

Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
  Preferred Stock  Common Stock          
  Shares  $  Shares  $  Capital in Excess of Par  Accumulated Deficit  Stockholders' Equity (Deficit) 
Balance at December 31, 2014  26,793  $268   7,345,028  $73,449  $175,519,459  $(162,303,412) $13,289,764 
Net loss                      (9,835,620)  (9,835,620)
Conversion of preferred stock into common stock  (2,627)  (26)  614,150   6,142   (6,116)      - 
Dividends on preferred stock          344,936   3,451   (3,451)      - 
Cashless exercise of lenders warrants          728,333   7,282   356,885       364,167 
Issuance of common stock for services rendered          58,167   582   215,029       215,611 
Stock-based compensation associated with stock incentive plans                  392,676       392,676 
Balance at September 30, 2015  24,166  $242   9,090,614  $90,906  $176,474,482  $(172,139,032) $4,426,598 
See accompanying notes to the Condensed Consolidated Financial Statements.
 
5

 
 
Condensed Consolidated Statements of Cash Flows
(Unaudited)
  Three Months Ended March 31, 
  2016  2015 
Cash flows from operating activities:      
Net loss $(2,533,545) $(4,263,722)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  2,916,263   3,003,447 
Loss on disposal of property  60,822   - 
Bad debt expense  65,000   150,000 
Stock-based compensation  198,884   122,516 
Stock based compensation issued for services rendered by third parties  51,900   46,201 
Amortization of debt discount and deferred financing fees  158,878   250,974 
(Gain) loss in the change in fair value of derivative liability  (182,400)  1,204,802 
Changes in operating assets and liabilities:        
Accounts receivable  (584,098)  25,470 
Prepaid expenses and other current assets  (930,554)  (296,470)
Other assets  9,807   (100)
Accounts payable and accrued expenses  390,727   (80,010)
Net cash (used in) provided by operating activities  (378,316)  163,108 
         
Cash flows from investing activities:        
Purchase of property and equipment  (988,768)  (796,304)
Proceeds from the sale of property and equipment  23,961   - 
Net cash acquired through acqusition  16,895   - 
Change in restricted cash  137,970   - 
Net cash used in investing activities  (809,942)  (796,304)
         
Cash flows from financing activities:        
Payments on equipment financing obligations  (241,099)  (148,829)
Repayments of notes payable  (238,111)  (306,250)
Net cash used in financing activities  (479,210)  (455,079)
Net change in cash and cash equivalents  (1,667,468)  (1,088,275)
Cash and cash equivalents, beginning of period  7,540,543   6,444,683 
Cash and cash equivalents, end of period $5,873,075  $5,356,408 
 

  Nine Months Ended September 30, 
  2015  2014 
Cash flows from operating activities:      
Net loss $(9,835,620) $(717,233)
Adjustments to reconcile net loss to net cash provided by operating activities:        
Depreciation and amortization  9,183,632   7,996,196 
Loss on extinguishment on debt  2,720,355   - 
Loss on accounts receivable settlement  111,659   - 
Loss on disposal of property  -   122,261 
Bad debt expense  373,034   399,995 
Stock-based compensation  392,676   253,492 
Stock and warrants issued for services rendered or in settlement of liabilities  215,611   81,667 
Amortization of debt discount and deferred financing fees  667,191   820,355 
Gain in the change in fair value of derivative liability  (2,543,878)  (4,308,272)
Changes in operating assets and liabilities:        
Accounts receivable  (565,227)  (590,444)
Prepaid expenses and other current assets  (83,205)  (670,888)
Other assets  (203,414)  (46,616)
Accounts payable and accrued expenses  (297,079)  (2,270,786)
Net cash provided by operating activities  135,735   1,069,727 
         
Cash flows from investing activities:        
Purchase of property and equipment  (2,479,335)  (2,954,791)
Proceeds from the sale of property and equipment  -   46,586 
Payments for acquisitions  (500,000)  (226,148)
Returns of security deposits  -   2,000,000 
Payment of security deposits  -   (16,886)
Change in restricted cash  1,000,000   (440)
Net cash used in investing activities  (1,979,335)  (1,151,679)
         
Cash flows from financing activities:        
Proceeds from the sale of preferred stock and warrants, net  -   3,984,426 
Proceeds from notes payable - non-related parties  9,000,000   - 
Proceeds from revolving debt  12,500,000   - 
Proceeds from accounts receivable factoring arrangement  1,630,045   1,200,210 
Repayments of borrowings to accounts receivable factoring arrangement  (1,666,919)  (1,102,723)
Payments on equipment financing obligations  (592,514)  (260,814)
Payment of financing fees  (680,828)  - 
Repayments of notes payable - related parties  -   (185,714)
Repayments of notes payable - non-related parties  (20,835,022)  (468,750)
Net cash (used in) provided by financing activities  (645,238)  3,166,635 
Net change in cash and cash equivalents  (2,488,838)  3,084,683 
Cash and cash equivalents, beginning of period  6,444,683   6,176,575 
Cash and cash equivalents, end of period $3,955,845  $9,261,258 
See accompanying notes to the Condensed Consolidated Financial Statements.
 
 
6

 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.                      Organization and Business
 
Fusion Telecommunications International, Inc. is a Delaware corporation incorporated in September 1997 (“Fusion” and together with its subsidiaries, the “Company”, “we,” “us,” and “our”) is a Delaware corporation..  The Company is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud storageinfrastructure, cloud computing, and securitymanaged cloud-based applications to businesses of all sizes, and IP-based domestic and international voice services.over IP (“VoIP”) - based voice services to other carriers.  The Company currently operates in two business segments, ‘Business Services’segments: Business Services and ‘Carrier Services’.Carrier Services.

Note 2.                      Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in all material respects in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying unaudited condensed consolidated interim financial statements have been prepared on the same basis as the financial statements for the fiscal year ended December 31, 2014.2015.

Because certain information and footnote disclosures have been condensed or omitted, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 20142015 as filed with the SEC.  In management’s opinion, all normal and recurring adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented have been included. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. The results for the three and nine months ended September 30, 2015March 31, 2016 are not necessarily indicative of the results to be expected for the full year.

Significant Accounting Policies

For a detailed discussion of significant accounting policies, please refer to our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015. There have been no material changes in our accounting policies during the quarter ended September 30, 2015.March 31, 2016.

Principles of Consolidation

The condensed consolidated interim financial statements include the accounts of Fusion and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
 
Use of Estimates
 
The preparation of condensed consolidated interim financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Key estimates include: the recognition of revenue, allowance for doubtful accounts; asset lives used in computing depreciation and amortization; valuation of intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates,estimates; accounting for income taxes, contingencies,taxes; contingencies; and litigation. While management believes that such estimates are reasonable when considered in conjunction with the financial position and results of operations of the Company taken as a whole, actual results could differ from those estimates, and such differences maycould be material.
 
Reclassifications

Certain reclassifications have been made to the prior year’syears’ financial statements in order to conform to the current year’s presentation. The reclassifications had no impact on net earnings previously reported.
 
 
7

 
 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Cash and Cash Equivalents

Cash and cash equivalents include cash on deposit and short-term, highly-liquid investments with maturities of three months or less aton the date of purchase. As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity.

Restricted Cash

Restricted cash consists primarily of cash held in reserve pursuant to the terms of financing arrangements and certificates of deposit that serve to collateralize outstanding letters of credit.  Restricted cash is recorded as current or non-current assets in the consolidated balance sheets depending on the duration of the restriction and the purpose for which the restriction exists.

Under the Company’s Senior Secured Credit Facility, dated as of August 28, 2015, with Opus Bank (the “Credit Agreement”),At March 31, 2016 and the Third Amended and Restated Securities Purchase Agreement and Security Agreement, dated August 28, 2015, with Praesidian Capital Opportunity Find III, LP (the “Restated Purchase Agreement”), the Company is not required to maintain restricted cash until and after December 31, 2015, at which time it must maintain a minimum cash balance of $1.0 million.  At September 30, 2015, the Company had certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $164,000.$27,000 and $165,000, respectively. The letter of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities.

At December 31, 2014, the Company had $1.0 million in restricted cash in accordance with the terms of the Second Amended and Restated Securities Purchase Agreement (the “SPA”), and certificates of deposit collateralizing a letter of credit in the aggregate amount of approximately $164,000.
Fair value of Financial Instruments
 
At September 30, 2015March 31, 2016 and December 31, 2014,2015, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximates its fair value due to the short term nature of these financial instruments.

Long-Lived Asset Impairment

The Company periodically reviews long-lived assets, including intangible assets subject to amortization, for possible impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying amount of an asset may not be recoverable.  Recoverability is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by such asset or asset group. If the undiscounted cash flows are less than the carrying amount of the asset or asset group, an impairment loss is recognized for the amount by which the carrying amount of the asset or asset group exceeds its fair value. The Company did not record any impairment charges during the ninethree months ended September 30,March 31, 2016 or 2015, or 2014, as there were no indicators of impairment.
 
8


FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Goodwill

Goodwill represents the excess of consideration paid over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators include, but are not limited to, deterioration in general economic conditions, adverse changes in the markets in which a company operates, increases in input costs that have negative effects on earnings and cash flows, or a trend of negative or declining cash flows over multiple periods.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
8

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Under the goodwill two-step quantitative impairment test, the Company reviews for impairment the fair value of each reporting unit to its carrying value. The Company has determined that its reporting units are its operating segments (See Note 18).  The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying value of the reporting unit exceeds its fair value, then the second step would be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. Any excess of the reporting unit goodwill carrying value over the respective implied fair value is recognized as an impairment loss. Goodwill at September 30, 2015At March 31, 2016 and December 31, 20142015, respectively, goodwill was approximately $10.5 million and $10.4 million, respectively.$27.0 million.  All of the Company’s goodwill is attributable to its ‘Business Services’ segment.  There was no change in goodwill as a result of adjustments to purchase price allocations of previous acquisitions during the quarter ended September 30, 2015. For the quarter ended September 30, 2015, the Company recognized estimated goodwill of approximately $0.09 million as a result of its acquisition of RootAxcess, LLC (“RootAxcess”).

March 31, 2016. There was no impairment charge recorded for goodwill during the ninethree months ended September 30,March 31, 2016 or 2015, or 2014, as there were no indicators of impairment.

Advertising and Marketing Costs
 
Costs related to advertising and marketing are expensed as incurred and included in selling, general and administrative expenses in the Company’sour condensed consolidated statements of operations. The Company’sOur advertising and marketing expense was approximately $145,000$172,000 and $52,000$115,000 for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, and approximately $379,000 and $130,000 for the nine months ended September 30, 2015 and 2014, respectively.

Income Taxes

The Company complies with accounting and reporting requirements with respect to accounting for income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2015March 31, 2016 and December 31, 2014.2015.  The Company is subject to income tax examinations by major taxing authorities for all tax years since 20102011 and its tax returns may be subject to review and
9

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.  No interest expense or penalties have been recognized as of September 30, 2015March 31, 2016 and December 31, 2014.2015.  During the three month ended March 31, 2016 and nine months ended September 30, 2015, and 2014, the Company recognized no adjustments for uncertain tax positions.

