| Significant Accounting Policies | Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the
consolidated accounts of Fusion and its wholly-owned and partially owned subsidiaries, and have been prepared in
accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and in
accordance with Regulation S-X of the Securities and Exchange Commission (the “SEC”). All intercompany balances
and transactions have been eliminated in consolidation. Effective September 1, 2017, Fusion transferred 40% of its membership
interests in Fusion Global Services LLC (“FGS”) to XcomIP, LLC (“XcomIP”), in exchange for which XcomIP
contributed assets of its carrier business to FGS. In connection with this transaction, Fusion and XcomIP also executed a members
agreement under which Fusion has agreed to provide up to $750,000 in working capital to FGS. The Company has determined that, based
on the terms of the members agreement, it has a controlling financial interest in FGS under the guidance set forth in Accounting
Standards Codification (“ASC”) 810, Consolidation, therefore the accounts of FGS are consolidated into Fusion’s
consolidated financial statements as of and for the year ended December 31, 2017. Prior to the transfer of membership interests
to XcomIP, Fusion transferred its Carrier Services business to FGS. Effective January 1, 2017, the Company changed the manner in which
it accounts for federal and state universal service fees and surcharges in its consolidated statement of operations. The Company
now includes the amounts collected for these fees and surcharges in revenues, and reports the associated costs in cost of revenues,
and this change has been applied retrospectively in the Company’s consolidated financial statements for all periods presented.
As a result, both the Company’s revenues and cost of revenues for years ended December 31, 2017 and 2016 include $3.3 million
and $2.6 million, respectively, of federal and state universal service fees and surcharges. Use of Estimates The preparation of consolidated financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the year. On an on-going basis, the Company evaluates its estimates, including, but not limited
to, those related to recognition of revenue, allowance for doubtful accounts; fair value measurements of its financial instruments;
useful lives of its long-lived assets used in computing depreciation and amortization; impairment assessment of goodwill and intangible
assets; accounting for stock options and other equity awards, particularly related to fair value estimates, accounting for income
taxes, contingencies, and litigation. Changes in the facts or circumstances underlying these estimates could result in material
changes, and actual results could differ from those estimates. These changes in estimates are recognized in the period they are
realized. Reclassifications Certain reclassifications have been made to the prior year’s
financial statements in order to conform to the current year’s presentation. Specifically, approximately $76,000 due from
the counterparty to the Company’s purchase of customer bases (see note 5) has been reclassified as a reduction to the liability
due to the same counterparty. The reclassification had no impact on results of operations as previously reported. Cash and Cash Equivalents Cash and cash equivalents include cash on deposit and short-term,
highly-liquid investments with maturities of three months or less at the date of purchase. As of December 31, 2017 and 2016, the
carrying value of cash and cash equivalents approximates fair value due to the short period of time to maturity. Restricted Cash Restricted cash consists of certificates of deposit that serve to
collateralize outstanding letters of credit. Restricted cash is recorded as current or non-current assets in the consolidated balance
sheets depending on the duration of the restriction and the purpose for which the restriction exists. At December 31, 2017 and
2016, the Company had certificates of deposit collateralizing a letter of credit aggregating approximately $27,000. The letter
of credit is required as security for one of the Company’s non-cancelable operating leases for office facilities. 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. The Company records provisions against revenue for billing adjustments, which are based upon estimates derived
from factors that include, but are not limited to, historical results, analysis of credits issued and current economic trends.
