UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2017~~2018

☐ 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,~~CONNECT, 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 ☑No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☑No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
(do not check if a smaller reporting company)		Emerging growth company	☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~November 12, 2017.~~August 10, 2018.

Title of Each Class		Number of Shares Outstanding
Common Stock, $0.01 par value	~~22,367,631~~	78,464,037

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

FUSION CONNECT, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Part 1 Financial ~~Information.~~Information	3

Item 1. Financial ~~Statements.~~Statements	1
	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations.~~Operations	24
	24
Item 3. Quantitative and Qualitative Disclosures About Market ~~Risk.~~Risk	31
	35
Item 4. Controls and ~~Procedures.~~Procedures	32
	35
Part II Other ~~Information.~~Information	36

Item 1. Legal ~~Proceedings.~~Proceedings	33
	36
Item 1A. Risk ~~Factors.~~Factors	33
	36
Item 2. Unregistered Sales of Equity Securities and Use of ~~Proceeds.~~Proceeds	37
	36
Item 3. Defaults Upon Senior ~~Securities.~~Securities	37
	36
Item 4. Mine Safety ~~Disclosures.~~Disclosures	37
	36
Item 5. Other ~~Information.~~Information	3637

Item 6. ~~Exhibits.~~Exhibits	37
~~Signatures.~~
Signatures	38

Index to Exhibits	39

As previously disclosed, on May 4, 2018 (the “Birch Closing Date”), Fusion Connect, Inc., a Delaware corporation (the “Fusion”), completed the merger (the “Birch Merger”) of its wholly-owned subsidiary, Fusion BCHI Acquisition LLC (“BCHI Merger Sub”), with and into Birch Communications Holding, Inc., a Georgia corporation (“Birch”), in accordance with the terms of the Agreement and Plan of Merger, dated as of August 26, 2017, as amended, among Fusion, Birch Merger Sub and Birch (the “Birch Merger Agreement”). As a result of the Birch Merger, each then existing subsidiary of Birch became indirect wholly-owned subsidiaries of Fusion. On May 4, 2018, Fusion also changed its corporate name from Fusion Telecommunications International, Inc. to Fusion Connect, Inc.

For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under generally acceptable accounting principles in the United States (“U.S. GAAP”) and Birch is considered the accounting acquirer. Accordingly, Birch’s historical results of operations will replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements.

In addition, as previously disclosed, on June 15, 2018 (the “MegaPath Closing Date”), the Company (as defined below) completed its acquisition of MegaPath Holding Corp., a Delaware corporation (“MegaPath”) through a merger (the “MegaPath Merger”) of Fusion MPHC Acquisition Corp. (“MegaPath Merger Sub”), with and into MegaPath, in accordance with the terms of the Agreement and Plan of Merger, dated as of May 4, 2018, among the Company, MegaPath, MegaPath Merger Sub and Shareholder Representative Services, LLC, as stockholder representative (the “MegaPath Merger Agreement”).

This quarterly report on Form 10-Q relates to the Company’s three and six-month periods ended June 30, 2018, which six-month period includes the date of the completion of the Birch Merger, and is therefore Fusion’s first quarterly report on Form 10-Q that includes results of operations for the combined company, including Birch and MegaPath.

Unless the context otherwise requires, references to the “Company,” the “combined company” “we,” “our” or “us” in this report refer to Fusion and its subsidiaries following the completion of the Birch Merger and references to “Fusion” refer to the Company prior to the completion of the Birch Merger.

Except as otherwise noted, references to “common stock” in this report refer to common stock, par value $0.01 per share, of Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split of its common stock (the “Reverse Split”). Unless noted otherwise, any share or per share amounts in this report, the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to the Reverse Split.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

PART 1I –FINANCIAL INFORMATION

Item 1. Financial Statements.

Fusion Connect, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except par value amounts)

September 30,
2017

December 31,
2016

ASSETS

(unaudited)

Current assets:

Cash and cash equivalents
$2,341,634
$7,221,910
Accounts receivable, net of allowance for doubtful accounts of


approximately $779,000 and $427,000, respectively
  14,359,639
  9,359,876
Prepaid expenses and other current assets
  1,776,072
  1,084,209
Total current assets
  18,477,345
  17,665,995
Property and equipment, net
  13,769,882
  14,248,915
Security deposits
  615,585
  630,373
Restricted cash
  27,153
  27,153
Goodwill
  34,773,629
  35,689,215
Intangible assets, net
  58,760,920
  63,617,471
Other assets
  52,231
  77,117
TOTAL ASSETS
$126,476,745
$131,956,239



LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities:


Term loan - current portion
$5,687,500
$2,979,167
Obligations under asset purchase agreements - current portion
  603,192
  546,488
Equipment financing obligations
  1,186,115
  1,002,578
Accounts payable and accrued expenses
  25,674,946
  19,722,838
Total current liabilities
  33,151,753
  24,251,071
Long-term liabilities:


Notes payable - non-related parties, net of discount
  31,822,773
  31,431,602
Notes payable - related parties
  918,135
  875,750
Term loan
  55,782,094
  60,731,204
Indebtedness under revolving credit facility
  1,500,000
  3,000,000
Obligations under asset purchase agreements
  1,265,811
  890,811
Equipment financing obligations
  716,005
  1,237,083
Derivative liabilities
  760,965
  348,650
Total liabilities
  125,917,536
  122,766,171
Commitments and contingencies


Stockholders' equity:


Preferred stock, $0.01 par value, 10,000,000 shares authorized,


14,341 and 17,299 shares issued and outstanding
  143
  174
Common stock, $0.01 par value, 90,000,000 shares authorized,


22,296,683 and 20,642,028 shares issued and outstanding
  222,967
  206,422
Capital in excess of par value
  193,642,257
  192,233,032
Accumulated deficit
  (193,312,093)
  (183,249,560)
Total Fusion Telecommunications International, Inc. stockholders' equity
  553,274
  9,190,068
Noncontrolling interest
  5,935
  -
Total stockholders' equity
  559,209
  9,190,068
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$126,476,745
$131,956,239

	June 30, 2018	December 31, 2017
	(unaudited)	(audited)
Current assets:
Cash and cash equivalents	$13,535	$5,757
Accounts receivable, net of allowance for doubtful	52,384	25,372
accounts of $6,077 and $2,652, respectively
Accounts receivable - stockholders/employees	-	920
Prepaid expenses	10,443	6,290
Inventory, net	1,618	1,142
Other assets	4,504	2,505
Current assets of discontinued operations	-	40,038
Total current assets	82,484	82,024
Long-term assets:
Property and equipment, net	121,294	106,557
Goodwill	217,814	89,806
Intangible assets, net	183,826	68,834
Other non-current assets	33,462	877
Total long-term assets	556,396	266,074
Total assets	$638,880	$348,098
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$76,075	$40,315
Accrued telecommunications costs	5,277	11,048
Deferred customer revenue	16,030	10,226
Other accrued liabilities	41,831	23,948
Current portion of capital leases	3,027	3,003
Current portion of long-term debt	24,500	26,500
Current liabilities from discontinued operations	-	34,864
Total current liabilities	166,740	149,904
Long-term liabilities:
Non-current portion of long-term debt	580,020	410,736
Non-current portion of capital lease	3,316	3,823
Other non-current liabilities	7,657	12,847
Total non-current liabilities	590,993	427,406
Stockholders’ deficit:
Preferred stock, $0.01 par value, 10,000 shares authorized,
15 and 0 shares issued and outstanding, respectively	-	-
Common stock, $0.01 par value; 150,000 shares authorized,
78,415 and 25,161 shares issued and outstanding, respectively	784	252
Additional paid-in capital	145,377	5,824
Accumulated deficit	(264,752)	(236,477)
Accumulated other comprehensive (loss) income	(262)	1,189
Total stockholders’ deficit	(118,853)	(229,212)
Total liabilities and stockholders’ deficit	$638,880	$348,098

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Fusion Connect, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss

~~(unaudited)~~(in thousands)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2017

2016

2017

2016

Revenues
$36,355,187
$30,159,019
$110,256,069
$95,041,024
Cost of revenues, exclusive of depreciation and




amortization, shown separately below
  19,749,188
  17,431,477
  59,921,649
  55,875,267
Gross profit
  16,605,999
  12,727,542
  50,334,420
  39,165,757
Depreciation and amortization
  3,711,253
  2,998,628
  11,149,010
  8,946,781
Selling, general and administrative expenses
  13,649,349
  11,408,048
  42,115,158
  34,102,847
Total operating expenses
  17,360,602
  14,406,676
  53,264,168
  43,049,628
Operating loss
  (754,603)
  (1,679,134)
  (2,929,748)
  (3,883,871)
Other (expenses) income:




Interest expense
  (2,204,520)
  (1,625,195)
  (6,468,916)
  (4,877,828)
(Loss) gain on change in fair value of derivative liabilities
  (617,820)
  152,057
  (544,486)
  380,099
Loss on disposal of property and equipment
  (161,037)
  (13,959)
  (253,087)
  (86,777)
Other income, net
  47,694
  32,028
  177,539
  120,291
Total other expenses
  (2,935,683)
  (1,455,069)
  (7,088,950)
  (4,464,215)
Loss before income taxes
  (3,690,286)
  (3,134,203)
  (10,018,698)
  (8,348,086)
Provision for income taxes
  (10,200)
  (10,951)
  (41,111)
  (10,951)
Net loss
  (3,700,486)
  (3,145,154)
  (10,059,809)
  (8,359,037)
Less: Net income attributable to non-controlling interest
  (2,724)
  -
  (2,724)
  -
Net loss attributable to Fusion Telecommunications International, Inc.
  (3,703,210)
  (3,145,154)
  (10,062,533)
  (8,359,037)
Preferred stock dividends
  (241,191)
  (285,646)
  (1,735,798)
  (2,102,467)
Net loss attributable to common stockholders
  (3,944,401)
  (3,430,800)
  (11,798,331)
  (10,461,504)





Basic and diluted loss per common share:
$(0.18)
$(0.23)
$(0.54)
$(0.72)
Weighted average common shares outstanding:




Basic and diluted
  22,352,341
  14,990,816
  21,828,816
  14,536,893

	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2018	2017	2018	2017

Revenue	$120,803	$116,677	$223,714	$231,743
Cost of revenue (exclusive of depreciation and amortization,
shown below)	66,189	63,039	121,316	125,899
Gross Profit	54,614	53,638	102,398	105,844
Operating expenses:
Selling, general and administrative	43,001	29,009	66,767	61,334
Depreciation and amortization	16,712	17,625	31,441	33,642
Impairment losses on intangible assets	-	-	2,314	-
Foreign currency loss (gain)	241	(131)	511	(166)
Total operating expenses	59,954	46,503	101,033	94,810

Operating (loss) income	(5,340)	7,135	1,365	11,034

Other (expense) income:
Interest expense, net	(17,608)	(11,852)	(29,370)	(21,481)
Loss on debt extinguishment	(14,414)	-	(14,414)	-
Other (expense) income	(211)	(28)	(168)	50
Total other expense	(32,233)	(11,880)	(43,952)	(21,431)

Loss before income taxes	(37,573)	(4,745)	(42,587)	(10,397)
Income tax benefit (expense)	3,872	44	4,869	(1,354)
Net loss from continuing operations	(33,701)	(4,701)	(37,718)	(11,751)
Net income (loss) from discontinued operations	15,179	(4,743)	6,218	(8,133)
Net loss	(18,522)	(9,444)	(31,500)	(19,884)
Other comprehensive income (loss):
Cumulative translation adjustment	(655)	44	(1,451)	(256)
Comprehensive loss	$(19,177)	$(9,400)	$(32,951)	$(20,140)

Net loss from continuing operations	(33,701)	(4,701)	(37,718)	(11,751)
Preferred stock dividends (see note 5)	(787)	-	(787)	-
Net loss attributable to common stockholders	$(34,488)	$(4,701)	$(38,505)	$(11,751)


Basic and diluted loss per common share from continuing operations	$(0.59)	$(0.19)	$(0.92)	$(0.47)
Basic and diluted loss per common share from discontinued operations	$0.26	$(0.19)	$0.15	$(0.32)

Basic and diluted weighted average common shares outstanding	58,248	25,161	41,796	25,161

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Condensed Consolidated Statement of Stockholders’ Equity~~

~~(unaudited)~~

Preferred Stock

Common Stock

Capital in Excess of Par Value

Accumulated Deficit

Total Fusion Telecommunications International, Inc. Equity

Non-controlling interest

Stockholders' Equity

Shares

$

Shares

$

Balance at December 31, 2016
  17,299
$174
  20,642,028
$206,422
$192,233,032
$(183,249,560)
$9,190,068
$-
$9,190,068
Conversion of preferred stock into common stock
  (2,958)
  ( 31)
  986,665
  9,866
  (9,835)
  -
  -
  -
  -
Non-controlling interest (40%) in FGS
  -
  -
  -
  -
  -
  -
  -
  3,211
  3,211
Dividends on preferred stock
  -
  -
  257,238
  2,572
  (2,572)
  -
  -
  -
  -
Exercise of common stock purchase warrants
  -
  -
  561,834
  5,617
  775,334
  -
  780,951
  -
  780,951
Issuance of common stock for services rendered
  -
  -
  125,870
  1,259
  183,301
  -
  184,560
  -
  184,560
Reclassification of derivative liability
  -
  -
  -
  -
  132,171
  -
  132,171
  -
  132,171
Forfeiture of common stock award by employee
  -
  -
  (5,938)
  (59)
  (8,552)
  -
  (8,611)
  -
  (8,611)
Cancellation of common stock issued in 2016 acquisition
  -
  -
  (300,000)
  (3,000)
  (360,000)
  -
  (363,000)
  -
  (363,000)
Cashless exercise of warrants
  -
  -
  28,986
  290
  (290)
  -
  -
  -
  -
Net (loss) income
  -
  -
  -
  -
  -
  ( 10,062,533)
  (10,062,533)
  2,724
  (10,059,809)
Stock-based compensation
  -
  -
  -
  -
  699,668
  -
  699,668
  -
  699,668
Balance at September 30, 2017
  14,341
$143
  22,296,683
$222,967
$193,642,257
$(193,312,093)
$553,274
$5,935
$559,209
Fusion Connect, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Deficit

(in thousands)

	Preferred Stock		Common Stock		Additional Paid-in	Accumulated Other Comprehensive	Accumulated	Stockholders'
	Shares	$	Shares	$	Capital	Income	Deficit	Deficit
Balance at December 31, 2017	-	$-	25,161	$252	$5,824	$1,189	$(236,477)	$(229,212)

Cumulative effect of change in accounting principle	-	-	-	-	-	-	3,725	3,725

Balance at January 1, 2018	-	-	25,161	252	5,824	1,189	(232,752)	(225,487)

Preferred Series D issued (note 16)	15	-	-	-	15,000	-	-	15,000

Payment of Preferred Series D dividend	-	-	-	-	-	-	(500)	(500)

Distribution of the Birch Consumer Segment (note 3)	-	-	-	-	(21,503)	-	-	(21,503)

Common stock issued in Birch reverse acquisition (note 4)	-	-	49,896	499	131,468	-	-	131,967

Common stock issued in MegaPath acquisition (note 4)	-	-	1,679	17	6,431	-	-	6,448

Common stock issued in a previous acquisition by the legacy Fusion company	-	-	129	1	499	-	-	500

Proceeds from the sale of common stock, net of costs	-	-	1,524	15	7,493	-	-	7,508

Net loss	-	-	-	-	-	-	(31,500)	(31,500)

Cumulative translation adjustment	-	-	-	-	-	(1,451)	-	(1,451)

Proceeds from exercise of stock options	-	-	26	-	73	-	-	73

Stock-based compensation	-	-	-	-	92	-	-	92
Balance at June 30, 2018	15	$-	78,415	$784	$145,377	$(262)	$(264,752)	$(118,853)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Fusion Connect, Inc. and Subsidiaries

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Unaudited Condensed Consolidated Statements of Cash Flows

~~(unaudited)~~(in thousands)

Nine Months Ended
September 30,

2017

2016

Cash flows from operating activities:

Net loss
$(10,059,809)
$( 8,359,037)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:


Depreciation and amortization
  11,149,010
  8,946,781
Loss on disposal of property and equipment
  253,087
  86,777
Stock-based compensation
  699,668
  572,996
Stock issued for services rendered or in settlement of liabilities
  184,560
  105,256
Amortization of debt discount and deferred financing fees
  630,279
  477,751
Loss (gain) on the change in fair value of derivative liability
  544,487
  (380,099)
Changes in operating assets and liabilities:


Accounts receivable
  (4,446,433)
  (410,771)
Prepaid expenses and other current assets
  (876,267)
  (1,373,378)
Other assets
  24,885
  (317,927)
Accounts payable and accrued expenses
  5,786,081
  (1,258,968)
Net cash provided by (used in) operating activities
  3,889,548
  (1,910,619)



Cash flows from investing activities:


Purchase of property and equipment
  (3,940,382)
  (3,782,232)
Proceeds from the sale of property and equipment
  96,344
  28,736
Noncontrolling interest
  3,211
  -
(Payment) for acquisitions, net of cash acquired
  (558,329)
  16,895
Refunds of purchase price from acquisitions
  150,000
  392,617
Return of security deposits
  14,788
  26,750
Net cash used in investing activities
  (4,234,368)
  (3,317,234)



Cash flows from financing activities:


Proceeds from the exercise of common stock purchase warrants
  780,951
  -
Repayments of term loan
  (2,437,500)
  (824,973)
Repayments of revolving debt, net
  (1,500,000)

Payments for obligations under asset purchase agreements
  (583,892)

Payments on equipment financing obligations
  (795,015)
  (743,647)
Net cash used in financing activities
  (4,535,456)
  (1,568,620)
Net change in cash and cash equivalents
  (4,880,276)
  (6,796,473)
Cash and cash equivalents, including restricted cash, beginning of period
  7,249,063
  7,705,666
Cash and cash equivalents, including restricted cash, end of period
$2,368,787
$909,193

	For The Six Months Ended June 30,
	2018	2017
Cash Flows from Operating Activities:
Net loss from continuing operations	$(37,718)	$(11,751)
Net loss from discontinued operations	6,218	(8,133)
Net loss from continuing operations	(31,500)	(19,884)

Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization	31,441	33,642
Deferred financing amortization	2,142	1,882
OID Interest	1,688	850
Deferred taxes	(2,453)	-
Gain on disposal of fixed assets	211	(26)
Loss on impairment of property, plant and equipment	2,314	-
Loss on extinguishment of debt	14,414	-
Non-cash share-based compensation	92	30
Changes in operating assets and liabilities:
Accounts receivable	(16,062)	3,403
Inventory, net	(188)	(298)
Prepaid expenses and other current assets	945	(547)
Other assets	(4,786)	301
Accounts payable	25,935	10,129
Other liabilities	(7,446)	(10,358)
Net cash provided by operating activities - continuing operations	10,529	27,257
Net cash used in operating activities - discontinued operations	(8,614)	(1,202)
Net cash provided by operating activities	1,915	26,055

Cash Flows from Investing Activities:
Acquisitions	(20,565)	-
Purchases of property and equipment	(15,369)	(17,927)
Proceeds from disposal of fixed assets	22	26
Net cash used in investing activities - continuing operations	(35,912)	(17,901)
Net cash used in investing activities - discontinued operations	(1,498)	(4,713)
Net cash used in investing activities	(37,410)	(22,614)

Cash Flows from Financing Activities:
Proceeds from notes payable and long-term debt	650,000	15,000
Repayment of debt obligation	(551,494)	(11,375)
Payment of capital lease obligations	(1,840)	(2,210)
Deferred financing costs and discounts	(50,383)	(4,325)
Issuance of Note Receivable	(25,000)	-
Issuance of preferred stock	14,500	-
Proceeds from the sale of common stock	7,508	-
Proceeds from stock options	73	-
Net cash provided by (used in) financing activities - continuing operations	43,364	(2,910)

Net increase in cash and cash equivalents - continuing operations	17,981	6,446
Net (decrease) in cash and cash equivalents - discontinued operations	(10,112)	(5,915)
Net increase in cash and cash equivalents	7,869	531

Cash and cash equivalents at beginning of period	5,757	8,208
Foreign currency translation effect on cash	(91)	27
Cash and cash equivalents at end of period	$13,535	$8,766

Supplemental Disclosure of Cash Flow Information:
Interest paid	$19,096	$18,064
Income tax paid	$-	$217
Non-cash purchases of property and equipment	$1,157	$-
Non-cash issuance of stock for acquisition	$138,915	$-
Non-cash dividend	$500	$-

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Fusion Connect, Inc. and Subsidiaries

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~Unaudited Condensed Notes to Consolidated Financial Statements

Note 1. Organization and Business

Fusion ~~Telecommunications International,~~Connect, Inc. is a Delaware corporation incorporated in September 1997 (“Fusion” ~~and together with its subsidiaries, the “Company,” “we,” “us” and “our”~~). The Company (as defined below) is a provider of integrated cloud solutions, including cloud voice, cloud connectivity, cloud infrastructure, cloud computing and managed cloud-based applications, ~~to businesses of all sizes,~~ and ~~voice over IP (“VoIP”) - based voice~~business services to ~~carriers. The Company currently operates in two business segments, Business Services~~small, medium and ~~Carrier Services.~~large businesses.

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 products and services include cloud voice and Unified Communications-as-a-Service, improving communication 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 and contact center solutions. Our cloud computing and Infrastructure-as-a-Service solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered. Complemented by our Software-as-a-Service solutions, such as security and business continuity, our advanced cloud offerings include private and hybrid cloud, storage, backup and recovery and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud.

On May 4, 2018 (the “Birch Closing Date”), Fusion, completed the previously announced merger (the “Birch Merger”) of its wholly-owned subsidiary, Fusion BCHI Acquisition LLC (“BCHI Merger Sub”), with and into Birch Communications Holding, Inc., a Georgia corporation (“Birch”), in accordance with the terms of the Agreement and Plan of Merger, dated as of August 26, 2017, as amended, among Fusion, Birch Merger Sub and Birch (the “Birch Merger Agreement”). As a result of the Birch Merger, each then existing subsidiary of Birch became an indirect-wholly owned subsidiary of Fusion. On May 4, 2018, Fusion also changed its corporate name from Fusion Telecommunications International, Inc. to Fusion Connect, Inc.

For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under generally acceptable accounting principles in the United States (“U.S. GAAP”) and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer based on the terms of the Birch Merger Agreement and other factors, such as relative stock ownership following the Birch Closing Date. Accordingly, Birch’s historical results of operations replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements.

Unless the context otherwise requires, references to the “Company,” the “combined company” “we,” “our” or “us” in this report refer to Fusion and its subsidiaries following the completion of the Birch Merger and, as applicable, the MegaPath Merger and references to “Fusion” refers to the Company prior to the completion of the Birch Merger.

Except as otherwise noted, references to “common stock” in this report refers to common stock, par value $0.01 per share, of Fusion. On May 4, 2018, Fusion effected a 1-for-1.5 reverse split of its common stock (the “Reverse Split”). Unless noted otherwise, any share or per share amounts in this report, the accompanying unaudited condensed consolidated financial statements and related notes give retroactive effect to the Reverse Split.

See note 4 for additional information on the reverse acquisition and the Company’s acquisition of MegaPath.

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 accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Pursuant to the rules and regulations of the U.S. 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.

~~Because certain information and footnote disclosures have been condensed or omitted, these unaudited~~ consolidated financial statements should be read in conjunction with Birch’s audited financial statements and notes thereto included in the Form 8-K filed by Fusion with the Securities and Exchange Commission (“SEC”) on May 10, 2018. The December 31, 2017 balance sheet information included herein was derived from the audited financial statements of Birch as of that date. The accompanying condensed consolidated financial statements have been prepared in accordance with US GAAP for interim financial information, the instructions for Form 10-Q and ~~related notes contained in~~ the ~~Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as amended (the “2016 Form 10-K”) as filed with~~rules and regulations of the SEC. ~~In management’s opinion,~~Accordingly, since they are interim statements, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by US GAAP for annual financial statements, but reflect all adjustments consisting of normal, ~~and~~ recurring adjustments, ~~considered~~that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods ~~presented have been included.~~presented. Management believes that the disclosures made in these unaudited condensed consolidated interim financial statements are adequate to make the information not misleading. ~~The~~Interim results ~~of operations for the interim periods presented~~ are not necessarily indicative of the results that may be expected for the ~~entire year.~~

~~Effective January 1, 2017,~~2018 fiscal year or for any other future periods. Certain reclassifications have been made to the Company changed the manner in which it accounts for federal and state universal service fees and surcharges in its consolidated statement of operations. The Company now includes the amounts collected for these fees and surcharges in revenues, and reports the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’sprior period consolidated financial statements for all periods presented. As a result, both the Company’s revenues and cost of revenues for the three and nine months ended September 30, 2017 include $0.9 million and $2.3 million, respectively, of federal and state universal service fees and surcharges. Revenues and cost of revenues for the three and nine months ended September 30, 2016 include $0.7 million and $1.9 million, respectively, of federal and state universal service fees and surcharges.

