Fusion Reports Third Quarter 2017 Financial Results

Business Services Revenue Grew 38% YoY, Driving 147% Growth in Adjusted EBITDA

Tailwinds’ Take: this was an excellent quarter that showed strong organic growth as well as low customer churn and high ARPUs. Fusion scored several big contracts and they are clicking on all cylinders. However, the big deal is closing the Birch acquisition that will lead to $150M in EBITDA for a company with a (post-merger) market cap of $250M, there is obviously huge upside potential here as it’s trading at 1.67X EBITDA. The 3 big catalysts I outlined are coming, starting with the proxy for the merger being filed next week…which will reveal Birch’s financials and detail just how much cash flow this combined entity might make in 2018.

NEW YORK, Nov. 13, 2017 — Fusion (NASDAQ:FSNN), a leading cloud services provider, today announced financial results for the third quarter ended September 30, 2017.

Third Quarter 2017 Highlights

  • Business Services segment revenue grew 38% year-over-year to $29.3 million, over 90% of which was recurring, and grew 10% year-over-year excluding the contribution from last year’s Apptix acquisition
  • Consolidated revenue grew 21% year-over-year to $36.4 million
  • Consolidated gross margin increased approximately 350 basis points to 45.7%, compared to 42.2% in Q3 2016
  • Net loss attributable to common shareholders totaled $(3.9) million, or $(0.18) per share on a basic and diluted basis in Q3 2017, compared to $(3.4) million, or $(0.23) per share on a basic and diluted basis in Q3 2016 
  • Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) grew 147% year-over-year to $4.2 million, and grew 13% sequentially (see definition and further discussion about the presentation of Adjusted EBITDA, a non-GAAP measurement, below)
  • Unlevered Free Cash Flow, defined as Adjusted EBITDA less capital expenditures, was $2.6 million, compared to $0.2 million in Q3 2016
  • New monthly recurring revenue (“MRR”) bookings were approximately $296,000, up 8% year-over-year and up 13% sequentially, while the total contract value in backlog was $13.1 million at September 30, 2017
  • Ended the quarter with approximately 13,300 Business Services customers with an average monthly revenue per customer (“ARPU”) of $731, compared to $568 at September 30, 2016
  • Monthly churn was 0.9% at the end of the quarter, compared to 1.1% at the end of Q3 2016
  • Announced the signing of a definitive agreement to acquire the Cloud and Business Services business of Birch Communications Holdings, Inc., and made significant progress toward obtaining the approvals and securing the capital required to complete the deal
  • Completed the formation of Fusion Global Services, a joint venture which combined Fusion’s Carrier Services division with the Carrier Services business of XComIP, LLC

“Fusion continued to deliver solid financial performance during the third quarter of 2017, with nearly 40% growth in Business Services revenue and nearly 150% growth in Adjusted EBITDA, thanks to the contribution from the Apptix acquisition as well as solid sales bookings and installations, customer novations, and continued low churn,” said Matthew Rosen, Fusion’s CEO. “These results clearly demonstrate the power of our compelling strategy as the single source for the cloud.

“Since we announced our definitive agreement to acquire the Cloud and Business Services business of Birch in late August, both companies have been planning for the integration of our people, products, networks, and systems to ensure that the combined company – which will be one of the largest cloud services providers in North America – is positioned to begin realizing the benefits of the combination immediately after closing. We have also made substantial progress on the steps required to complete the transaction, including antitrust filings and filings with the FCC and a number of state regulatory agencies, and we expect to file the preliminary proxy this week. Given the upcoming holiday season, we believe that the process of obtaining regulatory approvals will take the close of the acquisition into the first quarter of 2018,” Mr. Rosen stated.

Michael Bauer, Fusion’s CFO, said, “We are very excited to complete the Birch transaction. The combined company is projected to have approximately $575 million in pro forma annual revenue and over $150 million in pro forma annual Adjusted EBITDA, including over $20 million in expected cost synergies.

“We expect the transaction to be significantly accretive immediately upon closing, to considerably lower our leverage ratio and improve our financial flexibility, and to generate strong positive free cash flow on an ongoing basis,” Mr. Bauer concluded.

Third Quarter 2017 Financial Results

Fusion’s consolidated revenue grew 21% in Q3 2017 to $36.4 million, compared to $30.2 million in Q3 2016, due to an increase in the Company’s Business Services segment revenue. Business Services segment revenue grew 38% to $29.3 million, compared to $21.3 million in Q3 2016, primarily due to the acquisition of Apptix which closed in November 2016. Carrier Services segment revenue was $7.1 million, down 20% compared to $8.9 million in Q3 2016.