The provisions for revenue adjustments are recorded as a reduction of revenue when the revenue is recognized. Below is a summary
of the changes in the provisions against revenue for the years ended December 31, 2017 and 2016:
Balance at Beginning of Period Additions to Reserve Posted Credits and other Adjustments Balance at End of Period
Year ended December 31, 2017 $ 389,257 2,118,418 (1,918,155 ) $ 589,520
Year ended December 31, 2016 $ 223,045 2,582,163 (2,415,951 ) $ 389,257 The Company’s Business Services revenue includes fixed revenue
earned from monthly recurring services provided to customers, for whom charges are contracted for over a specified period of time,
and from variable usage fees charged to customers that purchase the Company’s Business Services products and services. Revenue
recognition commences after the provisioning, testing and acceptance of the service by the customer. The recurring customer charges
continue until the expiration of the contract, or until cancellation of the service by the customer. To the extent that payments
received from a customer are related to a future period, the payment is recorded as deferred revenue until the service is provided
or the usage occurs. Carrier Services revenue is primarily derived from usage fees charged
to other carriers that terminate voice traffic over the Company’s network. Variable revenue is earned based on the length
of a call, as measured by the number of minutes of duration. It is recognized upon completion of the call, and is adjusted to reflect
the Company’s allowance for billing adjustments. Revenue for each customer is calculated from information received through
the Company’s network switches. The Company’s customized software tracks the information from the switches and analyzes
the call detail records against stored detailed information about revenue rates. This software provides the Company with the ability
to complete a timely and accurate analysis of revenue earned in a period. The Company believes that the nature of this process
is such that recorded revenues are unlikely to be revised in future periods. Cost of Revenues Cost of revenues for the Company’s Business Services segment
consist of fixed expenses which include monthly recurring charges associated with certain platform services purchased from other
service providers, monthly recurring costs associated with private line services and the cost of broadband Internet access used
to provide service to business customers. For the Company’s Carrier Services segment, cost of revenues
is comprised primarily of costs incurred from other carriers to originate, transport, and terminate voice calls for the Company’s
carrier customers. Thus, the majority of the Company’s cost of revenues for this segment is variable, based upon the number
of minutes actually used by the Company’s customers and the destinations they are calling. Call activity is tracked and analyzed
with customized software that analyzes the traffic flowing through the Company’s network switch. During each period, the
call activity is analyzed and an accrual is recorded for the costs associated with minutes not yet invoiced. This cost accrual
is calculated using minutes from the system and the variable cost of revenue based upon predetermined contractual rates. Fixed
expenses reflect the costs associated with connectivity between the Company’s network infrastructure, including its New Jersey
switching facility, and certain large carrier customers and vendors. Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable is recorded net of an allowance for doubtful
accounts. On a periodic basis, the Company evaluates accounts receivable and records an allowance for doubtful accounts based on
the Company’s history of past write-offs, collections experience and current credit conditions. Specific customer accounts
are written off as uncollectible when collection efforts have been exhausted and payments are not expected to be received. During
the periods presented, the Company has not experienced any significant defaults on its accounts receivable. Below is a summary of the changes in allowance for doubtful accounts
for the years ended December 31, 2017 and 2016 (in thousands):
Balance at Beginning of Period Additions - Charged to Expense Deductions - Write-offs, Payments and other Adjustments Balance at End of Period
Year ended December 31, 2017 $ 427 1,135 (862 ) $ 700
Year ended December 31, 2016 $ 309 388 (270 ) $ 427 Business Combinations Business combinations are accounted for using the purchase method
of accounting, whereby the purchase price of the acquisition, including the fair value of contingent consideration, is allocated
to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. The results
of operations of all business acquisitions are included in our Consolidated Financial Statements from the date of acquisition. Goodwill as of the acquisition date, if any, is measured as the excess
of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value
assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently uncertain and subject
to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, to the extent
the Company identifies adjustments to the purchase price or the purchase price allocation, the Company records adjustments to the
assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period
or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded to the consolidated statements of operations. All transaction costs incurred in connection with a business combination
are expensed as incurred and are reflected in selling, general and administrative expense in the accompanying consolidated statements
of operations. Goodwill Goodwill is the excess of the acquisition cost of a business combination
over the fair value of the identifiable net assets acquired. Goodwill at December 31, 2017 and 2016 was $34.8 million and $35.7
million, respectively. All of the Company’s goodwill is attributable to its Business Services segment. The following table presents the changes in the carrying amounts
of goodwill during the years ended December 31, 2017 and 2016:
Balance at December 31, 2015 $ 27,060,297
Fidelity purchase price adjustment* 134,216
TFB acquisition* 993,637
Apptix acquisition 7,091,065
Customer base acquisition* 410,000
Balance at December 31, 2016 35,689,215
Increase in goodwill associated with a 2016 acquisition 7,414
Settlement of litigation with Apptix sellers (see note 16) (513,000 )
Adjustment to goodwill associated with acquisition of customer bases (410,000 )
Balance at December 31, 2017 $ 34,773,629
* - See note 5 for discussion of acquisitions Goodwill is not amortized and is tested for impairment on an annual
basis in the fourth quarter of each fiscal year and whenever events or circumstances change that would more likely than not reduce
the fair value of a reporting unit below its carrying amount. The impairment test for goodwill uses a two-step
approach, which is performed at the reporting unit level. The Company has determined that its reportable segments are its
reporting units (see Note 23) since that is the lowest level at which discrete, reliable financial and cash flow information
is available. Step one compares the fair value of the reporting unit (calculated using a market approach and/or a
discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, there is a potential
impairment and step two must be performed. Step two compares the carrying value of the reporting unit’s goodwill to its