Stock-Based Compensation

The Company recognizes expense for its employee stock-based compensation based on the fair value of the awards that are granted. The fair values of stock options are estimated at the date of grant using the Black-Scholes option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award.

9

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In addition, all  For transactions in which goods or services are the consideration received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are accounted for based onreceived at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is determined to be a more reliable measurement.

New and Recently Adopted Accounting Pronouncements
 
In September 2015,February 2016, the Financial Accounting Standard Board (“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.  The Company does not expectadoption of this guidance todid not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued guidance clarifying the circumstances under which an entity would account for fees paid in a cloud computing arrangement as a license of internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not expect this guidance to have a material impact on itsCompany’s  consolidated financial statements.
 
In addition, in April 2015, the 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 iswas effective for interim and annual reporting periods beginning after December 15, 2015.  The Company does not expectadopted this guidance as of January 1, 2016 and applied the provision retrospectively for fiscal 2015 (See to haveNote 11). The impact of adopting this guidance on the Company's consolidated balance sheet as of December 31, 2015 was a material impact on its consolidated financial statements.decrease to other assets of approximately $1.0 million, and a decrease to notes payable – non-related party of $1.0 million.
 
In May 2014, the 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, the 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.
10

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 3.                      EarningsLoss per share
 
Basic and diluted loss per share for the three months ended March 31, 2016 and 2015 is computed by dividing (i) (loss) incomeloss available to common stockholders, adjusted by approximately $1.2$0.0 million gainand $0.7 million, respectively, on the fair value of the Company’s derivative liability for the three months ended September 30, 2015 and 2014, and $1.9 million gain for the nine months ended September 30, 2015 and 2014,  that was attributable to 728,333 outstanding warrants with a nominal exercise price that were exercised in August 2015 and dividends on preferred stock, by (ii) the weighted-average number of common shares outstanding during the period, increased by the number of common shares underlying such warrants with a nominal exercise price as if such exercise had occurred at the beginning of the year.  

The following table sets forth the computation for basic and diluted net income per share for the three and nine months ended September 30, 2015March 31, 2016 and 2014:

10

2015:
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three Months Ended March 31, 
  2016  2015 
Numerator      
Net loss $(2,533,545) $(4,263,722)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock  (100,623)  (99,518)
Dividends declared on Series B-2 Convertible Preferred Stock  (1,431,359)  (319,470)
Loss on nominal warrants  -   713,766 
Adjusted loss attributable to common stockholders $(4,065,527) $(3,968,944)
         
Denominator        
Basic and diluted weighted average common shares outstanding  13,741,366   8,159,534 
Loss per share        
Basic and diluted $(0.30) $(0.49)
 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2015  2014  2015  2014 
Numerator            
(Loss) income available to common stockholders $(4,859,491) $309,923  $(9,835,620) $(717,233)
Dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock  (101,730)  (101,730)  (301,871)  (301,871)
Dividends declared on Series B-2 Convertible Preferred Stock  (278,010)  (331,242)  (884,955)  (1,016,383)
Gain on nominal warrants  (1,187,183)  (1,201,749)  (1,930,083)  (1,890,005)
Loss attributable to common stockholders $(6,426,414) $(1,324,798) $(12,952,529) $(3,925,492)
                 
Denominator                
Basic and diluted weighted average common shares outstanding  8,958,815   7,093,215   8,529,642   6,927,011 
Loss per share                
Basic and diluted $(0.72) $(0.19) $(1.52) $(0.57)
For the ninethree months ended September 30,March 31, 2016 and 2015, and 2014, the following were excluded from the calculation of diluted earnings per common share because of their anti-dilutive effects:

 Nine Months Ended 
 September 30,  Three Months Ended March 31, 
 2015  2014   2016   2015 
Warrants  3,011,760   3,509,205   3,005,337   3,391,324 
Convertible preferred stock  3,992,471   4,525,443   2,627,795   4,424,147 
Stock options  677,126   376,863   1,123,508   688,812 
  7,681,357   8,411,511   6,756,640   8,504,283 
 
The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’sthe Company’s outstanding Series A-1, A-2 and A-4 Preferred Stock (the “Series A Preferred Stock”) of approximately $102,000$101,000 and $100,000 for the three months ended September 30, 2015March 31, 2016 and 2014, and approximately $302,000 for2015.  Through March 31, 2016, the nine months ended September 30, 2015 and 2014.  As of September 30, 2015, Fusion’s Board of Directors had notof Fusion has never declared any dividendsa dividend on any series of the Series A Preferred Stock, and the Company had accumulatedresulting in approximately $4.2$4.4 million of accumulated preferred stock dividends.  Fusion’sThe Board of Directors has declared a dividend of $278,010$231,359 and $884,955$319,470 for the three and nine months ended September 30,March 31, 2016 and 2015, related to the Company’srespectively, on its Series B-2 Preferred Stock, which, in accordance withas permitted by the terms of the Series B-2 Preferred Stock,that series, was paid in the form of 128,999125,279 and 344,93672,205 shares of Fusionthe Company’s common stock, respectively. In addition, during the three months ended March 31, 2016, the Board of Directors paid an additional $1.2 million in dividends in the form of 666,667 shares in Fusion’s common stock to a holder of 5,000 shares of Series B-2 Preferred Stock for the conversion of their Series B-2 Preferred Stock holdings into Fusion’s common stock.
 
11

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4.      Intangible Assets
 
Intangible assets as of September 30, 2015March 31, 2016 and December 31, 20142015 are as follows:

  September 30,  December 31, 
  2015  2014 
       
Trademarks and tradename $1,093,400  $1,093,400 
Proprietary technology  5,781,000   5,781,000 
Non-compete agreements  10,227,100   9,852,100 
Customer relationships  25,563,800   24,897,800 
Favorable lease intangible  218,000   218,000 
   42,883,300   41,842,300 
   Less: accumulated amortization  (14,966,194)  (9,409,884)
   Intangible assets, net $27,917,106  $32,432,416 
  March 31,  December 31, 
  2016  2015 
       
Trademarks and tradenames $1,093,400  $1,093,400 
Proprietary technology  5,781,000   5,781,000 
Non-compete agreements  10,703,043   10,703,043 
Customer relationships  44,901,181   44,888,181 
Favorable lease intangible  218,000   218,000 
   62,696,624   62,683,624 
   Less: accumulated amortization  (18,263,204)  (16,859,225)
   Intangible assets, net $44,433,420  $45,824,399 
         
 
11

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amortization expense was $1.9$1.4 million and $1.7$1.9 million for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively, and for the nine months ended September 30, 2015 and 2014 was $5.6 million and $5.0 million, respectively.  Estimated future aggregate amortization expense is expected to be as follows:

Year Estimated Annual Amortization Expense 
    
2015 (remainder of the year) $1,671,159 
2016 $3,587,246 
2017 $3,454,097 
2018 $2,729,701 
2019 $1,895,455 
Remainder of2016  $4,578,104 
 2017  $5,848,934 
 2018  $5,105,126 
 2019  $4,212,644 
 2020 and thereafter $24,688,612 

Note 5.                      Stock–based compensation
 
The Company's stock-based compensation plan provides for the issuance of stock options to the Company’s employees, officers, and directors. The Compensation Committee of Fusion’s Board of Directors (the "Compensation Committee") approves all awards that are granted under the Fusion's stock-based compensation plan.

The following weighted average assumptions were used to determine the fair value of the stock options granted under the Company’s stock-based compensation plan using the Black-Scholes option-pricing model:
 
 Nine months ended September 30,  Three months ended March 31, 
 2015  2014  2016  2015 
Dividend yield (%)  0.0   0.0 
Dividend yield (%)*  0.0   0.0 
Expected volatility (%)  125.4   129.0   96.70   97.20 
Average Risk-free interest rate (%)  1.70   2.31   1.78   1.69 
Expected life of stock option term (years)  7.60   7.80   8.0   8.0 
        
*The dividend yield is zero as the Company has never paid and does not expect to pay dividends on its common stock.*The dividend yield is zero as the Company has never paid and does not expect to pay dividends on its common stock. 
 
12


FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company recognized compensation expense of approximately $154,000$198,884 and $393,000$122,516 for the three and nine months ended September 30,March 31, 2016 and 2015, respectively, and $111,000 and $253,000 for the three and nine months ended September 30, 2014, respectively.  These amounts are included in selling, general, and administrative expenses in theour condensed consolidated interim statements of operations.

The following table summarizes the stock option activity for the ninethree months ended September 30, 2015:

  Number of Options  Weighted Average Exercise Price 
       
Outstanding at December 31, 2014  607,877  $8.00 
Granted  112,080  $3.67 
Exercised  -  $- 
Forfeited  (33,264) $4.53 
Expired  (9,567) $28.29 
Outstanding at September 30, 2015  677,126  $7.09 
Exercisable at September 30, 2015  257,400  $12.44 
March 31, 2016:
 
12

  Number of Options  Weighted Average Exercise Price 
Balance at December 31, 2015  1,158,251  $4.96 
Shares granted during the period  3,800  $2.24 
Shares exercised during the period  -  $- 
Shares forfeited during the period  (29,035) $2.57 
Shares expired during the period  (9,508) $103.76 
Shares outstanding at March 31, 2016  1,123,508  $4.17 
Shares exercisable at March 31, 2016  373,292  $6.99 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2015, the CompanyMarch 31, 2016, we had approximately $1.0$1.4 million of unrecognized compensation expense, net of estimated forfeitures, related to stock options granted under the Company’s stock-based compensation plan, which is expected to be recognized over a weighted-average period of 2.01.85 years.

Note 6.     Acquisition

On March 31, 2016, the Company completed the acquisition of Technology for Business Corporation (“TFB”), a provider of industry leading contact center solutions for an estimated purchase price of $1.0 million based on a royalty fee equal to ten percent of the collected monthly recurring revenues derived from sales of the cloud version of the proprietary call center software and maintenance services. The royalty fee was recognized as a ‘non-current liability’ in the condensed consolidated balance sheet and will be paid on a quarterly basis, commencing as of the first full calendar quarter following the second anniversary of the closing date of this acquisition. The management of the Company is still evaluating the fair value of the assets acquired and liabilities assumed with the acquisition of TFB.
Note 6.7.     Supplemental Disclosure of Cash Flow Information
 
The following table summarizes the Company’s supplemental cash flows information:

  Nine Months Ended September 30, 
Supplemental Cash Flow Information 2015  2014 
   Cash paid for interest $3,961,498  $3,948,533 
   Cash paid for income taxes $-  $71,495 
         
Supplemental Non-Cash Investing and Financing Activities        
   Property and equipment acquired under capital leases $1,440,816  $1,423,257 
   Dividend on Series B-2 preferred stock paid with the issuance of common stock $884,955  $1,016,383 
   Due to seller of RootAxcess $700,000  $- 
   Equipment received in exchange for settlement of accounts receivable $105,570  $- 
   Exercise of lenders warrants $364,167  $- 

Note 7. Acquisition

On September 30, 2015, the Company acquired the customer base, technology platform, infrastructure and other assets of RootAxcess, for an aggregate purchase price of $1.2 million, payable in either total cash or in a mix of cash and, at our election, in up to $300,000 in shares of Fusion’s common stock.  The purchase price was funded through borrowings of $0.5 million under the Credit Agreement.  Of the $1.2 million purchase price, $0.7 million is being held by the Company against potential claims arising from breaches of representation and warranties. RootAxcess is included as part of Fusion ‘Business Services’ segment.