~~During the three and nine months ended September 30, 2017 and 2016, comprehensive loss was equal~~to conform to the ~~net loss amounts presented for~~current period presentation, including the ~~respective periods in the accompanying condensed consolidated interim statements~~transfer of ~~operations. We discussed further below,~~ ~~effective January 1, 2017~~ ~~the Company early adopted Accounting Standards Update (“ASU”) 2016-18,~~ ~~Restricted Cash.~~

~~Liquidity~~

~~Since inception, the Company has incurred significant net losses. At September 30, 2017, the Company had a working capital deficit of $14.7 million~~certain assets from intangibles to property and stockholders’ equity of $0.6 million. At December 31, 2016, the Company had a working capital deficit of $6.6 million and stockholders’ equity of $9.2 million. The Company’s consolidated cash balance at September 30, 2017 was $2.3 million. While the Company projects that it has sufficient cash to fund its operations and meet its operating and debt obligations through November 2018, it may be required to either raise additional capital, limit its discretionary capital expenditures or borrow amounts available under its revolving credit facility to support its business plan. There is currently no commitment for any additional funding and there can be no assurances that funds will be available on terms that are acceptable to the Company, or at all.equipment.

Principles of Consolidation

The ~~condensed consolidated interim~~ financial statements include the accounts of ~~Fusion~~the Company and each of its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Effective September 1, 2017, Fusion transferred 40% of its membership interests in Fusion Global Services LLC (“FGS”) to XcomIP, LLC (“XcomIP”), in exchange for which XcomIP contributed assets of its carrier business to FGS. Under the terms of various agreements entered into by Fusion and XcomIP, Fusion and XcomIP also executed a shareholder agreement under which Fusion has agreed to provide up to $750,000 in working capital to FGS. The Company has determined that, based on the terms of the foregoing agreements, it has a controlling financial interest in FGS under the guidance set forth in Accounting Standards Codification (“ASC”) 810, ~~Consolidation~~, therefore the accounts of FGS are consolidated into Fusion’s consolidated financial statements as of and for the nine months ended September 30, 2017. Prior to the transfer of membership interests to XcomIP, Fusion transferred its Carrier Services business to FGS.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Use of Estimates

The preparation of ~~condensed consolidated interim~~these financial statements ~~in conformity with U.S. GAAP~~ requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, ~~and~~ liabilities, revenues, expenses and disclosure of contingent assets and ~~liabilities at~~liabilities. Actual results may differ substantially from these estimates. The results of operations for the ~~date~~three and six months ended June 30, 2018 are not necessarily indicative of the ~~condensed consolidated interim financial statements and~~results that may be expected for the ~~reported amounts of revenues and expenses during the reporting~~full fiscal year or any other future periods. On an on-going basis, the Company evaluates its estimates, including, but not limited to, those related to recognition of revenue; allowance for doubtful accounts; fair value measurements of its financial instruments; useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible assets; accounting for stock options and other equity awards, particularly related to fair value estimates; and accounting for income taxes, contingencies and litigation. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates.

~~Cash Equivalents~~Segment Reporting

~~Cash~~Operating segments are defined as components of an enterprise for which discrete financial information is available and ~~cash equivalents include cash~~evaluated regularly by a company's chief operating decision maker in deciding how to allocate resources and assess performance. The Company has only one reportable segment – Business Services.

Notes Receivable

The Company recorded a notes receivable of $25.0 million in conjunction with the Vector Facility (as herein defined) and is classified as other non-current assets on ~~deposit and short-term, highly-liquid investments with maturities~~its balance sheet as of ~~three months or less on the date of purchase. As of September~~June 30, ~~2017 and December 31, 2016, the carrying value of cash and cash equivalents approximates fair value due~~2018. See note 13 for additional information relating to the ~~short period to maturity.~~Vector Facility.

Fair Value of Financial Instruments

~~At September 30, 2017 and December 31, 2016, the~~The carrying value of ~~the Company’s~~certain financial instruments such as accounts receivable, accounts payable and accrued expenses, approximates ~~its~~their fair ~~value~~values due to ~~the~~their short term ~~nature of these financial instruments.~~

~~Impairment of Long-Lived Assets~~

The Company periodically reviews long-lived assets, including intangible assets, for possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company did not record any impairment charges during the three and nine months ended September 30, 2017 and 2016, as there were no indicators of impairment.

~~Goodwill~~

Goodwill is the excess of the acquisition cost of a business combination over the fair value of the identifiable net assets acquired. Goodwill at September 30, 2017 and December 31, 2016 was $34.8 million and $35.7 million, respectively. All of the Company’s goodwill is attributable to its Business Services segment.

~~The following table presents the changes in the carrying amounts of goodwill during the nine months ended September 30, 2017:~~

~~Balance at December 31, 2016~~	$~~35,689,215~~
~~Increase in goodwill associated with a 2016 acquisition~~	~~7,414~~
~~Settlement of litigation with Apptix sellers~~	~~(513,000~~)
~~Adjustment to goodwill associated with acquisition of customer bases (see note 3)~~	~~(410,000~~)
~~Balance at September 30, 2017~~	$~~34,773,629~~

The reduction in goodwill related to the settlement of litigation consists of $150,000 in cash and the return to the Company of 300,000 shares of common stock valued at $0.4 million (see note 14). The litigation settlement pertains to a matter that existed at the closing date of the acquisition. Therefore, the Company has determined that the litigation matter has a clear and direct link to the original consideration transferred as part of the acquisition. Since the measurement period for purchase accounting was open at the time of settlement, the value of the consideration received by the Company in settlement of the litigation was recorded against the value of the original consideration paid by the Company in the acquisition transaction.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Goodwill is not amortized and is tested for impairment on an annual basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The impairment test for goodwill uses a two-step approach, which is performed at the reporting unit level. The Company has determined that its reporting units are its operating segments (see note 15) since that is the lowest level at which discrete, reliable financial and cash flow information is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its implied fair value, which is the fair value of the reporting unit less the fair value of the unit’s assets and liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying amount, an impairment is recognized.

In testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required to perform a quantitative impairment test. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The Company did not record any impairment charges related to goodwill during the three and nine months ended September 30, 2017 and 2016.

~~Advertising and Marketing Costs~~

~~Advertising and marketing expenses includes cost for promotional materials and trade show expenses for the marketing of the Company’s products and services.~~ Advertising and marketing expenses were $27,000 and $0.2 million for the three months ended September 30, 2017 and 2016, respectively, and $0.5 million for the nine months ended September 30, 2017 and 2016. Advertising and marketing expenses are reflected in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.nature.

Income Taxes

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

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. ~~Derecognition~~De-recognition 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, 2017 and December 31, 2016. The Company is subject to income tax examinations by major taxing authorities for all tax years since 2013 and its tax returns may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. No interest expense or penalties have been recognized as of September 30, 2017 and December 31, 2016. During the three and nine months ended September 30, 2017 and 2016, 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 aton the date of grant. The fair values of stock options are estimated aton 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. Compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation award. For transactions in which goods or services are received from non-employees in return for the issuance of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more readily determinable.

Revenue Recognition

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and represents the unit of account in applying the new revenue recognition guidance. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The Company’s performance obligations are satisfied over time as services are rendered or at a point in time depending on when the customer obtains control of the promised goods or services. Revenue is recognized when obligations under the terms of a contract with the customer are satisfied; generally, this occurs when services are rendered.

~~New~~

Customer revenue includes revenue received from the sale of integrated cloud solutions and ~~Recently Adopted~~business services and is comprised of monthly recurring charges, usage charges and initial nonrecurring charges. Monthly recurring charges include the fees paid by customers for services. Monthly recurring charges are recognized over the period that the corresponding services are rendered to customers. Usage charges consist of per-use sensitive fees paid for calls made. Additionally, access charges are comprised of charges paid primarily by interexchange carriers for the origination and termination of interexchange toll and toll-free calls. Usage and access charges are recognized monthly as the services are provided. Initial nonrecurring charges consist primarily of installation charges and revenue derived from sales of communications equipment such as phones. The Company recognizes installation revenue when the installation is complete.

Deferred Commissions

Direct incremental costs of obtaining a contract, consisting of sales commissions, are deferred and amortized over the estimated life of the customer, which is currently 36 months. We calculate the estimated life of the customer on an annual basis. The Company classifies deferred commissions as prepaid expenses or other noncurrent assets based on the timing of when it expects to recognize the expense.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates (“ASUs”). ASUs not discussed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated balance sheets or statements of operations.

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this ~~update~~ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. ~~The~~In April 2018, the Company ~~is currently evaluating the effect that the new~~early adopted this guidance ~~will have on~~with respect to its ~~financial statements and related disclosures.~~then outstanding warrants.

In ~~November 2016,~~May 2017, the FASB issued ASU ~~No. 2016-18,~~2017-09, ~~Restricted Cash~~Compensation-Stock Compensation: Scope of Modification Accounting, to provide guidance about which ~~clarifies guidance and presentation related~~changes to ~~restricted cash~~the terms or conditions of a share-based payment award require an entity to apply modification accounting in ~~the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents~~ASC 718. The amendments in ~~the statement of cash flows. The standard is~~this ASU are effective for fiscal years beginning after December 15, 2017, ~~with early adoption permitted,~~ and ~~is to~~should be applied ~~retrospectively.~~prospectively to an award modified on or after the adoption date. The Company ~~early~~ adopted ~~ASU 2016-18~~the amendments effective January 1, ~~2017. Adoption of this standard~~2018. The adoption did not have a material impact on ~~the Company’s~~its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, 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 of 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~~this new guidance will have on its financial statements and related disclosures. The Company’s current future lease obligations are disclosed in note 12 and in Note 6 "Leases" in the Form 8-K filed by Fusion with the SEC on May 10, 2018.

~~In November 2015, the FASB issued ASU No. 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes~~, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard became effective as of January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

~~In March 2016, the FASB issued ASU No. 2016-09,~~ ~~Compensation – Stock Compensation~~, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards are to be recognized as income tax expense or income tax benefit in the statement of operations. In addition, the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur and excess tax benefits should be recognized regardless of whether the benefit reduces taxes payable in the current period. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“~~ASC 606”~~ASU No. 2014-09”), which outlines a comprehensive revenue recognition model ~~and~~that supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ~~ASC 606~~ASU No. 2014-09 defines a five-step approach for recognizing revenue: (i) identification of the contract, (ii) identification of the performance obligations, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue as the entity satisfies the performance obligations. The new criteria for revenue recognition may require a company to use more judgment and make more estimates than under the current guidance. ~~The new guidance becomes~~The Company adopted this standard effective ~~in calendar year~~January 1, 2018, ~~and early adoption in calendar year 2017 is permitted. Two methods of adoption are permitted: (a) full retrospective adoption, meaning~~using the ~~standard is applied to all periods presented; or (b)~~ modified retrospective method. Following the adoption, ~~meaning~~ the ~~cumulative effect of applying~~revenue recognition for the ~~new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.~~Company’s sales arrangements remained materially consistent with our historical practice.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers (ASC 606): Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. ~~These~~All of these new standards, ~~will be~~which are collectively hereinafter referred to “ASC 606” became effective ~~for the Company~~ beginning inwith the first quarter of 2018. ~~Early adoption is permitted.~~See note 15 for further information.

The Company will adopt the new standard and related updates effective January 1, 2018, and intends to use the modified retrospective method of adoption. The Company has undertaken an initial impact analysis of these items, which includes reviewing the terms and conditions of its existing customer contracts with respect to the five discrete criteria required for recognizing revenue set forth in ASC 606. The Company believes that the most significant aspects of the new guidance that could impact the Company’s financial statements are the requirements surrounding contract acquisition costs and activation and installation revenues, and that implementation of these requirements could be material to the Company’s financial statements. The Company expects to conclude its analysis of the impact of the new revenue recognition guidance on its consolidated financial statements around December 31, 2017.

Note 3. Discontinued Operations

As a condition to closing the transactions contemplated by the Birch Merger Agreement (see note 4), Birch was required to spin-off its U.S.-based consumer customers, wireless customers and its small business customer-base (which include those business customers with $111 per month or less of monthly revenue) and assets associated with the support of those customers (collectively, the “Birch Consumer Segment”). Accordingly, prior to closing the Birch Merger on the Birch Closing Date, Birch distributed the assets and liabilities associated with the Birch Consumer Segment to the pre-merger Birch shareholders. At the time of the distribution, the Birch Consumer Segment met the criteria in ASC 205-20-45 for discontinued operations and, as a result, the assets, liabilities and results of operations associated with the Birch Consumer Segment have been classified as discontinued operations for all periods presented in the accompanying unaudited condensed consolidated balance sheet, statements of operations and statements of cash flows.

Summarized results for discontinued operations are as follows (in thousands):

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Revenues	$7,848	$24,988	$30,768	$51,755
Cost of revenues, exclusive of depreciation and
amortization, shown separately below	5,035	16,791	20,482	34,199
Gross profit	2,813	8,197	10,286	17,556

Selling, general and administrative expenses	3,824	7,763	11,809	15,738
Depreciation and amortization	500	3,684	2,008	6,873
Impairment losses on intangible assets	-	-	5,379	-
Total operating expenses	4,324	11,447	19,196	22,611
Operating loss on discontinued operations	(1,511)	(3,250)	(8,910)	(5,055)

Other (expenses) income:
Interest expense	(607)	(1,493)	(2,169)	(3,078)
Gain on extinguishment of debt	17,297	-	17,297	-

Net income (loss) on discontinued operations	$15,179	$(4,743)	$6,218	$(8,133)

The carrying amounts of assets and liabilities associated with discontinued operations are as follows (in thousands):

	December 31, 2017
Accounts receivable, net of allowance for doubtful accounts of
approximately $1,917, respectively	$9,549
Prepaid expenses	1,259
Inventory	37
Property and equipment, net	1,708
Goodwill	3,550
Intangible assets	23,935
Total current assets of discontinued operations	$40,038

Accounts payable and accrued expenses	$8,469
Deferred customer revenue	2,375
Other accrued liabilities	10,320
Debt	13,700
Total current liabilities of discontinued operations	$34,864

Note 4. Acquisitions

Birch

On the Birch Closing Date, Birch merged with and into BCHI Merger Sub, with BCHI Merger Sub surviving the merger as a wholly-owned subsidiary of Fusion. For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under U.S. GAAP and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer based on the terms of the Birch Merger Agreement and other factors, such as relative stock ownership of the Company following the Birch Merger. Accordingly, Birch’s historical results of operations replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements. All share numbers and other information about equity securities prior to the acquisition of Birch in this report relate to legacy Fusion.

On ~~November 18, 2016,~~ the ~~Company entered~~Birch Closing Date, all of the outstanding shares of common stock, par value $0.01 per share, of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) were cancelled and converted into ~~a purchase agreement pursuant~~the right to which the Company assumed obligations to provide services to the seller’s customer base. In connection with that transaction, the Company recognized goodwill and a corresponding obligation to the sellerreceive, in the ~~amount~~aggregate, 49,896,310 shares (the “Merger Shares”) of ~~$0.4 million. The Company also agreed to pay additional consideration to the seller if it was able to facilitate the assignment of certain additional customers to the Company.~~

~~On March 1, 2017, the Company entered into an additional asset purchase agreement with another party pursuant to~~Fusion common stock, which ~~the Company assumed obligations to provide services to a customer base and also purchased the outstanding accounts receivables associated with that customer base having a value of~~constituted approximately ~~$0.6 million~~. ~~As this customer base is within the scope~~65.5% of the ~~November 2016 agreement, the Company is required~~then issued and outstanding shares of Fusion common stock on that date. Pursuant to pay consideration to the seller in an estimated aggregate amount of $1.7 million (included in customer base acquisitions in note 11). The March 2017 agreement also provides for a management period during which the Company will be responsible for all aspectssubscription agreements executed by each of the ~~customer relationship with respect to~~former shareholders of Birch, the ~~acquired customer base until such time as all regulatory approvals have been obtained,~~Merger Shares were issued in the name of, and ~~the Company’s consolidated statement of operations includes the revenue associated with the customer base acquisition effective March 1, 2017. The March 2017 agreement also provides for~~are held by, BCHI Holdings, LLC, a ~~transition period during which the seller thereunder will provide certain services and assistance to the Company.~~Georgia limited liability company (“BCHI Holdings”).

The ~~aggregate amount payable~~fair value of assets acquired and liabilities assumed as a result of the Birch and Fusion combination is based upon management’s estimates which have been derived, in part, from an analysis provided by an independent third-party valuation firm. The assumptions are subject to change for a period of up to one year from date of the Birch Merger. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and the trade name, present value and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from those estimates.

The preliminary purchase price allocation is as follows (in thousands):

		Useful life (in years)
Purchase consideration for invested capital	$221,172
Less: debt	(89,205)
Total purchase consideration for equity	$131,967

Cash	$28,176
Accounts receivable	8,684
Other current assets	2,444
Property and equipment	13,008
Other noncurrent assets	1,220
Intangible assets:
Developed technology	4,710	3
Trademark	49,500	10
Customer relationships	41,100	15
Goodwill	99,253
Deferred revenue	(1,200)
Other liabilities, including debt	(114,928)
	$131,967

The excess of the purchase price over the assets acquired and liabilities assumed represents goodwill. The goodwill is primarily attributable to the synergies expected to arise from the combination and is not expected to be deductible for tax purposes.

MegaPath Holding Corporation

On June 15, 2018, the MegaPath Closing Date, the Company completed its acquisition of MegaPath. As required by the terms of the MegaPath Merger Agreement, the Company paid approximately $61.5 million of the $71.5 million purchase price in cash, with approximately $10 million of the purchase price paid in 1,679,144 shares of Fusion’s common stock, at an agreed upon price of $5.775 per share. As a result of the fixed price at which the Fusion shares were issued, from an accounting standpoint, the total purchase price actually paid by Fusion was $68.3 million. Of the cash consideration, $2.5 million was deposited into an escrow account to be held for one year to secure the indemnification obligations in favor of the Company under the ~~November 2016 and March 2017 agreements totals $2.3~~MegaPath Merger Agreement.

The cash consideration, as well as certain expenses associated with the acquisition of MegaPath, were funded from approximately $62.0 million ~~comprised~~of borrowings under the First Lien Credit Agreement (as defined in note 13). See note 13 for additional information regarding the First Lien Credit Agreement.

The preliminary purchase price allocation is as follows (in thousands):

		Useful life (in years)
Purchase consideration for invested capital	$68,251
Working capital	3,779
Debt	(12,181)
Total purchase consideration for equity	$59,849

Cash	$4,660
Accounts receivable	2,539
Other current assets	1,347
Property and equipment	6,319
Other noncurrent assets	1,602
Intangible assets:
Developed technology	10,610	3
Trademark	7,100	10
Customer relationships	17,800	15
Goodwill	28,755
Deferred revenue	(1,400)
Other liabilities, including debt	(19,483)
	$59,849

The following summarized unaudited consolidated pro forma information presents the results of operations of the ~~$0.6 million paid~~Company had each of the Birch Merger and the MegaPath Merger occurred on January 1, 2017 (in thousands except per share information):

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Revenues	$145,996	$173,200	$296,048	$342,827
Net loss	(27,714)	(14,214)	(46,483)	(29,997)
Basic and diluted net loss per share	(0.48)	(0.56)	(1.11)	(1.19)

The summarized unaudited consolidated pro forma results set forth in this note are not necessarily indicative of results that would have occurred if the Birch Merger and the MegaPath Merger had been in effect for the ~~accounts receivable~~periods presented. Further, these pro forma results are not intended to be a projection of future results.

During the three and ~~the $1.7 million of contingent consideration~~six months ended June 30, 2018, total acquisition costs related to the ~~customer base which, as provided for~~Birch merger and the MegaPath Merger were $9.9 million and $10.6 million, respectively. These costs are included in ~~the November 2016 agreement, was valued at a multiple of monthly revenue~~selling, general and ~~will be paid over a period of 18 months. The March 2017 agreement resulted in a reduction to the goodwill in the amount of $0.4 million. These agreements did not have a material effect~~administrative (“SG&A”) expenses on the ~~Company’s results~~accompanying unaudited condensed consolidated statement of ~~operations or financial condition.~~operations.

