UNITED STATES |
FORM 10-Q |
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 001-32421
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 58-2342021 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
420 Lexington Avenue, Suite 1718, New York, New York | 10170 |
(Address of principal executive offices) | (Zip Code) |
(212) 201-2400
(Issuer’s telephone number)
Indicate by check mark whether the registrant (1) 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. x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o |
Non-accelerated filer | o | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 7, 2008
Title Of Each Class | Number of Shares Outstanding |
Common Stock, $0.01 par value | 36,958,371 |
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I – FINANCIAL INFORMATION - pg 1
Item 1. Financial Statements - pg 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - pg 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk - pg 23
Item 4T. Controls and Procedures - pg 24
PART II – OTHER INFORMATION - pg 25
Item 1. Legal Proceedings - pg 25
Item 1A. Risk Factors - pg 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds - pg 26
Item 3. Defaults upon Senior Securities - pg 26
Item 4. Submissions of Matters to a Vote of Security Holders - pg 26
Item 5. Other Information - pg 26
Item 6. Exhibits - pg 26
SIGNATURES - pg 27
Index to Exhibits - pg 28
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
PART I —– FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2008 | December 31, 2007 | |||
(unaudited) | ||||
ASSETS | ||||
Current assets: | ||||
Cash and cash equivalents | $ | 273,236 | $ | 114,817 |
Accounts receivable, net of allowance for doubtful accounts of approximately $995,000 and $830,000 in June 30, 2008 and December 31, 2007, respectively | 3,805,781 | 5,545,408 | ||
Prepaid expenses and other current assets | 451,359 | 481,556 | ||
Assets held for sale | 129,231 | 129,231 | ||
Total current assets | 4,659,607 | 6,271,012 | ||
Property and equipment, net | 4,676,388 | 5,425,846 | ||
Other assets: | ||||
Security deposits | 68,157 | 66,638 | ||
Restricted cash | 416,566 | 416,566 | ||
Goodwill | 964,557 | 964,557 | ||
Intangible assets, net | 4,876,283 | 4,892,215 | ||
Other assets | 92,956 | 91,455 | ||
Total other assets | 6,418,519 | 6,431,431 | ||
Total assets | $ | 15,754,514 | $ | 18,128,289 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||
Current liabilities | ||||
Long-term debt, current portion | $ | 1,469,666 | $ | 566,567 |
Capital lease / equipment financing obligations, current portion | 178,095 | 233,759 | ||
Accounts payable and accrued expenses | 9,489,638 | 9,663,325 | ||
Liabilities of discontinued operations | 13,313 | 15,829 | ||
Total current liabilities | 11,150,712 | 10,479,480 | ||
Long-term liabilities | ||||
Long-term debt, net of current portion | 145,244 | 283,433 | ||
Capital lease / equipment obligations, net of | — | 10,922 | ||
Other long–term liabilities | 575,081 | 659,271 | ||
Total long-term liabilities | 720,325 | 953,626 | ||
Commitments and contingencies | ||||
Stockholders’ equity | ||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 7,995 and 7,995 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively | 80 | 80 | ||
Common stock, $0.01 par value, 105,000,000 shares authorized, 36,958,371 and 29,907,786 shares issued and outstanding in June 30, 2008 and December 31, 2007, respectively | 369,584 | 299,078 | ||
Capital–in–excess of par value | 122,777,429 | 120,402,691 | ||
Accumulated deficit | (119,263,616) | (114,006,666) | ||
Total Stockholders’ equity | 3,883,477 | 6,695,183 | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 15,754,514 | $ | 18,128,289 |
See accompanying notes to the condensed consolidated interim financial statements.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
2008 | 2007 | 2008 | 2007 | ||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||
Revenues | $ | 11,400,840 | $ | 13,744,209 | $ | 22,930,657 | $ | 26,950,163 | |
Operating expenses | |||||||||
| 10,653,614 | 12,751,750 | 21,361,587 | 24,837,521 | |||||
| 462,521 | 418,635 | 924,198 | 810,817 | |||||
| 3,048,729 | 3,269,297 | 6,359,541 | 6,696,666 | |||||
| 18,632 | 23,571 | 48,023 | 105,786 | |||||
Total operating expenses | (14,183,496) | 16,463,253 | 28,693,349 | 32,450,790 | |||||
Operating loss | (2,782,656) | (2,719,044) | (5,762,692) | (5,500,627) | |||||
Other income (expenses) | |||||||||
| 785 | 30,356 | 2,516 | 51,071 | |||||
| (53,197) | (27,830) | (70,587) | (50,979) | |||||
| (59,158) | 9,759 | (59,158) | 9,759 | |||||
| — | — | 634,991 | — | |||||
| — | 937,578 | — | 937,578 | |||||
| — | (15,000) | — | (60,000) | |||||
| 264 | 3,742 | (2,020) | 3,738 | |||||
Total other income (expenses) | (111,306) | 938,605 | 505,742 | 891,167 | |||||
Net loss | $ | (2,893,962) | $ | (1,780,439) | $ | (5,256,950) | $ | (4,609,460) | |
Basic and diluted net loss per common share: | |||||||||
Net loss per common share | $ | (0.08) | $ | (0.07) | $ | (0.16) | $ | (0.18) | |
Weighted average common shares outstanding: | |||||||||
Basic and diluted | 36,141,898 | 26,958,965 | 34,480,422 | 26,958,965 | |||||
See accompanying notes to the condensed consolidated interim financial statements.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, | ||||
2008 | 2007 | |||
(unaudited) | (unaudited) | |||
Cash flows from operating activities: |
|
|
| |
Net loss | $ | (5,256,950) | $ | (4,609,460) |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Depreciation and amortization | 924,198 | 810,817 | ||
Gain / loss on sale / disposal of fixed assets | 59,158 | (9,759) | ||
Gain on sale from investment in Estel | (937,578) | |||
Bad debt expense, net | 67,500 | 35,117 | ||
Stock–based compensation | 306,077 | 315,742 | ||
Gain on extinguishment of debt | (634,991) | — | ||
Loss from investment in Estel | — | 60,000 | ||
Increase (decrease) in cash attributable to changes in operating assets and liabilities: | ||||
Accounts receivable, net | 1,672,127 | 715,796 | ||
Prepaid expenses and other current assets | 30,197 | (64,976) | ||
Other assets | (1,501) | 6,424 | ||
Accounts payable and accrued expenses | 457,981 | (1,740,567) | ||
Liabilities of discontinued operations | (2,515) | (7,267) | ||
Other long-term liabilities | (84,190) | (65,323) | ||
Net cash used in operating activities | (2,462,909) | (5,491,034) | ||
Cash flows from investing activities: | ||||
Purchase of property and equipment | (217,966) | (597,642) | ||
Advances to Estel | — | (15,130) | ||
Proceeds from sale of investments in Estel | — | 484,985 | ||
Payments from Estel | — | 20,563 | ||
Payments for security deposits | (1,519) | (3,000) | ||
Difference payment related to purchase of minority interest | — | (171,852) | ||
Repayments of restricted cash | — | 365,000 | ||
Net cash provided by (used in) investing activities | (219,485) | 82,924 | ||
Cash flows from financing activities: | ||||
Proceeds from sale of Common Stock, net | 2,139,167 | — | ||
Proceeds from issuance of Preferred Stock, series A-2, A–3, and A–4, net | — | 4,104,532 | ||
Payments of notes payable - related parties | (361,768) | — | ||
Proceeds from advanced subscriptions | — | — | ||
Payments of long-term debt and capital lease /equipment financing obligations | (66,586) | (122,879) | ||
Proceeds from related parties | 555,000 | — | ||
Proceeds from non–related parties | 575,000 | — | ||
Net cash provided by financing activities | 2,840,813 | 3,981,653 | ||
Net increase (decrease) in cash and cash equivalents | 158,419 | (1,426,457) | ||
Cash and cash equivalents, beginning of period | 114,817 | 2,743,155 | ||
Cash and cash equivalents, end of period | $ | 273,236 | $ | 1,316,698 |
Six Months Ended June 30, | ||||
2008 | 2007 | |||
(unaudited) | (unaudited) | |||
Supplemental disclosure of cash flow information: | ||||
Cash paid during the period for interest | $ | 48,696 | $ | 14,582 |
Supplemental schedule of non–cash investing and financing activities: | ||||
Acquisition of capital lease / equipment financing obligations | $ | — | $ | 92,500 |
See accompanying notes to the condensed consolidated interim financial statements.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
1. Summary of Select Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying notes to the condensed consolidated interim financial statements should be read in conjunction with the Annual Report on Form 10-KA for the fiscal year ended December 31, 2007 for Fusion Telecommunications International, Inc. and its Subsidiaries (collectively, the “Company”). All material intercompany balances and transactions have been eliminated in consolidation. These condensed consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and Article 8 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC) and therefore, omit or condense certain footnotes and other information normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of the Company’s management, all adjustments (consisting of normal recurring accruals) considered necessary for fair financial statement presentation have been made. The results of operations for an interim period may not give true indication of the results for the entire year.