The aggregate purchase price has initially been allocated to the fair value of the assets acquired as follows:
Covenant not to compete $375,000 
Customer contracts/relationships  666,000 
Fixed assets acquired  59,810 
Goodwill  99,190 
Purchase Price $1,200,000 
Note 8. Due to RootAxcess Seller

In connection with the purchase of RootAxcess, the Company held back $.07 million against potential claims arising from breaches of representation and warranties. Of such amount, $0.4 million is to be paid to the Seller in six equal monthly installments of $66,667 each on the third, six, nine, twelve, fifteen and eighteen month anniversary of the closing date.  In addition, the Company held back $0.3 million to be paid in three equal installments of $100,000 on each of the twelve, fifteen, and eighteen month anniversary of the closing date.  To the extent there is a unresolved Claim Notice pending (as defined in the asset purchase agreement), the monthly installment payable to Seller immediately following the delivery of such Claim Notice may at the Company’s reasonable discretion be reduced by the amount in dispute under the Claim Notice and such amount will continue to be held by us until resolved, at which point, the Company will disburse the withheld amount to Seller in accordance with such resolution.
  Three Months Ended March 31, 
Supplemental Cash Flow Information 2016  2015 
   Cash paid for interest $1,460,306  $1,355,526 
         
Supplemental Non-Cash Investing and Financing Activities        
   Property and equipment acquired under capital leases $141,240  $669,863 
   Dividends on Series B-2 preferred stock paid with the issuance of common stock $231,358  $319,470 
   Due to seller of TFB $1,011,607  $- 
 
13

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 8.     Prepaid Expenses and Other Current Assets
The following table sets forth the items in prepaid expenses and other current assets:

  March 31,  December 31, 
  2016  2015 
       
Insurance $136,276  $93,040 
Rent  132,594   101,916 
Marketing  58,827   109,455 
Sofware subscriptions  1,017,104   498,078 
Due from seller of Fidelity  425,963   425,963 
Due from factoring party  -   26,018 
Commissions  70,633   20,805 
Escrow receivable  311,917   50,759 
Other  395,843   292,569 
  $2,549,157  $1,618,603 
Note 9.     Prepaid Expenses and Other Current Assets
The following table sets forth the items in prepaid expenses and other current assets:

  September 30,  December 31, 
  2015  2014 
       
Insurance $82,119  $61,004 
Rent  152,434   54,209 
Marketing  83,923   34,482 
Sofware subscriptions  615,416   502,696 
Real estate taxes and other taxes  24,574   - 
Due from factoring party  157,859   - 
Commissions  14,271   23,015 
Other  379,126   252,366 
  $1,509,722  $927,772 
Note 10.      Accounts Payable and Accrued Expenses
 
The following table sets forth the items in accounts payable and accrued expenses:

  September 30,  December 31, 
  2015  2014 
       
Trade accounts payable $2,473,302  $3,028,902 
Accrued bonus  625,625   575,000 
Professional and consulting fees  156,690   132,521 
Property and other taxes  460,392   235,600 
Accrued network costs  1,615,925   1,384,159 
Rent  92,614   131,627 
Accrued universal service fund fees  818,113   538,302 
Customer deposits  395,612   398,111 
Due to factoring party  122,176   - 
Accrued payroll and vacation  444,813   266,595 
Accrued sales and federal excise taxes  1,995,783   1,722,554 
Accrued sales commissions  749,981   864,928 
Interest payable  24,680   33,341 
Deferred revenue  597,553   729,618 
Other  565,989   430,256 
  $11,139,248  $10,471,514 
  March 31,  December 31, 
  2016  2015 
       
Trade accounts payable $3,658,630  $1,101,393 
Accrued bonus  546,454   700,000 
Accrued professional and consulting fees  232,128   274,205 
Accrued property and other taxes  586,953   534,388 
Accrued network costs  2,216,437   3,423,483 
Accrued rent  95,765   82,894 
Accrued universal service fund fees  327,871   494,852 
Customer deposits  372,650   358,227 
Accrued credit card  446,287   384,257 
Accrued payroll and vacation  403,217   555,493 
Accrued sales and federal excise taxes  2,259,766   2,204,098 
Accrued sales commissions  847,696   981,121 
Accrued interest payable  21,701   32,221 
Deferred revenue  1,124,095   1,157,036 
Other  577,106   845,557 
  $13,716,756  $13,129,225 
 
 
14

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 10.      Equipment Financing Obligations

From time to time, the Company enters into equipment financing or capital lease arrangements to finance the purchase of network hardware and software utilized in its operations.  These arrangements require monthly payments over a period of 24 to 48 months with interest rates ranging between 5.3% and 6.6%.  The Company’s equipment financing obligations are as follows:

  March 31,  December 31, 
  2016  2015 
       
Equipment financing obligations $2,944,937  $3,044,796 
Less: current portion  (989,636)  (959,380)
Long-term portion $1,955,301  $2,085,416 
         

Note 11.    Notes Payable – Non-Related Parties
Notes payable – non-related parties at March 31, 2016 and December 31, 2015 is as follows: 
  2016  2015 
       
Subordinated Notes $33,988,756  $34,160,200 
Unamortized discount on Subordinated Notes  (1,614,976)  (1,697,091)
Unamortized debt issuance costs  (933,310)  (981,584)
Total notes payable - non-related parties  31,440,470   31,481,525 
Less: current portion  (685,780)  (685,780)
Long-term portion $30,754,690  $30,795,745 
As required and as defined in the amended credit facility entered into by the Company on December 8, 2015 (the “Secured Credit Facility”) and the fourth amended credit agreement (the “Praesidian Facility”), the Company must satisfy customary financial covenants such as: borrower leverage ratio, fixed charge coverage ratio, capital expenditures annual limit, minimum adjusted EBITDA, and maximum senior leverage ratio.   For the three months ended March 31, 2016, the Company was in compliance with all the financial covenants.

During the quarter ended March 31, 2016, the Company paid interest expense of approximately $0.9 million at an annual interest rate of 10.8%.
15

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 11.     Equipment Financing Obligations12.  Due to RootAxcess Seller

From time to time, the Company enters into equipment financing or capital lease arrangements to financeIn connection with the purchase of network hardwarethe assets of RootAxcess, LLC (“RootAxcess”) in September 2015, the Company held back $0.7 million against potential claims arising from breaches of representation and software utilizedwarranties. Of such amount, $0.4 million is to be paid to the seller in its operations.  These arrangements requiresix equal monthly payments overinstallments of $66,667 on the three, six, nine, twelve, fifteen and eighteen month anniversary of the closing date.  In addition, the Company held back $0.3 million to be paid in three equal installments of $100,000 on each of the twelve, fifteen, and eighteen month anniversary of the closing date.  To the extent there is a periodunresolved claim notice pending (as defined in the asset purchase agreement), the monthly installment payable to seller immediately following the delivery of 24such claim notice may, at the Company’s reasonable discretion, be reduced by the amount in dispute under the claim notice and such amount will continue to 48 monthsbe held by the Company until resolved, at which point, the Company will disburse the withheld amount in accordance with interest rates ranging between 4% and 11%.  The Company’s equipment financing obligations are as follows:such resolution.

  September 30,  December 31, 
  2015  2014 
       
Equipment financing obligations $3,313,183  $2,364,835 
Less: current portion  (1,050,765)  (662,131)
Long-term portion $2,262,418  $1,702,704 
On March 31, 2016, the Company made a payment of $66,667 to the sellers in connection with the terms of the holdback agreement. At March 31, 2016, the remaining balance due is $566,667.
 
Note 12.    Notes Payable – Non-Related Parties
Notes payable – non-related at September 30, 2015 and December 31, 2014 is as follows:
  September 30,  December 31, 
  2015  2014 
       
Subordinated Notes $34,331,646  $46,166,667 
Discount on Subordinated Notes  (1,779,208)  (3,677,733)
Total notes payable - non-related parties  32,552,438   42,488,934 
Less: current portion  (685,780)  (1,225,000)
Long-term portion $31,866,658  $41,263,934 
On August 28, 2015, simultaneously with the execution of the Credit Agreement (see Note 13), the Company executed the Restated Purchase Agreement and repaid approximately $20.0 million of notes previously issued (the "Original Notes") under that facility held by Plexus Fund II, L.P., Plexus Funds III, L.P. and Plexus Fund QP III, L.P. (“Plexus”).

Under the Restated Purchase Agreement, approximately $11.0 million of the original notes held by Plexus were paid in full with borrowings under the Credit Agreement (see Note 13), and $9.0 million of the Original Notes held by Plexus were paid using the proceeds from the sale of Series F senior notes in the aggregate principal amount of $9.0 million, bearing interest at 10.8% annually and having a maturity date of February 28, 2021. Additionally, the maturity date of the all remaining Original Notes was extended to February 28, 2021, and the continuing lenders agreed to subordinate their notes to borrowings extended under the Credit Agreement.

As a result of the retirement of the Original Notes held by Plexus, the Company recorded a loss on extinguishment of debt of approximately $2.7 million.
15


FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 13.     Senior     Secured Credit Facility

On
In August 28, 2015, the Company entered into a wholly-owned subsidiary of Fusion executed the $40.0 million senior secured credit facility with Opus Bank, which facility was amended and restated by the Secured Credit Facility.   The Secured Credit Facility consists of a $15.0 million, four-year revolver,credit facility, and a $25.0 million, five-year term loan. The maturity date of amounts borrowed under the revolving facility is August 28, 2019, and the maturity date of any amounts borrowed under the term loan is August 28, 2020.

As of September 30, 2015,For the three months ended March 31, 2016, the Company had borrowed $12.5outstanding $15.0 million under the revolver and no amounts have been borrowed$25.0 million under the term loan.  TheFor the three months ended March 31, 2016, the Company pays interest monthly at an initial rate of 4.5%, and recognized interest expense of approximately $51,000. We used$480,278 at a monthy interest rate of 4.75%.  The interest rate is calculated as the proceedshigher of (a) the rate of interest in effect for such day as publicly announced from time to time by the revolver to retire approximately $12.0 million ofWall Street Journal as its “prime rate” (or the Original Notesaverage prime rate if a high and $0.5 million to fund our purchase of a low prime rate are therein reported) plus the assets of RootAxcess (See Note 7).Applicable Margin (as defined in the Amended Credit Facility) in effect at such time, or (b) 3.25% plus the Applicable Margin.