Note 4.5. Loss per share

Basic and diluted loss per share is computed by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. The following table sets forth the computation of basic and diluted net loss per share ~~for the three and nine months ended September 30, 2017 and 2016:~~(in thousands, except per share amounts):

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

	Three Months Ended June 30,		Six Months Ended June 30,
	2018	2017	2018	2017
Numerator
Net loss from continuing operations	$(33,701)	$(4,701)	$(37,718)	$(11,751)
Net income (loss) from discontinued operations	15,179	(4,743)	6,218	(8,133)
Total net loss	(18,522)	(9,444)	(31,500)	(19,884)
Undeclared dividends on Preferred Series D	(287)	-	(287)	-
Dividends paid on Preferred Series D	(500)	-	(500)	-
Total net loss less Preferred Series D dividends	$(19,309)	$(9,444)	$(32,287)	$(19,884)

Denominator
Basic and diluted weighted average common shares outstanding	58,248	25,161	41,796	25,161

(Loss) income per share basic and diluted
From continuing operations	$(0.59)	$(0.19)	$(0.92)	$(0.47)
From discontinued operations	$0.26	$(0.19)	$0.15	$(0.32)

Three Months Ended
September 30,

Nine Months Ended
September 30,

2017

2016

2017

2016

Numerator

Net loss
$(3,700,486)
$(3,145,154)
$(10,059,809)
$(8,359,037)
Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock
  (101,729)
  (101,729)
  ( 301,871)
  ( 302,976)
Conversion price reduction on Series B-2 Preferred Stock (see note 13)
  -
  -
  ( 623,574)
  -
Series B-2 warrant exchange (see note 13)
  -
  -
  ( 347,191)
  -
Dividends declared on Series B-2 Convertible Preferred Stock
  ( 139,462)
  ( 183,917)
  ( 463,162)
  ( 1,799,491)
Net income attributable to non-controlling interest
  (2,724)
  -
  (2,724)
  -
Net loss attributable to common stockholders
$(3,944,401)
$(3,430,800)
$(11,798,331)
$(10,461,504)





Denominator




Basic and diluted weighted average common shares outstanding
  22,352,341
  14,990,816
  21,828,816
  14,536,893





Loss per share




Basic and diluted
$(0.18)
$(0.23)
$(0.54)
$(0.72)

~~For~~From the ~~nine months ended September~~Birch Closing Date through June 30, ~~2017 and 2016, the following~~2018, dilutive securities ~~were~~ excluded from the calculation of diluted earnings per common share because of their anti-dilutive ~~effects:~~effects were as follows:

For the Nine Months Ended
September 30,

2017

2016

Warrants
  2,658,900
  2,946,948
Convertible preferred stock
  2,067,358
  2,626,518
Stock options
  2,222,288
  1,157,512

  6,948,546
  6,730,978

Warrants	1,105,278
Stock Options	1,955,295

~~The net loss per common share calculation includes a provision for preferred stock dividends on Fusion’s outstanding Series A-1, A-2~~Note 6. Prepaid Expenses

Prepaid expenses are as follows (in thousands):

	June 30, 2018	December 31, 2017
Insurance and benefits	$1,175	$252
Rent	642	907
Software subscriptions	3,137	1,448
Hardware maintenance	1,255	1,517
Commissions	2,292	-
Line costs	667	706
Taxes	613	883
Other	662	577
	$10,443	$6,290

Note 7. Property and ~~A-4 preferred stock (collectively, the “Series A Preferred Stock”) for the three~~Equipment

Property and nine months ended September 30, 2017 of $0.1 million and $0.3 million, respectively. The provision for dividends on the Series A Preferred Stock for the three and nine months ended September 30, 2016 was $0.1 million and $0.3 million, respectively. ~~Through September 30, 2017, the Board of Directors of Fusion has never declared a dividend on any series~~equipment consist of the ~~Series A Preferred Stock, resulting in approximately $5.0 million of accumulated preferred stock dividends.~~following (in thousands):

~~The Fusion Board declared dividends on the Company’s Series B-2 Cumulative Convertible Preferred Stock (the “Series B-2 Preferred Stock”) of $0.1 million and $0.2 million for~~

	June 30, 2018	December 31, 2017
Telecommunications equipment	$100,722	$85,472
Leasehold improvements	11,110	10,591
Office equipment	1,838	1,731
Buildings and building improvements	1,540	1,540
Furniture and fixtures	5,597	5,160
Computer Software	36,632	32,663
Land	470	470
Automobiles	53	56
Onboarding	23,893	15,727
Network transition	50,199	45,863
Construction-in-progress	4,468	3,680
Total owned assets	236,522	202,953
Less: accumulated depreciation	(139,949)	(120,761)
Net owned assets	96,573	82,192

Capital lease assets	40,084	38,123
Less: accumulated depreciation	(15,363)	(13,758)
Net capital lease assets	24,721	24,365

Property and equipment, net	$121,294	$106,557

For the three months ended ~~September~~June 30, 2018 and 2017, ~~and 2016, respectively, and $1.4~~depreciation expense was $10.8 million and ~~$1.8~~$11.8 million, ~~for~~respectively. For the ~~nine~~six months ended ~~September~~June 30, 2018 and 2017, depreciation expense was $20.6 million and ~~2016,~~$22.0 million, respectively. ~~As permitted by~~

Note 8. Goodwill

During the ~~terms of the Series B-2 Preferred Stock, dividends were paid in the form of 257,238 and 1,010,177 shares of Fusion’s common stock for the nine~~six months ended ~~September~~June 30, ~~2017 and 2016, respectively.~~2018, goodwill activity is as follows (in thousands):

Balance, January 1, 2018	$89,806
Acquisitions (note 4):
Birch reverse Merger	99,253
MegaPath	28,755
Balance, June 30, 2018	$217,814

Note 5.9. Intangible Assets

Intangible assets ~~as of September 30, 2017 and December 31, 2016~~ are as ~~follows:~~follows (in thousands):

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

	June 30, 2018			December 31, 2017
	Gross Carrying Amount	Accumulated Amortization	Total	Gross Carrying Amount	Accumulated Amortization	Total
Subscriber acquisition costs	$134,849	$(24,521)	$110,328	$77,189	$(20,918)	$56,271
Tradenames and trademarks	66,846	(8,333)	58,513	13,146	(6,174)	6,972
Proprietary technology	15,320	(335)	14,985	-	-	-
Noncompete agreement	-	-	-	3,000	(3,000)	-
Commissions	-	-	-	7,683	(2,092)	5,590
Total acquired intangibles	$217,015	$(33,189)	$183,826	$101,018	$(32,184)	$68,834

September 30, 2017

December 31, 2016

Gross Carrying Amount

Accumulated Amortization

Total

Gross Carrying Amount

Accumulated Amortization

Total

Trademarks and tradename
$1,093,400
$(629,731)
$463,669
$1,093,400
$(501,982)
$591,418
Proprietary technology
  6,670,000
  (5,028,346)
  1,641,654
  6,670,000
  (4,036,915)
  2,633,085
Non-compete agreement
  12,128,043
  (11,389,604)
  738,439
  12,128,043
  (9,891,892)
  2,236,151
Customer relationships
  67,713,181
  (11,799,657)
  55,913,524
  65,948,181
  (7,827,697)
  58,120,484
Favorable lease intangible
  218,000
  (214,366)
  3,634
  218,000
  (181,667)
  36,333
Total acquired intangibles
$87,822,624
$(29,061,704)
$58,760,920
$86,057,624
$(22,440,153)
$63,617,471

~~Amortization expense was $2.2 million and $1.4 million for~~During the three months ended ~~September~~June 30, 2018 and 2017, the Company recorded no impairment charges. During the six months ended June 30, 2018 and ~~2016, respectively, and $6.6~~2017, the Company recorded impairment charges on certain intangible assets of $2.3 million and ~~$4.1 million for~~$0, respectively.

For the ~~nine~~three months ended ~~September~~June 30, 2018 and 2017, amortization expense was $5.9 million and ~~2016,~~$5.8 million, respectively. For the six months ended June 30, 2018 and 2017, amortization expense was $10.8 million and $11.6 million, respectively. Estimated future aggregate amortization expense is expected to be as ~~follows:~~follows (in thousands):

Year	Amortization Expense
remainder of 2017	$1,962,993
2018	6,561,232
remainder of 2018		$14,743
2019	5,577,500	23,678
2020	5,537,117	23,678
2021	5,362,750	20,728
2022		18,571
Thereafter		82,428
		$183,826

N~~ote 6. Supplemental Disclosure of Cash Flow Information~~

~~Supplemental cash flow information for the nine months ended September 30, 2017 and 2016 is as follows:~~

Nine Months Ended
September 30,

Supplemental Cash Flow Information

2017

2016

Cash paid for interest
$6,166,497
$4,233,527
Cash paid for income taxes
$-
$-



Supplemental Non-Cash Investing and Financing Activities


Property and equipment acquired under capital leases or equipment financing obligations
$457,475
$188,497
Conversion of preferred stock into common stock
$2,958,000
$-
Dividends on Series B-2 Preferred Stock paid with the issuance of Fusion common stock
$463,163
$599,491
Obligations under purchase agreements
$1,350,000
$961,606

Note ~~7. Prepaid Expenses and~~10. Other ~~Current Assets~~Accrued Liabilities

~~Prepaid~~Other accrued expenses are as follows (in thousands):

	June 30, 2018	December 31, 2017
Compensation and benefits	$5,813	$2,462
Bonus	3,585	729
Taxes	4,775	169
Interest	10,552	8,219
Facility restructuring (note 11)	1,885	3,131
Legal settlements	10,940	13,360
Professional fees	6,920	1,389
Deferred tax	481	2,934
Sales commissions	929	965
Customer deposits	1,056	429
Other	2,552	3,008
	49,488	36,795
Less noncurrent portion:
Legal settlements	(6,100)	(8,520)
Deferred tax	(481)	(2,934)
Other	(1,076)	(1,393)
Total other non-current liabilities	(7,657)	(12,847)
Current portion of other accrued liabilities	$41,831	$23,948

Note 11. Restructuring Event

During 2018 and 2017, the Company implemented strategic re-alignments that included reductions in headcount, facility costs and other ~~current assets at September 30, 2017 and December 31, 2016 are as follows:~~operating costs.

September 30, 2017

December 31, 2016

Insurance
$5,327
$160,262
Rent
  16,326
  5,389
Marketing
  39,333
  74,665
Software subscriptions
  697,261
  419,431
Comisssions
  109,688
  159,146
Other
  908,137
  265,316
Total
$1,776,072
$1,084,209
The following table summarizes changes to the accrued liability associated with the restructuring for the six months ended June 30, 2018 and 2017 (in thousands):

	Employee Costs (1)	Facility Exit Costs (2)	Other Costs	Total
Balance, January 1, 2018	$107	$3,131	$24	$3,262
Expenses	3,045	534	42	3,621
Payments	(2,877)	(1,780)	(66)	(4,723)
Balance, June 30, 2018	275	1,885	-	2,160

Balance, January 1, 2017	$-	$-	$-	$-
Expenses	810	2,416	-	3,226
Payments	(56)	(31)	-	(87)
Balance, June 30, 2017	$754	$2,385	$-	$3,139

__________

(1)

13As of June 30, 2018, the remaining employee-related liability will be paid within four months and approximates fair value due to the short discount period.

(2)

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

These charges represent the present value of expected lease payments and direct costs to obtain a sublease, reduced by estimated sublease rental income. The timing and amount of estimated cash flows will continue to be evaluated each reporting period.

~~Note 8. Accounts Payable and Accrued Expenses~~

~~Accounts payable and accrued expenses at September 30, 2017 and December 31, 2016 are as follows:~~

September 30, 2017

December 31, 2016

Trade accounts payable
$7,275,546
$6,358,548
Accrued license fees
  3,140,568
  2,881,331
Accrued sales and federal excise taxes
  3,214,289
  2,863,363
Deferred revenue
  1,523,045
  1,874,641
Accrued network costs
  5,047,912
  1,416,000
Accrued sales commissions
  798,835
  819,106
Property and other taxes
  927,002
  581,956
Accrued payroll and vacation
  408,570
  421,733
Customer deposits
  378,783
  365,249
Interest payable
  7,849
  304,409
Credit card payable
  117,214
  265,985
Accrued USF fees
  498,441
  249,825
Accrued bonus
  376,890
  249,361
Professional and consulting fees
  151,948
  164,878
Rent
  129,428
  127,781
Other
  1,678,626
  778,672
Total
$25,674,946
$19,722,838

Note 9.12. Equipment and Network Infrastructure 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 periodof 242 to ~~48 months~~20 years with interest rates ranging between ~~5.3%~~2.0% and ~~6.6%.~~8.3% per annum. The Company’s equipment andnetwork infrastructure financing obligations are as ~~follows:~~follows (in thousands):

September 30,

December 31,

2017

2016

Equipment financing obligations
$1,902,120
$2,239,661
Less: current portion
(1,186,115)
(1,002,578)
Long-term portion
$716,005
$1,237,083

	June 30,	December 31,
	2018	2017
Equipment financing obligations	$2,345	$1,292
IRU (1)	4,822	6,415
Amount representing interest	(824)	(881)
Present value of minimum lease payments	6,343	6,826
Less current portion	(3,027)	(3,003)
Non-current portion	$3,316	$3,823

__________

(1)

Purchase of an indefeasible right to use (“IRU”) fiber network infrastructure owned by others.

The ~~Company’s~~ payment obligations under ~~its~~ capital leases are as ~~follows:~~follows (in thousands):

Year ending December 31:

Principal

remainder of 2017
$321,854
2018
  1,140,586
2019
  429,486
2020
  10,194

$1,902,120

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

remainder of 2018	$1,999
2019	2,211
2020	818
2021	442
2022	245
Thereafter	1,452
	$7,167

Note ~~10.~~13. Long-Term Debt

~~Secured Credit Facilities~~

~~As of September 30, 2017 and December 31, 2016, secured credit facilities~~Debt consists of the ~~following:~~following (in thousands):

September 30,

December 31,

2017

2016

Term loan
$62,562,500
$65,000,000
Less:


Deferred financing fees
  (1,092,906)
  (1,289,629)
Current portion
  (5,687,500)
  (2,979,167)
Term loan - long-term portion
$55,782,094
$60,731,204



Indebtedness under revolving credit facility
$1,500,000
$3,000,000

	June 30,
	2018
First Lien Credit Agreement:
Tranche A Term Loan	$45,000
Tranche B Term Loan	510,000
Revolving Facility	-
Second Lien Credit Agreement – Term Loan	85,000
Subordinated Note	10,000
Bircan Notes Payable	3,348
	653,348
Less:
Discounts	(48,828)
Current portion	(24,500)
Non-current portion	$580,020

On ~~November 14, 2016, Fusion NBS Acquisition Corp. (“FNAC”), a wholly-owned subsidiary of Fusion,~~the Birch Closing Date, the Company entered into a ~~new credit agreement~~First Lien Credit and Guaranty Agreement (the ~~“East West~~“First Lien Credit Agreement”) with ~~East West Bank,~~Wilmington Trust, National Association, as ~~administrative agent~~Administrative Agent and Collateral Agent (in such capacities, the “First Lien Agent”), the lenders ~~identified therein (collectively with East West Bank, the “East West~~party thereto (the “First Lien Lenders”)~~. Under the East West Credit Agreement, the East West Lenders extended FNAC (i) a $65.0 million term loan~~, and (ii) a $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis). The proceeds of the term loan were used to retire $40 million that was outstanding under a previously existing credit facility, and to fund the cash portion of the purchase price of FNAC’s acquisition of all of the ~~issued~~U.S.-based subsidiaries of the Company, as guarantors thereunder (the “Guarantors”), pursuant to which the First Lien Lenders extended (a) term loans to the Company in an aggregate principal amount of $555.0 million, consisting of the “Tranche A Term Loan” and ~~outstanding capital stock~~“Tranche B Term Loan,” in an aggregate principal amount of $45.0 million and $510.0 million, respectively (collectively, the “First Lien Term Loan”), and (b) a revolving facility in an aggregate principal amount of $40.0 million (the ~~“Apptix Acquisition”) of Apptix, Inc.~~“Revolving Facility”, ~~a wholly-owned subsidiary of Apptix, ASA (“Apptix”~~and together with the First Lien Term Loan, the “First Lien Facility”).

Borrowings under the ~~East West~~First Lien Credit Agreement are ~~evidenced by notes bearing interest at rates~~ computed based upon either the then current ~~“prime”~~“base rate” of interest or “LIBOR” rate of interest, as selected by the Company at the time of its borrowings. Interest on borrowings that the Company designates as “base rate” loans bear interest per annum at the greatest of (a) the prime rate published by the Wall Street Journal, (b) the federal funds effective rate as published by the Federal Reserve Bank of New York plus 0.5%, (c) the Adjusted LIBOR Rate (as defined below) with an interest period of one month plus 1%, or (d)(i) 1% (for the Revolving Facility) or (ii) 2% (for the First Lien Term Loan) (collectively, the “Base Rate”); plus (x) 4.00%, with respect to the Tranche A Term Loan, (y) 6.50%, with respect to the Tranche B Term Loan, or (z) 4.00%, with respect to the Revolving Facility (which shall be subject to adjustment based upon the net leverage ratio of the Company and its subsidiaries after the delivery of the Company’s financial statements for fiscal quarter ended June 30, 2018 and related compliance certificate (the “Financial Statement Delivery Date”)). Interest on borrowings that the Company designates as “LIBOR” loans bear interest per annum at (a) the “LIBOR” rate divided by (b) one minus the “applicable reserve requirement” of the Federal Reserve for Eurocurrency liabilities (subject to a floor of 1% for the First Lien Term Loan) (the “Adjusted LIBOR Rate”); plus (x) 5.00%, with respect to the Tranche A Term Loan, (y) 7.50%, with respect to the Tranche B Term Loan, or (z) 5.00%, with respect to the Revolving Facility (which shall be subject to adjustment based upon the net leverage ratio of the Company and its subsidiaries after the Financial Statement Delivery Date). The Tranche A Term Loan has an original issue discount of 0.5%. The Tranche B Term Loan has an original issue discount of 4%, except for the $170 million portion of the Tranche B Term Loan made by one lender and certain of its affiliates, which has an original issue discount of 9%, for a blended original issue discount of approximately 5.67%. The Tranche A Term Loan and the Revolving Facility mature on the fourth anniversary of the Closing Date and the Tranche B Term Loan matures on the fifth anniversary of the Closing Date. The Guarantors guaranty the obligations of the Company under the First Lien Credit Agreement.

In addition, the Company simultaneously entered into a Second Lien Credit and Guaranty Agreement (the “Second Lien Credit Agreement”, and with the First Lien Credit Agreement, the “Credit Agreements”), by and among the Company, the Guarantors, Wilmington Trust, National Association, as Administrative Agent and Collateral Agent (in such capacities, the “Second Lien Agent”, and together with the First Lien Agent, collectively the “Agents”), and the lenders party thereto (the “Second Lien Lenders”, and together with the First Lien Lenders, the “Lenders”), pursuant to which the Second Lien Lenders extended a term loan in the aggregate principal amount of $85.0 million (the “Second Lien Term Loan”, and collectively with the First Lien Term Loan, the “Term Loans”, and collectively with the First Lien Facility, the “Credit Facilities”). Borrowings under the Second Lien Credit Agreement are computed based upon either the then current “base” rate of interest or “LIBOR” rate of interest, as selected by ~~FNAC. Interest~~the Company at the time of its borrowings. The interest on borrowings, under the Second Lien Term Loan that ~~FNAC~~the Company designates as “base rate” loans, bear interest ~~at the greater of the prime rate published by the Wall Street Journal or 3.25%~~ per annum ~~in each case~~ at Base Rate plus ~~2% per annum. Interest~~ 9.50%. The interest on borrowings, under the Second Lien Term Loan that ~~FNAC~~the Company designates as ~~“LIBOR rate”~~“LIBOR” loans, bear interest per annum at (a) the ~~LIBOR~~“LIBOR” rate divided by (b) one minus the “applicable reserve requirement” of the Federal Reserve for Eurocurrency liabilities (subject to a floor of 1% for the Second Lien Term Loan), plus 10.50%. The Second Lien Term Loan has an original issue discount of 4.00% and it matures 5.5 years from the Closing Date. The Guarantors guaranty the obligations of the Company under the Second Lien Credit Agreement. The Credit Facilities may be prepaid, in whole or in part, subject to specified prepayment premiums.

As of June 30, 2018, the Credit Facilities (including the Revolving Facility) bear interest at a weighted-average rate of approximately LIBOR plus 7.6%. Excluding the Revolving Facility, the Credit Facilities bear interest ~~published by the Wall Street Journal,~~at a weighted-average rate of approximately LIBOR plus ~~5% per annum. The current interest rate is 6.25% per annum.~~

The Company is required to repay the term loan in equal monthly payments of $270,833 from January 1, 2017 through January 1, 2018, when monthly payments increase to $541,667, until the November 12, 2021 maturity date of the term loan, when the remaining $36.8 million of principal is due. Borrowings under the revolving credit facility are also payable on the November 12, 2021 maturity date of the facility. At September 30, 2017 and December 31, 2016, $1.5 million and $3.0 million, respectively, was outstanding under the revolving credit facility.7.7%.

In ~~conjunction~~connection with the ~~execution of~~Credit Facilities, the ~~East West Credit~~Company entered into (i) a First Lien Pledge and Security Agreement with the First Lien Agent and (ii) a Second Lien Pledge and Security Agreement with the Second Lien Agent, pursuant to which the Company and the ~~East West Lenders also entered into (i) an IP~~Guarantors pledged substantially all of their owned and after acquired property as security ~~agreement~~for the obligations under ~~which~~ the ~~Company pledged intellectual property to~~Credit Agreements, including the ~~East West Lenders to secure payment~~capital stock of the ~~East West Credit Agreement, (ii) subordination agreements under which certain creditors~~Guarantors and other direct and indirect subsidiaries of the Company (subject to certain limitations and the East West Lenders have established priorities among them and reached certain agreements as to enforcing their respective rights against the Company, and (iii) a pledge and security agreement under which Fusion and FNAC have each pledged its equity interestrestrictions set forth in ~~its subsidiaries to the East West Lenders.~~these agreements).

~~Under the East West Credit Agreement:~~

●

~~The~~Under the Credit Agreements, the Company is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to its obligations to the ~~East West~~ Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries.

●

~~The~~ Furthermore, the Company is required to comply with various financial covenants, including net leverage ratio, fixed charge coverage ratio and ~~minimum~~maximum levels of ~~earnings before interest, taxes, depreciation and amortization;~~consolidated capital expenditures; and its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of ~~amounts outstanding.~~

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

●

~~The Company granted the lenders security interests on all~~its indebtedness. As of ~~its assets, as well as its 60% membership interest in FGS and the capital stock of FNAC and each of its subsidiaries.~~

●

~~Fusion and its subsidiaries (and future subsidiaries of both) other than FNAC and FGS have guaranteed FNAC’s obligations, including FNAC’s repayment obligations thereunder.~~

~~At September~~June 30, ~~2017 and December 31, 2016,~~2018, the Company was in compliance with these financial covenants.

The proceeds of the Term Loans were used, in part, to refinance all of the ~~financial covenants contained in~~existing indebtedness of Fusion and its subsidiaries (including Birch), under (i) the ~~East West~~ Credit ~~Agreement.~~

~~Notes Payable – Non-Related Parties~~

~~At September 30, 2017 and December 31, 2016, notes payable – non-related parties consists~~Agreement, dated as of ~~the following:~~

September 30,

December 31,

2017

2016

Subordinated notes
$33,588,717
$33,588,717
Discount on subordinated notes
  (1,122,282)
  (1,368,629)
Deferred financing fees
  (643,662)
  (788,486)
Total notes payable - non-related parties
  31,822,773
  31,431,602
Less: current portion
  -
  -
Long-term portion
$31,822,773
$31,431,602

On November 14, 2016, ~~FNAC,~~as amended, among Fusion NBS Acquisition Corp., a subsidiary of Fusion (“FNBS”), East West Bank (“EWB”), as Administrative Agent, Swingline Lender, an Issuing Bank and ~~Fusion’s~~a Lender, and the other ~~subsidiaries entered into~~lenders party thereto; (ii) the Fifth Amended and Restated Securities Purchase Agreement ~~(the “Praesidian Facility”) with~~and Security Agreement, dated as of November 14, 2016, as amended, among FNBS, Fusion, the subsidiaries of Fusion guarantors thereto, Praesidian Capital Opportunity Fund III, ~~L.P.~~LP, as Agent, and the lenders party thereto; and (iii) the Credit Agreement, dated as of July 18, 2014, among Birch, Birch Communications, Inc., ~~Praesidian Capital Opportunity Fund III-A, LP~~Cbeyond, Inc., the other guarantors party thereto, the lenders party thereto and ~~United Insurance~~PNC Bank, National Association, as Administrative Agent. In addition, the Term Loans were used to repay, in full, approximately $0.9 million of indebtedness under that certain Second Amended and Restated Unsecured Promissory Note, dated November 14, 2016, payable by Fusion to Marvin Rosen. The proceeds were also used to pay the fees and expenses associated with the Birch merger and related transactions, including fees and expenses in connection with the Credit Facilities. The pay-off of the previous credit facilities, including the expensing of the related remaining unamortized debt costs, resulted in a debt extinguishment for accounting purposes. For the three and six months ended June 30, 2018, the Company recorded a loss on debt extinguishment of ~~America (collectively,~~$14.4 million. For additional information on the ~~“Praesidian Lenders”~~previous credit facilities, see Birch's audited financial statements and notes thereto included in the Form 8-K filed by Fusion with the SEC on May 10, 2018.

The Term Loans were also used to make a prepayment of an aggregate of approximately $3.0 million of indebtedness of Birch under related party subordinated notes each dated October 28, 2016, in favor of Holcombe T. Green, Jr., R. Kirby Godsey and the Holcombe T. Green, Jr. 2013 Five-Year Annuity Trust. The remaining balance of $3.3 million was brought forward and is now evidenced by three Amended and Restated Subordinated Notes, each dated as of the Birch Closing Date (the “Bircan Notes”). The ~~Praesidian Facility amends~~Bircan Notes accrue interest at the rate of 12% per annum, with interest due in quarterly installments. The Bircan Notes are being amortized in three equal installments and ~~restates a prior facility, pursuant~~will be paid off in March 2019. The Bircan Notes are unsecured and the Company’s obligations thereunder are subordinated to which FNAC previously sold its Series A, Series B, Series C, Series D, Series E and Series F senior notes in an aggregate principal amount of $33.6 million (the “SPA Notes”). These notes require interest payments inamounts borrowed under the ~~amount of $0.3 million per month. The current interest rate is 10.8% per annum.~~Credit Facilities.

~~Under the terms~~In addition, $62.0 million of the ~~Praesidian Facility,~~Tranche B Term Loan was used by the Company to pay the cash portion of the purchase price for MegaPath and certain expenses incurred in connection with that transaction. See note 4 for additional information on the MegaPath Merger.

Green Subordinated Note

On the Birch Closing Date, Holcombe T. Green, Jr. loaned the Company an additional $10 million, which is evidenced by a subordinated promissory note (the “Green Note”). The Green Note accrues interest at a rate of 13% per annum, was issued with an original issue discount of 4% and matures on the date which is 91 days after the maturity date of the ~~SPA Notes~~Second Lien Term Loan. Prior to maturity, only interest is ~~May 12, 2022, no payments of principal~~payable on the Green Note. The Green Note is unsecured, and obligations thereunder are ~~due until~~subordinated to amounts borrowed under the ~~maturity date, and the financial covenants contained~~Credit Facilities.