implied fair value, which is the fair value of the reporting unit less the fair value of the unit’s assets and
liabilities, including identifiable intangible assets. If the implied fair value of goodwill is less than its carrying
amount, an impairment is recognized. In testing goodwill for impairment, the Company has the option to
first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it
is more likely than not (more than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If
the Company elects to perform a qualitative assessment and determines that an impairment is more likely than not, it is then required
to perform a quantitative impairment test, otherwise no further analysis is required. The Company also may elect not to perform
the qualitative assessment and, instead, proceed directly to the quantitative impairment test. The Company performed a quantitative impairment analysis on its goodwill
as of December 31, 2017 and 2016 and determined that goodwill was not impaired. Impairment of Long-Lived Assets The Company reviews long-lived assets, including intangible assets,
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.
If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets
to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected
undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to
the extent that the carrying value of the asset exceeds its estimated fair value. The Company recorded an impairment charge related
to its intangible assets in the amount of $0.6 million in the year ended December 31, 2017 and did not record any impairment charges
for the year ended December 31, 2016. Property and Equipment Property and equipment are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the assets as follows:
Asset Estimated Useful Lives
Network equipment 5 - 7 Years
Furniture and fixtures 3 - 7 Years
Computer equipment and software 3 - 5 Years
Customer premise equipment 2 - 3 Years Leasehold improvements are depreciated over the shorter of the estimated
useful lives of the assets or the term of the associated lease. Maintenance and repairs are recorded as a period expense, while
betterments and improvements are capitalized. The Company capitalizes a portion of its payroll and related costs
for the development of software for internal use and amortizes these costs over three years. During the years ended December 31,
2017 and 2016, the Company capitalized costs pertaining to the development of internally used software in the amount of $2.0 million
and $1.2 million, respectively. Fair Value of Financial Instruments The Company applies fair value accounting for all financial assets
and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements
on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for
assets and liabilities which are required to be recorded at fair value, the Company considers the principal or most advantageous
market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing
the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated
by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization
within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
● Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
● Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets).
● Level 3 applies to assets or liabilities for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including the Company's own assumptions. The estimated fair value of financial instruments is determined by
the Company using available market information and valuation methodologies considered to be appropriate. At December 31, 2017 and
2016, the carrying value of the Company’s accounts receivable, accounts payable and accrued expenses approximate their fair
values due to their short maturities. Derivative Financial Instruments The Company accounts for equity and equity indexed instruments with
down round provisions issued in conjunction with the issuance of debt or equity securities of the Company in accordance with the
guidance contained in Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging Stock-Based Compensation The Company recognizes expense for its employee stock-based compensation
based on the fair value of the award at the date of grant. The fair values of stock options are estimated using the Black-Scholes
option valuation model. The use of the Black-Scholes option valuation model requires the input of subjective assumptions. Measured
compensation cost, net of estimated forfeitures, is recognized ratably over the vesting period of the related stock-based compensation
award. For transactions in which goods or services are the consideration received from non-employees in return for the issuance
of equity instruments, the expense is recognized in the period when the goods and services are received at the fair value of the
consideration received or the fair value of the equity instrument issued, whichever is determined to be a more reliable measurement. Advertising and Marketing Advertising and marketing expense includes cost for promotional materials
and trade show expenses for the marketing of the Company’s products and services. Advertising and marketing expenses were
$0.5 million and $0.7 million for the years ended December 31, 2017 and 2016, respectively. Income Taxes The accounting and reporting requirements with respect to income
taxes require an asset and liability approach. Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based
on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation
allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. In accordance with U.S. GAAP, the Company is required to determine
whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority,
including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit
to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon
ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability
that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized
tax benefits as of December 31, 2017 and 2016. No interest expense or penalties have been recognized as of December
31, 2017 and 2016. During the years ended December 31, 2017 and 2016, the Company recognized no adjustments for uncertain tax positions. Recently Issued Accounting Pronouncements In July 2017, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging
(Topic 815). The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments
(or embedded features) with down round features. When determining whether certain financial instruments should be classified as
liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument
is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified
instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be
accounted for as a derivative liability at fair value as a result of the existence of a down round feature. This standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures. During the first quarter of 2017, the FASB issued ASU 2017-04, Intangibles
- Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate the
requirement to perform step two of the goodwill impairment test, which requires a hypothetical purchase price allocation when
an impairment is determined to have occurred. A goodwill impairment will now be the amount by which a reporting unit’s carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard update is effective as of the first
quarter of 2020; however, early adoption is permitted for any interim or annual impairment tests performed after January 1, 2017.