During the six months ended June 30, 2008 and 2007, comprehensive loss was equal to the net loss amounts presented for the respective periods in the accompanying consolidated statements of operations.
Earnings (loss) per Share
Statement of Financial Accounting Standard ("SFAS") No. 128, “Earnings per Share,” requires dual presentation of basic and diluted income (loss) per share for all periods presented. Basic loss per share excludes dilution and is computed by dividing income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the income (loss) of the Company.
Unexercised Stock options to purchase 4,313,754 and 3,849,371 shares of the Company’s Common Stock as of June 30, 2008 and 2007, respectively, were not included in the computation of diluted income (loss) per share because the exercise of the Stock options would be anti-dilutive to loss per share.
Unexercised Warrants to purchase 16,425,484 and 11,432,029 shares of the Company’s Common Stock as of June 30, 2008 and 2007, respectively, were not included in the computation of diluted loss per share because the exercise of the Warrants would be anti-dilutive to loss per share.
Net loss per common share calculations include provisions for Preferred Stock dividend in the amount of approximately $319,000 and $215,000 for the six months ended June 30, 2008 and 2007 respectively. However, no dividends had been declared by the Board of Directors. As of June 30, 2008, the Company has accumulated approximately $856,000 of Preferred Stock dividends.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of a sale arrangement exists, delivery has occurred or services have been rendered, the sales price is fixed and determinable and collectability is reasonably assured. When significant, the Company records provisions against revenue for billing adjustments, which are based upon estimates derived from factors that include, but are not limited to, historical results, analysis of credits issued, current economic trends, and changes in demand. The provisions for revenue adjustments are recorded as a reduction of revenue when incurred or ratably over a contract period, as applicable.
The Company derives revenue principally from international voice services, including VoIP, private networks, and Internet services. Variable revenue derived from international voice services is recognized upon completion of a call and is based upon the number of minutes of traffic carried. Revenue from monthly recurring service from long distance, private networks, and Internet services are fixed and recurring in nature and are contracted over a specific period of time. Advanced billings for monthly fees are reflected as deferred revenues and are recognized as revenue at the time the service is provided. VoIP services enable customers, typically international corporations or cable operators, to place voice calls anywhere in the world using their personal computer. The majority of the Company's VoIP services to consumers are prepaid which is initially recorded as deferred revenue. Revenues from VoIP services to consumers are recognized based upon the usage of minutes by the consumer.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the amounts assigned to assets acquired and liabilities assumed. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is reviewed for impairment on an annual basis. Other intangible assets consist primarily of the trade name and trademarks associated with the Company's wholly owned subsidiary, Efonica FZ, LLC ("Efonica"). These long-lived assets are not amortized because they have indefinite lives. The remaining intangible asset acquired in the Efonica transaction is a customer list, which is being amortized using the straight-line method over the 10 year estimated useful life.
Stock–Based Compensation
The Company accounts for Stock-Based Compensation under the provisions of the Statement of Financial Accounting Standard No. 123 (revised 2004) and the Share-Based Payment, (SFAS No.123R). The impact on the Company’s results of operations of recording Stock-Based Compensation expense for the six-months ended June 30, 2008 and 2007, was approximately $306,000 and $316,000, respectively which is included in selling, general and administrative expenses in the Consolidated Statements of Operations.
The following table summarizes stock option activity for the six months ended June 30, 2008:
Activity | Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Life | |
Outstanding at January 1, 2008 | 3,116,676 | $ | 2.43 | 7.10 |
Granted | 1,353,750 | $ | 0.31 | — |
Cancelled or expired | (156,672) | $ | 2.60 | — |
Outstanding at June 30, 2008 | 4,313,754 | $ | 1.76 | 7.50 |
Exercisable at June 30, 2008 | 2,003,339 | $ | 2.97 | 5.88 |
The Company calculated the fair value of each Common Stock option grant on the date of grant using the Black-Scholes option pricing model method with the following assumptions:
Six Months Ended June 30, | ||||
2008 | 2007 | |||
Dividend yield | 0.0% | 0.0% | ||
Stock volatility | 101.35% | 81.7% | ||
Average Risk-free interest rate | 3.62% | 4.52% | ||
Average option term (years) | 4 | 4 | ||
As of June 30, 2008, there was approximately $781,000 of total unrecognized compensation cost, net of estimated forfeitures, related to stock options granted under our Stock Incentive Plans, which is expected to be recognized over a weighted-average period of 2 years.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Use of Estimates
The preparation of the condensed consolidated interim financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
2. Going Concern
At June 30, 2008, the Company had a working capital deficit of approximately $6,491,000 and an accumulated deficit of approximately $119,264,000. The Company has continued to sustain losses from operations. In addition, the Company has not generated positive cash flow from operations since inception. Management is aware that its current cash resources are not adequate to fund its operations for the remainder of the year. During the six months ended June 30, 2008, the Company raised $2,139,000 net of expenses from sale of its securities through private placement. The Company’s long-term liquidity is partially dependent on its ability to successfully complete the rollout of its full suite of retail VoIP paid services and effectively market its paid services, in order to attain profitable operations in the future. The Company cannot make any guarantees if and when it will be able to attain profitability. These conditions, among others, raise substantial doubt about the Company’s ability to continue operations as a going concern. No adjustment has been made in the condensed consolidated interim financial statements to the amounts and classification of assets and liabilities which could result, should the Company be unable to continue as a going concern.
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following at June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||
(unaudited) | ||||
Prepaid expenses | $ | 324,972 | $ | 352,146 |
Inventory | 71,331 | 71,370 | ||
Notes receivables | 49,113 | 49,113 | ||
Other | 5,943 | 8,927 | ||
$ | 451,359 | $ | 481,556 |
4. Accounts Payable and Accrued Expenses
The Company had a prior period outstanding balance with a foreign vendor for approximately $635,000; however, this balance was in dispute because of discrepancies on price and quality of service. The Company was advised that the foreign vendor went into liquidation in 2005. As of March 31, 2008, the balance had been outstanding for over five (5) years and the Company has been advised by local counsel that the Statue of Limitations of the foreign country’s jurisdiction for any claims by the vendor had expired. As a result, the Company recorded a gain on extinguishment of debt for approximately $635,000 during the quarter ended March 31, 2008.
The Company currently has ongoing regulatory matters with a regulatory agency that have not yet been concluded. Should the resolution of these issues result in an unfavorable outcome, the Company estimates that the liability would be within the range of $50,000 – $400,000. However, the liability range is just an estimate and could differ from the actual result.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Accounts payable and accrued expenses consist of the following at June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||
Trade accounts payable | $ | 6,712,418 | $ | 7,368,791 |
Accrued expenses | 1,334,954 | 1,031,350 | ||
Accrued payroll and vacation | 238,375 | 181,118 | ||
Cost accrual | 569,357 | 460,375 | ||
Interest payable | 40,144 | 22,953 | ||
Deferred revenue | 327,622 | 326,802 | ||
Short-term financing agreement | 71,737 | 94,597 | ||
Other | 195,031 | 177,339 | ||
| $ | 9,489,638 | $ | 9,663,325 |
5. Long–Term Debt and Capital Lease / Equipment Financing Obligations
At June 30, 2008 and December 31, 2007, components of long-term debt and capital lease / equipment financing obligations of the Company are comprised of the following:
June 30,2008 | December 31, 2007 | |||
Promissory notes payable | $ | 1,614,910 | $ | 850,000 |
Capital lease / equipment financing obligations | 178,095 | 244,681 | ||
Total long-term debt and capital lease / equipment obligations | 1,793,005 | 1,094,681 | ||
Less current portion | (1,647,761) | (800,326) | ||
$ | 145,244 | $ | 294,355 |
Promissory Notes Payable
During February 2004, the Company entered into a settlement agreement with a vendor for $600,000. In the same month, the Company paid $450,000 under the agreement and agreed to make 12 monthly payments for the remaining $150,000. The promissory note has not been repaid as of June 30, 2008, as the other party to the settlement agreement has not complied with the terms of the agreement.