Vector Facility

In connection with its participation in the ~~Praesidian Facility are substantially similar~~Tranche B Term Loan under the First Lien Credit Agreement, Vector Fusion Holdings (Cayman), Ltd. (“Vector”) entered into a separate credit agreement (the “Vector Credit Agreement”) with Goldman Sachs Lending Partners LLC, as administrative agent and lender (“Goldman Sachs”), and U.S. Bank National Association, as collateral agent and collateral custodian, pursuant to ~~those contained in~~which Vector borrowed funds from Goldman Sachs, the ~~East West~~proceeds of which were used to purchase Tranche B Term Loans under the First Lien Credit Agreement. In connection ~~with~~therewith, Vector issued to the ~~execution~~Company, and the Company purchased from Vector, a $25 million unsecured subordinated note (the “Vector Note”). The Vector Note bears interest at the rate earned by the bank account in which the proceeds of the ~~Praesidian Facility,~~Vector Note have been deposited and matures on May 3, 2024. The Vector Note is subordinate in right of payment to Vector’s loan from Goldman Sachs. Except in limited circumstances, the ~~Praesidian Lenders entered into a subordination agreement with~~Company is not entitled to any distribution on account of the ~~East West Lenders pursuant to which~~principal, premium or interest or any other amount in respect of the ~~Praesidian Lenders have subordinated their~~Vector Note until all amounts owed by Vector under the Vector Credit Agreement are paid in full. Similarly, while the Company has the right to ~~payment~~declare obligations under the ~~Praesidian Facility~~Vector Note to be immediately due and payable upon the ~~SPA Notes~~occurrence of an event of default (including, without limitation, in the event of any insolvency, bankruptcy or liquidation of Vector), the Company is not entitled to ~~repayment~~receive any payment on account of the Vector Note until Vector’s obligations under the Vector Credit Agreement are paid in full. The Vector Note is pledged as security for the Company’s obligations under the ~~East West~~ Credit ~~Agreement. At September 30, 2017~~Facilities.

In addition, in connection with its participation in the Tranche B Term Loan, Vector and ~~December 31, 2016,~~certain of its affiliates entered into a side letter with the Company ~~was in compliance with all~~pursuant to which Vector is entitled to certain non-voting board observation rights, including the receipt of materials provided to the Company’s board and attendance at regularly scheduled quarterly Company board meetings. Such board observation rights are not transferrable to any assignee of the ~~financial covenants contained in the Praesidian Facility.~~Tranche B Term Loans.

~~Notes Payable – Related Parties~~Estimated future aggregate payments for long-term debt are expected are expected to be as follows (in thousands):

~~At September 30, 2017 and December 31, 2016, notes payable – related parties consists of the following:~~

remainder of 2018	$23,068
2019	28,842
2020	38,156
2021	41,625
2022	72,844
Thereafter	448,813
	$653,348

September 30,

December 31,

2017

2016

Notes payable to Marvin Rosen
$928,081
$928,081
Discount on notes
(9,946)
(52,331)
Total notes payable - related parties
$918,135
$875,750

The notes payable to Marvin Rosen, the Chairman of Fusion’s Board of Directors, are subordinated to borrowings under the East West Credit Agreement and the Praesidian Facility. These notes are unsecured, pay interest monthly at an annual rate of 7%, and mature 120 days after the Company’s obligations under the East West Credit Agreement and the Praesidian Facility are paid in full.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Note ~~11.~~14. Obligations Under Asset Purchase Agreements

In connection with certain historical acquisitions ~~and asset purchases~~ completed by ~~the Company during 2015, 2016 and 2017,~~Fusion, the Company has various obligations to the sellers, mainly for payments of portions of the purchase price that have been deferred under the terms of the respective ~~asset purchase~~ agreements. Such obligations to sellers or other parties associated with these transactions ~~as of September 30, 2017 and December 31, 2016~~ are as ~~follows:~~follows (in thousands):

September 30,

December 31,

2017

2016

Root Axcess
$-
$166,668
Customer base acquisitions
  1,007,397
  334,025
Technology For Business, Inc.
  861,606
  936,606

  1,869,003
  1,437,299
Less: current portion
  (603,192)
  (546,488)
Long-term portion
$1,265,811
$890,811

	June 30,	December 31,
	2018	2017
Customer base acquisitions	$38	$-
IQMax	447	-
	485
Less current portion(1)	(485)	-
Long-term portion	$-	$-

(1) Included in "other accrued liabilities" on the accompanying condensed consolidated balance sheets as of June 30, 2018.

Note ~~12. Derivative Liability~~15. Revenues from Contracts with Customers

~~Fusion has issued warrants~~The Company adopted ASC 606 using the modified retrospective method by recognizing the cumulative effect of initially applying ASC 606 as an adjustment to ~~purchase shares~~the opening balance of ~~its common stock~~stockholders’ equity at January 1, 2018. Under the new guidance, these service revenues continue to be recognized when the services are provided. However, the new requirement to defer incremental contract acquisition and fulfillment costs, including sales commissions and installation costs, and recognize such costs over the period where control of goods and services are transferred resulted in ~~connection with certain debt and equity financing transactions. These warrants are accounted for~~the recognition of additional deferred contract costs in ~~accordance~~the consolidated balance sheet at the date of adoption. The following table presents the cumulative effect of the changes made to the consolidated balance sheet at January 1, 2018 (in thousands):

	Balance as of	ASC 606	Balance as of
	December 31, 2017	Transition Adjustment	January 1, 2018
Assets
Prepaid expenses	$6,290	$2,203	$8,493
Intangible assets, net	68,834	(3,304)	65,530
Other non-current assets	877	4,826	5,703
	$76,001	$3,725	$79,726
Stockholders' Equity
Accumulated deficit	$(236,477)	$3,725	$(232,752)

The following table summarizes the current impacts associated with the ~~guidance contained in~~adoption of ASC ~~Topic 815~~,~~Derivatives~~606 on the accompanying condensed consolidated balance sheet and ~~Hedging. For warrant instruments that are~~statement of operations and comprehensive loss (in thousands):

	June 30, 2018
			Impact of
	As reported	Previous guidance	Adoption of ASC 606
Assets
Prepaid expenses	$10,443	$8,226	$2,217
Intangible assets, net	183,826	189,020	(5,194)
Other non-current assets	33,462	30,485	2,977

Liabilities
Deferred customer revenue	(16,030)	(15,864)	(166)

Stockholders' Equity
Accumulated deficit	(264,752)	(264,586)	(166)

Amortization of deferred commissions was $0.5 million and $0.9 million for the three and six months ended June 30, 2018, respectively.

	For the three months ended June 30, 2018
			Impact of
	As reported	Previous guidance	Adoption of ASC 606

Revenues	$120,803	$120,968	$(165)
Selling, general and administrative	43,001	43,668	(667)
Net Impact	$77,802	$77,300	$502

	For the six months ended June 30, 2018
			Impact of
	As reported	Previous guidance	Adoption of ASC 606

Revenues	$223,714	$223,879	$(165)
Selling, general and administrative	66,767	67,852	(1,085)
Net Impact	$156,947	$156,027	$920

The impact associated with the adoption of ASC 606 on net income, basic and diluted net loss per share, consolidated statement of operations and the consolidated statement of cash flows were not ~~deemed~~material for the three and six months ended June 30, 2018.

The following table includes estimated revenue expected to be indexed to Fusion’s own stock, the Company classifies such instruments 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 isrecognized in the ~~Company’s statement of operations. At September 30, 2017, Fusion had 485,634 warrants outstanding which provide for a downward adjustment~~future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the exercise price if Fusion were to issue common stock at an issuance price, or issue convertible debt or warrants with a conversion or exercise price, that is less than the exercise price of these warrants. During the nine months ended September 30, 2017, 99,200 of these warrants were exercised, including 64,000 on a cashless basis. As a result, $132,171 was reclassified from the Company’s derivative liability into equity.reporting period (in thousands):

~~The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock.~~ ~~The following assumptions were used to determine the fair value of the warrants for the nine months ended September 30, 2017 and 2016:~~

	Deferred installation	Deferred installation
	revenue	costs	Net

remaining 2018	$21	$(887)	$(866)
2019	33	(1,490)	(1,457)
2020	28	(949)	(921)
2021	28	(179)	(151)
2022 and thereafter	11	(18)	(7)
	$121	$(3,523)	$(3,402)

Nine months ended
September 30,

2017

2016

Stock price ($)
  1.45-2.72
  1.65-1.84
Adjusted Exercise price ($)
  1.54-1.55
  6.25
Risk-free interest rate (%)
  2.23
  1.56-1.78
Expected volatility (%)
  64.3-84.3
  92.4-96.7
Time to maturity (years)
  1.5-1.75
  2.25-3.00

~~At September 30, 2017 and December 31, 2016, the fair value~~Summary of the derivative was $0.8 million and $0.3 million, respectively. For the three months ended September 30, 2017 and 2016, the Company recognized a (loss) gain on the change in fair value of the derivative of ($0.6) million and $0.2 million, respectively, and for the nine months ended September 30, 2017 and 2016, the Company recognized a (loss) gain on the change in the fair value of this derivative of ($0.5) million and $0.4 million, respectively.disaggregated revenue is as follows (in thousands):

	For the three months ended June 30,
	2018	2017
Monthly recurring	$104,651	$100,388
Usage and other	15,892	15,915
Installation	260	374
Total revenue	$120,803	$116,677

	For the six months ended June 30,
	2018	2017
Monthly recurring	$190,562	$200,599
Usage and other	32,555	30,344
Installation	597	800
Total revenue	$223,714	$231,743

Summary of revenue by country is as follows (in thousands):

	For the three months ended June 30,
	2018	2017
United States	$97,302	$89,900
Canada	23,501	26,777
Total revenue	$120,803	$116,677

	For the six months ended June 30,
	2018	2017
United States	$176,390	$204,966
Canada	47,324	26,777
Total revenue	$223,714	$231,743

Note ~~13.~~16. Equity Transactions

Private Placements of Common Stock

Immediately prior to the closing of the Birch Merger, Fusion ~~is authorized to issue 90,000,000 shares of common stock. As of September 30, 2017 and December 31, 2016, 22,296,683 and 20,642,028 shares of its~~entered into three separate common stock ~~respectively, were issued~~purchase agreements and ~~outstanding.~~

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~During~~simultaneously consummated the nine months ended September 30, 2017, the Company entered into exchange agreements with certain holders of Fusion’s outstanding warrants whereby the outstanding warrants were exchanged for new warrants (the “2017 Warrants”), which warrants permitted the holders to exercise and purchase, for a limited period of 60 days, unregistered shares of Fusion’s common stock at a discount of up to 10% below the closing bid price of Fusion’s common stock at the time of exercise but in no event at a price of less than $1.30 per share. In connection with these exchange agreements, the warrant holders exercised 2017 Warrants to purchase 561,834 shares of common stock on March 31, 2017 at an exercise price of $1.39 per share. The Company received proceeds from the exercise of the 2017 Warrants in the amount of $0.8 million, which were used for general corporate purposes. In connection with the exchange agreements, all of the 2017 Warrants were immediately exercised. As a result of the exchange, the Company recorded a preferred stock dividend in the amount of $0.3 million for the difference in fair value of the warrants that were exchanged (see note 4).

~~On September 15, 2017, 64,000 warrants were exercised on a cashless basis and, as a result, the Company issued 28,986 shares of common stock to the holder of those warrants.~~

During the nine months ended September 30, 2017, Fusion issued 125,870 shares of its common stock valued at approximately $0.2 million for services rendered. Also during the nine months ended September 30, 2017, (i) Fusion’s Board of Directors declared dividends on the Series B-2 Preferred Stock that were paid in the form of 257,238 shares of Fusion common stock (see note 4), and (ii) an officer of the Company forfeited a portion of his 2016 restricted stock award and 5,938 shares of common stock were returned to the Company.

In August 2017, in connection with the settlement of litigation with Apptix, FNAC was paid $150,000 in cash and Apptix surrendered 300,000 shares of Fusion common stock valued at $363,000 to the Company.

~~Preferred Stock~~

Fusion is authorized to issue up to 10,000,000 shares of preferred stock. As of September 30, 2017 and December 31, 2016, there were 5,045 shares of Series A Preferred Stock issued and outstanding. In addition, there were 9,296 and 12,254 shares of Series B-2 Preferred Stock issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.

On March 31, 2017, the Company agreed with certain holders of its Series B-2 Preferred Stock to convert their shares of Series B-2 Preferred Stock into shares of Fusion common stock at a conversion price of $3.00 per share (a two dollar reduction from the specified conversion price). As a result, 2,958 shares of Series B-2 Preferred Stock were converted into a total of 986,665 shares of Fusion common stock, and the Company recorded a preferred stock dividend of $0.6 million for the value of the incremental numbersale of shares of Fusion common stock thereunder. Specifically, Fusion issued inand sold (i) 952,382 shares of its common stock, for an aggregate purchase price of approximately $5.0 million, to North Haven Credit Partners II L.P., one of the Second Lien Lenders, which is managed by Morgan Stanley Credit Partners; (ii) 380,953 shares of its common stock, for an aggregate purchase price of approximately $2.0 million, to Aetna Life Insurance Company; and (iii) 190,477 shares of its common stock, for an aggregate purchase price of approximately $1.0 million to Backcast Credit Opportunities Fund I, L.P. In connection with these private placements, Fusion paid an aggregate of $492,000 of fees.

Private Placement of Series D Preferred Stock

Immediately prior to the ~~reduction in~~closing of the ~~conversion~~Birch Merger, Fusion entered into a preferred stock purchase agreement with Holcombe T. Green, Jr. pursuant to which it issued and sold to Mr. Green 15,000 shares of its Series D Cumulative Preferred Stock, par value $0.01 per share (the “Series D Preferred Stock”), for an aggregate purchase price of ~~the~~$14.7 million, and Fusion paid a $200,000 closing fee to Mr. Green. The Series ~~B-2~~D Preferred Stock ~~(see note 4).~~

has a stated value of $15.0 million. The ~~holders of the~~ Series AD Preferred Stock ~~are entitled to receive cumulative~~accrues dividends ~~of 8% per annum payable in arrears,~~ when, as and if declared by ~~Fusion’s Board,~~the Company’s board at an annual rate of 12% per annum, payable monthly in arrears on January 1 of each year. As of September 30, 2017, no dividends have been declared with respect to the Series A Preferred Stock (see note 4). The holders of the Series B-2 Preferred Stock are entitled to receive a cumulative ~~6% annual dividend payable quarterly in arrears when~~basis.From the Birch Closing Date through June 30, 2018, accrued and ~~if declared by Fusion’s Board, in cash or shares of Fusion common stock, at the option of the Company (see note 4). As of September 30, 2017, all required quarterly~~undeclared dividends ~~on the series B-2 Preferred Stock have been declared and paid in shares of common stock.~~were $0.2 million.

Stock Options

~~Fusion's~~The Company’s 2016 equity incentive plan reserves a number of shares of Fusion common stock equal to 10% of ~~Fusion’s~~its common stock outstanding from time to time on a fully diluted basis, adjusted upward for the number of shares available for grant under ~~Fusion’s~~its 2009 stock option plan plus ~~the~~a number of shares covered by options granted under the 2009 plan that expire without being exercised. The Company’s 2016 equity incentive plan provides for the grant of incentive stock options, stock appreciation rights, restricted stock, restricted stock units, stock grants, stock units, performance shares and performance share units to employees, officers, non-employee directors of, and consultants to, the Company. Options issued under the various ~~Fusion~~ plans typically vest in annual increments over a three or four year period, expire ten years from the date of grant and are issued at exercise prices no less than 100% of the fair market value at the time of grant.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~The following assumptions were used to determine the fair value of the stock options granted under Fusion’s stock-based compensation plans using the Black-Scholes option-pricing model:~~

Nine Months Ended
September 30,

2017

2016

Dividend yield
  0.0%
  0.0%
Expected volatility
  92.40%
  94.6-96.7%
Average Risk-free interest rate
  2.18%
  1.56%
Expected life of stock option term (years)
  8.00
  8.00

The Company recognized compensation expense of ~~$0.2~~$0.1 million ~~for~~from the ~~three months ended September~~Birch Closing Date through June 30, ~~2017 and 2016, and $0.7 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively. These amounts are~~2018. This amount is included in ~~selling, general and administrative expenses~~SG&A in the unaudited condensed consolidated ~~interim~~ statements of operations.

The following table summarizes stock option activity for the ~~nine~~six months ended ~~September~~June 30, ~~2017:~~2018 (number of options in thousands):

	Number of Options	Weighted Average Exercise Price	Weighted Average Remaining Contract Term	Number of Options	Weighted Average Exercise Price	Weighted Average Remaining Contract Term
Outstanding at December 31, 2016	2,183,723	$2.56	8.56 years
Outstanding at December 31, 2017				-	$-	-
Acquired in reverse acquisition				1,996	3.48	-
Granted	126,300	1.49		-		-
Exercised	-			(26)	2.67	-
Forfeited	( 61,460)	1.60		(14)	1.97	-
Expired	( 26,275)	18.80		(1)	6.35	-
Outstanding at September 30, 2017	2,222,288	2.33	7.95
Exercisable at September 30, 2017	712,542	3.89	6.35
Outstanding at June 30, 2018				1,955	3.50	7.79
Exercisable at June 30, 2018				1,428	4.01	7.62

As of ~~September~~June 30, ~~2017,~~2018, the Company had approximately ~~$1.2~~$0.7 million of unrecognized compensation expense ~~net of estimated forfeitures,~~ related to stock options granted under ~~the Company’s~~its stock-based compensation ~~plans, which~~plans. This amount is expected to be recognized over a weighted-average period of ~~1.9~~1.6 years.

Note ~~14.~~17. Commitments and Contingencies

From time to time, the Company ~~may be~~is involved in ~~a variety of claims, lawsuits, investigations and~~legal proceedings ~~relating to contractual disputes, employment matters, regulatory and compliance matters, intellectual property rights and other litigation~~ arising in the ordinary course of ~~business.~~business, including, for example, civil litigation arising from customer complaints, breach of contract, billing and collection issues, employee claims, and intellectual property. In addition, from time to time the Company is involved in various investigations and proceedings relating to its compliance with various federal and state laws, including those relating to its provision of cloud and business services. Defending such proceedings can be costly and can impose a significant burden on the Company’s management and employees. AsThe Company establishes a liability with respect to contingencies when a loss is probable and it is able to reasonably estimate such loss. At June 30, 2018, we believe we have adequate reserves for these liabilities, when taking into account contractual indemnitees that have been provided to the Company. For certain matters in which the Company is involved, for which a loss is reasonably possible, we are not currently able to reasonably estimate the potential loss. While the ultimate resolution of, ~~September 30, 2017,~~and costs associated with, these litigation and regulatory matters are uncertain, the Company does not ~~expect~~currently believe that ~~the outcome~~any of ~~any such claims or actions~~these pending matters will have a material adverse effect on the Company’s ~~liquidity,~~ results of operations, financial condition or ~~financial condition.~~

In May 2017, FNAC commenced an action in the United States District Court for the Southern District of New York against Apptix and certain of its and Apptix’s former officers and employees, arising from an estimated $2.9 million underpayment of license fees to a software vendor (see note 8). In August 2017, in connection with the settlement of this litigation matter, FNAC was paid $150,000 in cash and Apptix surrendered to Fusion 300,000 shares of Fusion common stock valued at $363,000.

~~Note 15. Proposed Merger Transaction~~

On August 26, 2017, Fusion and its wholly owned subsidiary, Fusion BCHI Acquisition LLC, a Delaware limited liability company (“Merger Sub”), entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) with Birch Communications Holdings, Inc., a Georgia corporation (“Birch”). The Merger Agreement, provides, among other things, that upon the terms and conditions set forth therein, Birch will merge with and into Merger Sub (the “Merger”), with Merger Sub surviving such Merger.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

On the effective date of the Merger, the outstanding shares of common stock, par value $0.01 per share, of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) will be cancelled and converted into the right to receive, in the aggregate, that number of shares of Fusion common stock equal to three times the number of shares of (i) Fusion common stock issued and outstanding immediately prior to the Effective Time (as defined in the Merger Agreement) (assuming the conversion of all outstanding preferred shares) plus (ii) Fusion common stock issuable upon the exercise of all in-the-money Fusion warrants (the “Merger Shares”). Pursuant to subscription agreements executed by each of the stockholders of Birch, the Merger Shares will be issued in the name of, and held by BCHI Holdings, LLC (“BCHI”), a limited liability company owned by the stockholders of Birch. On the closing date of the Merger, BCHI and Fusion will enter into a Registration Rights Agreement governing the registration rights of the BCHI in respect of the Merger Shares and pursuant to which Fusion will agree, among other things, to use reasonable best efforts to cause a shelf registration statement covering the resale of the Merger Shares to be declared effective by the SEC within 120 days of the closing of the Merger.liquidity.

At least 45 days before the closing of the Merger, the parties will give a written notice to each holder of Fusion’s existing preferred stock that such holders will have 15 days to convert their preferred stock into Fusion common stock. At the effective time of the Merger, any preferred shares that have not been converted into Fusion common stock will automatically terminate and be deemed cancelled without consideration.

Fusion, Birch and Merger Sub each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each of Fusion and Birch to, subject to certain exceptions, (a) conduct its business in the ordinary course, (b) preserve intact its business organization and significant business relationships, preserve satisfactory relationships with its officers and key employees and maintain its current rights and franchises, (c) maintain insurance on material assets, and (d) maintain all permits, each during the interim period between the execution of the Merger Agreement and the earlier of the consummation of the Merger or termination of the Merger Agreement.

Prior to the closing of the Merger, Fusion is obligated to use reasonable best efforts to cause the Merger Shares to be approved for listing on The NASDAQ Stock Market, LLC (“NASDAQ”), including, if necessary to comply with NASDAQ listing requirements, amending Fusion’s certificate of incorporation prior to the effective time of the Merger to effect a reverse stock split of the Fusion common stock to satisfy NASDAQ minimum price requirements.

Closing of the Merger is subject to numerous preconditions, including Fusion obtaining financing for the transaction, which will be used to retire existing senior debt facilities at Birch and Fusion (the “Refinancing”). Each of Fusion and Birch has agreed to use reasonable best efforts to cooperate and arrange and obtain the debt financing necessary to effect the required refinancing and to complete the transactions contemplated by the Merger Agreement.

Prior to the closing of the Merger, Birch is required to spin-off to the existing Birch stockholders, its consumer business, which consists of (i) the residential customer base, life line and consumer wireless business, and (ii) its single-line business customer base, in each case located in the United States and Canada. In addition, prior to the closing of the Merger, Fusion is required to spin-off or otherwise exit its Carrier Services business conducted through FGS.

On the effective date of the Merger, the certificate of incorporation of Fusion will be amended and restated, which amendments will, among other things, (i) increase the number of authorized shares of Fusion common stock to 150,000,000 and (ii) change the name of Fusion to “FusionConnect”.

The terms of the Merger Agreement are such that the Merger, if consummated, will result in a change in control. As a result, the transaction will be accounted for as a reverse acquisition and recapitalization, with Birch as the acquirer for accounting purposes, and the historical financial statements of Birch will become the historical financial statements of the Company.

~~Note 16. Segment Information~~

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

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

The Company has two reportable segments – Business Services and 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 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 2016 Form 10-K. The Company’s segments and their principal activities consist of the following:

~~Business Services~~

Through this operating segment, the Company provides a comprehensive suite of cloud communications, cloud connectivity, cloud computing and managed cloud-based applications 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.