Consolidated gross margin was 45.7%, compared to 42.2% in Q3 2016. The increase was due to a higher mix of Business Services revenue, which generates a substantially higher margin than Carrier Services revenue, in 2017 as compared to 2016. Business Services gross margin was 55.5% in Q3 2017, compared to 58.0% in Q3 2016, primarily due to the addition of lower margin revenue from certain new customers the Company began servicing during the first half of 2017. Carrier Services gross margin was 5.0% compared to 4.3% in Q3 2016.

Net loss attributable to common shareholders in Q3 2017 was $(3.9) million, or ($0.18) per share on a basic and diluted basis, compared to net loss in Q3 2016 of $(3.4) million, or ($0.23) per share on a basic and diluted basis.

Adjusted EBITDA grew 147% to $4.2 million, compared to $1.7 million in Q3 2016, due primarily to revenue growth and a continued focus on cost controls.

Capital expenditures in Q3 2017 totaled $1.6 million, or 4.4% of revenue. Capital expenditures in the first nine months of 2017 totaled $3.9 million, or 3.6% of revenue.

Unlevered free cash flow was $2.6 million in Q3 2017, compared to $0.2 million in Q3 2016.

Cash at September 30, 2017, totaled $2.3 million, compared to $7.2 million at December 31, 2016. During 2017, the Company made $2.4 million in senior debt principal payments, and reduced its revolving credit facility balance by $1.5 million. The Company’s $5.0 million revolving credit facility had an outstanding balance of $1.5 million at September 30, 2017, compared to $3.0 million outstanding at December 31, 2016.

Further details about the Company’s financial results are available in its quarterly report on Form 10-Q, which is available in the investor relations section of the Company’s website at ir.fusionconnect.com.

Conference Call Information

Fusion CEO Matthew Rosen and CFO Michael Bauer will host a conference call today to discuss its Q3 2017 financial results, followed by a question and answer period. To access the call, please use the following information:

Date:

Monday, November 13, 2017

 

Time:

4:30p.m. ET / 1:30p.m. PT

 

U.S. Toll Free:

1-888-857-6932

 

U.S. Toll/International:

1-913-312-1473

 

Conference ID:

2969072

 

Webcast:

ir.fusionconnect.comunder “Events”

 

 

Participants should dial in 10 minutes prior to the start time and ask to be placed into the Fusion call. An operator will register your name and organization. If you have any difficulty connecting with the conference call, please contact MZ Group at (949) 491-8235.

Use of Non-GAAP Financial Measurements

The Company believes that EBITDA (earnings before interest, taxes, depreciation and amortization) is useful to investors because it is commonly used in the cloud communications industry to evaluate companies on the basis of operating performance and leverage. Adjusted EBITDA provides an adjusted view of EBITDA that takes into account certain significant non-recurring transactions, if any, such as impairment losses and expenses associated with pending acquisitions, which vary significantly between periods and are not recurring in nature, as well as certain recurring non-cash charges such as changes in fair value of the Company’s derivative liabilities and stock-based compensation. The Company also believes that Adjusted EBITDA provides investors with a measure of the Company’s operational and financial progress that corresponds with the measurements used by management as a basis for allocating resources and making other operating decisions. Although the Company uses Adjusted EBITDA as one of several financial measures to assess its operating performance, its use is limited as it excludes certain significant operating expenses. EBITDA and Adjusted EBITDA are not intended to represent cash flows for the periods presented, nor have they been presented as an alternative to operating income or as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In accordance with SEC Regulation G, the non-GAAP measurements in this press release have been reconciled to the nearest GAAP measurement, which can be viewed under the heading “Reconciliation of Net Loss to Adjusted EBITDA”, immediately following the Consolidated Balance Sheets included in this press release.