On December 4, 2007, December 18, 2007, and December 19, 2007, the Company borrowed an aggregate of $540,000 from two Directors, Philip Turits and Marvin Rosen. The loans are evidenced by three promissory notes that are payable in 24 equal monthly installments of principal and interest (at the rate of 10% per annum) commencing January 4, 2008, January 18, 2008 and January 19, 2008 respectively, provided that the lenders have the right to demand payment of all unpaid principal and interest at any time after December 4, 2008, December 18, 2008 and December 19, 2008, respectively. The Company’s obligations under the notes are collateralized by a security interest in the Company’s accounts receivables and the monthly payments have been paid as scheduled through June 30, 2008. The proceeds of the loans are being used for general working capital purposes.
On December 21, 2007, the Company borrowed $160,000 from a Director, Marvin Rosen. The loan was evidenced by a non-interest bearing promissory note that was payable on January 3, 2008. The loan was paid on January 3, 2008.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
On April 17, 2008, the Company borrowed an aggregate amount of $300,000 from two of its Directors, Philip Turits, and Marvin Rosen, as evidenced by two promissory notes. Both notes provide repayment of the principal balance plus an interest rate of 10% per annum on any remaining unpaid balance until the maturity date of May 17, 2008. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On April 23, 2008 and May 8, 2008, the Company borrowed an aggregate amount of $375,000 from two individual shareholders as evidenced by executed promissory notes. Both promissory notes have an interest rate of 10% per annum from the date of execution upon any remaining unpaid balance until the maturity date of June 22, 2008 and July 8, 2008. These notes also grant the lenders a collateralized security interest in the Company’s accounts receivable. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On May 20, 2008, the Company borrowed an aggregate amount of $50,000 from two of its Directors, Philip Turits, and Marvin Rosen, as evidenced by two promissory notes. Both notes provide repayment of the principal balance plus an interest rate of 10% per annum on any remaining unpaid balance until the maturity date of June 30, 2008. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On May 22, 2008 and May 29, 2008 (which was amended and restated on July 15, 2008) the Company borrowed an aggregate amount of $325,000 from two (2) non–related parties as evidenced by two (2) executed promissory notes. Both promissory notes have an interest rate of 10% per annum from the date of execution upon any remaining unpaid balance until the maturity dates of July 22, 2008 and September 15, 2008, respectively. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
Capital Lease / Equipment Financing Obligations
Future aggregate principal payments for the Company’s capital lease / equipment financing obligations as of June 30, 2008, are as follows:
Total minimum payments | $ | 191,476 |
Less amount representing interest | (13,381) | |
Present value of minimum payments | 178,095 | |
Less current portion | (178,095) | |
$ | — |
6. Equity Transactions
Common Stock
On January 24, 2008, the Company entered into subscription agreements with ten (10) individual investors for an offering of 2,140,000 shares of Common Stock, in consideration for $535,000. In addition, the Company issued five-year Warrants to purchase 1,070,000 shares of Common Stock exercisable at $.30 per share, which was equal to 120% of the closing price of the Company’s common stock the day before Closing.
Also, on January 29, 2008, the Company entered into subscription agreements with four (4) individual investors for an offering of 480,000 shares of Common Stock, in consideration for $120,000. In addition, the Company issued five-year Warrants to purchase 240,000 share of Common Stock exercisable at $.30 per share, which was equal to the 120% of the closing price of the Company’s Common Stock the day before Closing.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
On February 20, 2008, the Company entered into subscription agreements with four (4) individual investors for an offering of 1,714,708 shares of Common Stock in consideration for $583,000. In addition, the Company issued five-year Warrants to purchase 857,355 shares of common stock exercisable at $0.41 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
Also, on February 21, 2008, the Company entered into a subscription agreement with one (1) individual investor for an offering of 131,579 shares of Common Stock, in consideration for $50,000. In addition, the Company issued five-year Warrants to purchase 65,790 shares of common stock exercisable at $0.46 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
On March 18, 2008, the Company entered into a subscription agreement with one (1) individual investor for an offering of 1,388,889 shares of Common Stock, in consideration for $500,000. In addition, the Company issued five-year Warrants to purchase 694,445 shares of common stock exercisable at $0.44 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
On May 13, 2008, the Company entered into a subscription agreement with three (3) individual investors for an offering of 416,668 shares of Common Stock, in consideration for $125,000. In addition, the Company issued five-year Warrants to purchase 208,334 shares of common stock exercisable at $0.36 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
On May 22, 2008, the Company entered into a subscription agreement with three (3) individual investors for an offering of 362,070 shares of Common Stock, in consideration for $105,000. In addition, the Company issued five-year Warrants to purchase 181,036 shares of common stock exercisable at $0.35 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
On June 30, 2008, the Company entered into a subscription agreement with two (2) individual investors for an offering of 416,668 shares of Common Stock, in consideration for $125,000. In addition, the Company issued five-year Warrants to purchase 208,334 shares of common stock exercisable at $0.36 per share, which was equal to 120% of the closing price of the Company’s Common Stock the day before Closing.
Preferred Stock Dividends
The holders of the Series A-1, A-2, A-3 and A-4 Preferred Stock are entitled to receive cumulative dividends of 8% per annum payable in arrears, when and as declared by the Company’s Board of Directors, on January 1 of each year, commencing on January 1, 2008. As of June 30, 2008, the Board of Directors had declared no dividend.
7. Recently Issued and Adopted and New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This Standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It applies to other accounting pronouncements where the FASB requires or permits fair value measurements but does not require any new fair value measurements. In February 2008, FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008. It did not have any impact on the Company's results of operations or financial position and did not result in any additional disclosures. The Company is in the process of evaluating the effect, if any, the adoption of FSP No. 157-2 will have on its consolidated results of operations or financial position. The Company does not expect the adoption of FSP No. 157-2 to have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (“SFAS 159”). This Statement allows all entities a one-time election to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value (the “fair value option”). The Company adopted SFAS 159 on January 1, 2008, resulting in no impact to the Company’s consolidated financial condition, results of operations or cash flows.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations ” (“SFAS 141R”). Among other changes, SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions, and requires the acquirer to disclose to investors and all other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is generally effective for business combinations occurring in the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its future consolidated results of operations, financial position and cash flows.
In December 2007, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements and amendment of ARB No. 51” (“SFAS 160”). Among other items, SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its consolidated results of operations, financial position and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment to FASB Statement No. 133." SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their efforts on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why and entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The adoption of this statement, which is expected to occur in the first quarter of 2009, is not expected to have a material effect on the Company's financial statements.
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in financial statements that are presented in conformity with U.S. generally accepted account principles for non–governmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is evaluating the impact that the adoption of SFAS 162 will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - An interpretation of FASB Statement No. 60". SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures and the insurance enterprise's risk-management activities. SFAS 163 requires that disclosures about the risk management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In June 2008, the FASB issued FSP EITF 03–6–1, “Determining Whether Instruments Granted in Share–Based Payment Transactions Are Participating Securities,” to clarify that all outstanding unvested share–based payment awards that contain no forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities. An entity must include participating securities in its calculation of basic and diluted earnings per share (EPS) pursuant to the two–class method, as described in FASB Statement 128, Earnings per Share. FSP EITF 03–6–1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company is evaluating the impact that the adoption of FSP EITF 03–6–1, if any, will have on its consolidated financial statements.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
8. Commitments and Contingencies
Legal Matters
On or about February 9, 2007, the Company filed a complaint against Patrick S. Dallas, InfoTel Holdings, Ltd., Phil Walton and John Does 1-5 in the Supreme Court of the State of New York (Fusion Telecommunications International, Inc. vs. Patrick S. Dallas, et al., Index No. 2007001836) seeking damages associated with Mr. Dallas’ sale of Convergent Technologies Ltd. Stock to us and InfoTel’s breach of its October 2007 agreement to purchase Fusion Jamaica Limited’s equipment in Jamaica and assume the real property lease in Jamaica. The Company believes Mr. Dallas owns or controls InfoTel. This complaint asserted the following claims for relief: Breach of Contract (the Stock Purchase Agreement); Breach of Mr. Dallas’ Employment Agreement; Breach of Mr. Dallas’ Non-Solicitation and Non-Compete Agreement; Breach of Contract (the InfoTel Agreement); Diversion and Waste of Corporate Assets; Conversion: Scheme to Defraud and Deceive and Demand for Accounting; Fraudulent Misconduct with Intent to Defraud (the Stock Purchase Agreement); Fraudulent Misconduct with Intent to Defraud (the InfoTel Agreement); Indemnification (the Stock Purchase Agreement); and Indemnification (the InfoTel Agreement). The Company's legal counsel has advised that, at this state, they cannot accurately predict the likelihood of an unfavorable outcome, or quantify the amount or range of damages the Company would be entitled to receive if the Company was to prevail.