~~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 carrier customers and vendors, and is working to expand its interconnection relationships, particularly with carriers in emerging markets. Operating segment information for the three and nine months ended September 30, 2017 and 2016 is summarized in the following tables:

Three Months Ended September 30, 2017

Carrier Services

Business Services

Corporate and Unallocated

Consolidated

Revenues
$7,058,137
$29,297,050
$-
$36,355,187
Cost of revenues (exclusive of depreciation and amortization)
  6,704,077
  13,045,111
  -
  19,749,188
Gross profit
  354,060
  16,251,939
  -
  16,605,999
Depreciation and amortization
  45,269
  3,470,310
  195,674
  3,711,253
Selling, general and administrative expenses
  547,654
  11,790,690
  1,311,005
  13,649,349
Impairment charge

  -

  -
Interest expense
  -
  (2,125,158)
  (79,361)
  (2,204,519)
Loss on change in fair value of derivative liability
  -
  -
  (617,820)
  (617,820)
Loss on extinguishment of debt
  -
  -
  -
  -
Other expenses, net
  9,371
  112,816
  8,844
  131,032
Income tax provision
  -
  (10,200)
  -
  (10,200)
Net loss
$(248,234)
$(1,257,235)
$(2,195,016)
$(3,700,486)





Total assets
$4,895,761
$119,113,665
$2,467,319
$126,476,745

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Nine Months Ended September 30, 2017

Carrier Services

Business Services

Corporate and Unallocated

Consolidated

Revenues
$22,496,958
$87,759,111
$-
$110,256,069
Cost of revenues (exclusive of depreciation and amortization)
��21,746,819
  38,174,830
  -
  59,921,649
Gross profit
  750,139
  49,584,281
  -
  50,334,420
Depreciation and amortization
  339,633
  10,408,551
  400,824
  11,149,008
Selling, general and administrative expenses
  1,639,020
  36,517,317
  3,958,821
  42,115,158
Impairment charge

  -

  -
Interest expense
  -
  (6,262,106)
  (206,810)
  (6,468,916)
Loss on change in fair value of derivative liability
  -
  -
  (544,485)
  (544,485)
Other (expenses) income, net
  (9,454)
  50,516
  (116,613)
  (75,551)
Income tax provision
  -
  (41,111)
  -
  (41,111)
Net loss
$(1,237,968)
$(3,594,288)
$(5,227,553)
$(10,059,809)





Capital expenditures
$21,443
$4,376,414
$-
$4,397,857

Three Months Ended September 30, 2016

Carrier Services

Business Services

Corporate and Unallocated

Consolidated

Revenues
$8,864,791
$21,294,318
$-
$30,159,109
Cost of revenues (exclusive of depreciation and amortization)
  8,487,912
  8,943,655
  -
  17,431,567
Gross profit
  376,879
  12,350,663
  -
  12,727,542
Depreciation and amortization
  38,094
  2,747,822
  212,712
  2,998,628
Selling, general and administrative expenses
  653,462
  9,547,547
  1,207,039
  11,408,048
Impairment charge

  -

  -
Interest expense
  -
  (1,551,534)
  (73,661)
  (1,625,195)
Gain on change in fair value of derivative liability
  -
  -
  152,057
  152,057
Other (expenses) income, net
  -
  (247,070)
  265,139
  18,069
Provision for income taxes
  -
  (10,951)

  (10,951)
Net loss
$(314,677)
$(1,754,261)
$(1,076,216)
$(3,145,154)





Total assets
$3,783,321
$90,027,291
$2,312,655
$96,123,267

Nine Months Ended September 30, 2016

Carrier Services

Business Services

Corporate and Unallocated

Consolidated

Revenues
$30,711,086
$64,329,938
$-
$95,041,024
Cost of revenues (exclusive of depreciation and amortization)
  29,341,982
  26,533,285
  -
  55,875,267
Gross profit
  1,369,104
  37,796,653
  -
  39,165,757
Depreciation and amortization
  116,102
  8,128,378
  702,301
  8,946,781
Selling, general and administrative expenses
  2,119,119
  28,052,965
  3,930,763
  34,102,847
Impairment charge

  -

  -
Interest expense
  -
  (4,647,847)
  (229,981)
  (4,877,828)
Gain on change in fair value of derivative liability
  -
  -
  380,099
  380,099
Other (expenses) income, net
  -
  (764,308)
  797,822
  33,514
Provision for income taxes
  -
  (10,951)

  (10,951)
Net loss
$(866,117)
$(3,807,796)
$(3,685,124)
$(8,359,037)





Capital expenditures
$41,584
$3,929,145
$-
$3,970,729

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Note 17. Related Party Transactions~~

~~Since March 6, 2014, the Company has engaged a tax advisor to prepare its tax returns and to provide related tax advisory services.~~ The Company was billed $0.2 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively, by this firm. Larry Blum, a member of Fusion’s Board of Directors, is a Senior Advisor to, and a former partner of, this firm.

~~The Company also has notes payable to Marvin Rosen (see note 10).~~

Note 18. ~~Fair Value Disclosures~~Income Taxes

~~Fair value~~During the six months ended June 30, 2018, the Company recorded an income tax benefit of ~~financial~~$4.9 million, resulting in an effective tax rate for the same period of approximately 11.43%. The difference between the effective tax rate and ~~non-financial~~the federal statutory rate primarily relates to changes in the valuation allowance on net deferred tax assets and certain discrete items. For the six months ended June 30, 2018, the income tax benefit includes certain refundable credits of which $4.3 million was recorded as a discrete benefit, partially offset by foreign and state taxes and amortization of intangibles with indefinite useful lives.

As of June 30, 2018, the Company had a full valuation allowance recorded against all of its net deferred tax assets, exclusive of its deferred tax liabilities with indefinite useful lives. The Company continually reviews the adequacy of the valuation allowance and recognizes the benefits of deferred tax assets only as the reassessment indicates that it is more likely than not that the deferred tax assets will be realized. As of June 30, 2018, the Company does not believe it is more likely than not that the remaining net deferred tax assets will be realized. Should the Company’s assessment change in a future period it may release all or a portion of the valuation allowance at such time, which would result in a deferred tax benefit in the period of adjustment.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. We recognized some provisional tax impacts related to the revaluation of deferred tax assets and liabilities ~~is defined~~in our consolidated financial statements for the year ended December 31, 2017, as ~~an exit price, representing~~we did not have all the ~~amount~~information regarding the changes of the 2017 Tax Act to determine any impact. The current period includes $2.3 million of tax benefit related to tax reform for certain refundable credits and the release of the valuation against our indefinite lived intangibles. The ultimate impact may differ from those provisional amounts due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that ~~would~~may be ~~received~~issued, and actions we may take as a result of the 2017 Tax Act. Any adjustments made 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~~provisional amounts under SAB 118 will be recorded as discrete adjustments in the ~~methodologies of measuring fair value for assets and liabilities, is as follows:~~period identified (not to extend beyond the one-year measurement provided in SAB118).

~~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~~

~~The following table represents the liabilities measured at fair value on a recurring basis:~~

Level 1

Level 2

Level 3

Total

As of September 30, 2017

Current liabilities:

Contingent purchase price liability
  -
  -
$603,192
$603,192
Non-current liabilities:




Contingent purchase price liability
  -
  -
$1,265,811
$1,265,811
Derivative liability (see note 12)
  -
  -
$760,965
$760,965
As of December 31, 2016




Current liabilities:




Contingent purchase price liability
  -
  -
$546,488
$546,488
Non-current liabilities:




Contingent purchase price liability
  -
  -
$890,811
$890,811
Derivative liability (see note 12)
  -
  -
$348,650
$348,650

~~Changes in the derivative warrant liability for the nine months ended September 30, 2017 are as follows:~~

~~Balance at December 31, 2016~~	$~~348,650~~
~~Change for the period:~~
~~Change in fair value included in net loss~~	~~544,486~~
~~Warrant exercises (see note 12)~~	~~(132,171~~)
~~Balance at September 30, 2017~~	$~~760,965~~

~~Changes in the contingent purchase price liability for the nine months ended September 30, 2017 are as follows:~~

~~Balance at December 31, 2016~~	$~~1,437,299~~
~~Change for the period:~~
~~Acquired customer base~~	~~1,350,000~~
~~Increase in amounts due from Technology Opportunity Group~~	~~(334,404~~)
~~Payments made~~	~~(583,892~~)
~~Balance at September 30, 2017~~	$~~1,869,003~~

~~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 condensed consolidated financial statements and the notes thereto appearing elsewhere herein and ~~in conjunction~~ with ~~the Management’s Discussion~~Birch’s audited financial statements and ~~Analysis set forth~~notes thereto included in the ~~Company’s Annual Report on~~ Form ~~10-K for~~8-K filed by the ~~year ended December 31, 2016, as amended, originally filed~~Company with the SEC on ~~March 21,~~May 10, 2018. As further described in “Note 4 – Acquisitions” in this report, Birch was determined to be the accounting acquirer in the Birch Merger and, accordingly, the historical financial information presented in this report, including for the second quarter of 2017, ~~(the “2016 Form 10-K”).~~reflects the standalone financial statements of Birch and, therefore, period-over-period comparisons may not be meaningful.

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.~~1995. 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~~subject to risks and uncertainties, including those set forth under Item 1A, “Risk Factors” in Fusion’s Annual Report on Form 10-K for the year ended December 31, 2017, and Part II, Item 1A in this report, that could cause actual events or results to differ materially from ~~those referred to in such forward-looking statements.~~historical results or anticipated results. The ~~primary risk~~risks of the Company isinclude, among other things, 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~~strategy, its ability to integrate acquisitions, its ability to comply with the terms of ~~its credit facilities,~~the Credit Facilities, 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 in this report are made as of the date hereof, are based on information available to the Company as of ~~the~~that date, ~~thereof,~~ and the Company assumes no obligation to update any such forward-looking statements.

OVERVIEW

Recent Developments

Birch

On the Birch Closing Date, Fusion completed the various transactions contemplated by the Birch Merger Agreement. As contemplated therein, on the Birch Closing Date, Birch merged with and into BCHI Merger Sub, with BCHI Merger Sub surviving the merger as a wholly-owned subsidiary of Fusion. For accounting purposes, the Birch Merger is treated as a “reverse acquisition” under U.S. GAAP and Birch is considered the accounting acquirer. Birch was determined to be the accounting acquirer based on the terms of the Birch Merger Agreement and other factors, such as relative stock ownership of the Company following the Birch Merger. Accordingly, Birch’s historical results of operations replace Fusion’s historical results of operations for all periods prior to the Birch Merger and, for all periods following the Birch Merger, the results of operations of the combined company will be included in the Fusion’s financial statements. All share numbers and other information about equity securities prior to the acquisition of Birch in this report relate to Fusion and give effect to the Reverse Split. See note 4 in the accompanying unaudited condensed consolidated financial statements for additional information on the reverse acquisition.

On the Birch Closing Date, all of the outstanding shares of common stock of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) were cancelled and converted into the right to receive the Merger Shares. Pursuant to subscription agreements executed by each of the former shareholders of Birch, the Merger Shares were issued in the name of, and are held by, BCHI Holdings.

MegaPath

On the MegaPath Closing Date (June 15, 2018), the Company completed the MegaPath Merger. In accordance with the terms of the MegaPath Merger Agreement, the Company paid approximately $61.5 million of the $71.5 million purchase price in cash , with approximately $10 million of the purchase price paid in 1,679,144 shares of Fusion’s common stock, at an agreed upon price of $5.775 per share. As a result of the fixed price at which the shares were issued, from an accounting perspective, the total purchase price was $68.3 million. Of the cash consideration, $2.5 million was deposited into an escrow account to be held for one year to secure the indemnification obligations in favor of the Company under the MegaPath Merger Agreement. The financial statements included in this report and in future reports filed by the Company include adjustments to reflect the acquisition of MegaPath as of MegaPath Closing Date.

The cash consideration, as well as certain expenses associated with the MegaPath Merger, was funded from $62.0 million of borrowings under the First Lien Credit Agreement. See note 13 in the accompanying unaudited condensed consolidated financial statements for additional information on the terms of the First Lien Credit Agreement.

See note 4 in the accompanying unaudited condensed consolidated financial statements for additional information regarding the Birch Merger and MegaPath Merger.

Our Business

We ~~offer~~are a ~~comprehensive suite~~provider of integrated cloud ~~communications, cloud connectivity, cloud computing and managed cloud-based applications~~solutions to small, medium and large ~~businesses,~~businesses. Our innovative cloud solutions lower our customers' cost of ownership and ~~offer domestic~~deliver new levels of security, flexibility, scalability and ~~international VoIP services to telecommunications carriers worldwide. Our advanced, proprietary cloud services platforms, as well as our state-of-the art switching systems, enable the integration~~speed 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.deployment.

~~In the Business Services segment, we~~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 as a Service,~~Communications-as-a-Service, improving communication ~~and~~ collaboration on virtually any device, virtually ~~anywhere,~~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 and contact center solutions. Our cloud computing and ~~Infrastructure as a Service~~Infrastructure-as-a-Service solutions are designed to provide our larger enterprise customers with a platform on which additional cloud services can be layered. Complemented by our ~~Software as a Service~~Software-as-a-Service solutions, such as security and business continuity, our advanced cloud offerings include private and hybrid cloud, storage, backup and recovery and secure file sharing that allow our customers to experience the increased efficiencies and agility delivered by the cloud. ~~The Company’s cloud-based services are flexible, scalable and rapidly deployed, reducing our customers’ cost of ownership while increasing their productivity.~~

Through our Carrier Services segment, we have agreements with approximately 370 carrier customers and vendors, through which we sell domestic and international voice services to carriers throughout the world. Customers include U.S.-based carriers sending voice traffic to international destinations and foreign carriers sending traffic to the U.S. and internationally. We also purchase domestic and international voice services from many of our Carrier Services customers. Our carrier-grade network, advanced switching platform and interconnections with global carriers on six continents also reduce the cost of global voice traffic and expand service delivery capabilities for our Business Services segment. Since July 2017, our Carrier Services business has been operated through Fusion Global Services, LLC (“FGS”), which is 60% owned by us and 40% by XcomIP, LLC.COMPONENTS OF STATEMENTS OF OPERATIONS

Revenue

We ~~manage our~~generate revenue primarily from monthly recurring, usage and installation fees related to the provision of cloud and business ~~segments based on gross profit and gross margin, which represents net revenue less the cost~~services.

Cost of Revenue

Cost of revenue primarily consists of circuit and ~~on net profitability after excluding certain non-cash~~third-party service costs and ~~non-recurring items. The majority of our operations, engineering, information systems~~taxes and ~~support personnel are assigned to either the Business Services or Carrier Services business segment for segment reporting purposes.~~fees.

SG&A

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~We continue~~SG&A consist primarily of costs related to ~~focus our~~ sales and marketing, ~~efforts on developing vertically oriented solutions~~compensation and other expense for ~~targeted markets that require the kind of specialized solutions made possible by our state-of-the-art network~~executive, finance, product development, human resources and ~~advanced services platforms. Our vertically oriented solutions, which are currently focused on healthcare, legal, hospitality~~administrative personnel, professional fees and real estate, offer a substantial opportunity to gain additional market share. We intend to accelerate the growth of our Business Services segment with the goal of increasing the portion of our total revenue derived from this higher margin and more stable segment. In addition to lowering the underlying costs of termination, we believe that our Carrier Services segment supports the growth of the Business Services segment by providing enhanced service offerings for business customers and by strengthening its relationships with major service providers throughout the world.

~~Proposed Merger Transaction~~

~~On August 26, 2017, we and the Merger Sub, entered into the Merger Agreement with Birch. The Merger Agreement, provides, among~~ other ~~things, that upon the terms and conditions set forth therein, Birch will merge with and into Merger Sub, with Merger Sub surviving such merger.~~

On the effective date of the Merger, the outstanding shares of common stock, par value $0.01 per share, of Birch (other than treasury shares or shares owned of record by any Birch subsidiary) will be cancelled and converted into the right to receive, in the aggregate, that number of shares of Fusion common stock equal to three times the number of shares of (i) Fusion common stock issued and outstanding immediately prior to the Effective Time (assuming the conversion of all outstanding preferred shares) plus (ii) the number of shares of Fusion common stock issuable upon the exercise of all in-the-money Fusion warrants. Pursuant to subscription agreements executed by each of the stockholders of Birch, the Merger Shares will be issued in the name of, and held by, BCHI. On the closing date of the Merger, BCHI and Fusion will enter into a Registration Rights Agreement governing the registration rights of BCHI in respect of the Merger Shares and pursuant to which Fusion will agree, among other things, to use reasonable best efforts to cause a shelf registration statement to be declared effective by the Securities and Exchange Commission within 120 days of the closing of the Merger.general corporate costs.

At least 45 days before the closing of the Merger, the parties will give a written notice to each holder of Fusion’s existing preferred stock that such holders will have 15 days to convert their preferred stock into Fusion common stock. At the effective time of the Merger, any preferred shares that have not elected to convert into Fusion common stock will automatically terminate and be deemed cancelled without consideration.

We, Birch and Merger Sub each made customary representations, warranties and covenants in the Merger Agreement, including, among others, covenants by each of Fusion and Birch to, subject to certain exceptions, (a) conduct its business in the ordinary course, (b) preserve intact its business organization and significant business relationships, preserve satisfactory relationships with its officers and key employees and maintain its current rights and franchises, (c) maintain insurance on material assets, and (d) maintain all permits, each during the interim period between the execution of the Merger Agreement and the consummation of the Merger.

Prior to the Closing, Fusion is obligated to use reasonable best efforts to cause the Merger Shares to be approved for listing on NASDAQ, including, if necessary to comply with NASDAQ listing requirements, amending the Fusion restated certificate of incorporation to effect, prior to the effective time of the Merger, a reverse stock split of the Fusion common stock to satisfy NASDAQ minimum price requirements.

Closing of the Merger is subject to numerous preconditions, including Fusion obtaining financing for the transaction, which will be used to retire existing senior debt facilities at Birch and Fusion. Each of Fusion and Birch has agreed to use reasonable best efforts to cooperate and arrange and obtain the debt financing necessary to effect the required refinancing and to complete the transactions contemplated by the Merger Agreement.

Prior to the closing of the Merger, Birch will spin-off to the existing Birch stockholders, its existing consumer business, which consists of (i) the residential customer base, life line and consumer wireless business, and (ii) its single-line business customer base, in each case located in the United States and Canada. In addition, prior to the closing of the Merger, Fusion will spin-off or otherwise exit its Carrier Services business conducted through FGS.

On the effective date of the Merger, the certificate of incorporation of Fusion will be amended and restated, which amendments will, among other things, increase the number of authorized shares of Fusion common stock to 150,000,000 and (ii) change the name of Fusion to "FusionConnect".

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Our Performance~~

Revenues for the three months ended September 30, 2017 were $36.4 million, an increase of $6.2 million, or 21%, compared to the three months ended September 30, 2016. Our operating loss for the three months ended September 30, 2017 was $0.8 million, as compared with $1.7 million for the three months ended September 30, 2016. Our net loss for the three months ended September 30, 2017 was $3.7 million, as compared to $3.1 million for the three months ended September 30, 2016.

Revenues for the nine months ended September 30, 2017 were $110.3 million, an increase of $15.2 million, or 16%, compared to the nine months ended September 30, 2016. Our operating loss for the nine months ended September 30, 2017 was $2.9 million, as compared to $3.9 million for the nine months ended September 30, 2016. Our net loss for the nine months ended September 30, 2017 was $10.1 million, as compared to $8.4 million for the nine months ended September 30, 2016.

~~Our Outlook~~

Our ability to achieve positive cash flows from operations and net profitability is substantially dependent upon our ability to increase revenue and/or on our ability to achieve further cost savings and operational efficiencies in our operations.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of financial condition and results of operations are based ~~upon~~on our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires usmanagement to make estimates and ~~judgments~~assumptions that affect the reported amounts of assets, liabilities, revenues, ~~and~~ expenses and ~~the related~~ disclosure of contingent assets and liabilities. ~~We base~~ Management makes these estimates on ~~our~~their historical experience and on various other assumptions that wethey believe to be reasonable under the circumstances, and these estimates form the basis for ~~our~~their judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. WeManagement periodically ~~evaluate~~evaluates these estimates and judgments based on available information and experience. Actual results ~~could~~may differ substantially from ~~our estimates under different assumptions and conditions.~~these estimates. If actual results significantly differ from ~~our~~management estimates, ~~our~~the Company’s financial condition and results of operations could be materially impacted.

We have identified the policies and significant estimation processes discussed below as critical to our operations and to an understanding of our results of operations. ~~For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in the 2016 Form 10-K.~~

Effective January 1, 2017, we changed the manner in which we account for federal and state universal service fees and surcharges in our consolidated statement of operations. We now include the amounts collected for these fees and surcharges in revenues, and reports the associated costs in cost of revenues, and this change has been applied retrospectively in the accompanying consolidated financial statements for all periods presented. As a result, both our revenues and cost of revenues for the three and nine months ended September 30, 2017 include $0.9 million and $2.3 million, respectively, of federal and state universal service fees and surcharges, and revenues and cost of revenues for the three and nine months and September 30, 2016 include $0.7 million, and $1.9 million, respectively, of federal and state universal service fees and surcharges.

Revenue Recognition

~~We recognize~~Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and represents the unit of account in applying the revenue recognition guidance provided by ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, ~~persuasive evidence~~or as, the performance obligation is satisfied. The Company’s performance obligations are satisfied over time as services are rendered or at a point in time depending on when the customer obtains control of the promised goods or services. Revenue is recognized when obligations under the terms of a ~~sale arrangement exists, delivery has occurred or~~contract with the customer are satisfied; generally, this occurs when services ~~have been rendered, the sales price is fixed and determinable and collectability is reasonably assured. We record provisions against revenue for billing adjustments, which~~ are based upon estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued and current economic trends. The provisions for revenue adjustments are recorded as a reduction of revenue at the time revenue is recognized.rendered.

~~Our Business Services~~Customer revenue includes revenue received from the sale of integrated cloud solutions and business services and is comprised of monthly recurring charges, ~~(“MRC”) to~~usage charges and initial nonrecurring charges. Monthly recurring charges include the fees paid by customers for ~~whom~~services. Monthly recurring charges are recognized over the period that the corresponding services are ~~contracted~~rendered to customers. Usage charges consist of per-use sensitive fees paid for calls made. Additionally, access charges are comprised of charges paid primarily by interexchange carriers for the origination and termination of interexchange toll and toll-free calls. Usage and access charges are recognized monthly as the services are provided. Initial nonrecurring charges consist primarily of installation charges and revenue derived from sales of communications equipment, such as phones. The Company recognizes installation revenue when the installation is complete.

Deferred Commissions

Direct incremental costs of obtaining a contract, consisting of sales commissions, are deferred and amortized over ~~a specified period of time, and variable usage fees charged to customers that purchase our business products and services. Revenue recognition commences after~~ the ~~provisioning, testing and acceptance~~estimated life of the ~~service by~~customer, which is currently 36 months. We calculate the ~~customer. MRC continues until the expiration~~estimated life of the ~~contract,~~customer on an annual basis. The Company classifies deferred commissions as prepaid expenses or until cancellation of the service by the customer. To the extent that payments received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided or the usage occurs.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Our Carrier Services revenue is primarily derived from usage fees charged to~~ other ~~carriers that terminate VoIP traffic over our network. Variable revenue is earned~~noncurrent assets expenses based on the ~~length~~timing of ~~a call, as measured by~~when it expects to recognize the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect the allowance for billing adjustments. Revenue for each customer is calculated from information received through our network switches. Our customized software tracks the information from the switches and analyzes the call detail records against stored detailed information about revenue rates. This software provides us with the ability to complete a timely and accurate analysis of revenue earned in a period. We believe that the nature of this process is such that recorded revenues are unlikely to be revised in future periods.

~~Cost of Revenues~~

For our Business Services segment, cost of revenues include the MRC associated with certain platform services purchased from other service providers, the MRC associated with private line services and the cost of broadband Internet access used to provide service to these business customers.

Cost of revenues for our Carrier Services segment consists primarily of costs incurred from other carriers to originate, transport, and terminate voice calls for our carrier customers. Thus, the majority of our cost of revenues for this segment is variable, based upon the number of minutes actually used by our customers and the destinations they are calling. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through our network switch. During each period, the call activity is analyzed and an accrual is recorded for the costs associated with minutes not yet invoiced. This cost accrual is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates. Fixed expenses reflect the costs associated with connectivity between our network infrastructure, including our New Jersey switching facility, and certain large carrier customers and vendors.

~~Fair Value of Financial Instruments~~

The carrying value of certain financial instruments such as accounts receivable, accounts payable and accrued expenses, approximates their fair values due to their short term nature. Some of the warrants issued in conjunction with the issuance of our debt and equity securities are accounted for in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging. For these warrant instruments that are not deemed to be indexed to Fusion’s stock, we classify the warrant instrument as a liability at its fair value and adjust the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the underlying warrants are exercised or they expire, and any change in fair value is recognized in our statement of operations. The fair values of these warrants have been estimated using option pricing and other valuation models, and the quoted market price of Fusion’s common stock.expense.