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2017

 

 

 

2016

 

 

 

2017

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

$

36,355,187

 

 

$

30,159,019

 

 

$

110,256,069

 

 

$

95,041,024

 

Cost of revenues (exclusive of depreciation and amortization, shown separately below)

19,749,188

 

 

 

17,431,477

 

 

 

59,921,649

 

 

 

55,875,267

 

Gross profit

 

16,605,999

 

 

 

12,727,542

 

 

 

50,334,420

 

 

 

39,165,757

 

Depreciation and amortization

 

3,711,253

 

 

 

2,998,628

 

 

 

11,149,010

 

 

 

8,946,781

 

Selling, general and

administrative expenses

 

13,649,349

 

 

 

11,408,048

 

 

 

42,115,158

 

 

 

34,102,847

 

Total operating expenses

 

17,360,602

 

 

 

14,406,676

 

 

 

53,264,168

 

 

 

43,049,628

 

Operating loss

 

(754,603)

 

 

 

(1,679,134)

 

 

 

(2,929,748)

 

 

 

(3,883,871)

 

Other (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(2,204,520)

 

 

 

(1,625,195)

 

 

 

(6,468,916)

 

 

 

(4,877,828)

 

Gain on change in fair value of derivative liability

 

(617,820)

 

 

 

152,057

 

 

 

(544,486)

 

 

 

380,099

 

Loss on disposal of property and equipment

 

(161,037)

 

 

 

(13,959)

 

 

 

(253,087)

 

 

 

(86,777)

 

Other income, net

 

47,694

 

 

 

32,028

 

 

 

177,539

 

 

 

120,291

 

Loss before income taxes

 

(3,690,286)

 

 

 

(3,134,203)

 

 

 

(10,018,698)

 

 

 

(8,348,086)

 

Provision for income taxes

 

(10,200)

 

 

 

(10,951)

 

 

 

(41,111)

 

 

 

(10,951)

 

Net loss

 

(3,700,486)

 

 

 

(3,145,154)

 

 

 

(10,059,809)

 

 

 

(8,359,037)

 

Less: Net income attributable to non-controlling interest

 

(2,724)

 

 

 

 

 

 

(2,724)

 

 

 

 

Net loss attributable to Fusion Telecommunications

 

(3,703,210)

 

 

 

(3,145,154)

 

 

 

(10,062,533)

 

 

 

(8,359,037)

 

Preferred stock dividends in arrears

 

(241,191)

 

 

 

(285,646)

 

 

 

(1,735,798)

 

 

 

(2,102,467)

 

Net loss attributable to common stockholders

$

(3,944,401)

 

 

$

(3,430,800)

 

 

$

(11,798,331)

 

 

$

(10,461,504)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share

$

(0.18)

 

 

$

(0.23)

 

 

$

(0.54)

 

 

$

(0.72)

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

22,352,341

 

 

 

14,990,816

 

 

 

21,828,816

 

 

 

14,536,893

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

 

September 30,

 

 

December 31,

 

 

2017

 

 

 

2016

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

2,341,634

 

 

$

7,221,910

 

Accounts receivable, net of allowance for doubtful accounts

 

14,359,639

 

 

 

9,359,876

 

Prepaid expenses and other current assets

 

1,776,072

 

 

 

1,084,209

 

Total current assets

 

18,477,345

 

 

 

17,665,995

 

Property and equipment, net

 

13,769,882

 

 

 

14,248,915

 

Security deposits

 

615,585

 

 

 

630,373

 

Restricted cash

 

27,153

 

 

 

27,153

 

Goodwill

 

34,773,629

 

 

 

35,689,215

 

Intangible assets, net

 

58,760,920

 

 

 

63,617,471

 

Other assets

 

52,231

 

 

 

77,117

 

TOTAL ASSETS

$

126,476,745

 

 

$

131,956,239

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Term loan – current portion

$

5,687,500

 

 

$

2,979,167

 

Obligations under asset purchase agreements – current portion

 

603,192

 

 

 

546,488

 

Equipment financing obligations

 

1,186,115

 

 

 

1,002,578

 

Accounts payable and accrued expenses

 

25,674,946

 

 

 

19,722,838

 

Total current liabilities

 

33,151,753

 

 

 

24,251,071

 

Long-term liabilities:

 

 

 

 

 

Notes payable – non-related parties, net of discount

 

31,822,773

 

 

 

31,431,602

 

Notes payable – related parties

 

918,135

 

 

 

875,750

 

Term loan

 

55,782,094

 

 

 

60,731,204

 

Indebtedness under revolving credit facility

 

1,500,000

 

 

 

3,000,000

 

Obligations under asset purchase agreements

 

1,265,811

 

 

 

890,811

 

Equipment financing obligations

 

716,005

 

 

 

1,237,083

 

Derivative liabilities

 

760,965

 

 

 

348,650

 

Total liabilities

 

125,917,536

 

 

 

122,766,171

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity (deficit):

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, 14,341 and 17,299 shares issued and outstanding

 

143

 

 

 

174

 