The Company is involved in other claim and legal actions arising in the normal course of business. Management does not expect that the outcome of these cases will have a material effect of the Company’s consolidated financial position.
Due to the regulatory nature of the industry, the Company is periodically involved in various correspondence and inquiries from state and federal regulatory agencies. Management does not expect the outcome of these inquiries to have a material impact on the Company’s consolidated operations or financial condition.
Restricted Cash
As of June 30, 2008 and December 31, 2007, the Company had approximately $417,000 of cash restricted from withdrawal and held by banks as certificates of deposit securing letters of credit. This restricted cash is required as security deposits for certain of the Company’s non-cancelable operating leases for office facilities and to secure a license to do business.
9. Segment Information
The Company complies with the reporting requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 requires disclosures of segment information on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments.
The Company has two reportable segments that it operates and manages which are organized by products and services. The Company measures and evaluates its reportable segments based on revenues and cost of revenues. This segment income excludes unallocated corporate expenses and other adjustments arising during each period. The other adjustments include transactions that the chief operating decision makers exclude in assessing business unit performance due primarily to their non-operational and/or non-recurring nature. Although such transactions are excluded from the business segment results, they are included in reported consolidated earnings. Each segment is managed according to the products, which are provided to the respective customers, and information is reported on the basis of reporting to the respective Company’s chief operating decision makers. The Company’s segments and their principal activities consist of the following:
Voice to Carriers
Voice to Carriers includes VoIP to carriers, which is the termination of voice telephony minutes by the Internet rather than older circuit-switched technology. VoIP permits a less costly and more rapid interconnection between our network and international telecommunications carriers. This segment also includes Traditional Voice (the termination of voice telephony minutes from or to the countries we serve, utilizing traditional Time Division Multiplexing (TDM) or “circuit-switched” technology. Typically, this will include interconnection with traditional telecommunications carriers either located internationally or those carriers that interconnect with us at their U.S. Points of Presence (POP) and provide service to other destinations. These minutes are sold to carriers on a wholesale basis.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Consumers, Corporations, and Other
We provide VoIP services targeted to consumers and corporations. We offer services that permit our customers to originate calls via IP telephones or telephone systems and use the Internet to complete those calls to standard telephone lines anywhere in the world. We also provide PC-to-Phone services that allow consumers to use their personal computers to place calls to the telephone of the called party. For corporate customers, we offer fully hosted IP-PBX services, as well as IP trunking solutions and Internet access. In addition, we selectively offer point-to-point private lines, virtual private networking, and call center services to certain customers within our target markets.
The Company employs engineering and operations resources that service across multiple product lines. Depreciation and indirect operating expenses were allocated to each product line based upon their respective percent utilization of those resources. The amounts reflected as Corporate and unallocated represent those expenses that were not appropriate to allocate to each product line.
Operating segment information for the three months ended June 30, 2008 and 2007 is summarized as follows:
Three Months Ended June 30, 2008 (unaudited)
| Voice To Carrier |
| Consumers, Corporations and Other |
| Corporate and Unallocated | Consolidated | ||
Revenues | $ | 11,170,255 | $ | 230,585 | $ | — | $ | 11,400,840 |
Cost of revenues |
| (10,471,385) |
| (182,229) | — | (10,653,614) | ||
Depreciation and amortization |
| (340,456) |
| (122,065) | — | (462,521) | ||
Selling, general and administrative |
| (2,072,086) |
| (970,743) | (5,900) | (3,048,729) | ||
Advertising and marketing |
| (2,903) |
| (15,729) | — | (18,632) | ||
Total other income (expenses) |
| (66,783) |
| (44,523) | — | (111,306) | ||
Net loss | $ | (1,783,358) | $ | (1,104,704) | $ | (5,900) | $ | (2,893,962) |
Capital expenditures | $ | — | $ | 42,841 | $ | 4,686 | $ | 47,527 |
Three Months Ended June 30, 2007 (unaudited)
|
| Voice To Carriers | Consumers, Corporations and Other |
| Corporate and Unallocated | Consolidated | ||
Revenues | $ | 13,342,954 | $ | 401,255 | $ | — | $ | 13,744,209 |
Cost of revenues |
| (12,415,774) | (335,976) | — | (12,751,750) | |||
Depreciation and amortization | (342,380) | (75,846) | (409) | (418,635) | ||||
Selling, general and administrative |
| (2,084,314) | (1,141,151) | (43,832) | (3,269,297) | |||
Advertising and marketing |
| (13,987) | (9,584) | — | (23,571) | |||
Total Other income (expenses) |
| 931,449 | 7,156 | — | 938,605 | |||
Net loss | $ | (582,052) | $ | (1,154,146) | $ | (44,241) | $ | (1,780,439) |
Capital expenditures | $ | 139,282 | $ | 172,815 | $ | — | $ | 312,097 |
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
Operating segment information for the six months ended June 30, 2008 and 2007 is summarized as follows:
Six Months Ended June 30, 2008 (unaudited)
| Voice To Carriers | Consumers, Corporations and Other | Corporate and Unallocated | Consolidated | ||||
Revenues | $ | 22,442,260 | $ | 488,397 | $ | — | $ | 22,930,657 |
Cost of revenues | (20,968,005) | (393,582) | — | (21,361,587) | ||||
Depreciation and amortization | (684,162) | (239,540) | (496) | (924,198) | ||||
Selling, general and administrative | (4,402,752) | (1,959,809) | 3,020 | (6,359,541) | ||||
Advertising and marketing | (12,779) | (35,244) | — | (48,023) | ||||
Total other income (expenses) | 304,074 | 201,668 | — | 505,742 | ||||
Net loss | $ | (3,321,364) | $ | (1,938,110) | $ | 2,524 | $ | (5,256,950) |
Capital expenditures | $ | 22,266 | $ | 170,366 | $ | 25,334 | $ | 217,966 |
Six Months Ended June, 2007 (unaudited)
Voice To Carriers | Consumers, Corporations and Other | Corporate and Unallocated | Consolidated | |||||
Revenues | $ | 26,101,633 | $ | 848,530 | $ | — | $ | 26,950,163 |
Cost of revenues | (24,192,914) | (644,607) | — | (24,837,521) | ||||
Depreciation and amortization | (656,244) | (154,164) | (409) | (810,817) | ||||
Selling, general and administrative | (4,182,587) | (2,465,751) | (48,328) | (6,696,666) | ||||
Advertising and marketing | (29,913) | (75,873) | — | (105,786) | ||||
Other income (expenses) | 884,989 | 6,178 | — | 891,167 | ||||
Net loss | $ | (2,075,036) | $ | (2,485,687) | $ | (48,737) | $ | (4,609,460) |
Capital expenditures | $ | 356,780 | $ | 240,862 | $ | — | $ | 597,642 |
10. Subsequent Events
On July 30, 2008, a vendor that provides management consulting and software systems services filed a complaint in the Supreme Court of the State of New York (Software Synergy, Inc., v Fusion Telecommunications International, Inc., Index No. 602223/08) seeking damages in the amount of $624,594 plus $155,787 in Prejudgment interest and costs, allegedly due plaintiff under terms of a Professional Services Letter Agreement and Master Software License Agreement. This complaint asserts claims for relief against the Company for Breach of Contract, failure to pay to plaintiff moneys allegedly due under the terms of a Professional Services Letter Agreement, violation of the terms of a Master Software License Agreement, and Prejudgment interest and costs. The Company vigorously refutes the charges, is not using this vendor's software, and is considering filing a counterclaim against the vendor. The Company cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the amount or range of potential financial impact, if any. Accordingly, no adjustment has been made in our accompanying financial statements as a result of this claim.