Accounts Receivable

Accounts receivable ~~is recorded net of an~~are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible amounts through a charge to earnings and a credit to a valuation allowance ~~for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and adjust the allowance for doubtful accounts~~ based on ~~our history~~its assessment of ~~past write-offs and collections and~~the current ~~credit conditions. Specific customer accounts~~status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off ~~as uncollectible if~~through a charge to the ~~probability of~~valuation allowance and a ~~future loss has been established, collection efforts have been exhausted and payment is not expected~~credit to ~~be received.~~accounts receivable.

Impairment of Long-Lived Assets

~~We periodically review~~The Company accounts for long-lived assets in accordance with provisions of ASC Topic 360, Accounting for the Impairment or Disposal of Long-Lived Assets. This guidance addresses financial accounting and reporting for the impairment and disposition of long-lived assets, including property and equipment and purchased intangible assets. The Company evaluates the recoverability of long-lived assets for impairment ~~whenever~~when events or changes in circumstances indicate ~~that~~ the carrying amount of an asset may not be ~~fully~~ recoverable. IfConditions that would necessitate an impairment ~~indicator~~assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is ~~present, we evaluate recoverability by~~used, or a ~~comparison~~significant adverse change that would indicate the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if it’s carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss, if any, based on the difference between the carrying amount and fair value. Long-lived assets held for sale are reported at the lower of cost or fair value less costs to sell. If impairment is indicated, the carrying amount of the asset is written down to future undiscounted net cash flows expected to be generated by the asset. If the carrying value of the asset exceeds the projected undiscounted cash flows, we are required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value.

~~Impairment testing for goodwill is performed in~~During the ~~fourth fiscal quarter of each year. The~~three months ended June 30, 2018 and 2017, the Company recorded no impairment ~~test for goodwill uses a two-step approach, which is performed at~~charges. During the ~~reporting unit level. We have determined that our reporting units are our operating segments since that is~~six months ended June 30, 2018 and 2017, the lowest level at which discrete, reliable financial and cash flow information is available. The authoritative guidance provides entities with an option to perform a qualitative assessment to determine whether a quantitative analysis is necessary. We did not record anyCompany recorded impairment charges ~~for goodwill or long-lived assets for the nine months ended September 30, 2017~~of $2.3 million and ~~2016.~~$0, respectively.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Income Taxes

We account for income taxes in accordance with U.S. GAAP, which requires the recognition of deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in our financial statements. Deferred income tax assets and liabilities are computed for temporary differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established to reduce deferred income tax assets when we determine that it is more likely than not that we will fail to generate sufficient taxable income to be able to utilize the deferred tax assets.

Recently Issued Accounting Pronouncements

~~In July 2017,~~Recently issued accounting pronouncements are summarized in note 2 in the ~~FASB issued ASU No. 2017-11,~~ ~~Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked~~accompanying unaudited condensed consolidated financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.statements.

~~In November 2016, the FASB issued ASU No. 2016-18,~~ ~~Restricted Cash~~, which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. We early adopted ASU 2016-18 effective January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~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, the FASB issued ASU No. 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes~~, 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 became effective as of January 1, 2017. Adoption of this standard did not have a material impact on our consolidated financial statements.

In May 2014, the FASB issued new guidance related to revenue recognition, ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which outlines a comprehensive revenue recognition model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods or services. ASC 606 defines a five-step approach for recognizing revenue: (i) identification of the contract, (ii) identification of the performance obligations, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance obligations, and (v) recognition of revenue as the entity satisfies the performance obligations. The new criteria for revenue recognition may require a company to use more judgment and make more estimates than under the current guidance. The new guidance becomes effective in calendar year 2018 and early adoption in calendar year 2017 is permitted. Two methods of adoption are permitted: (a) full retrospective adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings balance.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

In March 2016, April 2016 and December 2016, the FASB issued ASU No. 2016-08, Revenue From Contracts with Customers (ASC 606): Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These standards will be effective for the Company beginning in the first quarter of 2018. Early adoption is permitted.

We will adopt the new standard and related updates effective January 1, 2018, and intend to use the modified retrospective method of adoption. We have undertaken an initial impact analysis of these items, which includes reviewing the terms and conditions of our existing customer contracts with respect to the five discrete criteria required for recognizing revenue set forth in ASC 606. We believe that the most significant aspects of the new guidance that could impact the Company’s financial statements are the requirements surrounding contract acquisition costs and activation and installation revenues, and that implementation of these requirements could be material to our financial statements. We expect to conclude our analysis of the impact of the new revenue recognition guidance on our consolidated financial statements by December 31, 2017.

RESULTS OF OPERATIONS

Three Months Ended ~~September~~June 30, ~~2017~~2018 Compared with Three Months Ended ~~September~~June 30, ~~2016~~2017

The ~~following table summarizes the~~ results of ~~our consolidated operations~~Fusion have been included in the financial results for the ~~three months ended September 30, 2017~~combined company from the Birch Closing Date and ~~2016:~~MegaPath from the MegaPath Closing Date.

2017

2016

$

%

$

%

Revenues
$36,355,187
  100.0
$30,159,019
  100.0
Cost of revenues *
  19,749,188
  54.3
  17,431,477
  57.8
Gross profit
  16,605,999
  45.7
  12,727,542
  42.2
Depreciation and amortization
  3,711,253
  10.2
  2,998,628
  9.9
Selling, general and administrative expenses
  13,649,349
  37.5
  11,408,048
  37.8
Total operating expenses
  17,360,602
  47.8
  14,406,676
  47.8
Operating loss
  ( 754,603)
  (2.1)
  ( 1,679,134)
  (5.6)
Other (expenses) income:




Interest expense
  ( 2,204,520)
  (6.1)
  ( 1,625,195)
  (5.4)
(Loss) gain on change in fair value of derivative liability
  ( 617,820)
  (1.7)
  152,057
  0.5
Loss on disposal of property and equipment
  ( 161,037)
  (0.4)
  (13,959)
  (0.0)
Other income, net
  47,694
  0.1
  32,028
  0.1
Total other expenses
  ( 2,935,683)
  (8.1)
  ( 1,455,069)
  (4.8)
Loss before income taxes
  ( 3,690,286)
  (10.2)
  ( 3,134,203)
  (10.4)
Provision for income taxes
  (10,200)
  (0.0)
  (10,951)
  (0.0)
Net loss
$(3,700,486)
  (10.2)
$(3,145,154)
  (10.4)

	Three Months Ended June 30,
	2018		2017
		%		%
Revenue	$120,803	100.0	$116,677	100.0
Cost of revenue *	66,189	54.8	63,039	54.0
Gross profit	54,614	45.2	53,638	46.0
SG&A	43,001	35.6	29,009	24.9
Depreciation and amortization	16,712	13.8	17,625	15.1
Foreign currency loss (gain)	241	0.2	(131)	(0.1)
Total operating expenses	59,954	49.6	46,503	39.9
Operating (loss) income	(5,340)	(0.04)	7,135	6.1
Other expense:
Interest expense, net	(17,608)	(14.6)	(11,852)	(10.2)
Loss on debt extinguishment	(14,414)	(11.9)	-	-
Other expense	(211)	(0.2)	(28)	-
Total other expense	(32,233)	(26.7)	(11,880)	(10.2)
Loss before income taxes	(37,573)	(31.1)	(4,745)	(4.1)
Income tax benefit	3,872	3.2	44	-
Net loss from continuing operations	(33,701)	(27.6)	(4,701)	(4.0)
Net income (loss) from discontinued operations	15,179	12.6	(4,743)	(4.1)
Net loss	$(18,522)	(15.3)	$(9,444)	(8.1)

__________

*Exclusive of depreciation and amortization, shown separately.

Revenues

~~Consolidated revenues were $36.4~~Revenue increased to $120.8 million for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to ~~$30.2~~$116.7 million for the same period in 2017. This increase is primarily due to $17.7 million of revenue attributable to Fusion and $1.6 million of revenue attributable to MegaPath, partially offset by $15.2 million impact of churn.

Cost of Revenue and Gross Profit

Cost of revenue increased to $66.2 million for the three months ended ~~September~~June 30, ~~2016, an~~2018, as compared to $63.0 million for the same period in 2017. This increase is primarily due to $8.1 million of ~~$6.2~~costs attributable to Fusion and $1.1 million ~~or 21%.~~of costs attributable to MegaPath, partially offset by $6.0 million costs associated with a lower revenue volume.

~~Revenues from~~Gross margin was 45.2% for the ~~Business Services segment were $29.3~~three months ended June 30, 2018, as compared to 46.0% for the same period in 2017. This decrease is primarily due to the fixed cost network becoming a higher percent of cost of revenue.

SG&A

SG&A increased to $43.0 million for the three months ended ~~September~~June 30, ~~2017~~2018, as compared to ~~$21.3~~$29.0 million for the ~~three months ended September 30, 2016.~~same period in 2017. This increase is primarily ~~attributable to revenue derived from new customers acquired in a November 2016 acquisition, and to the customer base acquired in November 2016 and March 2017.~~

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Revenues from the Carrier Services segment were $7.1 million for the three months ended September 30, 2017, as compared~~due to $8.9 million ~~for the three months ended September 30, 2016. The decrease~~of transactions costs, $0.9 million in ~~Carrier Services revenue was primarily due~~restructuring costs, $5.7 million of expenses attributable to ~~a reduction in the number~~Fusion, $1.6 million of ~~minutes transmitted over our network in the third quarter of 2017,~~expenses attributable to MegaPath, partially offset by ~~an increase~~$2.7 million in ~~the blended rate per minute of traffic terminated.~~

~~Effective January 1, 2017, we changed the manner in which we account for federal~~headcount reduction and state universal service fees and surcharges in our consolidated statement of operations. We now include the amounts for these fees and surcharges in net revenues, and report the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented. As a result, our Business Services revenues and cost of revenues for the three months ended September 30, 2017 and 2016 include $0.9 million and $0.7 million, respectively, of federal and state universal service fees and surcharges

~~Cost of Revenues and Gross Margin~~

~~Consolidated cost of revenues was $19.7 million for the three months ended September 30, 2017, as compared to $17.4 million for the three months ended September 30, 2016.~~ The increase is largely due to a $4.1 million increase in costs resulting from higher revenues in our Business Services segment, partially offset by a $1.8 million decline in costs in our Carrier Services segment resulting from a decrease in blended cost per minute of traffic terminated.

Consolidated gross margin was 45.7% for the three months ended September 30, 2017, as compared to 42.2% for the three months ended September 30, 2016. The increase is due to a higher mix of Business Services revenue, which generates a substantially higher margin than our Carrier Services revenue, in 2017 as compared to 2016.

~~Gross margin for the Business Services segment was 55.5% for the three months ended September 30, 2017, as compared to 58.0% for the three months ended September 30, 2016.~~ ~~The decrease is due primarily to lower margins associated with revenues from the customer bases acquired in November 2016 and March 2017 (see note 3 to the consolidated financial statements).~~

~~Gross margin for the Carrier Services segment was 5.0% for the three months ended September 30, 2017, as compared to 4.3% for the three months ended September 30, 2016.~~ ~~The increase in gross margin was mainly due to the decrease in the cost per minute of traffic terminated in the third quarter of 2017 as compared to the same period of a year ago.~~discretionary items.

Depreciation and Amortization

Depreciation and amortization expense ~~was $3.7~~decreased to $16.7 million for the three months ended ~~September~~June 30, ~~2017,~~2018, as compared to ~~$3.0~~$17.6 million infor the same period ~~of 2016.~~in 2017. This ~~increase~~decrease is primarily due to the impact of impairment charges in the fourth quarter of 2017, partially offset by the additional depreciation and amortization expense ~~related to~~on the ~~intangible~~Fusion assets ~~recognized in a November 2016 acquisition, consisting primarily of customer contracts.~~.

~~Selling, General and Administrative Expenses~~Interest Expense

~~SG&A for the three months ended September 30, 2017 was $13.6 million, as compared~~Interest expense increased to ~~$11.4~~$17.6 million for the three months ended ~~September~~June 30, ~~2016.~~2018, as compared to $11.9 million for the same period in 2017. This ~~This~~ increase is ~~driven~~ primarily ~~by higher salaries~~due to increased borrowings and ~~employee related costs, as well as other expenses resulting from a November 2016 acquisition.~~interest rate under our Credit Facilities.

~~Operating Loss~~Income Tax Benefit

~~Our operating loss~~For the three months ended June 30, 2018, the income tax benefit of ~~$0.8~~$3.9 million includes discrete benefits of $3.4 million. The discrete benefit includes certain refundable credits of $1.4 million, indefinite lived intangibles of $1.5 million and certain state tax refunds of $1.0 million, partially offset by foreign and state taxes. For the three months ended June 30, 2017, the income tax benefit of $0.1 million was related to historical Birch tax positions.

Loss on Debt Extinguishment

Loss on debt extinguishment was $14.4 million for the three months ended ~~September~~June 30, ~~2017 represents a decrease of $0.9 million~~2018. This loss resulted from the ~~operating loss~~pay-off of the prior credit facilities of Fusion and Birch in May 2018. See note 13 in the accompanying unaudited condensed consolidated financial statements for the three months ended September 30, 2016. The decrease is due to the $3.9 million increase in consolidated gross profit in 2017 resulting from increased revenues from the Business Services segment, largely offset by the $3.0 million increase in operating expenses.information on our debt.

~~Other Expenses~~Net Income (Loss) from Discontinued Operations

~~Other expenses, which includes interest expense, gains and losses on the change in fair value of the Company’s derivative liability, loss on the disposal of property and equipment and miscellaneous~~Net income ~~and expense,~~from discontinued operations was ~~$2.9~~$15.2 million for the three months ended ~~September~~June 30, ~~2017, as compared to $1.5 million for the three months ended September 30, 2016. The increase is mainly due to the loss on change in fair value of the derivative liability in 2017 of $0.6 million,~~2018, as compared to a gain of $0.2 million in 2016, and to higher interest expense in the amount of $0.6 million related to the increase in outstanding indebtedness incurred in November 2016 to finance an acquisition. This new financing increased our outstanding debt by approximately $25 million.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Net Loss~~

~~Our~~ net loss ~~for the three months ended September 30, 2017 was $3.7 million, as compared to $3.1~~of $4.7 million for the ~~three months ended September 30, 2016, as~~same period in 2017, resulting from the ~~improvement~~ spin-off of the Birch Consumer Segment immediately prior to the Birch Merger. See note 3 in ~~operating loss of $0.9 million~~the accompanying unaudited condensed consolidated financial statements for ~~the quarter was more than offset by the increase in other expenses.~~additional information on discontinued operations.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2017~~2018 Compared with ~~Nine~~Six Months Ended ~~September~~June 30, ~~2016~~2017

The ~~following table summarizes the~~ results of ~~our consolidated operations~~Fusion have been included in the financial results for the ~~nine months ended September 30, 2017~~combined company from the Birch Closing Date and ~~2016:~~MegaPath from the MegaPath Closing Date.

2017

2016

$

%

$

%

Revenues
$110,256,069
  100.0
$95,041,024
  100.0
Cost of revenues *
  59,921,649
  54.3
  55,875,267
  58.8
Gross profit
  50,334,420
  45.7
  39,165,757
  41.2
Depreciation and amortization
  11,149,010
  10.1
  8,946,781
  9.4
Selling, general and administrative expenses
  42,115,158
  38.2
  34,102,847
  35.9
Total operating expenses
  53,264,168
  48.3
  43,049,628
  45.3
Operating loss
  ( 2,929,748)
  (2.7)
  ( 3,883,871)
  (4.1)
Other (expenses) income:




Interest expense
  ( 6,468,916)
  (5.9)
  ( 4,877,828)
  (5.1)
(Loss) gain on change in fair value of derivative liability
  ( 544,486)
  (0.5)
  380,099
  0.4
Loss on disposal of property and equipment
  ( 253,087)
  (0.2)
  (86,777)
  (0.1)
Other income, net
  177,539
  0.2
  120,291
  0.1
Total other expenses
  ( 7,088,950)
  (6.4)
  ( 4,464,215)
  (4.7)
Loss before income taxes
  ( 10,018,698)
  (9.1)
  ( 8,348,086)
  (8.8)
Provision for income taxes
  (41,111)
  (0.0)
  (10,951)
  (0.0)
Net loss
$(10,059,809)
  (9.1)
$(8,359,037)
  (8.8)

	Six Months Ended June 30,
	2018		2017
		%		%
Revenue	$223,714	100.0	$231,743	100.0
Cost of revenue *	121,316	54.2	125,899	54.3
Gross profit	102,398	45.8	105,844	45.7
SG&A	66,767	29.8	61,334	26.5
Depreciation and amortization	31,441	14.1	33,642	14.5
Impairment losses on intangible assets	2,314	1.0	-	-
Foreign currency loss (gain)	511	0.2	(166)	(0.1)
Total operating expenses	101,033	45.2	94,810	40.9
Operating income	1,365	0.6	11,034	4.8
Other expense:
Interest expense, net	(29,370)	(13.1)	(21,481)	(9.3)
Loss on debt extinguishment	(14,414)	(6.4)	-	-
Other (expense) income	(168)	(0.1)	50	-
Total other expense	(43,952)	(19.6)	(21,431)	(9.2)
Loss before income taxes	(42,587)	(19.0)	(10,397)	(4.5)
Income tax benefit (expense)	4,869	2.2	(1,354)	(0.6)
Net loss from continuing operations	(37,718)	(16.9)	(11,751)	(5.1)
Net income (loss) from discontinued operations	6,218	2.8	(8,133)	(3.5)
Net loss	$(31,500)	(14.1)	$(19,884)	(8.6)

__________

*Exclusive of depreciation and amortization, shown separately.

~~Revenues~~

~~Consolidated revenues were $110.3 million for the nine months ended September 30, 2017, as compared to $95.0 million for the nine months ended September 30, 2016, an increase of $15.2 million, or 16%.~~Revenues

Revenues ~~from the Business Services segment were $87.8~~decreased to $223.7 million for the ~~first nine~~six months ~~of 2017,~~ended June 30, 2018, as compared to ~~$64.3~~$231.7 million for the ~~first nine~~same period in 2017. This decrease is primarily due to $27.3 million of net revenue loss driven by 2017 churn, partially offset by $17.7 million of revenue attributable to Fusion and $1.6 million of revenue attributable to MegaPath.

Cost of Revenue and Gross Profit

Cost of revenue decreased to $121.3 million for the six months ended June 30, 2018, as compared to $125.9 million for the same period in 2017. This decrease is primarily due to $13.8 million of ~~2016, an increase~~lower revenue volume, partially offset by $8.1 million of ~~37%.~~costs attributable to Fusion and $1.1 million of costs attributable to MegaPath.

Gross margin remained fairly constant at 45.8% for the six months ended June 30, 2018, as compared to 45.7% for the same period in 2017.

SG&A

SG&A increased to $66.8 million for the six months ended June 30, 2018, as compared to $61.3 million for the same period in 2017. This increase is primarily due to $9.9 million of transaction costs, $0.4 million in restructuring costs, $5.6 million of expenses attributable to ~~revenue derived from new customers obtained from a November 2016 acquisition,~~Fusion and $1.6 million of expenses attributable to ~~the customer base acquired in November 2016 and March 2017.~~

Revenues from the Carrier Services segment were $22.5 million for the nine months ended September 30, 2017 as compared to $30.7 million for the nine months ended September 30, 2016. The decrease in Carrier Services revenue was primarily due to a reduction in the number of minutes transmitted over our network in the first nine months of 2017,MegaPath, partially offset by ~~an increase~~$6.5 million in ~~the blended rate per minute of traffic terminated.~~

Effective January 1, 2017, we changed the manner in which we account for federal and state universal service fees and surcharges in our consolidated statement of operations. We now include the amounts for these fees and surcharges in net revenues, and report the associated costs in cost of revenues, and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented. As a result, our Business Services revenues and cost of revenues for the nine months ended September 30, 2017 and 2016 include $2.3 million andheadcount reduction, $1.9 million ~~respectively, of federal universal service fees~~in lower rent and ~~surcharges.~~

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~Cost of Revenues~~facilities costs and ~~Gross Margin~~

~~Consolidated cost of revenues was $59.9~~$3.6 million ~~for the nine months ended September 30, 2017, as compared to $55.9 million for the nine months ended September 30, 2016.~~ ~~The increase is mainly due to an $11.7 million increase~~ in ~~costs resulting from higher revenues in our Business Services segment, largely offset by the decline in call volume serviced by our Carrier Services segment.~~

~~Consolidated gross margin was 45.7% for the nine months ended September 30, 2017, compared to 41.2% for the nine months ended September 30, 2016, as both of our business segments experienced~~ lower ~~gross margins for the nine months ended September 30, 2017, as compared to the same period of a year ago.~~

~~Gross margin for the Business Services segment was 56.5% for the nine months ended September 30, 2017, as compared to 58.8% for the nine months ended September 30, 2016.~~ ~~The decrease is due primarily to lower margins associated with revenues from the acquired customer bases.~~

~~Gross margin for the Carrier Services segment was 3.3% for the nine months ended September 30, 2017, as compared to 4.5% for the nine months ended September 30, 2016.~~ ~~The decrease in gross margin was mainly due to an increase in the cost per minute of traffic terminated in the nine months ended September 30, 2017, as compared to the same period of a year ago.~~discretionary items.

Depreciation and Amortization

Depreciation and amortization expense ~~was $11.1~~decreased to $31.4 million for the ~~nine~~six months ~~September~~ended June 30, ~~2017,~~2018, as compared to ~~$8.9~~$33.6 million infor the same period in 2017. This decrease is primarily due to the impact of ~~2016.~~impairment charges in the fourth quarter of 2017, partially offset by the additional depreciation and amortization expense on the Fusion assets.

Impairment Losses on Intangible Assets

During the six months ended June 30, 2018, the Company recorded an impairment charge of $2.3 million on certain intangible assets. There was no comparable charge during the same period in 2017.

Interest Expense

Interest expense increased to $29.3 million for the six months ended June 30, 2018, as compared to $21.5 million for the same period in 2017. This increase is primarily due to ~~amortization expense related to the intangible assets recognized in the November 2016 acquisition, consisting primarily of customer contracts.~~increased borrowings and interest rate under our Credit Facilities.

~~Selling, General~~Income Tax (Benefit) Expense

For the six months ended June 30, 2018, the income tax benefit of $4.9 million includes discrete benefits of $4.4 million. The discrete benefit includes certain refundable credits of $1.4 million, indefinite lived intangibles of $2.6 million and ~~Administrative Expenses~~certain state tax refunds of $1.0 million, partially offset by foreign and state taxes. For the six months ended June 30, 2017, the income tax expense of $1.4 million was related to historical Birch tax positions.

Loss on Debt Extinguishment

~~SG&A for the nine months ended September 30, 2017~~Loss on debt extinguishment was ~~$42.1 million, as compared to $34.1~~$14.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~ 2018. This ~~increase is driven primarily by higher salaries and employee related costs, as well as other expenses resulting from a November 2016 acquisition.~~

~~Operating Loss~~

~~Our operating~~ loss ~~of $2.9 million for the nine months ended September 30, 2017 represents a decrease of $1.0 million~~resulted from the ~~same period of a year ago, as the increase in consolidated gross profit of $11.2 million was largely offset by the increase in operating expenses.~~

~~Other Expenses~~

Other expenses was $7.1 million for the nine months ended September 30, 2017, as compared to $4.5 million for nine months ended September 30, 2016. The increase is due to higher interest expense in the amount of $1.6 million related to the increase in outstanding indebtedness incurred in November 2016 to finance an acquisition, and to the loss on the change in fair valuepay-off of the ~~derivative liability~~prior credit facilities of ~~$0.5 million~~Fusion and Birch in ~~2017, as opposed to a gain $0.4 million~~May 2018. See note 13 in ~~2016.~~the accompanying unaudited condensed consolidated financial statements for information on our debt.