Note 14.     Derivative Liability

As part of various debt and equity financing transactions and other agreements, theThe Company has issued warrants to purchase shares of Fusion’s common stock.stock in connection with certain debt and equity financing transactions. These warrants are accounted for in accordance with the guidance contained in ASC Topic 815, ‘Derivatives and Hedging’ (“ASC 815”).  For warrant instruments that do not meet an exclusion from derivative accounting, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrant is exercised or expires, and any change in fair value is recognized in the Company’s statement of operations.  In this regard, the Company has 722,112584,834 outstanding warrants (the “Investor Warrants”) which provide for a downward adjustment of the exercise price if the Company were to issue common stock at an issuance price or issue convertible debt or equity securities with an exercise price that is less than the Investor Warrant exercise price.price for these warrants. In addition, in connection with the sale of the Original Notes tocertain notes under the Senior Lenders,original version of the Praesidian credit facility, the Company issued nominal warrants to the Senior Lendersoriginal lenders to purchase an aggregate of 728,333 shares of its common stock (the “Lenders’ Warrants”).  stock.  The fair values of these warrants have been estimated using Black-Scholesoption pricing and other valuation models, and the quoted market price of Fusion’s common stock.
 
16

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following assumptions were used to determine the fair value of the warrants for the ninethree months ended September 30, 2015March 31, 2016 and 2014:
2015:
  March 31,  March 31, 
  2016  2015 
Stock price ($)  1.79   4.13 
Exercise price ($)  6.25   0 - 6.25 
Risk-free interest rate (%)  1.78   1.71 - 1.94 
Expected volatility (%)  96.70   97.20 
Time to maturity (years)  3.00   7.6 - 8.6 
 Nine months ended September 30,
 2015  2014
Stock price ($)1.88  3.65
Exercise price ($) 0 - 6.25   0 - 6.25
Risk-free interest rate (%)1.75 - 2.06  1.78 - 2.52
Expected volatility (%)125.4  129.0
Time to maturity (years)7.08 - 8.25  4.25 - 9.25
On August 28, 2015 as part of the debt refinancing, the lenders under Original Credit Facility exercised warrants to purchase 728,333 shares of common stock. As a result of the exercise of these nominal warrants, the Company recognized a reduction in the derivative liability of approximately $364,000 with a reclass to equity.

At September 30, 2015March 31, 2016 and December 31, 2014,2015, the fair value of the derivative was approximately $0.9 million$431,633 and $3.8 million,$953,005, respectively.  ForDuring the three monthsquarter ended September 30, 2015 and 2014,March 31, 2016, the Company recognized a gain on the change in the fair value of this derivative of approximately $1.0 million offset by a loss of approximately $0.8 million as a result of the adjustment discussed below, and a loss of $1.2 million and $2.4 million, respectively, and a gain of approximately $2.5 million and $4.3 million forin the nine monthsquarter ended September 30, 2015 and 2014, respectively.March 31, 2015.

16

During the three months ended March 31, 2016, the Company adjusted the valuation of its derivative liability for warrants issued in December 2013 and January 2014 and for changes to its valuation of warrants exercised during 2015. The amount of the adjustment was $772,022 impact on the condensed consolidated statements of operations resulting from the loss on the change in the fair value of the derivative and $338,972 impact to capital in excess of par in the condensed consolidated balance sheets (see Note 20). The Company has evaluated these adjustments in accordance with ASC 250-10-S99, SEC Materials (formerly SEC Staff Accounting Bulletin 99, Materiality) and concluded that both quantitatively and qualitatively the adjustments were not material. These adjustments were also evaluated by management in their assessment of internal controls over financial reporting.
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 15.  Notes Payable-Related Parties
 
Notes payable – related parties at September 30, 2015March 31, 2016 and December 31, 20142015 is as follows:

 September 30,  December 31,  March 31,  December 31, 
 2015  2014  2016  2015 
            
Notes payable to Marvin Rosen $1,478,081  $1,478,081  $1,178,082  $1,178,082 
Discount on note  (143,602)  (185,203)  (91,087)  (103,253)
Total notes payable - related parties $1,334,479  $1,292,878  $1,086,995  $1,074,829 
 
The note payable to Marvin Rosen, the Company’s Chairman of the Board, is subordinated to borrowings under the Amended Credit AgreementFacility and the Restated Purchase Agreement.Fourth Amended SPA.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after the Company’s obligations under the Amended Credit AgreementFacility and the Fourth Amended SPA are paid in full.  
For the ninethree months ended September 30, 2015,March 31, 2016, the Company recognized interest expense on the Rosen note of approximately $80,000,$21,300, and amortization on the discount of approximately $42,000.$12,000.
17

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 16.     Equity Transactions
 
Common Stock

FusionThe Company is authorized to issue 50,000,000 shares of its common stock. As of September 30, 2015March 31, 2016 and December 31, 2014, 9,090,6142015, 14,810,917 and 7,345,028 shares of Fusion’s common stock, respectively, were issued and outstanding.

On August 28, 2015, as part of the debt refinancing Fusion issued 728,33312,788,971 shares of its common stock to the original lenders under the Original Credit Agreement upon their cashless exercise of lenders’ warrants.were issued and outstanding, respectively.

For
During the quarter ended September 30, 2015, Fusion did not issue any shares of its common stock to third party consultants, and throughMarch 31, 2016, the nine months ended September 30, 2015, Fusion hasCompany issued an aggregate of 58,16730,000 shares of common stock to third party consultants for services renderedan employee in lieu of a cash bonus valued at $215,611. During$51,900. In addition, the nine months ended September 30, 2015, the Fusion Board of Directors declared aggregate dividendsa dividend of $884,955$231,359 related to Fusion’sthe Company’s Series B-2 preferred stock,Preferred Stock, which, as permitted byin accordance with the terms of the Series B-2 preferred stock,Preferred Stock, was paid in the form of 344,936125,279 shares of Fusion’s common stock. Also, certain holders of our Series B-2 preferred stockPreferred Stock elected to convert 2,627their 6,000 shares of their Series B-2 preferred stock into an aggregate of 614,1501,866,667 shares of Fusion’s common stock, including 666,667 shares of common stock which were issued as a payment of additional dividends for the conversion of their Series B-2 Preferred Stock holdings into Fusion’s common stock. The additional shares issued were valued at the closing market price at the date of issuance of $1.80 per share or $1.2 million.

On May 9, 2016, the Company received a staff determination letter from Nasdaq (“Nasdaq”) stating that the Company was not in compliance with its rules for continued listing, Rule 5635(b), because it violated the shareholder approval requirement. The technical violation results from the recent purchase of 1,834,862 shares of the Company’s common stock by Unterberg Technology Partners, L.P. (“Unterberg”) in December 2015, which when aggregated with the common shares underlying of the Company’s Series B Preferred Stock held by Unterberg (the common shares were ultimately issued in February 2016, see note 3), the amount owned by Unterberg exceeded the level allowed by Nasdaq without a prior shareholder vote.   The Nasdaq letter indicates that the Company has forty-five (45) calendar days to submit a plan to regain compliance. If such a plan is timely submitted by the Company, the Nasdaq Staff may grant the Company up to 180 calendar days from May 9, 2016 to regain compliance. The Nasdaq notification has no current effect on the listing of the Company’s common stock. The Company is reviewing various ways to correct the technical violation, including seeking approval of the transaction in question by its shareholders. The Company has available options to resolve this technical violation which will not require a cash redemption.
Preferred Stock

FusionThe Company is authorized to issue up to 10,000,000 shares of preferred stock. As of September 30, 2015March 31, 2016 and December 31, 2014,2015 there werewas 5,045 shares of Fusion’s Series A-1, A-2 and A-4 cumulative convertible preferred stockA Preferred Stock issued and outstanding.outstanding, respectively. In addition, as of September 30, 2015 and December 31, 2014, there were 19,12112,279 and 21,74818,279 shares of Series B-2 preferred stockPreferred Stock issued and outstanding as of March 31, 2016 and December 31, 2015, respectively.

The holders of the Series A preferred stockPreferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and if declared by the Fusion’s Board of Directors, on January 1 of each year. As of September 30, 2015,March 31, 2016, no dividend had been declared by the FusionFusion’s Board of Directors with respect to the Series A preferred stock,Preferred Stock, and the Company had accumulated approximately $4.2$4.4 million of preferred stock dividends. In addition, shares of Series B-2 preferred stock bear a cumulative 6% annual dividend payable quarterly in arrears, in cash or shares of common stock, at the option of the Company.

Commencing January 1, 2016, Fusion has the right to force the conversion of the Series B-2 preferred stockPreferred Stock into Fusion common stock at the specified preferreda conversion price;price of $5.00 per share; provided that the volume weighted average price for its common stock is at least $12.50 for ten consecutive trading days.
17

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 17.    Commitments and Contingencies
 
Legal matters
 
From time to time, the Company ismay 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 the Company’s management and its other employees. The Company does not expect that the outcome of any such claims or actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition. As of September 30, 2015,March 31, 2016, the Company did not have any significant ongoing legal matters.
18

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 18.    Segment Information
 
Operating segments are defined under U.S. GAAP as components of an enterprise for which separate financial information is available and evaluated regularly by a company's chief operating decision maker ("CODM") in deciding how to allocate resources and assess performance.

The Company has two reportable segments – “Carrier“Business Services” and “Business“Carrier Services”.  These segments are organized by the products and services that are sold and the customers that are served.  The Company measures and evaluates its reportable segments based on revenues and gross profit margins.  The Company’s measurement of segment gross profit exclude the Company’s executive, administrative and support costs.  The accounting policies of the segments are the same as those described in Note 2, Summary of

Significant Accounting Policies, of the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.  The Company’s segments and their principal activities consist of the following:

Carrier Services

Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily Voice over Internet Protocol (“VoIP”) technology.  VoIP permits a less costly and more rapid interconnection between the Company and international
telecommunications carriers, and generally provides better profit margins for the Company than other technologies.  The Company currently interconnects with over 270 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.

Business Services

Through this operating segment, the Company provides cloud communications, cloud connectivity, cloud storage and cloud security solutions to small, medium and large businesses. These services are sold through both the Company’s direct sales force and its partner sales channel, which utilizes the efforts of independent third-party distributors to sell the Company’s products and services. The Business Services segment includes the Company’s acquisition of PingTone Communications, Inc. (“PingTone”) effectivethe assets of RootAxcess that was completed as of November 1, 2014.September 30, 2015, and its acquisition of the stock of various Fidelity companies on December 8, 2015.
Carrier Services

Carrier Services includes the termination of domestic and international carrier traffic utilizing primarily VoIP technology.  VoIP permits a less costly and more rapid interconnection between the Company and international telecommunications carriers, and generally provides better profit margins for the Company than other technologies.  The Company currently interconnects with approximately 370 carriers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets.
 