In August 2008, the Company concluded an audit for the periods prior to 2006 by a regulatory authority, which resulted in a payment by the Company of approximately $14,000.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
The following discussion of our consolidated financial condition and results of operations should be read together with our consolidated financial statements and the related notes thereto included in another part of this Quarterly Report on Form 10-Q. This discussion contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties, When used in this report the words “anticipate,” “believe,” “estimate,” “expect” and similar expressions as they relate to our management or us are intended to identify such forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, these forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, risks associated with the integration of businesses following an acquisition, concentration of revenue from one source, competitors with broader product lines and greater resources, emergence into new markets, the termination of any of the Company’s significant contracts or partnerships, the Company’s inability to maintain working capital requirements to fund future operations or the Company’s inability to attract and retain highly qualified management, technical and sales personnel, and other factors identified by us from time to time in our filings with the SEC. Historical operating results are not necessarily indicative of the trends in operating results for any future period. All forward-looking statements included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements.
We seek to become a leading provider of Voice over Internet Protocol (VoIP) video and other advanced Internet services to, from, in and between the developed markets of North America and Europe and emerging markets in Asia, the Middle East, Africa, Latin America and the Caribbean. Our strategy is to provide a full suite of VoIP video and other Internet based services to consumers and corporations in the emerging markets and their communities of interest around the world. We seek to create local partnerships to facilitate distribution of our services within our target countries. We also seek to create global partnerships to facilitate broader distribution of our services. We have spent approximately $40 million on the development and maintenance of our infrastructure and service offerings, and believe that our VoIP network is one of the best, most advanced, next generation networks of any major telecommunications carrier. We currently market VoIP services to consumers, corporations, government entities, Internet service providers, and distribution partners and telecommunications carriers seeking to communicate internationally. We target markets that we believe have: (i) barriers to entry, (ii) substantial growth prospects, (iii) an increasing number of corporations operating within them, (iv) high cost of traditional telecommunications services, and (v) a substantial quantity of voice and data traffic between the United States and Europe and emerging countries within our target markets. We currently have operating agreements with over 200 carriers and provide services in over 100 countries.
The following table summarizes our results of operations for the periods indicated:
Three months ended June 30 | Six Months ended June 30 | ||||||||
2008 | 2007 | 2008 | 2007 | ||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||
Revenues | $ | 11,400,840 | $ | 13,744,209 | $ | 22,930,657 | $ | 26,950,163 | |
Operating expenses: | |||||||||
Cost of revenues | 10,653,614 | 12,751,750 | 21,361,587 | 24,837,521 | |||||
Depreciation and amortization | 462,521 | 418,635 | 924,198 | 810,817 | |||||
Selling, general and administrative | 3,048,729 | 3,269,297 | 6,359,541 | 6,696,666 | |||||
Advertising and marketing | 18,632 | 23,571 | 48,023 | 105,786 | |||||
Total operating expenses | 14,183,496 | 16,463,253 | 28,693,349 | 32,450,790 | |||||
Operating loss | (2,782,656) | (2,719,044) | (5,762,692) | (5,500,627) | |||||
Other income (expenses): | |||||||||
Interest income | 785 | 30,356 | 2,516 | 51,071 | |||||
Interest expense | (53,197) | (27,830) | (70,587) | (50,979) | |||||
Gain (loss) on sale/disposal of fixed assets | (59,158) | 9,759 | (59,158) | 9,759 | |||||
Gain on extinguishment of debt | — | — | 634,991 | — | |||||
Gain on sale of investment in Estel | — | 937,578 | — | 937,578 | |||||
Loss from investment in Estel | — | (15,000) | — | (60,000) | |||||
Other | 264 | 3,742 | (2,020) | 3,738 | |||||
Total other income (expenses) | (111,306) | 938,605 | 505,742 | 891,167 | |||||
Net loss | $ | (2,893,962) | $ | (1,780,439) | $ | (5,256,950) | $ | (4,609,460) | |
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
The following table presents our historical operating results as a percentage of revenues for the periods indicated:
Three months ended June 30, | Six Months ended June 30, | |||
2008 | 2007 | 2008 | 2007 | |
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |
Revenues | 100.0% | 100.0% | 100.0% | 100.0% |
Operating expenses: | ||||
Cost of revenues | 93.4% | 92.8% | 93.2% | 92.2% |
Depreciation and amortization | 4.1% | 3.0% | 4.0% | 3.0% |
Selling, general and administrative | 26.7% | 23.8% | 27.7% | 24.8% |
Advertising and marketing | 0.2% | 0.2% | 0.2% | 0.4% |
Total operating expenses | 124.4% | 119.8% | 125.1% | 120.4% |
Operating loss | (24.4)% | (19.8)% | (25.1)% | (20.4)% |
Other income (expenses): | ||||
Interest income | 0.0% | 0.2% | 0.0% | 0.2% |
Interest expense | (0.5)% | (0.2)% | (0.3)% | (0.2)% |
Gain (loss) on sale / disposal of fixed assets | (0.5)% | 0.1% | (0.3)% | 0.0% |
Gain on extinguishment of debt | 0.0% | 0.0% | 2.8% | 0.0% |
Gain on sale of investment in Estel | 0.0% | 6.8% | 0.0% | 3.5% |
Loss from investment in Estel | 0.0% | (0.1)% | 0.0% | (0.2)% |
| Other | 0.0% | 0.0% | 0.0% | 0.0% |
Total other income (expenses) | (1.0)% | 6.8% | 2.2% | 3.3% |
| Other | 0.0% | 0.0% | 0.0% | 0.0% |
Net loss | (25.4)% | (13.0)% | (22.9)% | (17.1)% |
Historically, we have generated the majority of our revenues from voice traffic sold to other carriers, with a primary focus in the last several years on VoIP terminations to the emerging markets. We focus on growing our existing customer base, which is primarily US based, as well as the addition of new customers, and the establishment of direct VoIP terminating arrangements with telecommunication carriers in emerging markets and around the world. Although we believe that this business continues to be of value to our strategy, ongoing competitive and pricing pressures have caused us to increase our focus on higher margin, value-added services (primarily VoIP to consumers and corporations which includes VOIP video and other advanced internet services), and market them to, or in conjunction with, distribution partners on a direct, co-branded or private label basis.
In an effort to further increase margins, expand our retail customer base, and develop more stable revenue streams, we have begun to focus significant effort and resources to build our VoIP business to consumers and corporations. While this does not yet represent a significant portion of our revenue base, we expect to continue to increase our emphasis in this area. We believe that this will complement our carrier business with a higher margin and more stable customer base.
In 2002, we established Efonica F-Z, LLC, as a retail services Company marketing VoIP products to consumer and corporate customers in emerging markets. Beginning in the Middle East, Asia and Africa, and then extending into Latin America, Efonica’s services are primarily sold through distribution channels on a pre-paid basis. Efonica’s customers can place calls from anywhere in the world to any destination using a personal computer, Internet protocol telephone or regular telephone when accompanied by a hardware device that may be purchased through Efonica. We believe that the introduction of advanced features such as voicemail, call waiting and call forwarding will enhance this value-added offering. In February 2005, we completed our acquisition of the 49.8% minority interest in Efonica, and following such acquisition, we own 100% of Efonica.
We manage our revenues by product and customer. We manage our costs by provider (vendor). We track total revenue at the customer level because our sales force has to manage the revenue generation at the customer level, and invoices are billed to and collected at the customer level. We also have to track the same revenues by product, because different products have different billing and payment terms, and individual customers may have multiple billing and payment terms if they purchase multiple products from us.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
We manage our revenue segments based on gross margin, which is net revenues less cost of revenues, rather than on net profitability, due to the fact that our infrastructure is built to support all products, rather than individual products. This applies both to the capital investments made (such as switching and transmission equipment), and to selling, general and administrative resources. The majority of our sales and operations personnel support all product lines within their market segment, (i.e. Carrier), and are not separately hired to support individual product segments. For segment reporting purposes, all expenses below cost of revenues are allocated based on percentage of utilization of resources unless the items can be specifically identified to one of the product segments.
Operating Expenses
Our operating expenses are categorized as cost of revenues, depreciation and amortization, and selling, general and administrative expenses.
Costs of revenues include costs incurred with the operation of our leased network facilities, and the purchase of voice termination and Internet protocol services from other telecommunications carriers and Internet service providers. We continue to work to lower the variable component of the cost of revenue through the use of least cost routing, and continual negotiation of usage-based and fixed costs with domestic and international service providers.
Depreciation and amortization includes depreciation of our communications network equipment, amortization of leasehold improvements of our switch locations and administrative facilities, and the depreciation of our office equipment and fixtures. It also includes amortization of the Efonica customer list.
Selling, general and administrative expenses primarily include salaries and benefits, insurance, occupancy costs, marketing and advertising, professional fees and other administrative expenses.