Fusion will adopt this standard on January 1, 2018. The adoption of this standard update will not have a significant impact on
Company’s financial statements. In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash,
which clarifies guidance and presentation related to restricted cash in the statement of cash flows, including stating that restricted
cash should be included within cash and cash equivalents in the statement of cash flows. The standard is effective for fiscal years
beginning after December 15, 2017, with early adoption permitted, and is to be applied retrospectively. The Company early adopted
ASU 2016-18 effective January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated
financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases, which
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted.
Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a
lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right to-use asset,
which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The
Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures. In November 2015, the FASB issued ASU No. 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred income taxes by requiring
that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The updated standard became effective
as of January 1, 2017. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Compensation –
Stock Compensation, which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.
Under ASU 2016-09, all excess tax benefits and tax deficiencies related to share-based payment awards are to be recognized as income
tax expense or income tax benefit in the statement of operations. In addition, the tax effects of exercised or vested awards should
be treated as discrete items in the reporting period in which they occur and excess tax benefits should be recognized regardless
of whether the benefit reduces taxes payable in the current period. Adoption of this standard did not have a material impact on
the Company’s consolidated financial statements. In May 2014, the FASB issued new guidance related to revenue recognition,
ASU 2014-09, Revenue from Contracts with Customers (“ASC 606”), which outlines a comprehensive revenue recognition
model and supersedes most current revenue recognition guidance. The new guidance requires a company to recognize revenue upon transfer
of goods or services to a customer at an amount that reflects the expected consideration to be received in exchange for those goods
or services. ASC 606 defines a five-step approach for recognizing revenue: (i) identification of the contract, (ii) identification
of the performance obligations, (iii) determination of the transaction price, (iv) allocation of the transaction price to the performance
obligations, and (v) recognition of revenue as the entity satisfies the performance obligations. The new criteria for revenue recognition
may require a company to use more judgment and make more estimates than under the current guidance. The new guidance becomes effective
in calendar year 2018 and early adoption in calendar year 2017 is permitted. Two methods of adoption are permitted: (a) full retrospective
adoption, meaning the standard is applied to all periods presented; or (b) modified retrospective adoption, meaning the cumulative
effect of applying the new guidance is recognized at the date of initial application as an adjustment to the opening retained earnings
balance. In March 2016, April 2016 and December 2016, the FASB issued ASU
No. 2016-08, Revenue From Contracts with Customers (ASC 606): Principal Versus Agent Considerations, ASU No. 2016-10, Revenue From
Contracts with Customers (ASC 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-20, Technical Corrections
and Improvements to Topic 606, Revenue From Contracts with Customers, respectively, which further clarify the implementation guidance
on principal versus agent considerations contained in ASU No. 2014-09. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts
with Customers, narrow-scope improvements and practical expedients which provides clarification on assessing the collectability
criterion, presentation of sales taxes, measurement date for non-cash consideration and completed contracts at transition. These
standards will be effective for the Company beginning in the first quarter of 2018. Early adoption is permitted. The Company will adopt the new standard and related updates effective
January 1, 2018, using the modified retrospective method of adoption. The Company estimates that, based on available information,
both the impact of the adjustment to opening retained earnings and the ongoing impact from the deferral of acquisition costs and
activation and installation revenues will not be material to the Company’s financial statements. |