Net ~~Loss~~Income (Loss) from Discontinued Operations

~~Our net loss~~Net income from discontinued operations was $6.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017 was $10.1 million,~~2018, as compared to ~~$8.4~~a net loss of $8.1 million for the ~~nine months ended September 30, 2016, as~~same period in 2017, resulting from the ~~narrowing of our operating loss by $1.0 million was more than offset by the increase in our interest expense and the loss on the change in fair value~~spin-off of the ~~derivative liability~~Birch Consumer Segment in May 2018. See note 3 in the. accompanying unaudited condensed consolidated financial statements for additional information on discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Since our inception, we have incurred significant net losses. During the three and six months ended June 30, 2018, we had a net loss of $18.5 million and $31.5 million, respectively. At ~~September~~June 30, ~~2017,~~2018, we had a working capital deficit of ~~$14.7~~$84.3 million and stockholders’ ~~equity of $0.6 million. At December 31, 2016, we had a working capital~~ deficit of ~~$6.6 million and stockholders’ equity of $9.2~~$118.9 million. Our ~~consolidated~~ cash balance at ~~September~~June 30, ~~2017~~2018 was ~~$2.3~~$13.5 million. While our management projects 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~~decide to either raise additional capital, limit our discretionary capital expenditures or borrow amounts available under ~~our revolving credit facility~~the Revolving Facility to support our business plan. There is currently no commitment for additional funding and there can be no assurances that other funds will be available on terms that are acceptable to us, or at all.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

We have never paid cash dividends on our common stock, and we do not anticipate paying 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 further expansion of our business. Subject to the rights of holders of our ~~outstanding preferred stock,~~Series D Preferred Stock, any future determination to pay dividends is at the discretion of ~~Fusion’s Board,~~the Company’s board, and will be dependent upon our financial condition, operating results, capital requirements, general business conditions, the terms of our then existing credit facilities, limitations under Delaware law and other factors that ~~Fusion’s Board~~the Company’s board and senior management consider appropriate.

The ~~holders~~holder of our Series ~~B-2~~D Preferred Stock ~~are~~is entitled to receive ~~quarterly~~monthly dividends at an annual rate of 6%12%. These dividends can be paid, at the Company’s option, either in cash or, under certain circumstances, in shares of ~~Fusion’s~~our common stock. ~~For~~From the ~~nine months ended September~~Birch Closing Date through June 30, ~~2017, the Fusion Board declared~~2018, undeclared dividends ~~of $0.5 million~~ on the Series ~~B-2~~D Preferred Stock ~~which, as permitted by the terms of the Series B-2 Preferred Stock, was paid in the form of 257,238 shares of Fusion common stock.~~

For the past several years we have relied primarily on the sale of Fusion’s equity securities and the cash generated from our Business Services segment to fund our operations, and we issued additional debt securities to fund our acquisitions and growth strategy. On March 31, 2017, certain holders of outstanding warrants exercised their warrants and we received proceeds of approximately $0.8were $0.2 million.

Capital Resources

On ~~November 14, 2016, contemporaneously with an acquisition, we~~the Birch Closing Date, the Company entered into ~~credit agreement (the “East West~~the First Lien Credit ~~Agreement”) with East West Bank, an administrator agent~~Agreement, which provides for a $45.0 million Tranche A Term Loan, a $510.0 million Tranche B Term Loan and the ~~lenders, identified therein (the “East West Lenders”). Under~~$40.0 million Revolving Facility. In addition, the ~~East West~~Company simultaneously entered into the Second Lien Credit Agreement, ~~the East West Lenders extended us (i) a $65.0~~which provides for an $85.0 million term ~~loan and (ii) a $5.0 million revolving credit facility (which includes up to $4 million in “swingline” loans that may be accessed on a short-term basis).~~loan. The proceeds of the ~~term loan~~Term Loans were used to ~~retire~~refinance all of the ~~$40 million that was outstanding under a previously~~then existing ~~credit facility,~~indebtedness of Fusion and its subsidiaries (including Birch), except for the Bircan Notes, and to ~~fund~~finance the cash portion of the ~~purchase price of an acquisition in~~consideration for the ~~amount of $23.1 million.~~MegaPath Merger. See note 13 for further information.

~~Borrowings under~~As of June 30, 2018, our debt consisted of the ~~East West~~following (in thousands):

First Lien Credit Agreement:
Tranche A Term Loan, matures May 2022	$45,000
Tranche B Term Loan, matures May 2023	510,000
Revolving Facility, matures May 2022	-
Second Lien Credit Agreement – Term Loan, matures November 2022	85,000
Subordinated Note, matures February 2023	10,000
Bircan Notes Payable, matures March 2019	3,348
	653,348
Less:
Discounts	(48,828)
Current portion	(24,500)
	$580,020

As of June 30, 2018, the Credit ~~Agreement are evidenced by notes bearing interest at rates to be computed based upon either~~Facilities (including the ~~then current “prime” rate of interest or “LIBOR” rate of interest, as selected by us at the time of borrowing. Interest on borrowings that we designate as “base rate” loans~~Revolving Facility) bear interest at a weighted-average rate of approximately LIBOR plus 7.6%. Excluding the ~~greater of~~Revolving Facility, the ~~prime rate published by the Wall Street Journal or 3.25% per annum, in each case plus 2% per annum. Interest on borrowings that we designate as “LIBOR rate” loans~~Credit Facilities bear interest at ~~the~~a weighted-average rate of approximately LIBOR ~~rate published by the Wall Street Journal,~~ plus ~~5% per annum. The current interest rate is 6.25% per annum.~~7.7%.

We are required to repay the term loan in equal monthly payments of $270,833 commencing January 1, 2017 and continuing through January 1, 2018, when monthly payments increase to $541,667 until the maturity date of the term loan on November 12, 2021, when the remaining $36.8 million of principal is due. Borrowings under the revolving credit facility are also payable on the November 12, 2021 maturity date of the facility. During the nine months ended September 30, 2017, we paid down $1.5 million of the $3.0 million that was outstanding on the revolving credit facility as of December 31, 2016, and at September 30, 2017, $62.6 million was outstanding under the term loan and $1.5 million was outstanding under the revolving credit facility.

Under the ~~East West~~ Credit ~~Agreement:~~

●

~~We are~~Agreements, the Company is subject to a number of affirmative and negative covenants, including but not limited to, restrictions on paying indebtedness subordinate to ~~our~~its obligations to the ~~East West~~ Lenders, incurring additional indebtedness, making capital expenditures, dividend payments and cash distributions by subsidiaries.

●

~~We are~~ Furthermore, the Company is required to comply with various financial covenants, including net leverage ratio, fixed charge coverage ratio and ~~minimum~~maximum levels of ~~earnings before interest, taxes, depreciation~~consolidated capital expenditures; and ~~amortization; and our~~its failure to comply with any of the restrictive or financial covenants could result in an event of default and accelerated demand for repayment of ~~this~~its indebtedness.

●

~~We granted~~ As of June 30, 2018, the ~~East West Lenders security interests in all of our assets, as well as our 60% membership interest in FGS and the capital stock of FNAC and each of its subsidiaries.~~

●

~~Fusion and its subsidiaries (and future subsidiaries of both) other than FNAC and FGS have guaranteed FNAC’s obligations, including FNAC’s repayment obligations thereunder.~~

On November 14, 2016, FNAC, Fusion and Fusion’s subsidiaries other than FNAC entered into the Praesidian Facility. The Praesidian Facility amends and restates a prior facility, pursuant to which FNAC previously sold the SPA Notes. The proceeds from the SPA Notes were used to finance previous acquisitions within our Business Services segment. These notes require payments of monthly interest in the amount of $0.3 million and the entire principal amount of the notes are due May 12, 2022. The current interest rate is 10.8% per annum.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

~~The Praesidian Facility contains financial covenants that are substantially similar to those contained in the East West Credit Agreement. At September 30, 2017, we were~~Company was in compliance with ~~all of the~~these financial ~~covenants under the East West Credit Agreement and the Praesidian Facility.~~covenants.

Based on the findings of a compliance audit for the use of certain software licenses by one of the Company’s recently acquired businesses, the Company has received a notice for payment for the use of such licenses in the amount of $3.7 million. The Company is currently negotiating with the software vendor to settle this matter and has recorded approximately $2.9 million in the reserves. However, there can be no assurances that the Company will be able to settle this matter for less than the amount received in the demand letter.

The following table sets forth a summary of our cash flows for the periods ~~indicated:~~indicated (in thousands):

Nine Months ended September 30,

2017

2016

Net cash provided by (used in) operating activities
$3,889,548
$(1,910,619)
Net cash used in investing activities
  (4,234,368)
  (3,317,234)
Net cash used in financing activities
  (4,535,456)
  (1,568,620)
Net decrease in cash and cash equivalents
  (4,880,276)
  (6,796,473)
Cash and cash equivalents, including restricted cash, beginning of year
  7,249,063
  7,705,666
Cash and cash equivalents, including restricted cash, end of year
$2,368,787
$909,193

Cash provided by operating activities was $3.9 million for the nine months ended September 30, 2017, as compared to cash used in operating activities of $1.9 million during the nine months ended September 30, 2016.

	Six Months Ended June 30,
	2018	2017
Net cash provided by operating activities	$1,915	$26,055
Net cash used in investing activities	(37,410)	(22,614)
Net cash provided by (used in) financing activities	43,364	(2,910)
Net increase in cash and cash equivalents	7,869	531
Cash and cash equivalents, beginning of period	5,757	8,208
Foreign currency translation effect on cash	(91)	27
Cash and cash equivalents, end of period	$13,535	$8,766

The following table illustrates the primary components of our cash flows ~~from operations:~~provided by operations (in thousands):

	Nine Months ended September 30,		Six Months Ended June 30,
	2017	2016	2018	2017
Net loss from continuing operations			$(37,718)	$(11,751)
Net loss from discontinued operations			6,218	(8,133)
Net loss	$(10,059,809)	$(8,359,037)	(31,500)	(19,884)
Non-cash expenses, gains and losses	13,461,091	9,809,462	49,850	36,378
Changes in accounts receivable	(4,446,433)	(410,771)	(16,062)	3,403
Changes in accounts payable and accrued expenses	5,786,081	(1,258,968)
Changes in accounts payable			25,935	10,129
Other	(851,382)	(1,691,305)	(11,476)	(10,902)
Cash provided by (used in) operating activities	$3,889,548	$(1,910,619)
Cash provided by operating activities - continuing operations			10,529	27,257
Cash provided by operating activities - discontinued operations			(8,614)	(1,202)
Net cash provided by operating activities			$1,915	$26,055

~~Cash~~For the six months ended June 30, 2018, cash used in investing activities ~~for~~consists primarily of acquisitions in the ~~nine months ended September 30,~~amount of $20.6 million and capital expenditures of $15.4 million. For the same period in 2017, cash used in investing activities consists primarily of capital expenditures in the amount of ~~$3.9 million, and cash paid for~~$17.9 million.

For the acquisition of the accounts receivables associated with the customer bases acquired (see note 3 to the accompanying Consolidated Financial Statements) in the amount of $0.6 million. Cash used in investing activities for the ninesix months ended ~~September~~June 30, ~~2016~~2018, cash provided by financing activities consists primarily of ~~capital expenditures in~~proceeds from term loans of $650.0 million, partially offset by principal payments on previous term loans, revolving credit facility and other debt of $551.5 million, as well as issuance costs of $50.4 million. Additionally, cash from financing activities includes $14.5 million from the ~~amount of $3.8 million and a partial refund~~issuance of the ~~purchase price of a prior acquisition in the amount of $0.4 million. Capital expenditures for the remainder of 2017 are expected to be approximately $1.0 million to fund the purchase of network~~Series D Preferred Stock and related equipment and operational support systems as we continue to grow our Business Services segment. While we expect capital expenditures to remain at approximately 3% to 4% of revenue, we may incur limited increases in our capital expenditures in support of new acquisition or revenue opportunities as they develop. A portion of our capital expenditure requirements may be financed through capital leases or other equipment financing arrangements.

~~Cash used in financing activities was $4.5 million and $1.6 million for the nine months ended September 30, 2017 and 2016, respectively. During the first nine months of 2017, we received~~ proceeds from the ~~exercise~~sale of common stock ~~purchase warrants~~of $7.5 million. For the same period in ~~the amount~~2017, cash provided by financing activities consists primarily of ~~$0.8~~proceeds from term loans of $15.0 million, ~~made principal payments on the East West Credit Facility term loan in the amount~~$4.3 million of ~~$2.4~~issuance costs and $11.4 million ~~paid down our revolving line~~ of ~~credit in the amount $1.5 million, made payments under capital lease obligations~~repayments of $0.8 million and paid down obligations under asset purchase agreements in the amount of $0.6 million. During the first nine months of 2016, we made capital lease payments of approximately $0.7 million and made payments on outstanding notes payable in the amount of $0.8 million.debt obligations.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Other Matters

Inflation

WeAt this time, we do not believe that inflation has a significant effect on our operations at this time.

~~Off Balance~~Off-Balance Sheet Arrangements

At ~~September~~June 30, ~~2017,~~2018, we have no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on ~~the Company’s~~our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital ~~resources that are material to investors.~~resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Disclosure under this section is not required for a smaller reporting company.

Item 4. Controls and Procedures.

~~We maintain~~Fusion maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our 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 Chief Financial Officer, has evaluated the effectiveness of the design and operation of ~~our~~Fusion’s disclosure controls and procedures as of ~~September~~June 30, ~~2017.~~2018. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that ~~our~~Fusion’s disclosure controls and procedures were effective to accomplish their objectives. However, such evaluation relates only to Fusion. Management is still in the process of evaluating the internal controls employed by each of Birch and MegaPath to determine whether they will be adopted by the Company. Accordingly, our controls and procedures for the Company are currently evolving and will continue to evolve during the integration period which we anticipate will extend through at least the end of 2018, after which time we expect to be able to fully evaluate the effectiveness of the controls and procedures of the Company.

Our Chief Executive Officer and 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~~Other than with respect to the integration of Birch and MegaPath, including the potential adoption of certain controls and procedures thereof, which the Company is still in the process of evaluating, there have been no other changes in ~~our~~Fusion’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended ~~September~~June 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, ~~our~~Fusion’s internal control over financial reporting.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

~~In May 2017, FNAC commenced an action~~From time to time, the Company is engaged in legal proceedings arising in the ~~United States District Court~~ordinary course. The Company believes that it has adequate reserves for ~~the Southern District~~and/or is indemnified against these liabilities and that, as of ~~New York against Apptix, ASA~~June 30, 2018, there is no litigation or regulatory proceeding pending that could have a material adverse effect on our results of operations and ~~certain of its and Apptix’s former officers and employees, arising from an estimated $2.9 million underpayment of license fees to a software vendor (see note 8 to the accompanying consolidated~~ financial statements). In August 2017, in connection with the settlement of this litigation matter, FNAC was paid $150,000 in cash and Apptix surrendered to Fusion 300,000 shares of Fusion common stock valued at $363,000.condition.

Item 1A. Risk Factors.

Risk factors describing the major risks to our business can be found ~~under~~in Item 1A, “Risk Factors,” in ~~our 2016~~Fusion’s Form ~~10-K.~~10-K for the year ended December 31, 2017. There have been no material changes to our risk factors from those previously disclosed in ~~the 2016~~that Form 10-K, except as discussed ~~below.~~below:

We earn revenue, incur costs and maintain cash balances in multiple currencies, and currency fluctuations could adversely affect our financial results.

We have operations in Canada, where we earn revenue and incur costs in Canadian Dollars. Doing business in Canada exposes us to foreign currency risks in numerous areas, including revenue, purchases and payroll. Certain of these currency exposures are naturally offset because revenue and costs are both denominated in the same foreign currency, and certain cash balances are held in U.S. Dollar denominated accounts. However, due to the increasing size and importance of our Canadian operations, fluctuations in foreign currency exchange rates could materially impact our results. Our cash position includes amounts denominated in both U.S Dollars and Canadian Dollars. We manage our overall cash requirements considering available funds from our subsidiaries and the cost effectiveness with which these funds can be accessed. The repatriation of cash balances from our subsidiaries outside the U.S. could have adverse tax consequences and be limited by foreign currency exchange controls. However, those balances are generally available in the local jurisdiction without legal restrictions to fund ordinary business operations. Any fluctuations in foreign currency exchange rates could materially impact the availability and amount of these funds available for transfer.

A significant amount of our revenue is derived from a limited number of customers, and any reduction in revenue from any of these customers could have a material adverse effect on our business.

After giving effect to the Birch Merger and the MegaPath Merger, our ten largest customers by revenue accounted for approximately 4% of our proforma consolidated revenue in 2017. For the years ended December 31, 2017 and after giving effect to the Birch Merger and the MegaPath Merger, no single customer accounted for more than 10% of our proforma consolidated revenue or accounts receivable. If any of our key customers decides not to renew its contracts with us, or to renew on less favorable terms, our business, revenue, reputation, and our ability to obtain new customers could be adversely affected.

Our rights to the use of fiber that is part of our network may be affected by the ability to continue long term contracts and the financial stability of our IRU fiber providers.

A portion of our services are provided on network fiber facilities licensed or leased from other network service providers through indefeasible rights of use (“IRUs”) or similar arrangements. The facilities under these agreements have remaining terms generally ranging from less than 1 year to 24 years. In these agreements, the network owner is responsible for network maintenance for which we pay such network owners. If our network provider under IRU agreements has financial troubles, it could adversely affect our costs, especially maintenance costs and ability to deliver service. Also, if our network providers under IRU agreements are unable to obtain and maintain necessary rights-of-way and access to pole attachments for their fiber networks or if they fail to renew or extend our IRUs, our operations may be interrupted and/or we could incur material expenses if we were required to relocate to alternative network assets.

Our ability to provide certain of our services and systems at competitive prices is dependent on our ability to negotiate and enforce favorable interconnection and other agreements with ILECs.

Our ability to continue to obtain favorable interconnection, unbundling, service provisioning and pricing terms is dependent, in part, on maintenance of interconnection agreements with the incumbent local exchange carrier (“ILEC”). We are party to one or more interconnection agreements in each state and service territory in which we require such agreements. The initial terms of many of our interconnection agreements have expired, however, our interconnection agreements generally contain an “evergreen” provision that allows the agreement to continue in effect until terminated. ILECs also are making available some facilities and services to competitors under unregulated “commercial agreements” that are not subject to the same requirements as interconnection agreements. The largest ILECs are also attempting to eliminate mandatory interconnection through FCC rulemaking, and replace regulated interconnection arrangements with commercial negotiations. If we were to receive a termination notice from an ILEC, we could negotiate a new agreement or initiate an arbitration proceeding at the relevant state commission before the agreement expired. In addition, the Federal Communications Act of 1934, as amended (the “Communications Act”) gives us the right to opt into interconnection agreements which have been entered into by other carriers, provided the agreement is still in effect and provided that we adopt the entire agreement. We cannot assure you that we will be able to successfully renegotiate these agreements or any other interconnection agreement on terms favorable to us or at all. Local telephone service competition depends on cost based and nondiscriminatory interconnection with, and use of, ILEC networks and facilities. Failure to achieve and maintain such arrangements could have a material adverse effect on our ability to provide competitive local telephone services. If we are unable to renegotiate or enter into new agreements on acceptable terms, our cost of doing business could increase and our ability to compete could be impeded.

Due to their control of “last-mile” access to many of our customers, if we experience difficulties in working with ILECs, our ability to offer services on a timely and cost-effective basis could be materially and adversely affected.

Our business depends on our ability to interconnect with ILEC networks and to lease from the ILECs certain essential network elements. We obtain access to these network elements and services under terms established in interconnection agreements, contract tariffs and commercial arrangements that we have entered into with ILECs. Like many competitive communications services providers, from time to time, we may experience difficulties in working with ILECs with respect to obtaining information about network facilities, ordering and maintaining network elements and services, interconnecting with ILEC networks and settling financial disputes. These difficulties can impair our ability to provide service to customers on a timely and competitive basis. If an ILEC refuses to cooperate or otherwise fails to support our business needs for any other reason, including labor shortages, work stoppages, cost-cutting initiatives or disruption caused by mergers, other organizational changes or terrorist attacks, our ability to offer services on a timely and cost-effective basis can be materially and adversely affected.

Additional taxation and government regulation of the cloud communications industry may slow our growth, resulting in decreased demand for our products and services and increased costs of doing business.

As a result of changes in regulatory policy, we could be forced to pay additional taxes on the products and services we provide. We structure our operations and our pricing based on assumptions about various domestic and international tax laws, tax treaties and other relevant laws. Taxation authorities or other regulatory authorities might not reach the same conclusions about taxation that we have reached in formulating our assumptions. We could suffer adverse tax and other financial consequences if our assumptions about these matters are incorrect or the relevant laws are changed or modified. In the U.S., our products and services are subject to varying degrees of federal, state and local regulation, including regulation by the Federal Communications Commission (“FCC”) and various state public utility commissions. In Canada, our products and services are subject to varying degrees of federal, provincial and local regulation, including regulation by The Canadian Radio-television and Telecommunications Commission. We may also be subject to similar regulation by other foreign governments and their telecommunications and/or regulatory agencies. While these regulatory agencies grant us the authority to operate our business, they typically exercise minimal control over the cloud services that we offer. However, they do require the filing of various reports, compliance with public safety and consumer protection standards and the payment of certain regulatory fees and assessments.

We also hold various U.S. federal and state licenses authorizing us to provide regulated interstate and intrastate telecommunications services to our carrier and end-user customers, and we comply with federal and state reporting, fee payment, tariffing and other obligations with respect to these services. In contrast to the typically lighter regulation of cloud services, described above, telecommunications services in the U.S. are often subject to a more formalized and aggressive regulatory regime. Even in jurisdictions where we are primarily providing cloud or lightly regulated VoIP services, we are regulated more pro-actively based upon the holding of a license to provide telecommunications services. It is possible that at some point we may be found not to have fully complied with applicable federal and/or state licensing or compliance requirements and, as a result, we may be subject to fines, penalties or other enforcement consequences. In addition, following the Birch Merger, our operations are subject to the requirements of a Consent Decree established in 2016 between Birch Communications, Inc. (“BCI”) and the FCC to settle allegations of noncompliance by BCI and its operating subsidiaries. We may face heightened regulatory scrutiny going forward as a result of the Consent Decree and in the event that we are found to have violated any of the specific laws and regulations implicated in the BCI Consent Decree, it is possible that we will face escalated penalties. Over time, it is possible that U.S. federal and/or state regulation of telecommunications services may change and become more burdensome, resulting in increased labor costs for compliance management and/or increases in direct costs of operations, including, for example, increased federal/state Universal Service Fund contributions or increased FCC and state public utility commission regulatory assessments. In the event that federal and/or state telecommunications regulation becomes more robust in the future, it could provide the basis for an increase in complaints filed against companies such as Fusion pursuant to the Communications Act, and/or state laws and regulations.

Birch previously has been the subject of litigation and could be the subject of additional legal actions and possible liabilities in the future.

In the course of normal business activities, Birch and its subsidiaries have been the subject of civil litigation concerning various types of matters including, for example, customer complaints, breach of contract, billing and collection, employee claims, and intellectual property. It is possible that we could be the subject of additional litigation involving similar or different matters in the future. For example, an individual or business could initiate litigation involving similar actions or behavior for which Birch previously was found liable, in the hopes of achieving a similarly favorable outcome. Due to the inherently uncertain nature of litigation, it is not possible to predict the likelihood, scope, or outcome of any future litigation. If litigation is initiated and the outcome is unfavorable to the Company we could be found liable for financial or other penalties. Any such liabilities are not predictable and, individually, or in the aggregate, could have a material adverse impact on the Company’s financial results.

Lingo may fail to perform under the Transition Services Agreement that was entered into as part of the Birch Merger which could affect our profitability and business.

In connection with the Birch Merger, Birch spun off the Birch Consumer Segment through a dividend of its membership interests in Lingo Management, LLC (“Lingo”) and Lingo and the Company entered into a transition services agreement, dated as of May 4, 2018 (the “Transition Services Agreement”), pursuant to which each of the Company and Lingo agreed perform certain services for the benefit of the other for a period of time after the closing of the Birch Merger. If Lingo is unable or unwilling to satisfy its payment or performance obligations under the Transition Services Agreement, we could incur losses which could have an adverse effect on our profitability and business. In addition, if we do not have our own systems and services in place, or if we do not have agreements in place with other service providers of these services, or the cost of providing services to Lingo increase substantially, the cost to comply with our obligation to provide services under the Transition Services Agreement may be greater than what is provided therein.

The ~~proposed Merger with Birch might~~indemnification provided by BCHI Holdings to the Company regarding various litigation matters and pending regulatory proceedings may not be ~~accretive~~sufficient to cover the full amount owed.