Advertising and marketing expense includes cost for promotional materials for the marketing of our retail products and services, as well as for public relations.
Company Highlights
The following summary of significant events during the six months ended June 30, 2008 and 2007 highlight the accomplishments and events that have influenced our performance during the respective periods.
Six Months Ended June 30, 2008
• $2.1 million raised in Common Stock equity financing;
• Gordon Hutchins Jr., promoted to President and Chief Operating Officer;
• A vendor debt was extinguished resulting in approximately $0.6 million of Other Income.
Six Months Ended June 30, 2007
• Consummation of Private Placement – In May 2007, the Company entered into subscription agreements with 28 individual investors for an offering of 3,375 shares in consideration for $3,375 million dollars of Series A–2 Cumulative Convertible Preferred Stock, (the “Series A–2 Preferred Stock”);
• Strategic Investment – A global communications service provider, Ditigial FX International, Inc. made a $700,000 strategic investment in the Company;
• Sale of Equity Interest in Indian Joint Venture - The Company completed the sale of its 49% equity share of Estel Communications Pvt., LTD, an Internet service provider in India.
The information in our period-to-period comparisons below represents only our results from continuing operations.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 2008 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2007.
Revenues
Consolidated revenues was $11.4 million during the three months ended June 30, 2008, compared to $13.7 million during the three months ended June 30, 2007, a decrease of $2.3 million or 17%.
Revenues for Voice to Carriers decreased $2.3 million or 17.2%, to $11.1 million during the three months ended June 30, 2008 from $13.3 million during the three months ended June 30, 2007. The decreased revenues were the result of a decrease in the blended rate per minute. Based on the peaks and valleys of the carrier segment, we cannot predict what impact competitor pricing pressure may have on future periods.
Revenues for Consumers, Corporations and Other during the three months ended June 30, 2008 was $0.3 million, compared to $0.4 million during the three months ended June 30, 2007, a decrease of $0.1 million or 15.4%. The technical difficulties encountered in prior periods and the sale of the Indian Joint Venture in the second quarter of 2007 contributed to this decrease.
Cost of Revenues
Consolidated cost of revenues was $10.7 million during the three months ended June 30, 2008, compared to $12.8 million during the three months ended June 30, 2007, a decrease of $2.1 million or 16.5%. Approximately $2.0 million of this decrease was attributable to Voice to Carriers, which is consistent with the decrease in revenues.
Cost of revenue for Carriers was $10.4 million during the three months ended June 30, 2008, compared to $12.4 million during the three months ended June 30, 2007; a decrease of 2.0 million or 16.1% as a result of a lower blended rate per minute.
Cost of revenues for Consumers, Corporations and Other during the three months ended June 30, 2008 were $0.2 million compared to $0.3 million during the three months ended June 30, 2007, a decrease of $0.1 million or 41.8% due to lower sales in the second quarter of 2008 vs. second quarter of 2007.
Operating Expenses
Depreciation and Amortization : Depreciation and amortization increased by $0.1 million or 10.5% to $0.5 million during the three months ended June 30, 2008, from $0.4 million during the three months ended June 30, 2007. Our depreciation expense increased as more assets were acquired to support the retail platform.
Selling, General and Administrative : Selling, general and administrative expenses decreased $0.2 million or 6.7% to $3.1 million during the three months ended June 30, 2008, from $3.3 million during the three months ended June 30, 2007. This decrease is primarily attributed to decreased personnel related expenses of approximately $0.07 million and decreased legal, professional and consulting expenses of approximately $0.13 million as better rates were negotiated or expenses were no longer needed.
Advertising and Marketing: Advertising and marketing expenses for the quarter ended June 30, 2008 were consistent with the same period of 2007.
Operating Loss: Our operating loss increased $0.1 million or 2.3% to a loss of $2.8 million during the three months ended June 30, 2008, from a loss of $2.7 million during the three months ended June 30, 2007. The decrease in operating loss was primarily attributable to the decline in revenues.
Other Income (Expenses): Total other income (expense) changed from income of approximately $0.9 million during the three months ended June 30, 2007 to expense of $0.1 million during the three months ended June 30, 2008. The gain reported in 2007 was primarily attributable to the gain on the sale of the Company’s Equity interest in its India joint venture. Also, contributing to the decrease in other income during the 2nd quarter 2008 were losses on asset disposal and increased interest expense as a result of additional financing incurred.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Net Loss: Net loss increased $1.1 million, or 62.5% for the three months ended June 30, 2008, compared to the three months ended June 30, 2007. The primary factor contributing to the decreased income compared to 2007 was the gain on the sale of the Company’s investment in its India joint venture reported in the second quarter of 2007; during the same period of 2008 the Company recorded losses associated with the disposal of Fixed assets and increased interest expenses as a result of additional financing incurred in 2008.
Six Months Ended June 30, 2008 Compared With Six Months Ended June 30, 2007.
Revenues
Consolidated revenues was $22.9 million during the six months ended June 30, 2008, compared to $27.0 million during the six months ended June 30, 2007 a decrease of $4.0 million or 14.9%.
Revenues for Voice to Carriers decreased $4.0 million or 15.3%, to $22.1 million during the six months ended June 30, 2008 from $26.1 million during the six months ended June 30, 2007. The decreased revenues were the result of a decrease in the blended rate per minute as well as a decrease in the number of minutes.
Revenues for Consumers, Corporations and Other during the six months ended June 30, 2008 was $0.809 million, compared to $0.848 million during the six months ended June 30, 2007, a decrease of $0.039 million or 4.6%. The technical difficulties encountered in prior periods and the sale of the India Joint Venture in the second quarter of 2007 contributed to this decrease.
Cost of Revenues
Consolidated cost of revenues was $21.4 million during the six months ended June 30, 2008, compared to $24.8 million during the six months ended June 30, 2007, a decrease of $3.4 million or 14.0%.
Cost of Revenues for Carriers was $20.9 million during the six months ended June 30, 2008, compared to $24.2 million during the six months ended June 30, 2007. A decrease of $3.3 million or 13.7% as a result of a lower cost per minute and a reduction in the number of minutes.
Cost of revenues for Consumers, Corporations and Other during the six months ended June 30, 2008 was $0.5 million compared to $0.6 million during the six months ended June 30, 2007, a decrease of $0.1 million or 24.6% due to lower sales in the first six months of 2008 vs. 2007.
Operating Expenses
Depreciation and Amortization: Depreciation and amortization increased by $0.1 million or 14.% to $0.9 million during the six months ended June 30, 2008, from $0.8 million during the six months ended June 30, 2007. Our depreciation expense increased as more assets were acquired to support the retail platform.
Selling, General, and Administrative: Selling, general, and administrative expenses decreased $0.3 million or 5.0% to $6.4 million during the six months ended June 30, 2008, from $6.7 million during the six months ended June 30, 2007. Salaries, benefits, and other personnel related expenses decreased approximately $0.3 million as a result of several senior management and other positions being eliminated during the first quarter of 2007, as the company was focusing on cost containment. Legal, accounting, non-cash compensation expenses (Consultants) also decreased approximately $0.3 million as better rates were negotiated or expenses were no longer needed. Partially offsetting this decrease was an increase of $0.3 million in our communication expenses.
Advertising and Marketing: Advertising and marketing expenses decreased $0.058 million or 54.6% to $0.048 million during the six months ended June 30, 2008, from $0.106 million during the six months ended June 30, 2007 as the advertising and marketing campaign of our Efonica product was more aggressive during the first six months of 2007.
Operating Loss: Our operating loss increased $0.3 million or 4.8% to $5.8 million during the six months ended June 30, 2008, from a loss of $5.5 million during the six months ended June 30, 2007. The decrease in operating loss was primarily attributable to the decline in revenues.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Other Income (Expenses): Total other income (expense) went from other income of $0.9 million during the six months ended June 30, 2007 to other income of $0.5 during the six months ended June 30, 2008, a decrease of $0.4 million, or 43.2%. During the second quarter of 2007, the company sold its equity ownership of Estel and recorded a gain of $0.9 million and during the first quarter of 2008, the company recorded a gain of $0.6 million on the extinguishment of debt. Also contributing to this decrease in Other income during the six months ended June 30, 2008 were losses on assets disposal and increased interests expenses as a result of additional financing incurred during this period.
Net Loss: Net loss increased $0.6 million, or 14.0% for the six months ended June 30, 2008, compared to the six months ended June 30, 2007. The increase in net loss is attributable to the decreased sales during the first six months of 2008.