18


FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Operating segment information for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is summarized in the following table:as follows:
 
 Three months ended September 30, 2015  Three months ended March 31, 2016 
 Carrier Services  Business Services  Corporate and Unallocated*  Consolidated  Carrier Services  Business Services  Corporate and Unallocated*  Consolidated 
Revenues $8,269,529  $16,261,295  $-  $24,530,824  $12,231,665  $20,952,750  $-  $33,184,415 
Cost of revenues (exclusive of depreciation and amortization)  7,642,008   5,891,639   -   13,533,647   11,699,547   8,222,130   -   19,921,677 
Gross profit  627,521   10,369,656   -   10,997,177   532,118   12,730,620   -   13,262,738 
Depreciation and amortization  48,022   2,898,066   194,339   3,140,427   31,310   2,675,521   209,432   2,916,263 
Selling, general and administrative expenses  1,095,851   7,954,321   746,311   9,796,483   1,381,688   9,011,989   1,031,109   11,424,786 
Interest expense  (6,002)  (1,813,060)  384,328   (1,434,734)  (1,566)  (1,551,141)  (75,257)  (1,627,964)
Gain on change in fair value of derivative liability  -   -   1,237,730   1,237,730   -   -   182,400   182,400 
Loss on extinguishment of debt  (182,083)  (2,538,272)  -   (2,720,355)
Other income (expenses)  58,939   (243,049)  181,711   (2,399)  13   (289,018)  279,335   (9,670)
Net (loss) income $(645,498) $(5,077,112) $863,119  $(4,859,491)
Net loss $(882,432) $(797,049) $(854,063) $(2,533,545)
Total assets $4,639,835  $59,128,769  $3,128,866  $66,897,470  $7,740,286  $93,789,887  $2,179,070  $103,709,243 
Capital expenditures $16,244  $972,524  $-  $988,768 
 
  Nine months ended September 30, 2015 
  Carrier Services  Business Services  Corporate and Unallocated*  Consolidated 
Revenues $25,767,099   49,090,458  $-  $74,857,557 
Cost of revenues (exclusive of depreciation and amortization)  23,540,573   17,819,382   -   41,359,955 
Gross profit  2,226,527   31,271,076   -   33,497,602 
Depreciation and amortization  138,944   8,809,670   235,018   9,183,632 
Selling, general and administrative expenses  3,165,276   23,685,034   2,528,886   29,379,196 
Interest expense  (97,193)  (4,457,080)  (96,014)  (4,650,286)
Gain on change in fair value of derivative liability  -   -   2,543,878   2,543,878 
Loss on extinguishment of debt  (182,083)  (2,538,272)  -   (2,720,355)
Other (expenses) income  465,614   (590,956)  181,711   56,369 
Net loss $(891,355) $(8,809,936) $(134,329) $(9,835,620)
                 
Capital expenditures $69,905  $2,409,430  $-  $2,479,335 
 
19

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

  Three months ended September 30, 2014 
  Carrier Services  Business Services  Corporate and Unallocated*  Consolidated 
Revenues $7,253,220  $15,233,311  $-  $22,486,531 
Cost of revenues (exclusive of depreciation and amortization)  6,525,201   5,786,987   -   12,312,188 
Gross profit  728,019   9,446,324   -   10,174,343 
Depreciation and amortization  164,153   2,642,797   23,777   2,830,727 
Selling, general and administrative expenses  752,911   6,051,105   1,333,352   8,137,368 
Interest expense  -   (1,396,038)  (46,470)  (1,442,508)
Loss on change in fair value of derivative liability  -   -   2,389,203   2,389,203 
Other (expenses) income  (3,449)  12,784   304   9,639 
Benefit for income taxes  -   -   (147,341)  (147,341)
Net (loss) income $(192,494) $(630,832) $1,133,249  $309,923 
Total assets $3,599,981  $58,126,589  $5,250,339  $66,976,909 
  Nine months ended September 30, 2014 
  Carrier Services  Business Services  Corporate and Unallocated*  Consolidated 
Revenues $21,926,591  $46,605,742  $-  $68,532,333 
Cost of revenues (exclusive of depreciation and amortization)  19,558,258   17,730,403   -   37,288,661 
Gross profit  2,368,333   28,875,339   -   31,243,672 
Depreciation and amortization  280,351   7,647,899   67,946   7,996,196 
Selling, general and administrative expenses  2,194,143   17,891,406   3,696,710   23,782,259 
Interest expense  -   (4,150,106)  (284,163)  (4,434,269)
Gain on change in fair value of derivative liability          4,308,272   4,308,272 
Other (expenses) income  (97,486)  (13,871)  80,641   (30,716)
Provision for income taxes  -   -   25,737   25,737 
Net (loss) income $(203,647) $(827,943) $314,357  $(717,233)
                 
Capital expenditures $100,403  $2,854,388  $-  $2,954,791 
  Three months ended March 31, 2015 
  Carrier Services  Business Services  Corporate and Unallocated*  Consolidated 
Revenues $8,477,121  $16,785,917  $-  $25,263,038 
Cost of revenues (exclusive of depreciation and amortization)  7,926,666   6,086,026   -   14,012,692 
Gross profit  550,455   10,699,891   -   11,250,346 
Depreciation and amortization  44,997   2,934,094   24,356   3,003,447 
Selling, general and administrative expenses  735,480   8,008,448   992,366   9,736,294 
Interest expense  -   (1,562,227)  (44,616)  (1,606,843)
Loss on change in fair value of derivative liability  -   -   (1,204,802)  (1,204,802)
Other (expenses) income  -   (185,158)  222,477   37,319 
Net loss $(230,022) $(1,990,037) $(2,043,663) $(4,263,722)
Total assets $5,223,717  $64,265,798  $1,706,229  $71,195,744 
Capital expenditures $5,366  $790,938  $-  $796,304 
 
 *The Company employs executive, administrative, human resources, and finance resources that service both the Carrier Services and Business Services segments.  The amounts reflected as Corporatein the column titled “Corporate and UnallocatedUnallocated” represent those operating expenses, assets and capital expenditures that werehave not been allocated to a business segment or product line.
 
Note 19.    Related Party Transactions

Since March 6, 2014, the Company has engaged a third party to prepare its tax returns and to provide related tax advisory services. Larry Blum, a member of Fusion’sour Board of Directors, is a Senior Advisor and a former partner of the third party that the Company is using to provide tax advisory services.
company.
 
20

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 20.     Fair Value Disclosures
 
Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities, is as follows:
 
Level 1—Quoted prices in active markets for identical assets or liabilities
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3—No observable pricing inputs in the market
20

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table represents the fair value of the liability measured at fair value on a recurring basis:

 Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total 
As of September 30, 2015            
As of March 31, 2016            
Non-current liabilities:                        
Derivative liability (see note 14) $-  $-  $931,524  $931,524  $-  $-  $431,633  $431,633 
As of December 31, 2014                
As of December 31, 2015                
Non-current liabilities:                                
Derivative liability (see note 14) $-  $-  $3,839,569  $3,839,569  $-  $-  $953,005  $953,005 
 
Changes in the derivative warrant liability for the ninethree months ended September 30, 2015March 31, 2016 are as follows:
 
Balance at December 31, 2014 $3,839,569 
Gain for the period:    
Included in net loss  (2,543,878)
Reduction in derivative liability due to exercise of Lenders' warrants  (364,167)
Included in other comprehensive loss  - 
Balance at September 30, 2015 $931,524 
    
Balance at December 31, 2015 $953,005 
Gain for the period:    
  Included in net loss  (954,422)
  Adjustment for prior issuances and conversion of warrants  433,050 
Balance at March 31, 2016 $431,633 
     
 
 
21

 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and the notes thereto appearing elsewhere herein and in conjunction with the Management’s Discussion and Analysis set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.
Certain statements and the discussion contained herein regarding the Company’s business and operations may include “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”, “plans”, “expect”, “anticipate”, “intend”, “estimate” or “continue” 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. The primary risk of the Company is its ability to attract new capital to execute its comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, the Company’s ability to comply with its senior debt agreements, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, natural disasters, acts of war, terrorism or other events beyond the Company’s control and the other factors identified by the Company from time to time in its filings with the SEC.  However, the risks included should not be assumed to be the only risks that could affect future performance.

All forward-looking statements included are made as of the date hereof, based on information available to as of the date thereof, and the Company assumes no obligation to update any forward-looking statements.
 
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 communications 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  unified communications,UCaaS, improving communication 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)IaaS solutions, are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered.  Complemented by storage solutions, as well as software as a service (SaaS)SaaS solutions, such security and business continuity, our advanced cloud offerings allow our larger enterprise 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 over 270approximately 370 carrier customers and vendors, and sells itsthrough which we sell domestic and international voice services to other communications service providerscarriers 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 increasingly 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 focusare currently focused on healthcare, legal, services, 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 businesssegment 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.

Our Performance

Revenues for the three months ended September 30, 2015March 31, 2016 were $24.5$33.2 million, an increase of $2.0$7.9 million, or 9.1%31.4%, compared to the three months ended September 30, 2014,March 31, 2015, as a result of an increase in revenues from our Business Services segment of approximately $4.2 million driven primarily by revenues generated from our acquisitions of RootAxcess and Fidelity in the fourth quarter of 2015, and an increase in revenues of $3.7 million from our Carrier Services segment mainly due to a 41.1% increase in the blended rate per minute of traffic terminated and 2.3% increase in the volume of traffic terminated.  We had a net loss for the first three months of 2016 of approximately $2.5 million, compared to net loss of $4.3 million in the same period a year earlier, an improvement of $1.7 million as a result of higher revenues offset by PingTonehigher cost of revenues of $6 million and selling, general and administrative expenses ("SG&A") of $1.7 million driven primarily by higher salaries and payroll benefits of approximately $1.9 million.  Our operating loss for the three months ended September 30, 2015 was $2.0 million, compared to an operating lossoffset by a decrease in acquisition integration costs of $0.8 million in the same
$0.6 million.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

period a year ago, as a result of higher salaries and payroll benefits of approximately $1.1 million and depreciation and amortization expense of approximately $0.3 million.

We had a net loss for the three months ended September 30, 2015 of $4.9 million, compared to a net income of $0.3 million for the three months ended September 30, 2014. The net loss was primarily the result of the loss on the extinguishment of debt of approximately $2.7 million.

Revenues for the nine months ended September 30, 2015 were $74.9 million, an increase of $6.4 million, or 9.2%, compared to the nine months ended September 30, 2014.  Our operating loss for the nine months ended September 30, 2015 was $5.1 million, as compared to an operating loss of $0.5 million in the same period a year ago, mainly due to higher salaries and payroll benefits of approximately $3.4 million and depreciation and amortization expense of $1.2 million.  We had a net loss for the nine months ended September 30, 2015 of $9.8 million, as compared to net loss of $0.7 million for the nine months ended September 30, 2014, this increase in net loss is primarily the result of the loss on the extinguishment of debt, depreciation and amortization, and selling, general and administrative expenses.
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, to a lesser extent, on our ability to identify further synergistic cost savings and operational efficiencies from our more recent acquisitions.
Revenues from our Carrier Services segment have declined over the last few years due, in large part, to decreases in the prevailing rates charged for the termination of international traffic.  We believe these declines resulted largely from increased competition, deregulation in many of the markets we serve and the use by competitors of lower cost, Internet-based technologies.  While the market demand for international voice termination has seen a corresponding increase over the last few years, we have been unable to increase our revenues accordingly due to capacity limitations on our network switching platform and liquidity constraints.  During late 2014, we implemented new systems and equipment which increased our network capacity to levels necessary to compete in the current market environment and allow us to increase our traffic volume and, therefore, gross profit for this business segment. 