Common stock, $0.01 par value, 90,000,000 shares authorized, 22,296,683 and 20,642,028 shares issued and outstanding

 

222,967

 

 

 

206,422

 

Capital in excess of par value

 

193,642,257

 

 

 

192,233,032

 

Accumulated deficit

 

(193,312,093)

 

 

 

(183,249,560)

 

Total Fusion Telecommunications International, Inc. stockholders’ equity

 

553,274

 

 

 

9,190,068

 

Non-controlling interest

 

5,935

 

 

 

 

Total stockholders’ equity

 

559,209

 

 

 

9,190,068

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$

126,476,745

 

 

$

131,956,239

 

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES

Reconciliation of Net Loss to EBITDA and Adjusted EBITDA

(Unaudited)

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2017

 

 

 

2016

 

 

2017

 

 

2016

 

Net loss attributable to Fusion Telecommunications International, Inc.

$

(3,703,210)

 

$

$

(3,145,154)

 

$

(10,062,533)

 

$

(8,359,037)

 

Interest expense and other financing costs

2,216,608

 

 

 

1,625,413

 

 

6,492,368

 

 

4,878,328

 

Provision for income taxes

 

10,200

 

 

 

10,951

 

 

41,111

 

 

10,951

 

Depreciation and amortization

 

3,711,253

 

 

 

2,998,628

 

 

11,149,010

 

 

8,946,781

 

EBITDA

 

2,234,851

 

 

 

1,489,838

 

 

7,619,956

 

 

5,477,023

 

Acquisition transaction expenses

878,069

 

 

 

111,900

 

 

1,803,311

 

 

275,710

 

Change in fair value of derivative liability

617,821

 

 

 

(152,057)

 

 

544,486

 

 

(380,099)

 

(Gain) loss on disposal of property and equipment

161,037

 

 

 

13,958

 

 

253,087

 

 

86,777

 

Non-recurring employee related expenses

 

 

 

 

 

 

 

535,500

 

Stock based compensation expense

286,221

 

 

 

228,040

 

 

909,113

 

 

686,535

 

Adjusted EBITDA

$

4,177,999

 

$

 

1,691,679

 

$

11,129,953

 

$

6,681,446

 

 

 

About Fusion

Fusion (NASDAQ:FSNN), a leading provider of integrated cloud solutions to small, medium and large businesses, is the industry’s single source for the cloud. Fusion’s advanced, proprietary cloud services platform enables the integration of leading edge solutions in the cloud, including cloud communications, contact center, cloud connectivity, and cloud computing. Fusion’s innovative, yet proven cloud solutions lower our customers’ cost of ownership, and deliver new levels of security, flexibility, scalability, and speed of deployment. For more information, please visit www.fusionconnect.com.

Forward Looking Statements

Statements in this press release that are not purely historical facts, including statements regarding Fusion’s beliefs, expectations, intentions or strategies for the future, may be “forward-looking statements” under the Private Securities Litigation Reform Act of 1996. Such statements consist of any statement other than a recitation of historical fact and may sometimes be identified by the use of forward-looking terminology such as “may”, “expect”, “anticipate”, “intend”, “estimate” or “continue” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward-looking statements are speculative, and there are certain risks and uncertainties that could cause actual events or results to differ from those referred to in such forward-looking statements. Important risks regarding the Company’s business include the Company’s ability to raise the capital necessary to fund its acquisition of Birch Communications Holdings, Inc., its ability to obtain the required approvals necessary to close that transaction, and its ability to integrate that business following the closing; the Company’s ability to comply with covenants included in its senior debt agreements; competitors with broader product lines and greater resources; emergence into new markets; natural disasters, acts of war, terrorism or other events beyond the Company’s control; and other factors identified by Fusion from time to time in its filings with the Securities and Exchange Commission, which are available through http://www.sec.gov. However, the reader is cautioned that Fusion’s future performance could also be affected by risks and uncertainties not enumerated above.

In the event that there is any inconsistency between the information contained in this press release and the information set forth in Fusion’s Annual Report on Form 10-K or Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission, the information contained in the Annual Report on Form 10-K or Quarterly Reports on Form 10-Q governs.

Fusion Contact:

Brian Coyne

(212) 201-2404

bcoyne@fusionconnect.com

Investor Relations:

Chris Tyson | MZ North America

(949) 491-8235

FSNN@mzgroup.us

www.mzgroup.us

Disclaimers & Disclosures: For a full list of disclaimers and disclosures, please visit: www.tailwindsresearch.com/disclaimer/

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