Liquidity and Capital Resources
Since our inception, we have incurred significant operating and net losses. In addition, we are not generating positive cash flow from operations. As of June 30, 2008, we had Stockholders’ equity of approximately $3.9 million as compared to $6.7 million at December 31, 2007, and a working capital deficit of approximately $6.5 million as compared to $4.2 million at December 31, 2007. During the six months ended June 30, 2008, we raised approximately $ 2.1 million from the sale of our securities through private placement financing (See Note 6 to the consolidated financial statements contained in this quarterly report on Form 10-Q). The proceeds have been and will continue to be used for working capital and general corporate purposes, international deployment, and to fund the development of our retail service offerings. We may seek further financing through the sale of debt or equity securities, although we have no commitments to do so.
Below is a summary of our cash flow for the periods indicated. These cash flow results are consistent with prior years, in that we continued to use significant cash in connection with our operating and investing activities and had significant cash provided by financing activities.
A summary of our cash flows for the periods indicated is as follows:
Six Months Ended June 30, | ||||
2008 | 2007 | |||
(unaudited) | (unaudited) | |||
Cash used in operating activities | $ | (2,462,909) | $ | (5,491,034) |
Cash provided by (used in) investing activities | (219,485) | 82,924 | ||
Cash provided by financing activities | 2,840,813 | 3,981,653 | ||
Increase(decrease) in cash and cash equivalents | 158,419 | (1,426,457) | ||
Cash and cash equivalents, beginning of period | 114,817 | 2,743,155 | ||
Cash and cash equivalents, end of period | $ | 273,236 | $ | 1,316,698 |
Sources of Liquidity
As of June 30, 2008, we had cash and cash equivalents of approximately $0.3 million. In addition, as of June 30, 2008, we had approximately $0.4 million of cash restricted from withdrawal and held by banks as certificates of deposits securing letters of credit (equal to the amount of the certificates of deposit).
From our inception through June 30, 2008, we financed our operations from cash provided from financing activities. These activities were primarily through net proceeds of approximately $23.3 million from our initial public offering (IPO), and the private placement of approximately $62.7 million of equity securities, $1.6 million from the exercise of Stock options and Warrants, and $23 million from the issuance of notes. In addition, since inception we have financed the acquisition of $8.2 million of fixed assets through capital leases.
Our long-term liquidity is dependent on our ability to attain future profitable operations and/or additional financing. We cannot predict if and when we will be able to attain future profitability, or obtain the necessary financing to support our continued operations and expansion strategy. We are from time to time engaged in discussions regarding financing as opportunities arise, however, as of this date have no specific commitments.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Uses of Liquidity
Our short-term and long-term liquidity needs arise primarily from principal and interest payments related to our capital lease/equipment financing obligations, capital expenditures, and working capital requirements as may be needed to support the growth of our business, and any additional funds that may be required for business expansion opportunities.
Our cash capital expenditures were approximately $0.2 million and $0.6 million for the six months ended June 30, 2008 and 2007, respectively. We expect our cash capital expenditures to be approximately $0.5 million for the next six months ended December 31, 2008. The 2008 estimated capital expenditures primarily consist of additional retail infrastructure development, purchase of additional software for expanded product offerings, and international deployment.
In some situations, we may be required to guarantee payment or performance under agreements, and in these circumstances we would need to secure letters of credit or bonds to do so.
Debt Service Requirements
At June 30, 2008, we had approximately $1.6 million of current debt, which relates primarily to our notes payable and capital lease/equipment financing obligations. We intend to pay current obligations through internal funds or external financing.
Capital Instruments
In November 2007, the Company commenced a private placement for the purpose of raising working capital for the Company's operations. The private placement provided for the sale of up to $7 million of the Company's Common Stock. During the six months ended June 30, 2008, the Company issued 7,050,582 share of Common Stock for which proceeds of approximately $2.1 million were received, net of expenses of approximately $4,000. In addition, the Company issued five (5) year Warrants to purchase 3,525,294 shares of Common Stock, exercisable at 120% of the closing price of the Company's Common Stock the day before closing. The private placement terminated on June 30, 2008.
Critical Accounting Policies and Estimates
We have identified the policies and significant estimation processes below as critical to our business operations and the understanding of our results of operations. The listing is not intended to be a comprehensive list. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management judgment in their application. In other cases, management is required to exercise judgment in the application of accounting principles with respect to particular transactions. The impact and any associated risks related to these policies on our business operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to Consolidated Financial Statements for the year ended December 31, 2007, included in our Annual Report on Form 10-KA . Our preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates and such differences could be significant.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Revenue Recognition
Our revenue is primarily derived from fees charged to terminate voice services over our network, retail VoIP sales to consumers and corporations, and from monthly recurring charges associated with Internet and private line services.
Variable revenue is earned based on the number of minutes during a call and is recognized upon completion of a call, adjusted for allowance for doubtful accounts receivable and billing adjustments. Revenue for each customer is calculated from information received through our network switches. Customized software has been designed to track the information from the switch and analyze the call detail records against stored detailed information about revenue rates. This software provides us the ability to do a timely and accurate analysis of revenue earned in a period. Consequently, the recorded amounts are generally accurate and the recorded amounts are unlikely to be revised in the future.
Fixed revenue is earned from monthly recurring services provided to the customer that are fixed and recurring in nature, and are contracted for over a specified period of time. The initial start of revenue recognition is after the provisioning, testing and acceptance of the service by the customer. The charges continue to bill until the expiration of the contract, or until cancellation of the service by the customer.
Additionally, the majority of our VoIP services to consumers and corporations are prepaid. The revenue received from the prepayments that is related to VoIP termination services in the current month is booked to the current month’s revenue, and the remainder of the prepayments is booked to deferred revenue, until usage occurs.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of an allowance for doubtful accounts. On a periodic basis, we evaluate our accounts receivable and record an allowance for doubtful accounts, based on our history of past write-offs and collections and current credit conditions. Specific customer accounts are written off as uncollectible if the probability of a future loss has been established and payments are not expected to be received.
Cost of Revenues and Cost of Revenues Accrual
Cost of revenues is comprised primarily of costs incurred from other domestic and international communications carriers to originate, transport and terminate calls. The majority of our cost of revenue is variable, based upon the number of minutes of use, with transmission and termination costs being the most significant expense. Call activity is tracked and analyzed with customized software that analyzes the traffic flowing through our network switches. Each period the activity is analyzed and an accrual is recorded for minutes not invoiced. This cost accrual is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates.
In addition to the variable cost of revenue, there are also fixed expenses. One category of fixed expenses is associated with the network backbone connectivity to our switch facilities. These expenses would consist of hubbing charges at our New York switch facility that allow other carriers to send traffic to our switch, satellite or cable charges to connect to our international network, or Internet connectivity charges to connect customers or vendors to Fusion’s switch via the public Internet, a portion of which are variable costs. The other category of fixed expenses is associated with charges that are dedicated point-to-point connections to specific customers (both private line and Internet access).
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Intangible Assets and Goodwill Impairment Testing
Absent any circumstances that Warrant testing at another time, we test for goodwill and non-amortizing intangible asset impairment as part of our year-end closing process. Impairment losses are recorded when indicators of impairment are present based primarily upon estimated future cash flows.
Income Taxes
We account for income taxes in accordance with the provisions of SFAS No. 109", “Accounting for Income Taxes” (“SFAS 109”) and Financial Interpretation 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN No. 48). SFAS No. 109" requires companies to recognize deferred tax liabilities and assets for the expected future income tax consequences of events that have been recognized in our consolidated financial statements . FIN No. 48, clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109. Deferred tax liabilities and assets are determined based on the temporary differences between the consolidated financial statements carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in the years in which the temporary differences are expected to reverse. In assessing the likelihood of utilization of existing deferred tax assets and recording a full valuation allowance, we have considered historical results of operations and the current operating environment.
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). This Standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It applies to other accounting pronouncements where the FASB requires or permits fair value measurements but does not require any new fair value measurements. In February 2008, FASB issued FASB Staff Position ("FSP") No. 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company adopted SFAS 157 for financial assets and liabilities on January 1, 2008. It did not have any impact on the Company's results of operations or financial position and did not result in any additional disclosures. The Company is in the process of evaluating the effect, if any, the adoption of FSP No. 157-2 will have on its consolidated results of operations or financial position. The Company does not expect the adoption of FSP No. 157-2 to have a material effect on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115” (“SFAS 159”). This Statement allows all entities a one-time election to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value (the “fair value option”). The Company adopted SFAS 159 on January 1, 2008, resulting in no impact to the Company’s consolidated financial condition, results of operations or cash flows.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 (revised 2007), “Business Combinations ” (“SFAS 141R”). Among other changes, SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction at fair value, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, including earn-out provisions, and requires the acquirer to disclose to investors and all other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 141R is generally effective for business combinations occurring in the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its future consolidated results of operations, financial position and cash flows.