Results of Operations

Three Months Ended March 31, 2016 Compared with Three Months Ended March 31, 2015
The following table summarizes the results of our consolidated operations for the three and nine months ended September 30, 2015March 31, 2016 and 2014:2015:
 
 Three Months Ended September 30,  Nine Months Ended September 30, Three Months Ended March 31, 
 2015  % Sales  2014  % Sales  2015  % Sales  2014  % Sales  2016  % Revenues  2015  % Revenues 
                                    
Revenues $24,530,824   100.0% $22,486,531   100.0% $74,857,557   100.0% $68,532,333   100.0% $33,184,415  $100.0% $25,263,038   100.0%
Cost of revenues*  13,533,647   55.2%  12,312,188   54.8%  41,359,955   55.3%  37,288,661   54.4%  19,921,677   60.0%  14,012,692   55.5%
Gross profit  10,997,177   44.8%  10,174,343   45.2%  33,497,602   44.7%  31,243,672   45.6%  13,262,738  $40.0%  11,250,346   44.5%
Depreciation and amortization  3,140,427   12.8%  2,830,727   12.6%  9,183,632   12.3%  7,996,196   11.7%  2,916,263   8.8%  3,003,447   11.9%
Selling, general and administrative expenses  9,796,483   39.9%  8,137,368   36.2%  29,379,196   39.2%  23,782,259   34.7%  11,424,786   34.4%  9,736,294   38.5%
Total operating expenses  12,936,911   52.7%  10,968,095   48.8%  38,562,828   51.5%  31,778,455   46.4%  14,341,049   43.2%  12,739,741   50.4%
Operating loss  (1,939,734)  (7.9%)  (793,752)  (3.5%)  (5,065,226)  (6.8%)  (534,783)  (0.8%)  (1,078,311)  (3.2%)  (1,489,395)  (5.9%)
Other (expenses) income:                                                
Interest expense  (1,434,734)  (5.8%)  (1,442,508)  (6.4%)  (4,650,286)  (6.2%)  (4,434,269)  (6.5%)  (1,627,964)  (4.9%)  (1,606,843)  (6.4%)
Gain on change in fair value of derivative liability  1,237,730   5.0%  2,389,203   10.6%  2,543,878   3.4%  4,308,272   6.3%
Loss on extinguishment of debt  (2,720,355)  (11.1%)  -   0.0%  (2,720,355)  3.6%  -   0.0%
Other expenses, net  (2,398)  (0.0%)  9,639   0.0%  56,369   0.1%  (30,716)  0.0%
Total other income (expenses)  (2,919,757)  (11.9%)  956,334   4.3%  (4,770,394)  (6.4%)  (156,713)  (0.2%)
(Loss) income before income taxes  (4,859,491)  (19.8%)  162,582   0.7%  (9,835,620)  (13.1%)  (691,496)  (1.0%)
(Benefit) provision for income taxes  -   0%  (147,341)  (0.7%)  -   0%  25,737   0.0%
Net (loss) income $(4,859,491)  (19.8%) $309,923   1.4% $(9,835,620)  (13.1%) $(717,233)  (1.0%)
Gain (loss) on change in fair value of derivative liability  182,400   0.5%  (1,204,802)  -4.8%
Other income, net  (9,674)  (0.0%)  37,319   0.1%
Total other expenses  (1,455,234)  (4.4%)  (2,774,326)  -11.0%
Loss before income taxes  (2,533,545)  (7.6%)  (4,263,721)  -16.9%
Provision for income taxes  -   0%  -   0.0%
Net loss $(2,533,547)  (7.6%) $(4,263,721)  -16.9%

*Exclusive of depreciation and amortization, shown separately below.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Three Months Ended September 30, 2015 Compared with Three Months Ended September 30, 2014
Revenues
 
Revenues

Consolidated revenues were $24.5$33.2 million duringfor the three months ended September 30, 2015March 31, 2016 compared to $22.5$25.3 million duringfor the three months ended September 30, 2014,March 31, 2015, an increase of $2.0$7.9 million, or 9.1%31.4%.  

Revenues for the Business Services segment were $16.3$20.9 million for the three months ended September 30, 2015March 31, 2016 as compared to $15.2$16.8 million for the three months ended September 30, 2014.March 31, 2015.  The increase is primarily dueattributable to the inclusion of revenuesrevenue derived from our acquisition of PingTone that was completedassets from RootAxcess on October 31, 2014.September 30, 2015 and Fidelity on December 8, 2015.

Carrier Servicesservices revenue of approximately $8.3$12.2 million represents an increase of $1.0$3.7 million, or 14%44.3%, fromcompared to the same period a year ago, mainly due to a 13.2%2.3% increase in overall trafficthe volume and blended per minute rate of traffic terminated and an increase of approximately 0.7%.41.1% in the blended rate per minute of traffic terminated.

Cost of Revenues and Gross Margin
 
Consolidated cost of revenues was $13.5$20 million for the three months ended September 30, 2015 asMarch 31, 2016 compared to $12.3$14.0 million for the three months ended September 30, 2014.  ThisMarch 31, 2015.  The increase was primarilyis due to the costs attributable to revenues resulting from the RootAxcess and Fidelity acquisitions during the last quarter of 2015, and higher rates for the cost of traffic terminated of 44.3% in the Carrier Services segment of approximately $1.1 million and a $0.1 million increase in costs incurred by the Business Services segment.
 
ForConsolidated gross margin was 40% for the three months ended September 30, 2015, consolidated gross margin was 44.8%,March 31, 2016 compared to 45.2% for44.5% in the same three month period in 2014.for 2015. The increase in gross margindecrease is due primarily to higher revenues from bothapproximately $3.9 million of additional costs of traffic terminated by our Carrier Services segment  and an increase of approximately $1.5 million in customer provisioning costs in our Business Services segments of approximately $2.0 million offset by an increase in cost of revenues of approximately $1.0 million.segment.

Gross margin for the Business Services segment was 63.8%60.8% for the three months ended September 30, 2015ending March 31, 2016 as compared to 62.0%63.7% for the three months ended September 30, 2014, as a resultending March 31, 2015. The decrease is due primarily to an increase in costs of services of 35.1% driven primarily by the inclusion of the incremental revenue from PingTone offset by a slight increase in cost of revenues of approximately $0.1 million.Fidelity acquisition.

Gross margin for the Carrier Services segment was 7.6%4.4% for the three months ended September 30, 2015March 31, 2016 as compared to 10.0%6.5% in the three months ended September 30, 2014.March 31, 2015.  The decrease was due to costshigher cost per minute of traffic terminated of approximately 3.4% which was higher than the blended per minute rate of traffic terminated of 0.7%$3.8 million, or 44.3% over the same period a year ago.earlier.

Depreciation and Amortization
 
Depreciation and amortization expense was $3.1$2.9 million for the three months ended September 30, 2015March 31, 2016 as compared to $2.8$3.0 million during the same period a year ago, primarily due to our acquisitionago. The decrease is the result of PingTone.the amortization expense of the intangible assets decreasing by $0.5 million as a result of some of the intangible assets being fully amortized, offset, in part, by an increase in depreciation expense of approximately $0.4 million.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative expenses (“SG&A”) for the three months ended September 30, 2015March 31, 2016 was $9.8$11.4 million as compared to $8.1$9.7 million forduring the three months ended September 30, 2014.March 31, 2015.  This increase is the result of higher salaries and employee related benefits of approximately $1.1$1.5 million driven primarily by an increase inincreased headcount result from our PingTone acquisition, professional and consulting fees of $0.4 million, and integration costs of approximately $0.3 million associated with our Broadvox and PingTone acquisitions.

Operating Loss
Our operating loss for the three months ended September 30, 2015 was $1.9 million as compared to an operating lossacquisition of $0.8 million for the three months ended September 30, 2014.  The increase in operating loss was due to increases in SG&A and depreciation and amortization expense.
Fidelity.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Interest Expense

Interest expense decreased bywas approximately $7 thousand in$1.6 million for the three months ended September 30, 2015 as comparedMarch 31, 2016 and 2015. For the quarter ended March 31, 2016, we recognized interest expense of approximately $1.4 million related to the three months ended September 30, 2014, assenior secured borrowings, $21,300 of interest expense on a result of  of lowerrelated party note, $45,000 in interest rates resultingexpense from the debt refinancing for the remaining debt under the Original Notes offset by additionalour capital lease financing program, and approximately $159,000 in interest incurred in the revolving credit facility of $51 thousand.

Loss on Extinguishment of Debt

During the three months ended September 30, 2015, we recorded a loss on extinguishment of debt of $2.7 million as a result ofexpense associated with debt discount and debt issuance costs write-off of $1.7 million and prepayment penalty of approximately $1.0 million associated with the early retirement of approximately $20.0 million of Original Notes under the Original Credit Agreement
amortization.

Change in Fair Value of Derivative Liability
 
On August 28, 2015, as part of the debt refinancing the lenders under the Original Credit Agreement exercised warrants to purchase 728,333 shares of Fusion common stock. As a result of the exercise of these nominal warrants, the Company recognized a reduction in the associated derivative liability of approximately $364,000 with a reclass to equity.

During the three monthsquarter ended September 30, 2015,March 31, 2016, we recognized a gain on the change in fair value of our derivative liabilityliabilities in the amount of approximately $1.0 million offset by a loss of approximately $0.8 million for an adjustment for prior issuances and conversion of warrants (see Notes 14 and 20) compared to a loss in the amount of $1.2 million compared to a gain in the amountsame quarter of $2.4 million for2015.   The gain and loss on the same period in 2014.  These gains and lossesderivative are related to the derivatives associated with the warrants that we issued to our senior lenders in 2012 and 2013 and with the warrants we issued to purchasers of our preferred stock,Series B-2 Preferred Stock, 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.  TheThese warrants are valued using the Black-Scholesan option pricing model and other option pricingvaluation models, such that increases toin Fusion’s stock price result in a higher valuation of the derivative and a charge to our income statement, and decreases toin Fusion’s stock price result in a lower valuation and a gain being recorded in our income statement.

We expect that we willmay be subject to additional significant fluctuations in our income statement in 20152016 and beyond based on changes in ourFusion’s stock price and the corresponding changes in fair value of our derivative liabilities.
Net Loss
Net loss forliabilities associated with the three months ended September 30, 2015 was $4.9 million as compared to net income of $0.3 million for the three months ended September 30, 2014. The net loss was primarily a result of the loss on the extinguishment of debt of $2.7 million, and a decreasewarrants issued in the gain on the change in the fair value ofconnection with our derivative liability of approximately $1.2 million.

Nine Months Ended September 30, 2015 Compared with Nine Months Ended September 30, 2014

Revenues

Consolidated revenues were $74.9 million for the nine months ended September 30, 2015 compared to $68.5 million for the nine months ended September 30, 2014, an increase of $6.4 million, or 9.2%, primarily as a result of revenues generated by PingTone of approximately $5.8 million.  

Revenues for the Business Services segment increased by $2.4 million in 2015 to $49.0 million from $46.6 million in 2014, mainly as a result of the inclusion of revenues from the PingTone acquisition which was completed on October 31, 2014.

Carrier Services revenue of $25.8 million represents an increase of $3.9 million, or 17.5%, from a year ago, as a result of a 24.0% increase in the volume of traffic terminated over our network, offset by a 5% decrease in the blended rate realized per minute of traffic terminated.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Cost of Revenues and Gross Margin

Consolidated cost of revenues was $41.4 million for the nine months ended September 30, 2015 compared to $37.3 million for the nine months ended September 30, 2014.  This increase was primarily due to higher cost of traffic terminated in the Carrier Services segment of $3.9 million.

Consolidated gross margin was 44.7% in the nine months ended September 30, 2015 compared to 45.6% in the nine months ended September 30, 2014. The decrease resulted from increased cost of revenues of 10.9% driven by higher cost of traffic terminated in the Carrier Services segment that outpaced the increase in overall revenues of 9.2% resulting from higher mix of Business Services revenue from the PingTone acquisition.

Gross Margin for the Business Services segment was 63.7% in the first nine months of 2015 compared to 62.0% in the first nine months of 2014, as a result of incremental revenue from the PingTone acquisition of approximately $5.7 million offset by an increase in the cost of revenues of approximately $0.9 million.

Gross margin for the Carrier Services business segment was 8.6% for the nine months ended September 30, 2015 compared to 10.8% for the nine months ended September 30, 2014, primarily due to a 5% decrease in the blended rate of per minute traffic terminated.

Depreciation and Amortization

Depreciation and amortization increased by approximately $1.2 million to $9.2 million for the nine months ended September 30, 2015 from $8.0 million during the same period a year earlier, mainly as a result of the PingTone acquisition that contributed approximately $140,000 and $500,000 in depreciation and amortization expense, respectively.

Selling, General and Administrative Expenses

SG&A expenses increased by $5.6 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.  The increase is the result of higher salaries and employee related benefits of approximately $3.4 million driven primarily by an increase in headcount resulting from the PingTone acquisition, professional fees of $1.4 million, and higher integration costs of approximately $1.0 million as a result of the Broadvox and PingTone acquisitions.

Operating Loss

Our operating loss was $5.0 million for the nine months ended September 30, 2015 as compared to an operating loss of $0.5 million for the same period of a year earlier.  The operating loss is driven primarily by an increase in SG&A of approximately $5.6 million and depreciation and amortization expense of $1.2 million.

Interest Expense

Interest expense increased by approximately $0.2 million in the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014, as a result of higher interest rate related to the Original Notes before the debt refinance and additional interest incurred in the revolving credit facility of $51 thousand.

Loss on Extinguishment of Debt

The loss on extinguishment of debt of $2.7 million relates to the retirement of approximately $20.0 million of Original Notes outstanding under the Original Credit Facility which accelerated the write-off of approximately $1.7 million of debt discount and debt issuance costs.

Change in Fair Value of Derivative Liability

On August 28, 2015, as part of the debt refinancing the lenders under the Original Credit Facility exercised warrants to purchase 728,333 shares of Fusion common stock. As a result of the exercise of these nominal warrants, the Company recognized a reduction in the derivative liability of approximately $364,000 with a reclass to equity.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

The change in fair value of the derivative was a gain of $2.5 million in the nine months ended September 30, 2015 compared to a gain of $4.3 million for the nine months ended September 30, 2014.  This change is due to the decrease in Fusion's common stock price during these periods, which decreases the value of our derivative liability.

Net Loss

Our net loss was $9.8 million for the nine months ended September 30, 2015 compared to a net loss of $0.7 million for the nine months ended September 30, 2014, mainly due to the increase in SG&A of approximately $5.6 million, loss on extinguishment of debt of $2.7 million, and depreciation and amortization expense of $1.2 million.Series B-2 Preferred Stock.

Liquidity and Capital Resources
 
Since our inception, we have incurred significant net losses. At September 30, 2015,March 31, 2016, we had negative working capital of approximately $0.7$0.9 million and stockholders’ equity of $12.5 million.  At December 31, 2015, we had working capital of $1.7 million and stockholders’ equity of approximately $4.4 million.  At December 31, 2014, we had working capital of $2.1 million and stockholders’ equity of approximately $13.3$14.5 million.  Our consolidated cash balance at September 30, 2015March 31, 2016 was $3.9$5.9 million as compared to $6.4$7.5 million at December 31, 2014.2015.  While we believe that 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.needed or on terms deemed by us to be acceptable.  

During fiscal 2013 and for most of fiscal 2014, we relied primarily on the sale of Fusion’s equity securities and the cash generated from our Business Services segment to fund our operations.

We have never paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our 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, general business conditions, the terms of our senior debtcredit facilities, limitations under Delaware law and other factors that Fusion’s Board of Directors and senior management consider appropriate.

The holders of theour Series A-1, A-2, and A-4 preferred stockA Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, as and if declared by Fusion’s Board of Directors. The holders of theour Series B-2 preferred stockPreferred 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 FusionFusion’s common stock.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

As of September 30, 2015, the FusionThrough March 31, 2016, Fusion’s Board of Directors had notnever declared any dividends on Fusion’sany series of the Series A preferred stock,Preferred Stock, and, as a result, the Company had accumulated approximately $4.2$4.4 million of undeclared preferred stock dividends. The Fusion Board of Directors declared a dividend of $278,010$231,358 for the three months ended September 30, 2015 related toMarch 31, 2016 on the Series B-2 preferred stock,Preferred Stock, which, as permitted by the terms of the Series B-2 preferred stock,Preferred Stock, was paid in the form of 128,999125,279 shares of Fusion’s common stock.

At September 30, 2015, we have approximately $34.0 million principal amount of subordinated senior notes outstanding under the Restated Purchase Agreement as follows:Secured Credit Facility

●  
Series A and B Notes.  On October 29, 2012, the Company sold the Series A Notes in the aggregate principal amount of $6.5 million, bearing interest at the rate of 10.0% annually, and the Series B notes in the aggregate principal amount of $10.0 million bearing interest at the rate of 11.5% annually.  The proceeds from the sale of the Series A Notes and Series B Notes were used to finance the acquisition of Network Billing Systems, LLC.

●  
Series C Notes. On December 15, 2013, the Company sold the Series C Notes in the aggregate principal amount of $0.5 million.  The proceeds were used to pay a deposit on the purchase price to the sellers in connection with our acquisition of certain assets of Broadvox.

●  
Series D Notes. On December 31, 2013, the Company sold the Series D Notes in the aggregate principal amount of $25.0 million.  The proceeds from the sale of the Series D Notes were used to finance the acquisition of certain assets of Broadvox.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

●  
Series E Notes. On October 31, 2014, contemporaneously with the completion of the acquisition of PingTone, the Company sold the Series E Notes in an aggregate principal amount of $5.0 million.

●  
Series F Notes.  On August 28, 2015, the Company sold the Series F Notes in the aggregate principal amount of $9.0 million. The proceeds were used to retire a portion of the approximately $20.0 million of Original Notes held by one of the original lenders.

In accordance with the terms of the Restated Purchase Agreement, all of the senior notes now bear interest at an annual rate of 10.8%, with monthly principal payments of approximately $57,148 from August 2015 through February 2021 and with the outstanding principal balance on all the senior notes payable at maturity on February 28, 2021.

For the three months ended September 30, 2015 and 2014, we paid interest expense on the senior notes of approximately $1.1 million and $1.2 million, respectively, and $3.7 million and $3.5 million for the nine months ended September 30, 2015 and 2014, respectively.

We have a note payable outstanding of approximately $1.3 million from Marvin Rosen, Fusion’s Chairman of the Board of Directors.  This note is subordinated to all amount borrowed under the Credit Agreement and the Restated Purchase Agreement.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after the Opus senior notes are paid in full.   For the three months ended September 30, 2015 and 2014 and nine months ended September 30, 2015 and 2014, we paid interest expense on this note of approximately $27,000 and $80,000, respectively.

For the year ended December 31, 2014, we exceeded the limit on capital expenditures set forth in the Original Credit Agreement, which constituted to an event of default under terms of the senior notes and the Original Credit Agreement. On March 27, 2015, the holders of our senior notes waived the event of default for 2014 and amended the terms of the Original Credit Agreement by adjusting the threshold for 2015. As a result of the amendment, we were in compliance with the capital expenditure limit for the year ended December 31, 2014. 

On June 16, 2015, the Company and the senior lenders entered into the Original Credit Agreement whereby the senior lenders agreed, among other things, to (i) increase the amount of our capital lease indebtedness to $7.0 million, (ii) extend to July 31, 2015, the date by which we are required to satisfy the minimum cash commitment, (iii) extend to September 30, 2015, the date by which EBITDA at Fusion must equal or exceed EBITDA at Fusion’s subsidiaries.  In the Original Credit Agreement, we also agreed to sell at least $3.0 million of Fusion equity securities by July 31, 2015 on terms reasonably satisfactory to the senior lenders.  As of July 31, 2015, we failed to sell the required equity securities and we also failed to meet the minimum cash commitment.  In addition, we were not in compliance with our minimum EBITDA and Fixed Charge Coverage Ratio covenants.  On August 13, 2015, the holders of our senior notes waived our events of default with respect to the minimum EBITDA and Fixed Charge Coverage Ratio obligations and extended to September 30, 2015 the date by which we must raise $3.0 million of additional capital from the sale of Fusion equity and our obligation to satisfy the minimum cash commitment.   As a result of this waiver and amendment, we were in compliance with our obligations under the Original Credit Agreement as of June 30, 2015 whose terms were subsequently modified under the Restated Purchase Agreement discussed below.

On August 28, 2015, the Company entered into the Secured Credit Agreement.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.    The Secured Credit AgreementFacility consists of a $15.0 million revolvercredit facility and a $25.0 million term loan.  Amounts borrowed under the revolver are permitted to be used to retire a portion of the Original Notes and for general working capital purposes.  Amounts borrowed under the term loan must be used to fund approved acquisitions. All borrowings under the Amended Credit AgreementFacility bear interest at a rate equal to the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by the Wall Street Journal as its “prime rate” (or the average prime rate if a high and a low prime rate are therein reported) plus the Applicable Margin then in effect at such time, or (b) 3.25% plus the Applicable Margin and are secured by a first priority security interest in all of the assets of Fusion and its subsidiaries, including the capital stock of each such subsidiary. Under the Amended Credit Agreement,Facility, “Applicable Margin” is calculated based on the ratio of Senior Indebtedness to Adjusted EBITDA (each as defined in the Amended Credit Agreement)Facility) and ranges from 1.25% to 2.00% based on the ratio level.

In addition, subject to certain limitations, Fusion and certain of its subsidiaries have guaranteed the obligations of the borrower (“Fusion NBS Acquisition Corp.”)  under the Amended Credit Agreement,Facility, including its obligations to repay all borrowings. The maturity date of amounts borrowed under the revolvercredit facility is four years or August 28, 2019, and the maturity date of any amounts borrowed under the term loan is August 28, 2020.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

As of September 30, 2015, the Company has borrowed $12.5 million under the revolver and has not drawn down any amounts under the term loan.  The Company pays interest monthly at an initial rate of 4.5%, and recognized interest expense of approximately $51,000 during the quarter just ended.

TheAmended Credit AgreementFacility contains a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to borrowings under the Amended Credit Agreement,Facility, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries. The Amended Credit AgreementFacility also requires on-going compliance with various financial covenants, including a maximum senior leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization. Effective December 31, 2015, Fusion is requiredthe Company’s obligation to maintain a minimum unencumbered cash bank balance of no less than $1.0 million at all times. Failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerate demand for repayment of amounts borrowedtimes was eliminated.

At March 31, 2016, we have outstanding $15.0 million under the Secured Credit Agreement.Facility and $25.0 million under the term loan.   The Company paid monthly interest at a rate of 4.75%, and paid interest expense of $480,278 during the quarter ended March 31, 2016.  As of September 30, 2015,March 31, 2016, we were in compliance with all the financial covenants in the Amended Credit Agreement.Facility.

Praesidian Facility

Simultaneous with the execution of the Secured Credit Agreement, the Company executed the Restated Purchase Agreement.Praesidian Facility. The Restated Purchase Agreement amendsPraesidian Facility amended and restatesrestated the terms of the Original Credit Agreement, pursuant to which the Company previously sold the Original Notes.  Under theThird Amended and Restated Securities Purchase Agreement approximately $11.0 millionand Security Agreement (the “Third Amendment”).  The Third Amendment amended and restated the terms of second amended and restated agreement, which itself amended and restated earlier versions of this securities purchase agreement.  The Third Amendment, together with each earlier version of this facility are hereinafter collectively referred to as the Original Notes held by Plexus Fund II, L.P., Plexus Funds III, L.P. and Plexus Fund QP III, L.P. (“Plexus”“Praesidian Facility”) were paid in full with borrowings under.  Specifically, the Credit Agreement (see Note 12), and $9.0 millionPraesidian Facility amended the Third Amendment to (i) provide the consent of the Original Notes held by Plexus were paid using the proceeds from the sale of Series F senior notes in the aggregate principal amount of $9.0 million, bearing interest at 10.8% annually and having a maturity date of February 28, 2021, additionally the maturity date of the all remaining Original Notes was extended to February 28, 2021, and the continuing lenders agreed to subordinate their notes to borrowings extendedthe acquisition of Fidelity (ii) add Fidelity as a guarantor and credit party under the Credit Agreement. Subject to certain limitations, FusionPraesidian Facility, and (iii) modify or eliminate certain of its subsidiaries have guaranteed the borrower’s obligations underfinancial covenants contained in the Restated Purchase Agreement,Third Amendment, including its obligations to repay the notes.

The Restated Purchase Agreement contains affirmative and negative covenants similar to those set forth in Credit Agreement, including but not limited to, restrictions on paying indebtedness subordinate to the notes issued thereunder, incurring additional indebtedness, making capital expenditures, paying dividends and cash distributions by subsidiaries. Effective December 31, 2015, Fusion is requiredrequirement to maintain a minimum unencumbered cash bank balance of no less than $1.0 million.

The Restated Purchase Agreement also requires on-going compliance with various financial covenants, including a leverage ratio, fixed charge coverage ratio and minimum levels of earnings before interest, taxes, depreciation and amortization. Failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerate demand for repayment of the notes.million at all times. As of September 30, 2015,March 31, 2016, we were in compliance with all the financial covenants in the Restated Purchase Agreement.Fourth Amended SPA.

 The following notes have been issued by us under the Praesidian Facility:
● 
Series A and B Notes.  The Company sold $6.5 million aggregate principal amount of Series A notes, and $10.0 million aggregate principal amount of Series B notes in October 2012, the proceeds of which were used to finance our acquisition of Network Billing Systems, LLC.

● 
Series C and D Notes. The Company sold $0.5 million aggregate principal amount of Series C notes and $25.0 million aggregate principal amount of Series D notes in December 2013, to finance our acquisition of certain assets of Broadvox.

● 
Series E Notes. The Company sold $5.0 million aggregate principal amount of Series E notes in October 2014 to fund our acquisition of PingTone Communications Inc.

● 
Series F Notes.  The Company sold $9.0 million aggregate principal amount of Series F notes in August 2015 to retire a portion of the approximately $20.0 million of notes held by one of the original lenders.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

At March 31, 2016, we had approximately $34.0 million principal amount of notes outstanding under the Fourth Amended SPA. In accordance with the terms of the Fourth Amended SPA, the notes bear interest at an annual rate of 10.8%, with monthly principal payments of approximately $57,148 with the outstanding principal balance on all the notes payable at maturity on February 28, 2021.
In the quarter ended March 31, 2016 and March 31, 2015, we paid interest expense on the notes of approximately $0.9 million and $1.3 million, respectively.
Related Party Note Payable
We have a note payable outstanding of approximately $1.2 million to Marvin Rosen, the Chairman of Fusion’s Board of Directors.  This note is subordinated to all amounts borrowed under the Amended Credit Facility and the Fourth Amended SPA.  This note is unsecured, pays interest monthly at an annual rate of 7%, and matures 120 days after all borrowings under the Amended Credit Facility and the Fourth Amended SPA are paid in full. For the quarter ended March 31, 2016, the Company recognized interest expense on this note of approximately $21,300.
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%.   During the first quarter of 2016, we paid $241,099 scheduled principal payments under these leases and $45,463 in interest expense.
The following table sets forth a summary of our cash flows for the periods indicated:

  Nine Months Ended September 30, 
  2015  2014 
       
Net cash provided by operating activities $135,735  $1,069,727 
Net cash used in investing activities  (1,979,335)  (1,151,679)
Net cash (used in) provided by financing activities  (645,238)  3,166,635 
Net (decrease) increase in cash and cash equivalents  (2,488,838)  3,084,683 
Cash and cash equivalents, beginning of period  6,444,683   6,176,575 
Cash and cash equivalents, end of period $3,955,845  $9,261,258 
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  Three Months Ended March 31, 
  2016  2015 
       
Net cash (used in) provided by operating activities $(378,316) $163,108 
Net cash used in investing activities  (809,942)  (796,304)
Net cash used in financing activities  (479,210)  (455,079)
Net  decrease in cash and cash equivalents  (1,667,468)  (1,088,275)
Cash and cash equivalents, beginning of period  7,540,543   6,444,683 
Cash and cash equivalents, end of period $5,873,075  $5,356,408 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Cash provided byused in operating activities was approximately $0.1$0.4 million forduring the ninethree months ended September 30, 2015March 31, 2016, compared to cash provided by operating activities of $1.0$0.2 million forduring the ninethree months ended September 30, 2014. This decrease was attributable to changes in non-cash items.March 31, 2015.  The following table illustrates the primary components of our cash flows from operations:

  Nine Months Ended September 30, 
  2015  2014 
Net loss $(9,835,620) $(717,233)
Non-cash expenses, gains and losses  11,120,280   5,365,694 
Accounts receivable  (565,227)  (590,444)
Accounts payable and accrued expenses  (297,079)  (2,270,786)
Other  (286,619)  (717,504)
Cash provided by  operating activities $135,735  $1,069,727 
  Three Months Ended March 31, 
  2016  2015 
Net loss $(2,533,545) $(4,263,722)
Non-cash expenses, gains and losses  3,269,347   4,777,940 
Accounts receivable  (584,098)  25,470 
Accounts payable and accrued expenses  390,727   (80,010)
Other  (920,747)  (296,570)
Cash (used in) provided by  operating activities $(378,316) $163,108 
 
Cash used in investing activities, comprised mainly of capital expenditures, was approximately $2.5$0.9 million for the ninethree months ended September 30, 2015,March 31, 2016 as compared to $3.0$0.8 million for the ninethree months ended September 30, 2014.March 31, 2015.  Capital expenditures for the remainder of 20152016 are expected to be approximately $2.0$3.5 million to fund the purchase of network and related equipment and operational support systems as we continue to grow our Business Services segment.  A portion of our capital expenditure requirements may be financed through capital leases or other equipment financing arrangements. Many of these projects are subject to review and cancellation at the discretion of Fusion’s Chief Executive Officer and Board of Directors. In addition, we paid $0.5 million in our acquisition of the assets of RootAxcess and restricted cash provided cash of approximately $1.0 million.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Cash used in financing activities was $0.5 million for the ninethree months ended September 30, 2015 of approximately $0.6 million was primarily attributable to payments of $0.8 million to our senior lenders, retirement of debt of approximately $20.0 million, $0.6 million in capital lease payments,March 31, 2016 and approximately $1.7 million repayment of borrowings under a factoring arrangement with a third party, offset by approximately $1.6 million in proceeds received from the transfer of receivables from such third party. In addition, during2015.  For the quarter ended September 30, 2105,March 31, 2016, the use of cash was the result of debt service payments and equipment financing obligations of $238,111 and $241,099, respectively.  In the first quarter of 2015, we issued the Series F Notes for $9.0 millionmade debt service payments and borrowed $12.5 million under the revolver.equipment financing obligations of $306,250 and $148,829, respectively.

Other Matters

Inflation
 
We do not believe inflation has a significant effect on ourthe Company’s operations at this time.

Off Balance Sheet Arrangements
 
At September 30, 2015,March 31, 2016, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on ourthe Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Forward Looking Statements
Certain statements and the discussion contained herein regarding our business and operations may include “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”, “anticipate”, “intend”, “estimate” or “continue” 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. Our primary risk is our ability to attract new capital to execute on our comprehensive business strategy. There may be additional risks associated with the integration of businesses following an acquisition, our ability to comply with our senior debt agreements, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, natural disasters, acts of war, terrorism or other events beyond our control and the other factors identified by us from time to time in our filings with the SEC.  However, the risks included should not be assumed to be the only things that could affect our future performance.

All forward-looking statements included are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
 
Disclosure under this section is not required for a smaller reporting company.
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 4. 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 (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 Chief Executive Officer and Chief Financial Officer, as appropriate, 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 Chief Executive Officer and Acting Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015.March 31, 2016.  Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.

Our Chief Executive Officer and Acting Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended September 30, 2015March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


Item 1. Legal Proceedings.
None.
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
 
None.

Item 1A. Risk Factors.
 
Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.2015.  There have been no material changes to our risk factors from those previously disclosed in such Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
 
Through September 30, 2015, we have issued an aggregate of 58,167 shares of common stock valued at approximately $216,000 to third party consultants for services rendered.  These securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but were issued in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.None.

None.

Item 4. Mine Safety Disclosures.
 
Not applicable

Item 5. Other Information.
None.
 
 
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FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Item 6. Exhibits.

EXHIBIT NO.DESCRIPTION
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* 
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
 
* 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, Actas amended, except as expressly set forth by specific reference in such filing, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections.

 
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SIGNATURESIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
 
    
November
May 16, 20152016
By:/s/ Gordon Hutchins, Jr.Lisa Taranto 
  Gordon Hutchins, Jr.Lisa Taranto 
  President, Chief Operating Officer and Acting Chief FinancialPrincipal Accounting Officer 
    


 
 
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Index to Exhibits
 
Index to Exhibits
EXHIBIT NO.DESCRIPTION
Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Acting Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of the Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS* 
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
* 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, 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.
* 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, 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.
 
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