As a result of the Birch Merger, Birch and certain of its subsidiaries that are involved in various litigation matters and pending regulatory proceedings became subsidiaries of Fusion and, as a result, the Company is responsible for any liabilities arising from those various matters. BCHI Holdings entered into a letter agreement with the Company under which it agreed, for a period of 18 months following the closing of the Birch Merger, to indemnify and hold harmless Fusion for and against any and all losses in excess of $500,000 that are related to, or arise from, certain specified litigation and regulatory matters, subject to a maximum aggregate liability of $25 million. Amounts owed by BCHI Holdings under this indemnity may, with limited exception, be paid in cash or shares of Fusion common stock at the option of BCHI Holdings, with such shares valued for this purpose at the greater of (A) $4.50 or (B) the weighted average daily closing bid price during a certain period prior to transfer. The BCHI Holdings indemnification does not provide us protection if (i) Birch and our ~~earnings~~other new subsidiaries have liabilities for litigation or ~~otherwise improve~~regulatory matters that are not specifically enumerated in the indemnification letter, (ii) the liabilities relating to the covered matters do not arise until after the 18 month indemnity period, or (iii) to the extent the aggregate liability relating to such matters exceeds $25 million. Furthermore, if an indemnifiable claim exists and BCHI Holdings elects to pay us with shares of Fusion common stock, we may not have sufficient cash on-hand to cover the required payments. In addition, if the price of Fusion common stock is lower than $4.50 per share, then the indemnification payment in shares will be less than the losses that we incur.

The indemnification provided by BCHI Holdings to the Company regarding state tax matters may not be sufficient to cover the full amount owed and BCHI Holdings may not have the cash required to fund some or all of its indemnification obligations to the Company arising under a separation agreement between Birch and its former chief executive officer.

Various Birch subsidiaries that became subsidiaries of Fusion as a result of the Birch Merger are involved in various tax audits and may have failed to file certain historical state tax filings. As a result of the Birch Merger, the Company is responsible for any liabilities arising from these audits and late and/or missed filings. BCHI Holdings has entered into a letter agreement with the Company under which it agreed, for a period of 24 months following the closing of the Birch Merger, to indemnify and hold harmless the Company for and against any and all asserted and/or actual liabilities for unpaid state income tax and franchise fees and associated late fees, penalties and interest for 2017 and prior years; provided however, that the Company shall bear the initial $1.0 million of any actual taxes (but not any late fees, penalties or interest on any such amounts). Amounts owed by BCHI Holdings under this tax indemnity may be paid in cash or shares of Fusion common stock at the option of BCHI Holdings, with such shares valued for this purpose at the greater of (A) $4.50 or (B) the weighted average daily closing bid price during a certain period prior to transfer. This BCHI Holdings indemnification does not provide us protection if (i) Birch and our other new subsidiaries have liabilities for other types of state taxes or any federal tax liabilities, or (ii) the liabilities relating to the covered tax matters do not arise until after the 24 month indemnity period. Furthermore, if an indemnifiable tax claim exists and BCHI Holdings elects to pay us with shares of Fusion common stock, we may not have sufficient cash on-hand to cover the required tax payments. In addition, if the price of Fusion common stock is lower than $4.50 per share, then the indemnification payment in shares will be less than the losses that we incur.

In addition to the foregoing tax indemnity side letter, BCHI Holdings entered into another letter agreement under the terms of which it has agreed to indemnify Birch for amounts owed by Birch under a separation agreement, as amended, between Birch and its former chief executive officer. Under the terms of this letter agreement, BCHI Holdings has agreed to remit funds sufficient to satisfy each payment to the former chief executive officer on or prior to the dates such payments are required to be made to the former chief executive officer by Birch. Under this indemnity arrangement, BCHI Holdings may settle amounts owed in shares of Fusion common stock only if, after diligent efforts, it has been unable to secure the required cash. The value of the shares returned to Fusion in any such case would be determined on the same basis as described above in the case of the tax indemnity letter. If BCHI does not make the required payments when due or it settles these amounts in shares of Fusion common stock, we may not have sufficient cash on-hand to cover the required payments.

Birch and MegaPath may have liabilities that are not known, probable or estimable at this time. As a result of the Birch Merger and the MegaPath Merger, Birch and MegaPath became subsidiaries of Fusion and remain subject to all of their liabilities.

There could be unasserted claims or assessments, including failure to comply with applicable communications laws, regulations, orders and consent decrees that we failed or were unable to discover or identify in the course of performing our due diligence investigation of Birch and MegaPath. In addition, there may be liabilities that are neither probable nor estimable at this time that may become probable or estimable in the future. Any such liabilities, individually or in the aggregate, could have a material adverse effect on our financial results. We may learn additional information about Birch or MegaPath that adversely affects us, such as unknown, unasserted or contingent liabilities and issues relating to compliance with applicable laws.

We may not realize the revenue growth opportunities and cost synergies that are anticipated from the Birch Merger or the MegaPath Merger as we may experience difficulties in integrating the three businesses.

The benefits that are expected to result from the Birch Merger and the MegaPath Merger will depend, in part, on our ability to realize the anticipated revenue growth opportunities and cost synergies projected to result from each of these transactions. Our success in realizing these revenue growth opportunities and cost synergies, and the timing of this realization, depends on the successful integration of the three businesses. There is a significant degree of difficulty and management distraction inherent in the process of integrating an acquisition. The difficulty and risks could be heightened when integrating multiple acquisitions within a short period of time. The process of integrating operations could cause an interruption of, or loss of momentum in, our core business, the acquired businesses and the business of MegaPath. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage the combined company, service existing customers of each company, attract new customers, and develop new products or strategies. If senior management is unable to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. There can be no assurance that we will successfully or cost-effectively integrate the three businesses. The failure to do so could have a material adverse effect on our business, financial condition or results of operations.

~~Acquisitions, such as~~

Even if we are able to integrate the ~~proposed Merger~~three businesses successfully, this integration may not result in the realization of the full benefits of the growth opportunities and cost synergies that we currently project from these transactions, and we cannot guarantee that these benefits will be achieved within anticipated timeframes or at all. For example, we may not be able to eliminate duplicative costs. Moreover, we may incur substantial expenses in connection with ~~Birch, involve~~ the integration of ~~previously separate businesses into a common enterprise in which~~the three companies and the integration may take longer that we anticipate. While it is ~~envisioned~~anticipated that synergistic operations and economies of scale will result in improved financial performance. However, realization of these desired results are subject to numerous risks and uncertainties, including but not limited to the following:

●

~~diversion of management time and attention from daily operations;~~

●

~~difficulties integrating the acquired business, technologies and personnel into the existing business;~~

●

~~potential loss of key employees, key contractual relationships or key customers of the acquired businesses; and~~

●

~~in the case of a stock acquisition, exposure to unforeseen liabilities.~~

~~Notwithstanding consummation of our recent acquisitions, there is no assurance that the proposed Merger~~certain expenses will be ~~accretive~~incurred to ~~our earnings~~achieve cost synergies, such expenses are difficult to estimate accurately, and may exceed current estimates. Accordingly, the benefits from the transactions may be offset by costs incurred to, or ~~otherwise improve our results of operations.~~

~~If we are unable to successfully manage the integration of Birch, we may not benefit from our acquisition strategy.~~

~~We may not be successful~~delays in, integrating the newly acquired business into our day-to-day operations for a number of reasons, including if we are unable to (a) retain skilled managerial, technical, and sales personnel; (b) retain customers acquired; (c) integrate the services offered by the acquired business with our existing services to achieve a single package of service offerings; (d) establish and maintain uniform standards, controls, policies and procedures throughout the Company; or (e) devote the management time required to successfully integrate the acquired businesses.

Fusion Common Stock is concentrated in the hands of a few stockholders, and their interests may not coincide with those of our other Stockholders.

As of August 10, 2018, BCHI Holdings beneficially own approximately 63.5% of Fusion outstanding common stock. Accordingly, BCHI Holdings and its affiliates currently have the ability to exercise significant influence over matters generally requiring stockholder approval. These matters include the election of directors and the approval of significant corporate transactions, including potential mergers, consolidations or sales of all or substantially all of our assets. The interests of BCHI Holdings and its affiliates may differ from those of other Fusion stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Item 6. Exhibits


EXHIBIT NO.		DESCRIPTION
~~10.1.1~~ 10.1	~~First~~	Amendment No. 2 to ~~Agreement and Plan of Merger, dated as of September 15, 2017, by and among~~the Fusion Telecommunications International, Inc.~~, Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.~~ 2016 Equity Incentive Plan.
~~10.1.2~~ 10.2	~~Second Amendment to Agreement and Plan~~	Form of ~~Merger, dated as of September 29, 2017, by and among Fusion Telecommunications International, Inc., Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.~~Director Indemnification Agreement.
~~10.1.3~~ 31.1	Amended and Restated Third Amendment to Agreement and Plan of Merger, dated as of October 27, 2017, by and among Fusion Telecommunications International, Inc., Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.
~~10.1.4~~	~~Lease Agreement, dated as of June 30, 2017, between LMR USA LLC and Network Billing Systems LLC relating to leased premises located at 695 Route 46, Fairfield, NJ 07004.~~
~~31.1~~	Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the 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

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

SIGNATURES

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,~~CONNECT, INC.

~~November 13, 2017~~August 14, 2018	By:	/s/ ~~Michael R. Bauer~~Kevin M. Dotts
		~~Michael R. Bauer~~Kevin M. Dotts
		Executive Vice President, Chief Financial Officer

~~November 13, 2017~~	~~By:~~	~~/s/ Lisa Taranto~~
		~~Lisa Taranto~~
		and Principal Accounting Officer

~~FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES~~

Index to Exhibits

EXHIBIT NO.		DESCRIPTION
~~10.1.1~~ 10.1	~~First~~	Amendment No. 2 to ~~Agreement and Plan of Merger, dated as of September 15, 2017, by and among~~the Fusion Telecommunications International, Inc.~~, Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.~~ 2016 Equity Incentive Plan.
~~10.1.2~~ 10.2	~~Second Amendment to Agreement and Plan~~	Form of ~~Merger, dated as of September 29, 2017, by and among Fusion Telecommunications International, Inc., Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.~~
~~10.1.3~~	Amended and Restated Third Amendment to Agreement and Plan of Merger, dated as of October 27, 2017, by and among Fusion Telecommunications International, Inc., Fusion BCHI Acquisition LLC and Birch Communications Holdings, Inc.
~~10.1.4~~	~~Lease Agreement, dated as of June 30, 2017, between LMR USA LLC and Network Billing Systems LLC relating to leased premises located at 695 Route 46, Fairfield, NJ 07004.~~Director Indemnification Agreement.
31.1		Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the ~~Acting~~ Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		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

	September 30, 2017	December 31, 2016
ASSETS	(unaudited)
Current assets:
Cash and cash equivalents	$2,341,634	$7,221,910
Accounts receivable, net of allowance for doubtful accounts of
approximately $779,000 and $427,000, respectively	14,359,639	9,359,876
Prepaid expenses and other current assets	1,776,072	1,084,209
Total current assets	18,477,345	17,665,995
Property and equipment, net	13,769,882	14,248,915
Security deposits	615,585	630,373
Restricted cash	27,153	27,153
Goodwill	34,773,629	35,689,215
Intangible assets, net	58,760,920	63,617,471
Other assets	52,231	77,117
TOTAL ASSETS	$126,476,745	$131,956,239

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loan - current portion	$5,687,500	$2,979,167
Obligations under asset purchase agreements - current portion	603,192	546,488
Equipment financing obligations	1,186,115	1,002,578
Accounts payable and accrued expenses	25,674,946	19,722,838
Total current liabilities	33,151,753	24,251,071
Long-term liabilities:
Notes payable - non-related parties, net of discount	31,822,773	31,431,602
Notes payable - related parties	918,135	875,750
Term loan	55,782,094	60,731,204
Indebtedness under revolving credit facility	1,500,000	3,000,000
Obligations under asset purchase agreements	1,265,811	890,811
Equipment financing obligations	716,005	1,237,083
Derivative liabilities	760,965	348,650
Total liabilities	125,917,536	122,766,171
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized,
14,341 and 17,299 shares issued and outstanding	143	174
Common stock, $0.01 par value, 90,000,000 shares authorized,
22,296,683 and 20,642,028 shares issued and outstanding	222,967	206,422
Capital in excess of par value	193,642,257	192,233,032
Accumulated deficit	(193,312,093)	(183,249,560)
Total Fusion Telecommunications International, Inc. stockholders' equity	553,274	9,190,068
Noncontrolling interest	5,935	-
Total stockholders' equity	559,209	9,190,068
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$126,476,745	$131,956,239

	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2017	2016	2017	2016
Revenues	$36,355,187	$30,159,019	$110,256,069	$95,041,024
Cost of revenues, exclusive of depreciation and
amortization, shown separately below	19,749,188	17,431,477	59,921,649	55,875,267
Gross profit	16,605,999	12,727,542	50,334,420	39,165,757
Depreciation and amortization	3,711,253	2,998,628	11,149,010	8,946,781
Selling, general and administrative expenses	13,649,349	11,408,048	42,115,158	34,102,847
Total operating expenses	17,360,602	14,406,676	53,264,168	43,049,628
Operating loss	(754,603)	(1,679,134)	(2,929,748)	(3,883,871)
Other (expenses) income:
Interest expense	(2,204,520)	(1,625,195)	(6,468,916)	(4,877,828)
(Loss) gain on change in fair value of derivative liabilities	(617,820)	152,057	(544,486)	380,099
Loss on disposal of property and equipment	(161,037)	(13,959)	(253,087)	(86,777)
Other income, net	47,694	32,028	177,539	120,291
Total other expenses	(2,935,683)	(1,455,069)	(7,088,950)	(4,464,215)
Loss before income taxes	(3,690,286)	(3,134,203)	(10,018,698)	(8,348,086)
Provision for income taxes	(10,200)	(10,951)	(41,111)	(10,951)
Net loss	(3,700,486)	(3,145,154)	(10,059,809)	(8,359,037)
Less: Net income attributable to non-controlling interest	(2,724)	-	(2,724)	-
Net loss attributable to Fusion Telecommunications International, Inc.	(3,703,210)	(3,145,154)	(10,062,533)	(8,359,037)
Preferred stock dividends	(241,191)	(285,646)	(1,735,798)	(2,102,467)
Net loss attributable to common stockholders	(3,944,401)	(3,430,800)	(11,798,331)	(10,461,504)

Basic and diluted loss per common share:	$(0.18)	$(0.23)	$(0.54)	$(0.72)
Weighted average common shares outstanding:
Basic and diluted	22,352,341	14,990,816	21,828,816	14,536,893

	Nine Months Ended September 30,
	2017	2016
Cash flows from operating activities:
Net loss	$(10,059,809)	$( 8,359,037)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	11,149,010	8,946,781
Loss on disposal of property and equipment	253,087	86,777
Stock-based compensation	699,668	572,996
Stock issued for services rendered or in settlement of liabilities	184,560	105,256
Amortization of debt discount and deferred financing fees	630,279	477,751
Loss (gain) on the change in fair value of derivative liability	544,487	(380,099)
Changes in operating assets and liabilities:
Accounts receivable	(4,446,433)	(410,771)
Prepaid expenses and other current assets	(876,267)	(1,373,378)
Other assets	24,885	(317,927)
Accounts payable and accrued expenses	5,786,081	(1,258,968)
Net cash provided by (used in) operating activities	3,889,548	(1,910,619)

Cash flows from investing activities:
Purchase of property and equipment	(3,940,382)	(3,782,232)
Proceeds from the sale of property and equipment	96,344	28,736
Noncontrolling interest	3,211	-
(Payment) for acquisitions, net of cash acquired	(558,329)	16,895
Refunds of purchase price from acquisitions	150,000	392,617
Return of security deposits	14,788	26,750
Net cash used in investing activities	(4,234,368)	(3,317,234)

Cash flows from financing activities:
Proceeds from the exercise of common stock purchase warrants	780,951	-
Repayments of term loan	(2,437,500)	(824,973)
Repayments of revolving debt, net	(1,500,000)
Payments for obligations under asset purchase agreements	(583,892)
Payments on equipment financing obligations	(795,015)	(743,647)
Net cash used in financing activities	(4,535,456)	(1,568,620)
Net change in cash and cash equivalents	(4,880,276)	(6,796,473)
Cash and cash equivalents, including restricted cash, beginning of period	7,249,063	7,705,666
Cash and cash equivalents, including restricted cash, end of period	$2,368,787	$909,193

	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
Numerator
Net loss	$(3,700,486)	$(3,145,154)	$(10,059,809)	$(8,359,037)
Undeclared dividends on Series A-1, A-2 and A-4 Convertible Preferred Stock	(101,729)	(101,729)	( 301,871)	( 302,976)
Conversion price reduction on Series B-2 Preferred Stock (see note 13)	-	-	( 623,574)	-
Series B-2 warrant exchange (see note 13)	-	-	( 347,191)	-
Dividends declared on Series B-2 Convertible Preferred Stock	( 139,462)	( 183,917)	( 463,162)	( 1,799,491)
Net income attributable to non-controlling interest	(2,724)	-	(2,724)	-
Net loss attributable to common stockholders	$(3,944,401)	$(3,430,800)	$(11,798,331)	$(10,461,504)

Denominator
Basic and diluted weighted average common shares outstanding	22,352,341	14,990,816	21,828,816	14,536,893

Loss per share
Basic and diluted	$(0.18)	$(0.23)	$(0.54)	$(0.72)

	September 30, 2017			December 31, 2016
	Gross Carrying Amount	Accumulated Amortization	Total	Gross Carrying Amount	Accumulated Amortization	Total

Trademarks and tradename	$1,093,400	$(629,731)	$463,669	$1,093,400	$(501,982)	$591,418
Proprietary technology	6,670,000	(5,028,346)	1,641,654	6,670,000	(4,036,915)	2,633,085
Non-compete agreement	12,128,043	(11,389,604)	738,439	12,128,043	(9,891,892)	2,236,151
Customer relationships	67,713,181	(11,799,657)	55,913,524	65,948,181	(7,827,697)	58,120,484
Favorable lease intangible	218,000	(214,366)	3,634	218,000	(181,667)	36,333
Total acquired intangibles	$87,822,624	$(29,061,704)	$58,760,920	$86,057,624	$(22,440,153)	$63,617,471

	Nine Months Ended September 30,
Supplemental Cash Flow Information	2017	2016
Cash paid for interest	$6,166,497	$4,233,527
Cash paid for income taxes	$-	$-

Supplemental Non-Cash Investing and Financing Activities
Property and equipment acquired under capital leases or equipment financing obligations	$457,475	$188,497
Conversion of preferred stock into common stock	$2,958,000	$-
Dividends on Series B-2 Preferred Stock paid with the issuance of Fusion common stock	$463,163	$599,491
Obligations under purchase agreements	$1,350,000	$961,606

	September 30, 2017	December 31, 2016
Insurance	$5,327	$160,262
Rent	16,326	5,389
Marketing	39,333	74,665
Software subscriptions	697,261	419,431
Comisssions	109,688	159,146
Other	908,137	265,316
Total	$1,776,072	$1,084,209

	September 30, 2017	December 31, 2016
Trade accounts payable	$7,275,546	$6,358,548
Accrued license fees	3,140,568	2,881,331
Accrued sales and federal excise taxes	3,214,289	2,863,363
Deferred revenue	1,523,045	1,874,641
Accrued network costs	5,047,912	1,416,000
Accrued sales commissions	798,835	819,106
Property and other taxes	927,002	581,956
Accrued payroll and vacation	408,570	421,733
Customer deposits	378,783	365,249
Interest payable	7,849	304,409
Credit card payable	117,214	265,985
Accrued USF fees	498,441	249,825
Accrued bonus	376,890	249,361
Professional and consulting fees	151,948	164,878
Rent	129,428	127,781
Other	1,678,626	778,672
Total	$25,674,946	$19,722,838

	September 30,	December 31,
	2017	2016
Equipment financing obligations	$1,902,120	$2,239,661
Less: current portion	(1,186,115)	(1,002,578)
Long-term portion	$716,005	$1,237,083

Year ending December 31:	Principal
remainder of 2017	$321,854
2018	1,140,586
2019	429,486
2020	10,194
	$1,902,120

	Three Months Ended September 30, 2017
	Carrier Services	Business Services	Corporate and Unallocated	Consolidated
Revenues	$7,058,137	$29,297,050	$-	$36,355,187
Cost of revenues (exclusive of depreciation and amortization)	6,704,077	13,045,111	-	19,749,188
Gross profit	354,060	16,251,939	-	16,605,999
Depreciation and amortization	45,269	3,470,310	195,674	3,711,253
Selling, general and administrative expenses	547,654	11,790,690	1,311,005	13,649,349
Impairment charge		-		-
Interest expense	-	(2,125,158)	(79,361)	(2,204,519)
Loss on change in fair value of derivative liability	-	-	(617,820)	(617,820)
Loss on extinguishment of debt	-	-	-	-
Other expenses, net	9,371	112,816	8,844	131,032
Income tax provision	-	(10,200)	-	(10,200)
Net loss	$(248,234)	$(1,257,235)	$(2,195,016)	$(3,700,486)

Total assets	$4,895,761	$119,113,665	$2,467,319	$126,476,745

	Nine Months Ended September 30, 2017
	Carrier Services	Business Services	Corporate and Unallocated	Consolidated
Revenues	$22,496,958	$87,759,111	$-	$110,256,069
Cost of revenues (exclusive of depreciation and amortization)	��21,746,819	38,174,830	-	59,921,649
Gross profit	750,139	49,584,281	-	50,334,420
Depreciation and amortization	339,633	10,408,551	400,824	11,149,008
Selling, general and administrative expenses	1,639,020	36,517,317	3,958,821	42,115,158
Impairment charge		-		-
Interest expense	-	(6,262,106)	(206,810)	(6,468,916)
Loss on change in fair value of derivative liability	-	-	(544,485)	(544,485)
Other (expenses) income, net	(9,454)	50,516	(116,613)	(75,551)
Income tax provision	-	(41,111)	-	(41,111)
Net loss	$(1,237,968)	$(3,594,288)	$(5,227,553)	$(10,059,809)

Capital expenditures	$21,443	$4,376,414	$-	$4,397,857

	Three Months Ended September 30, 2016
	Carrier Services	Business Services	Corporate and Unallocated	Consolidated
Revenues	$8,864,791	$21,294,318	$-	$30,159,109
Cost of revenues (exclusive of depreciation and amortization)	8,487,912	8,943,655	-	17,431,567
Gross profit	376,879	12,350,663	-	12,727,542
Depreciation and amortization	38,094	2,747,822	212,712	2,998,628
Selling, general and administrative expenses	653,462	9,547,547	1,207,039	11,408,048
Impairment charge		-		-
Interest expense	-	(1,551,534)	(73,661)	(1,625,195)
Gain on change in fair value of derivative liability	-	-	152,057	152,057
Other (expenses) income, net	-	(247,070)	265,139	18,069
Provision for income taxes	-	(10,951)		(10,951)
Net loss	$(314,677)	$(1,754,261)	$(1,076,216)	$(3,145,154)

Total assets	$3,783,321	$90,027,291	$2,312,655	$96,123,267

	Nine Months Ended September 30, 2016
	Carrier Services	Business Services	Corporate and Unallocated	Consolidated
Revenues	$30,711,086	$64,329,938	$-	$95,041,024
Cost of revenues (exclusive of depreciation and amortization)	29,341,982	26,533,285	-	55,875,267
Gross profit	1,369,104	37,796,653	-	39,165,757
Depreciation and amortization	116,102	8,128,378	702,301	8,946,781
Selling, general and administrative expenses	2,119,119	28,052,965	3,930,763	34,102,847
Impairment charge		-		-
Interest expense	-	(4,647,847)	(229,981)	(4,877,828)
Gain on change in fair value of derivative liability	-	-	380,099	380,099
Other (expenses) income, net	-	(764,308)	797,822	33,514
Provision for income taxes	-	(10,951)		(10,951)
Net loss	$(866,117)	$(3,807,796)	$(3,685,124)	$(8,359,037)

Capital expenditures	$41,584	$3,929,145	$-	$3,970,729

	Level 1	Level 2	Level 3	Total
As of September 30, 2017
Current liabilities:
Contingent purchase price liability	-	-	$603,192	$603,192
Non-current liabilities:
Contingent purchase price liability	-	-	$1,265,811	$1,265,811
Derivative liability (see note 12)	-	-	$760,965	$760,965
As of December 31, 2016
Current liabilities:
Contingent purchase price liability	-	-	$546,488	$546,488
Non-current liabilities:
Contingent purchase price liability	-	-	$890,811	$890,811
Derivative liability (see note 12)	-	-	$348,650	$348,650