In December 2007, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements and amendment of ARB No. 51” (“SFAS 160”). Among other items, SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. SFAS 160 is effective for the first annual reporting period beginning after December 15, 2008. The Company is evaluating the effect of this recently issued standard on its consolidated results of operations, financial position and cash flows.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment to FASB Statement No. 133." SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their efforts on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why and entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The adoption of this statement, which is expected to occur in the first quarter of 2009, is not expected to have a material effect on the Company's financial statements.
In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in financial statements that are presented in conformity with U.S. generally accepted account principles for non–governmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company is evaluating the impact that the adoption of SFAS 162 will have on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee Insurance Contracts - An interpretation of FASB Statement No. 60". SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures and the insurance enterprise's risk-management activities. SFAS 163 requires that disclosures about the risk management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
In June 2008, the FASB issued FSP EITF 03–6–1, “Determining Whether Instruments Granted in Share–Based Payment Transactions Are Participating Securities,” to clarify that all outstanding unvested share–based payment awards that contain no forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities. An entity must include participating securities in its calculation of basic and diluted earnings per share (EPS) pursuant to the two–class method, as described in FASB Statement 128, Earnings per Share. FSP EITF 03–6–1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company is evaluating the impact that the adoption of FSP EITF 03–6–1, if any, will have on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to certain market risks that are inherent in our financial instruments. These instruments arise from transactions in the normal course of business.
At June 30, 2008, the majority of our cash balances were held primarily in the form of short-term highly liquid investment grade money market funds held in major financial institutions. Due to the short-term nature of our investments, we believe that we are not subject to any material interest or market rate risks.
At June 30, 2008, all of our outstanding debt has fixed interest rates. As such, we are not subject to interest rate risk on any of our debt. Consequently, we currently believe that our interest rate risk is very low.
We currently do not conduct any significant amount of business in currencies other than the United States dollar. The reporting and functional currency for our Dubai international subsidiary is the United States dollar. However, in the future, we likely will conduct a larger percentage of our business in foreign currencies that could have an adverse impact on our future results of operations.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 4T. Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or 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 disclosure controls and procedures as of June 30, 2008. Based upon that evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to accomplish their objectives.
Our Chief Executive Officer and Chief Financial Officer do not expect that our disclosure controls or our internal controls will prevent all error and all fraud. The design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.
There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On July 30, 2008, a vendor that provides management consulting and software systems services filed a complaint in the Supreme Court of the State of New York (Software Synergy, Inc., v Fusion Telecommunications International, Inc., Index No. 602223/08) seeking damages in the amount of $624,594 plus $155,787 in Prejudgment interest and costs, allegedly due plaintiff under terms of a Professional Services Letter Agreement and Master Software License Agreement. This complaint asserts claims for relief against the Company for Breach of Contract, failure to pay to plaintiff moneys allegedly due under the terms of a Professional Services Letter Agreement, violation of the terms of a Master Software License Agreement, and Prejudgment interest and costs. The Company vigorously refutes the charges, is not using this vendor's software, and is considering filing a counterclaim against the vendor. The Company cannot accurately predict the likelihood of a favorable or unfavorable outcome or quantify the amount or range of potential financial impact, if any. Accordingly, no adjustment has been made in our accompanying financial statements as a result of this claim.
In August 2008, the Company concluded an audit for the periods prior to 2006 by a regulatory authority, which resulted in a payment by the Company of approximately $14,000.
Due to the regulatory nature of the industry, the Company is periodically involved in various correspondence and inquiries from state and federal regulatory agencies. Management does not expect the outcome of these inquiries to have a material impact on the Company’s operations or financial condition.
As of June 30, 2008, the Company’s Stockholder’s equity was $3,883,477, which in conjunction with historical losses, does not meet the minimum standards of Section 1003 of the AMEX Company Guide. That section states that AMEX may consider suspending dealings in, or removing from the list, securities of an issuer with Stockholders’ equity less than the standards cited in Section 1003. As of this date, the Company has not received any notice of non-compliance or delisting from AMEX.
In light of this situation, AMEX may require, as a condition of continued listing, that the Company present a plan of compliance to demonstrate how the it intends to regain compliance with the AMEX standards. We are engaged in ongoing discussions with potential sources of financing which, if consummated, would enable us to increase our Stockholders’ equity and regain compliance with the AMEX standards. We believe that we can present an acceptable plan of compliance to AMEX, if we are required to do so. However, there is no assurance that our plan of compliance would be accepted, or that if accepted we would be successful in consummating the transactions necessary to increase our Stockholders’ equity sufficiently to achieve compliance with AMEX requirements.
In the event AMEX was to delist our securities, we believe our securities would be eligible to continue trading on the over-the-counter Bulletin Board. However, such delisting could have a material adverse effect on the Company, including, but not limited to, the market value of our securities, the demand for our securities, our ability to raise additional financing, and our being subject to certain state securities regulations from which we had previously been exempt.
Going Concern
At June 30, 2008, the Company had a working capital deficit of approximately $6,491,000 and an accumulated deficit of approximately $119,264,000. The Company has continued to sustain losses from operations. In addition, the Company has not generated positive cash flow from operations since inception. Management is aware that its current cash resources are not adequate to fund its operations for the remainder of the year. During the six months ended June 30, 2008, the Company raised $2,139,000 net of expenses from sale of its securities through private placement. The Company’s long-term liquidity is partially dependent on its ability to successfully complete the rollout of its full suite of retail VoIP paid services and effectively market its paid services, in order to attain profitable operations in the future. The Company cannot make any guarantees if and when it will be able to attain profitability. These conditions, among others, raise substantial doubt about the Company’s ability to continue operations as a going concern. No adjustment has been made in the consolidated financial statements to the amounts and classification of assets and liabilities which could result, should the Company be unable to continue as a going concern.
25
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Unregistered Sales of Securities:
None
(b) Use of Proceeds:
None
Item 3 Defaults upon Senior Securities.
None
None
On April 17, 2008, the Company borrowed an aggregate amount of $300,000 from two of its Directors, Philip Turits, and Marvin Rosen, as evidenced by two promissory notes. Both notes provide repayment of the principal balance plus an interest rate of 10% per annum on any remaining unpaid balance until the maturity date of May 17, 2008. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On April 23, 2008 and May 8, 2008, the Company borrowed an aggregate amount of $375,000 from two individual shareholders as evidenced by executed promissory notes. Both promissory notes have an interest rate of 10% per annum from the date of execution upon any remaining unpaid balance until the maturity date of June 22, 2008 and July 8, 2008. These notes also grant the lenders a collateralized security interest in the Company’s accounts receivable. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On May 20, 2008, the Company borrowed an aggregate amount of $50,000 from two of its Directors, Philip Turits, and Marvin Rosen, as evidenced by two promissory notes. Both notes provide repayment of the principal balance plus an interest rate of 10% per annum on any remaining unpaid balance until the maturity date of June 30, 2008. The lenders have the right to demand payment of all unpaid principal and interest at any time thereafter. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
On May 22, 2008 and May 29, 2008 (which was amended and restated on July 15, 2008) the Company borrowed an aggregate amount of $325,000 from two (2) non–related parties as evidenced by two (2) executed promissory notes. Both promissory notes have an interest rate of 10% per annum from the date of execution upon any remaining unpaid balance until the maturity dates of July 22, 2008 and September 15, 2008, respectively. These notes also grant the lenders a collateralized security interest from the Company’s accounts receivable. The proceeds will be for general working capital purposes.
Exhibit No. | Description |
31.1 | Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
31.2 | Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
32.1 | Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.1 | Form of Promissory Note (incorporated by reference to Exhibit 99.1 to the registrant’s Quarterly Report on Form 10–Q filed with the Securities Exchange Commission on May 15, 2008 |
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.
Date: August 14, 2008 | By: /s/MATTHEW D. ROSEN |
Date: August 14, 2008 | BY: /s/ BARBARA HUGHES |
FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
Exhibit No. | Description |
31.1 | Certification of the Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
31.2 | Certification of the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 13a–14(a)/15d–14(a). |
32.1 | Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |